Inflation Has Repudiated $5 Trillion of U.S. Government Debt Since Biden's Inauguration

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3 MIN READ - A national debt update from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Cautious Optimism regular Keith Shapiro (aka. K-Shap) commented a few weeks ago that “governments love inflation.”

He’s absolutely right and here’s a prime example of why.

This November the federal government will have repudiated $5 trillion of its debt since Joe Biden took office, but without paying the debt down by even a penny. It will all be through the magic of inflation.

Here’s the fairly simple math.

1) Starting with the arbitrary baseline of January 2021, the national debt was $27.75 trillion at the time.

Since January 2021 the CPI index has risen 19.9%—diminishing the dollar by 16.6% of its value. Hence, $4.61 trillion of the $27.75 trillion debt has been wiped out due to the watered down value of our money.

(We are using official government CPI here for what it’s worth, so apply your own numbers which will certainly mean higher inflation and ultimately far more than $5 trillion of debt erased)

2) In 2021 the federal government added another $1.87 trillion of debt and the dollar has lost 10.3% of its value since then.

Another $193 billion of debt erased.

3) In 2022 the federal government added another $1.80 trillion of debt and the dollar has lost 4.6% of its value since then.

Another $83 billion of debt erased.

4) In 2023 the federal government added another $2.58 trillion of debt and the dollar has lost 1.6% of its value since then.

Another $42 billion of debt erased.

We’ll skip what debt has been added so far in 2024.

So add $4.61 trillion + $193 billion + $83 billion + $42 billion and inflation has helped the Treasury renege on $4.93 trillion of debt.

These numbers are as of September 2024. Unless the government borrows nothing in the next two months and inflation reaches zero as well, the amount of debt relief the government has granted itself will exceed $5 trillion by November.

As a reminder, $5 trillion is roughly how much George W. Bush increased the national debt during his eight years in office—a figure liberals screamed bloody murder about at the time. But with less than four years of inflation the Federal Reserve has just “coincidentally helped” absolve Bush’s entire eight-year debt tab just by cranking up the printing presses.

It’s an old trick that goes back to (the oldest version the Correspondent can find) ancient Greece around 380 BC. Cautious Rockers who missed that story can go to…

https://www.cautiouseconomics.com/2024/02/economic-history-05.html

The same story repeated itself in ancient Rome…

https://www.cautiouseconomics.com/2023/07/inflation-currencies33.html

And in medieval England…

https://www.cautiouseconomics.com/2022/10/inflation-currencies25.html

And today across the entire world with modern central banks.

Governments borrow $1,000 and promise to pay it back 10 years later. But in between the economy grows 2% a year and the central bank raises prices by 2.5% a year, so 10 years later nominal GDP is 56% greater.

Assuming the government taxes roughly the same percentage of GDP in 10 years that it does today, its nominal revenues are 56% higher, making it easier to repay the $1,000.

Of course the economy really only grew 21.9% in those ten years (1.02^10). The other 34.1% of that nominal GDP growth is simply inflation and higher prices.

It’s a sweet deal for the government that finds it much easier to repay debt with considerably less valuable dollars that are more abundant when the bill comes due.

But there’s no such thing as a free lunch. So who really pays for this sweet deal? 

Savers—basically anyone holding dollars who watches their wealth debased 22.4% by the printing press.

In a longer 30 years their dollars are debased by 53.2%. Yep, cut by more than half.

This is what the Fed calls “price stability,” and what Democratic politicians pin on “corporate greed.”

And these numbers all assume a scenario of 2.5% inflation. We saw official inflation peak at 9.1% in late 2021.

The 1970’s were even worse. From 1971, when Richard Nixon broke the last link between the dollar and gold, to 1983 the dollar became 38 cents wiping out savers and retirees in particular. If the national debt ever starts to get unmanageable the Fed can come to the Treasury’s rescue in such a manner again (imagine our $35 trillion debt becoming only $13.3 trillion in twelve years), then officially announce “Sorry, it was just a small mistake on our part. We have inflation back down to about 2% so everyone should be happy now.”

And anyone who complains that “Hey, this fiat money monopoly run by the Fed is ripping us all off. We need money tied to a finite commodity like gold again” will be mocked and ridiculed by the liberal media and government economists as a pedantic neanderthal. 

Because everybody knows the only way an economy can possibly function is with a state-sanctioned monopoly that creates money at zero cost without limit, gets its power from the same government that is heavily in debt and which uses police and guns to shut down any alternative form of money while forcing its citizens to use only its crummy, depreciating currency.

Another coincidence: the government and its economists say the state monopoly issuing their constantly devaluing money is just the only version of money that will ever possibly work. We can't even think about alternatives.

GDP Part 4: Is the Consumer Really Two-Thirds of the Economy?

