The Shocking Truth About Government Debt

Dear Reader,

Is the post-recession “recovery” actually a depression obscured by the false prosperity of debt?

A scandalous question… with perhaps a scandalous answer.

Today, we penetrate the “squid ink of official truth”… scatter the statistical fog… and let in an illuminating shaft of light.

Between 2010 and 2016, nominal U.S. GDP expanded an average 2.1% per year.

Some years it expanded more than others. But each year, nominal GDP expanded — officially.

GDP increases every year

Meantime, the national debt has nearly doubled since 2010. It now floats above $20 trillion.

And the Federal Reserve has nearly quadrupled its balance sheet to nearly $4.5 trillion.

So… how much of the post-recession growth is real… and how much is a debt-spun mirage, a shadow, a phantom?

What would GDP look like absent the artificial stimulus?

Financial advisory firm Baker & Co. Inc. recently hatched a study to answer these questions.

Their findings are illuminating…

The government has borrowed and spent luxuriantly for decades.

And “actual” GDP (details to follow) has always risen with the rising debt — whether because of it — or in spite of it.

But after 2008, Baker & Co. argues, “Something in our economy broke.”

“Actual” GDP is no longer rising with the rising debt.

In fact, it is falling.

They argue the depression has been obscured by the phony fireworks of debt:

Since then, it appears the economy has been in what would be considered a depression but masked by huge federal government stimulus borrowing.

Their conclusion swims outside the mainstream… flouts official wisdom… strips the emperor of his garments.

But is it true?

At the heart of Baker’s tort is a trick the federal government uses to measure GDP.

It begins with this question:

If you take on debt, do you consider it income? Or do you take it at face — debt that must be repaid?

If you answered debt is income, we suggest you apply for a position within the Bureau of Economic Analysis…

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

But 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.”

How does “actual” GDP appear without the smoke screen of debt?

Their shocking answer:

Something broke in the economy after 2008

Examine the graph, says 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%.

Perhaps now you realize why the government was so hot to raise the debt ceiling last month — and will be again this December when the current deal expires.

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

Prominent 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%, growth is “roughly cut in half.”

When did the U.S. debt-to-GDP ratio nick 90%?

In 2010… shortly after “something broke” in the economy.

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

About 105%.

We can only conclude that something is still broken in the economy… and will stay broken until further notice.

The problem now 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.

What happens without it?

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?

Maybe the time has come to let the tiger go… and pray.


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning