America’s “Actual” GDP: The Shocking Truth

Saturday last we offended the pieties.

We reckoned that democracies — being shortsighted — tend toward vast accumulations of debt.

In response, reader Tom B. dealt with us as follows:

The committed ignorance of pseudointellectual arrogance and their refusal to take an economics class on the uses of the FIAT dollar is stunning! It’s the reason Warren Buffet [sic] smiles every time “financial experts” demagogue debt!

Congrats, Daily Reckoning, you’re consistently ignorant!

It is with high honor that we accept Tom’s congratulations.

True consistency is a rare feat in this world… even if consistently ignorant.

Thus we wear the garland proudly and — if you’ll forgive the expression — we are in our reader’s debt.

Of course, we do not question the utility of the fiat dollar… or of debt.

As our co-founders Bill Bonner and Addison Wiggin argued in their best-selling Empire of Debt, the United States built an entire empire upon it.

Only a debt-backed system of fiat money could finance the great wars, the great social improvements… and the greater economic booms.

Fiat money was made for public service.

It is civic-minded. It has a heart. It does what it’s told.

Whatever war, whatever boondoggle, whatever swindle it is ordered to get behind… it will get behind.

“Whatever you need, I’m here for you,” it seems to say.

And fiat money willingly sacrifices its value for the greater good.

The dollar has lost some 80% of its value since Nixon severed its final linkage to gold.

Gold, conversely… is as public-minded as a cat.

The greater good is beyond its care. It lacks all human compassion. It moves at its own leisurely pace.

And it is remarkably unsuited for war.

“You go over there,” gold tells the fiat dollar. “I’ll stay here.”

And unlike its self-sacrificial fiat counterpart… gold guards its value with vengeance.

Its limited quantity, therefore, forms a natural brake upon credit.

And as the right-thinkers tell us, credit must continually expand to “grease the wheels of industry.”

In summary, explain Messieurs Bonner and Wiggin:

The trouble with gold is that it turns its back on world improvers, empire builders and do-gooders… The nice thing about gold is that it is so unresponsive. It neither laughs nor applauds.

Nor do we laugh, nor applaud.

Or do much of anything else.

We simply watch — stupefied — and wonder.

We wonder, for example, how much more debt the American Republic can absorb before the entire business turns sour.

The national debt has nearly doubled since 2010. It presently rises above $21 trillion.

Total U.S. public and private debt runs to some $68 trillion.

Has productivity kept pace?

Alas… it has not:


Real U.S. GDP growth has averaged 2.16% since the end of the Great Recession — far beneath the typical 4.3% post-recession average since WWII.

Real GDP has also endured a record 11 consecutive years without 3% growth.

It is working on 12.

A dollar of debt just doesn’t do the duty it once did… when debt was but a trifle.

Assume, if you can somehow, an economy unburdened by crushing debt.

In this economy the miracle multiplier of debt could make a case for itself.

One dollar of debt might transform the cup of water into the quart of wine.

But the debt begins to mount… and each new drop of water yields less and less wine.

Ultimately comes the point when water not only yields no wine… it actually starts turning the whole business to vinegar.

Economists Carmen Reinhart and Kenneth Rogoff have shown that annual economic growth falls 2% per year when the debt-to-GDP reaches 60%.

When it hits 90%… they conclude one dollar of debt yields less than one dollar of output.

Debt no longer lifts… but drags.

What is America’s current debt-to-GDP ratio?

Roughly 105%.

When did the U.S. debt-to-GDP ratio cross the 90% red line?

This is, when did the wine start turning to vinegar?

In 2010, it appears… shortly after the great turning point.

After 2008, argues financial advisory firm Baker & Co., “something in our economy broke.”

Before 2008, what they term “actual” GDP had always risen alongside the rising debt — whether because of it — or in spite of it.

But no longer.

According to Baker, actual GDP is falling… while debt soars heavenward.

But what is this “actual” GDP?

In official GDP calculations, government spending adds juice to the economy.

It makes no distinction between money the government raises through taxes… and the money it raises by borrowing.

Baker counters that the money government borrows must eventually be repaid.

Thus, it is not income.

It is “artificial stimulus”:

[We] suggest that government debt is not part of “national income” because it is not income. It is borrowed… and must be paid back eventually… Debt is artificial stimulus, not national income! Governments must pay back debt either through higher taxes, inflation/depreciated currency, reduced services or some combination thereof.

Baker therefore created what they consider a measure of true GDP — the “Actual National Income.”

Unlike official GDP, it accounts for debt’s drag.

What is the path of “actual” GDP without the phony fireworks?

Their shocking answer:


Examine the graph, roars Baker, and “tell me if you think the actual economy has healed.”

We did. We can’t.

How much bounce has the post-2008 barrage of debt given GDP?:

Since 2008, this artificial stimulus has averaged 7.45% of GDP. The arithmetic… is quite simple; without the artificial stimulus created by spending the proceeds of newly issued Treasury bonds, our GDP has declined an average of 7.45% each year since 2007!

Kind heaven, no — actual GDP has declined an average 7.45% each year since 2007?

And if that artificial stimulus is removed?:

With the federal government borrowing and spending over 6–7% of GDP, then it stands to reason that without the government’s ability to borrow new money, GDP would collapse 6–7%.

Let us repeat:

Remove the stimulus and GDP collapses up to 7% — if the theory holds.

Meantime, the latest IMF report draws a grim sketch of the approaching scenery.

IMF director Vitor Gaspar says the “United States stands out” as the only advanced country planning on a rising debt burden in the years ahead.

The culprit being the Trump tax cuts… twinned with massively increased government spending.

The Congressional Budget Office now projects trillion-dollar deficits through at least 2028.

We can only conclude that something is still broken in the economy… and will stay broken for the foreseeable future.

The problem at this point appears to be the problem of having the tiger by the tail.

The economy requires constant injections of debt to sustain the appearance of growth.

But if that debt only burdens the economy without producing any authentic bang…

Is it not better to stop now, before the tiger grows larger — and hungrier?

Maybe the time has finally come to let the tiger go.

Our only advice is this:

Be prepared to run… and pray…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning