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Marc Cuniberti: How much is too much?

 

In 2020, multiple COVID stimulus and relief packages flowed out of Washington. Some programs you have may heard about and possibly benefited from, but much more money did not go to consumers, but instead assisted the financial conduits of the economy. Some might rush to call those conduits “Wall Street,” but that is a topic for a different day.

With another 1.9 trillion dollar package about to be approved by Washington, any talk of excessive government spending is relegated to limiting package amounts rather than to killing these programs all together.

With that in mind, little concern seems to exist in Washington or in the news media as to the dangers of massive government spending. To this analyst the silence is deafening.



Since the government gets its money from taxing it, borrowing it or creating it out of thin air, there is historical precedent as to the hazards of excessive government spending. The word “excessive” is key and when that spending becomes excessive is a topic of debate.

A common metric for measuring just how much is too much when discussing government spending is the ratio of public debt to Gross Domestic Product (GDP). GDP is the total amount of monetary transactions for all goods and services within a country.




Although there is more than government spending measured in the “public debt” definition, the correlation of the two is commonly accepted among certain scholars.

It was once thought that a debt to GDP ratio exceeding about 90% meant a serious risk of an eventual sovereign default (a country unable to meet its debt obligations).

Needless to say, a sovereign default is about as serious as it gets when it comes to a negative economic event. Even a default from a relatively small country can cause serious economic damage to the global economy. The bigger the country, the more severe the damage. The event can cause worldwide financial disruptions at minimum, and the risk of a total global financial implosion in the worst case. Think 2008/2009.

With modern central banking having more and more influence over global financial mechanisms, the ratio metrics have been repeatedly tested, and the amount of how much debt is too much is constantly being revised upwards. During the last few decades, as more countries have gone further and further into debt yet failed to succumb to it, the spending continues to accelerate in just about every country of the world.

Some argue central bank bailouts have mitigated the risk while others claim bailouts have only postponed the day of reckoning. The limits continue to be tested and COVID-19 has only pushed debt levels even higher.

Japan is an egregious example of pushing the envelope, with current public debt levels surpassing the 230% level.

At the conclusion of the 4th quarter of 2019, United States public debt-to-GDP ratio was 106.7%. Today’s U.S. estimate is over 120%. Albeit far below Japan’s, it is still argued to be excessive when compared to initial theoretical levels.

As the upper limits are tested, it is important to remember a failure of a GDP/debt ratio means a sovereign default.

The ramifications being so dire, it would be best not find out what that limit is by exceeding it. At that point, it would be too late.

Much like loading a bridge with more and more weight to see how much it would take to cause its collapse, the reality is the bridges failure would destroy the entire structure and everything on and under it.

Extrapolating that into the discussion of what is a toxic GDP/debt level, the answer should be arrived upon by theory and ongoing study, and not by real world experimentation.

To instead keep adding more and more debt until something breaks, given the consequences which could be regional at best, and global at worst, is to tempt a redo of 2008/09 financial implosion which almost wrecked the entire global financial system.

With ever increasing global debt levels, theory suggests each subsequent debt-failure event is larger than the one that preceded it, and they have been.

And that dear reader, means another one of these debt/GDP failures would spawn an event which would be unparalleled in its destruction.

Opinions expressed here are those of Mr. Cuniberti and may not reflect those of any media outlet. For a list of the services offered by Mr. Cuniberti, call 530-559-1214. California Insurance License #0L34249 and Medicare Agent approved. Email: news@moneymanagementradio.com.

 


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