Debt-to-GDP

Economic expansion is not limited to, for example, the amount of gold in reserve. If it were, the Great Recession would have been the Great Depression all over again.

Now we have the Federal Reserve system. Economic value (expansion and contraction) is held in reserve and centrally managed independent of the political system, although in practice it serves a critical, political function as well.

To expand, the central bank buys bonds from banks in the system (it prints money, which is value held in reserve). To contract, the Fed sells its bonds back to the banks (reducing the supply of money, which puts the value back in reserve). The risk (the value being produced and consumed, or the risk-value) is either "on" or "off." It is binomial because dummy variables are unambiguous, easy to measure, and easy to manage.

While expanding the money supply should render a competitive, pluralistic economy in which inflation and unemployment are the least of our problems, the Fed reports that both will be critically problematic for years. The Fed is essentially just buying and selling bonds (sovereign debt), which gives basic value to the risk (basis points), but what the private sector does with the money determines the effect (the risk-value).

The Fed does not create risk. Risk is coefficiently constant, but it can be structured and restructured to accumulate value. If the marketplace is continuously consolidating with each boom-bust (risk on-risk off) cycle (with big firms being fittest to survive), the private sector is determined to consolidate the risk and consume the value (the GDP) it produces. The result is the crisis we have now with GDP being consumed by debt. This is not something grandma did by going to the doctor or needing hip-replacement surgery..., but because Wall Street overleveraged the risk into a crisis proportion (it expanded the money supply to consolidate rather than deconsolidate the risk). The probability grandma can afford her health care has been consumed by Wall Street (the value has been consolidated, putting grandma at the mercy of the so-called fittest to survive--"the smartest" by virtue of uncompromised self-interest).

Wall Street overleveraged the money supply so extensively, but with slow growth, that fiscal stimulus, QE-1 and QE-2 were not enough to cover it, and it looks like QE-3 will be needed to cover the extended debt proportion.

Without a third round of accommodative easing, the slow growth experienced during the Bush administration's throwback to reaganomics will keep us in a deflationary trend because the monetary expansion (the leveraging) did not trickle-down the income to pay for the homes or the second mortgages that were sold, or anything else for that matter. Consumer demand is consumed with debt, and this is not the paradox of thrift. It is a deliberate--knowing and willing--deprivation of income needed to prevent the current crisis and the consolidation of assets and income still to be consumed (foreclosed) in a crisis proportion going forward.

Keep in mind that, given the current political will in the representative form, a distribution on the accumulation will not occur until there is no one left to pay the debt but rich people. Thus, the long, deflationary tail of the cycle, and the S&P downgrade.

The downgrade occurred because the "paradox of thrift" is not what is in operation here. It is the deliberate consumption of equity by means of an over-extended (over-leveraged) risk proportion intended to force us into default and foreclosure (increased debt-to-GDP). Instead of increasing supply, supply is consolidated and sold with an increasing debt proportion.

The economy (GDP) did not expand in proportion to the amount of money leveraged by the private sector. Income, rather than being expanded to pay the debt, accumulated at the top, which causes deflationary crises and the need for the Fed to expand the money supply from its reserve (ex nihilo).

When the private sector over-leverages into crises, the Fed steps in and provides the liquidity to cover it. This, you see, provides our economy with millionaires and billionaires (a lot of money to trickle down according to the Hamiltonian model, and plenty of aspiring ideologues) but not a lot of GDP. Since being rich is supposed to be exclusive, ideologues press to turn off the spigot to consolidate their gains--and so while the rich trot off with all the booty, the Fed gets all the blame for a declining GDP ratio.

With the model of over-leveraging being successfully applied with virtually no liability, it will be replicated. That is, we will keep increasing debt at the expense of GDP. As long as the Fed is doing its job of preventing full-blown depression, entrepreneurs can be in the business of making money without risk (without creating jobs and the income to sanction them in the marketplace).

If the risk can be profitably offset to all the other poor suckers in the world, it will. As long as the means to sanction (the application of risk for consumption) is allowed to consolidate for redistribution, the value it produces will be retributive (negative GDP). The sanctioned (the non-elite who are forced to take all the risk rather than apply it) have no recourse but big government to counter the power of big business. Government, of course, is then falsely valued as being the source of the problem (the source of the retributive value).

We have to seriously question whether government has caused record budget deficits and public debt (the value to be retributed). If we attribute government to the retributive value of the risk, then the basis for future asset valuation and economic performance is determined to be contractionary (the uncertainty is effectively zero). The risk, then, is really high (it is fully gamma), and so then is the value of the reward.

If economic contraction is the model of success, income will not be available to ensure a free-market consensus. Hence, the Fed prints it "out of nothing" to hedge the inevitable, political risk, which at the same time supports economic entities that are modeled to gobble-up GDP with debt. The printed money (the potential, alpha risk of the free market) is turned into debt (kinetic risk of overwhelming force) that is "too big to fail" in a gamma-risk proportion.

Without adequate income (expansion of GDP-to-debt) the gamma risk is fully proportioned. Politics becomes the risk determinant, not economics, and the Fed is the perfect foil for what fails us in a too-big-to-fail proportion.

Now, for example, after the Great Recession, we can fallaciously blame the Fed, post hoc, for causing the problem when it is mitigating the effect of turning equity into debt (rising debt-to-GDP and likely default). Since, however, the private sector is responsible for adding GDP, but is not, the ex-nihilo funds are indeed producing next to nothing (except millionaires and billionaires by default). The added liquidity is being used to inflate commodity prices for capital gains which are reaganomically taxed at the lowest rate. The combination of high liquidity but low GDP, along with declining revenues against the need to spend, is trending us toward default. Dump reaganomics and this trend will quickly reverse!

We should reverse reagonomic tax incentives not because it is fair, but because, as Reagan proponents argue in support of marginal rate reduction, it is practical. It is the best way to achieve economic growth, reduce the need for government spending and the need to monetize an overwhelming debt burden despite record profits.

The reason equities get support on bad economic metrics is because the Fed is there to expand the money supply. Although the Fed is fingered to be the cause of the problem, it is there to "accommodate" it (manage the risk), not cause it.

At this point in our political-economic history, if we did not have a policy of accommodative easing we would be in the depths of another depression. Instead of wrangling over tax rates we would be looking squarely at the fundamental legitimacy of capitalism.

The accommodative policy of the Federal Reserve offsets the risk into a bureaucratic model (a stable, routine, quasi public-private management of risk and the distribution of its value). Risk is managed by a power elite in the gamma dimension not to deconsolidate it (to keep it in the alpha dimension where risk is divisibly controlled by The People), but to keep it consolidated, which defeats the free-market legitimacy of capitalism (accumulation of value only by the consent of the governed who solely own the value of the risk).

Much safer to argue about "fairness" of the tax code than to directly examine the legitimate (fundamental, alpha risk) distribution of income and, thus, the power to control the risk. Remember that during the boom phase, risk is on. If an expanding money supply does not produce alpha risk (GDP), the gamma risk is too high. The value is too consolidated and presents as high debt-to-GDP. When the gamma risk is switched on, the alpha risk is effectively off (equity is liquidating into debt) and the system is critically unstable no matter how hard we try to ignore it with ambiguous issues that tend to be safely symptomatic if related at all.

So, if reducing debt-to-GDP is the magic bullet, what's keeping us from killing the "job killer?"