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6 MIN READ - The Cautious Optimism Correspondent for Economics Affairs and Other Egghead Stuff concludes his miniseries on what goes into GDP.

Gross business receipts vs. consumer spending

We’ve all heard it over and over from politicians and media: “the consumer is two-thirds of the economy,” or sometimes “consumer spending is two-thirds of the economy.” And the statistic is accepted as an article of faith by the business press while used by certain politicians and academics to minimize the importance of the business sector.

Why exactly do they run around saying this? And is it true?

As you might guess, the answer is a little complicated.

GDP MATH

First let’s cover where the “two-thirds” number comes from. You may recall reading in an earlier installment of this GDP series that Gross Domestic Product is calculated as consumption spending + business investment spending + government purchases + net exports, or:

Y = C + I + G + Nx

If we go to the Bureau of Economic Analysis webpage and break down these elements for the full year 2023 we get the following:

(C)onsumption spending = $18.8 trillion
Business (I)nvestment spending = $5.0 trillion
(G)overnment purchases = $4.7 trillion
(Nx)et exports =  -$800 billion
GDP = $27.7 trillion

Based on these figures, consumption spending is indeed 67.8% of GDP. And business investment is a surprisingly small 18.1% of GDP.

And there it is (according to politicians and the business press): proof positive that the consumer is “two-thirds of the economy.”

But is it really that simple?

PROBLEMS WITH GDP

A vocal minority of economists argue that official GDP numbers are misleading and understate the size of business investment activity. For one, salaries aren’t counted but instead only spending on capital investment for things like factories, buildings, machines, etc…

Incidentally, excluding salaries is part of the more popular “expenditure approach” to GDP, but the less-used “income approach” to GDP includes employee compensation. However we’re not going in depth into the accounting of “expenditure” versus “income” GDP in this article.

Another controversy that the Economics Correspondent would like to address in more detail is the intermediate “value added” math used in GDP.

That sounds like a mouthful, but in plain English it means this: GDP calculates business investment spending by counting only the total investment that goes into the final stage product. It doesn’t include investment spending on all the intermediate goods that work their way up the supply chain to the finished good.

A simple example might be a car. General Motors might make a steel chassis and produce its own engine and transmission for a car it intends to sell. Additionally GM will have investment costs for factories and machines that help workers produce these components and assemble the car. 

GDP includes all these costs in investment spending.

However before GM bought the steel for the chassis, raw iron first had to be extracted from the earth. The raw materials company had business investment expenses of its own.

Guess what, the raw materials company’s investment expense is not included in GDP (will explain why in a moment).

The same is true for the refining company that purified it into productive metal. Its purchase of the ore and all investment expenses for its plant are not included in GDP.

Then the steel mill that combined the iron and coke incurred expense to purchase those precursors plus investment expense for the mill and furnaces. None of this spending is included in GDP either.

In economics terms, only investment spending on the final product is counted, but investment in goods produced during the intermediate stages of production which ultimately find their way into the final product are not counted.

Hence the controversy. How can business investment be only 18% of GDP when only investment spending at the final goods level (General Motors’ inputs, plant and equipment) is counted, but spending for the steel mill, the refiner, the raw ore extractor, and countless other firms that produce the myriad of precursors for wheels, tires, seating, windows, electronics, fluids, glass, etc… is not?

OFFICIALLY THE ANSWER IS…

Well the mainstream economics community has a good answer. They want to avoid double counting.

If the refiner pays $250 for a block of ore, then adds its own investment to turn it into refined iron and sells it to a steel mill for $500 which in turn combines it with other inputs and sells the steel for $750, economists don’t want to add $250 + $500 + $750 = $1,500.

To count $1,500 in business investment expense would count the $250 paid for the block of ore three different times as it's sold once to the refiner, a second time to the steel mill, and a third time to GM.

The same for the refined iron. Economists don’t want to count its $500 twice: once when sold to the steel mill and a second time when the steel is passed on to GM.

On and on, they say, down the production chain… double and triple and quadruple counting could inflate the numbers. By the time the chassis is produced for, say, $1,000 (the Correspondent is guessing, he doesn’t really know how much a chassis costs to produce), the chain of businesses could have “invested in” the $250 block of iron ore three or four times. 

In economics terms the logic is this: all the investments by intermediate stage companies will ultimately be reflected in GM’s final product: the car. GM paid, say, $20,000 for all inputs (there’s your single counting for intermediate stage investments), added $10,000 more of its own investment spending and, after a few transfer costs like interest on debt and taxes, sold the final product for a profit at $35,000.

With traditional GDP only the investment inputs added by GM—plus all the inputs from intermediate firms which are reflected solely in the prices GM, and only GM, paid suppliers for those inputs at the last stage—are counted using this math. There is no double counting of investment.

VERDICT?

