Puplava talks EJ's book

[Chomsky]

Another great piece by Chris Puplava. His weekly column has become essential reading.

http://www.financialsense.com/Market...2008/1112.html

While banks reign in credit someone will have to take the place of the consumer (and thus indirectly domestically exposed U.S. companies), and the 800 pound gorilla in the corner is the U.S. government. We are already witnessing massive deficit spending by the U.S. government to help stimulate the economy while the financial economy deleverages. This is exactly what happened when banks went through their seven year deleveraging process from 1974 to 1981, where U.S. government debt relative to GDP expanded from 23% to 30%, more then making up for the 7% reduction (46% to 40%) in bank credit relative to GDP.

Figure 14

Source: Federal Reserve/BEA

Hopefully the increased deficit spending by the government will go towards productive means. Over the last thirty years we have been getting less bang for every buck borrowed. The growth in total U.S. debt has grown faster than GDP with each decade getting less dollars in GDP for each dollar of debt accumulated, with large drops seen in the 1980s and 1990s (Figure 16).

Figure 15

Source: Federal Reserve/BEA

Figure 16

Source: Federal Reserve/BEA

The large drop in productivity as measured by how much GDP rises per dollar of debt borrowed in the 1980s and 2000s corresponds with increased debt accumulation by the consumer on “things” as well as increased defense spending out of necessity (Cold War, 9/11 attacks). Unfortunately, cars, tv’s and missiles have a short shelf life and do not add significantly to economic growth and productivity gains.

Figure 17

Source: Federal Reserve/BEA

Hopefully the wars in Afghanistan and Iraq will come to a close and allow the government to shift its spending towards areas that will have long lasting gains in productivity such as infrastructure as well as energy independence. Not only will spending on infrastructure and energy independency produce more jobs here at home, it is an outright necessity. If we do not increase infrastructure spending then we can expect to see more electrical blackouts, more levees breaking, spikes in energy due to inadequate supply, more bridge collapses, more gridlock on the freeways, and so on and so on. Hopefully President-elect Barack Obama and his advisors understand this so that we can come out of our nation’s crisis more productive than when we entered it. If he does then infrastructure companies may be the next big thing in the years to come.