As mentioned before, the mainstream economics community accepts the “don’t double count” logic pretty much unquestioningly.

The Economics Correspondent agrees with the logic too, but believes that leaves us with a not fully satisfying number that can still be misleading in other ways.

In the affirmative, yes, the investment dollars for a block of iron shouldn’t be multiplied two, three, four, or five times just because it passes through the hands of several firms.

Where the math gets misleading is it completely understates the total amount of business activity and gross investment spending that goes on in the economy. The math looks as if GM is the only company spending any money when in fact there are countless firms “behind” GM that are collectively spending even more and also employing a lot more people.

It also understates the impact on the economy of disruption in the business sector. If investment spending fell by 5% then according to the standard formula just 5% of 18% is a 0.9% fall in GDP: a blip on the radar.

But a 5% reduction in all (gross) business spending is a much larger number. In the real world the scope of business losses, bankruptcies, and idling of workers would be enormous, far outstripping the suggested 0.9% slump (see attached chart during 2008 and 2020 recessions).

Why? Because there are a whole lot more dollars flowing through the business sector overall than the GDP model portrays.

(Also see comparative size of recessions in attached chart from economist Mark Skousen’s column: “Business—Not Consumers—Drives the Economy.”)

And let’s not even get started on how the salaries and compensation of all those employees isn’t even counted. We even noted in an earlier article that government spending on employees and contractors is considered a “purchased service” and counted in GDP, yet all those private sector salaries and other compensation are not. This makes government worker salaries look “productive” for the economy while private sector salaries are mathematically excluded.

What, private sector employee's aren't productive but government workers are?

Imagine how much larger business investment would look as a share of the economy if private payrolls were included.

There is an alternative measure of economic output that attempts to right some of these wrongs called Gross Output or GO, and in 2014 the Bureau of Economic Analysis even began including crude statistics on GO although they’re buried deep in the website and basically require a search to locate. However the BEA is tacitly admitting GO has certain advantages by putting it on their site.

Conclusion: In the first article on GDP the Correspondent said the formula is pretty good, but not perfect. Understating business activity and excluding expense on salaries are the two biggest reasons why.

In the end, traditional GDP is correct not to double, triple, and quadruple count investment expenditures as intermediate goods flow through the various stages of production, but the press should be a lot more careful when concluding from the simplified math that “the consumer is two-thirds of the economy.” 

Of course in a world where people only want to have to digest a single headline, good luck explaining the nuances of where GDP math falls short. And don’t hold your breath waiting for the media, in its present wretched form, to grasp the math either let alone not censor it even if they did understand.

GDP Part 3: Annualized GDP and GDP Across Different Countries

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues his mini-series on understanding GDP.

Nominal and PPP GDP yield different results

ANNUALIZED GDP

As we continue our examination of GDP as a measurement tool, a quick word about quarterly and annualized GDP figures.

When the Bureau of Economic Analysis releases a quarterly GDP report with headlines like “Economy Grew at 3% Pace in Second Quarter,” the 3% number is annualized. That is, the economy only grew about one-quarter as fast as 3% but the BEA reports an annualized number that assumes the same quarterly rate of growth continues for three more quarters. This makes the final number easier to understand for readers.

Most people would prefer a headline that reads “grows at 3% annualized pace” than “grows at 0.75% quarterly pace.”

Incidentally the assumed growth over four quarters is compounded so technically 3% annualized isn’t quite 0.75% per quarter. If one compounds 0.75% growth over four quarters the annualized result is actually slightly higher than 3% (1.0075 * 1.0075 * 1.0075 * 1.0075 = 1.030339), or +3.03%.

Such a tiny difference may not mean much, but when dealing with larger numbers the differences can stack up, namely during the recent Covid crisis.

When the state governments shut down economies across the country in the second quarter of 2020, the BEA reported that GDP contracted by 34.3%.

We now know that’s an annualized number so one might assume the real rate of contraction for the quarter itself was 34.3 divided by 4 or -8.575%.

In fact, the quarterly contraction has to be compounded four times, so although the math is a little weird the formula is actually

(1-.343)^(1/4) = .9003

...or a quarterly contraction of -9.97%, not -8.575%.

Likewise when the economy reopened in the third quarter, the much less widely reported headlines read that GDP rose by 33.4%.

Once again, 33.4% is annualized, assuming the quarterly rate of growth compounds over four quarters total. So using our compounded math the economy really grew 1.334^(1/4) = 1.0747 or 7.47% that quarter.

Down 9.97% in Q2, up 7.47% in Q3. In one quarter the economy clawed back most of what it had lost, but not all.

OTHER COUNTRIES: NOMINAL GDP

Occasionally the Economics Correspondent will read a headline that “China has the world’s largest economy measured by purchasing power parity.”

As you might guess, this headline is pretty misleading. China does not have the world’s largest economy (although it is safely #2).

The source of confusion is that economists use two different measures of GDP, especially when comparing different countries: nominal versus purchasing power parity or PPP.

The easiest way to think of these two is:

“Nominal” is the best measure of the actual value of all products and services produced by an economy. On that measure the United States remains #1 at $28.78 trillion versus China at $18.53 trillion (IMF).

"PPP" takes nominal GDP and adjusts it for cost-of-living in each country. So while the USA might produce more stuff and more valuable stuff than China, it still costs Chinese less to live in China than it costs Americans to live in the USA.

But when comparing U.S. output to Chinese output the Economics Correspondent thinks it’s useless to work with PPP and divide by U.S. or Chinese cost-of-living. Nominal is what matters which indicates the USA still outproduces China.

To see the difference in U.S./Chinese nominal vs PPP GDP, see the following links:

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

So why use PPP at all?

PPP GDP

Because PPP does still play an important role in measuring "per-capita" GDP.

On a nominal basis U.S. per-capita GDP, or output per citizen, ranks #6 in the world at $85,373 (IMF) and is easily the highest of any country with any meaningful population (Monaco, the Caymans, Singapore, and even Ireland, all of which rank higher than the USA, are small countries with at most 5.9 million people).

China, which has far more people than the USA, falls to #69 at $13,136 on a per-capita basis (IMF). This is where the phrase “American workers are among the most productive in the world” comes from: the United States still produces a lot more valuable stuff per worker, and per citizen, than China and most other countries.

However, it still costs a lot less to live in China, so adjusting with PPP gives us a clearer picture of the material standard of living for a nation’s citizens. By nominal measure Americans produce 6.5 times more stuff per person than Chinese, but PPP tells us Americans don’t enjoy a 6.5 times higher living standard.

Using PPP, U.S. per-capita remains $85,373 but Chinese per-capita GDP rises to $25,015. So a more accurate picture of living standards tells us Americans are about 3.4 times richer than Chinese. Still a lot better, but not 6.5 times richer.

To see the difference in U.S./Chinese nominal vs PPP per-capita GDP, see the linked photos:

Per-capita GDP nominal

https://image.cnbcfm.com/api/v1/image/106859827-1616735644553-US-China_GDP_per_capita.png

Per-capita GDP PPP

https://mgmresearch.com/2018/12/China-vs-US-GDP-PPP-per-capita-comparison.png

Bottom line? When comparing how much one country produces against another, use nominal GDP.

When comparing how high a living standard one country’s citizens reap from economic production against another country’s citizens, use PPP per-capita GDP.

And ignore articles and charts that compare U.S. GDP to Chinese GDP using PPP metrics. They are meaningless when stacking two entire countries' economies next to one another.

One final complication about comparing countries. Nominal GDP is the best metric to use, but it’s not perfect.

U.S. GDP is measured in dollar spending on consumption, business investment, government purchases, and net exports. But, say… Japanese GDP is measured in yen spending on those same variables.

So we are now comparing a dollar-based metric with a yen-based metric, aka. apples and oranges.

To convert to an apples-to-apples comparison economists simply adjust by the going currency exchange rate. This is not a bad thing since, although the exchange rate fluctuates, currency markets adjust largely based on the perceived economic output of each country.

So if Japan were to go into a depression and produce 50% less stuff while leaving the money supply constant (leading to a doubling in prices) the Japanese nominal spending numbers might look like U.S. vs Japanese GDP hasn't changed much when in fact Japan’s real GDP is half what it was.

But currency markets would notice the Japanese inflation and the U.S. dollar would strengthen—by somewhere around double—against the yen. Hence Japan's dollar-denominated GDP would be halved (adjusted by a far more favorable exchange rate for the dollar) and in nominal terms U.S. GDP would accordingly look a whole lot bigger than Japan’s, and far bigger than it was a year prior.

Where this can lead to complications is central bank exchange rate manipulation. If a government is intervening in currency markets and manipulatively undervaluing its currency—something China did a great deal of 15-20 years ago and still does occasionally today—Chinese GDP would appear slightly smaller than it really is. This is why 15-20 years ago economists argued Chinese GDP was probably somewhat higher than the nominal numbers indicated.

Likewise if a country is overvaluing its currency, as Venezuela has for decades and Argentina did up to Javier Milei’s election victory, the currency adjustment will make Venezuelan or Argentinian GDP look stronger than they really are.

Yes, all along Venezuela's nominal GDP has been even worse than it appears, and that's before the socialist government starts lying.

In extreme cases like Venezuela and Argentina the resulting nominal GDP numbers were way off, but economists took into account the overvaluation and adjusted their GDP estimates to be more realistic. But in cases of modest undervaluation, such as China or Japan today, the GDP adjustment is pretty small.