Ricardo, Wicksell, Hayek, Friedman all got it: Tariffs don't cause inflation

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff once again visits recent inflation numbers and the media’s repeated attempts to link them to tariffs.

Ricardo's 1810 Bullion Debates.
The media should have checked this first

Last week we got a slightly elevated July consumer inflation report, up 2.7% year-over-year, and higher than in June and May.

And immediately the press blamed tariffs with headlines like:

” Inflation ticks higher as Trump's tariffs kick in.”

-Politico, August 12th

“Inflation remains elevated as Trump's tariffs take hold.”

-NPR, August 12th

“US wholesale prices jump in July as tariffs hit.”

-BBC, August 12th

Now the Economics Correspondent is generally no fan of tariffs, especially when other countries impose them unilaterally on the United States for decades. But whether you’re pro-tariff, anti-tariff, pro-free trade, pro-mercantilist, or pro-industrial policy, inflation is still a monetary phenomenon and not caused by tariffs (except under a rare set of conditions which we’ll see don’t apply here).

Milton Friedman famously said “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

That remains true, and to prove both Friedman right and the “blame Trump’s tariffs” press wrong, let’s take a look at what the media won't: the "monetary phenomenon" of the last year.

As we’ve already covered in previous articles Friedman’s license plate read:

mv=py

That is, money supply x monetary velocity = the general price level x economic output.

There’s nothing about "tariffs" in the formula.

So what happens if, unlike the media, we actually bother to look at the "m" in the equation of exchange: the money supply?

M2 from July 2024 to July 2025 rose by 4.8%, which is entirely within the purview of the Federal Reserve.

https://fred.stlouisfed.org/graph/?g=1LAKm

I'll repeat both numbers:

Prices rose 2.7%. 

The money supply rose 4.8%.

Since the Fed is in charge of monetary policy, since the Fed is tasked with meeting a 2% inflation target, and since the Fed boasts of its independence, then the Fed is far more guilty of the 2.7% inflation report than any alleged effect of tariffs.

For all that was required for the Fed to achieve its 2% year-over-year inflation target was to increase the money supply by a still-forceful 4.1% instead of the too-high 4.8%.

Why doesn’t the press mention this instead?

Part of it is Trump Derangement Syndrome. A bigger part of it is the much longer-standing ignorance of what the Fed actually does plus a tendency by the establishment—the media included—to rally around our central bank as some indispensable institution that bestows us with eternal economic salvation (hint: it's neither).

Now some more sophisticated people might say "Well the Fed has to offset real economic growth to keep prices stable, so of course it has to grow the money supply.”

OK fine. From 2Q24 to 2Q25 real GDP rose by 2%.

https://fred.stlouisfed.org/graph/?g=1LAKs

So if you print 4.8% more money chasing 2% more goods and services, the result is 2.7% inflation (1.048/1.02 = 1.0274), which is exactly the elevated inflation rate we got.

Thus, the original point remains: none of the latest inflation number can be attributed to non-monetary factors, including tariffs.

And again, the Fed printed money too fast. If it had simply printed 4.1% more money instead of 4.8% more money then year-over-year inflation in July, even with offsetting economic growth, would have been its dead on target at 2% (1.041/1.02 = 1.0206).

But then, say the sophisticated Fed apologists, to slow down the rate of monetary growth the Fed would have to raise interest rates which would be really bad, right?

Not when considering an even better solution they don’t mention. Namely, the Fed could have simply never lowered interest rates during the last five months of the Biden administration in the first place (September 2024 to January 2025). Had rates stayed where they had been for the previous year, a full 100 basis points higher, we wouldn't be looking at 2.7% CPI inflation today.

Inflation stood at 2.6% in October 2024 and 2.7% in November 2024. Given its dual mandate of full employment and a 2% inflation target (which the Correspondent believes is already too high), the Fed’s rate cuts made no sense in late 2024, just as cutting rates today with 2.7% inflation also makes no sense.

But then the press wouldn't have a Trump-linked scapegoat to headline.

To repeat: monetary policy is the purview of the Fed. The Fed is not only entrusted with it, Congress has granted it a coercive monopoly over currency, reserves, setting interbank interest rates and interest on reserves (IOR) rates, etc... to carry out its mandates. It has all the tools it needs to achieve any price target it wants.

Former Fed governor and short-list nominee for next Fed Chair Kevin Warsh said exactly this (about the Fed’s toolbox) in his recent Hoover Institution interview.

But the media reports "tariffs, tariffs, tariffs” while remaining silent on the money supply and silent on the Fed.

One more thought that puts this all in historical perspective: The United States was a major tariff/protectionist country in the late 19th century. The post-civil war era was dominated by Republican administrations and Congresses, and in those days the Republicans were a big pro-tariff party and imposed them all throughout.

So if tariffs cause inflation, why then in the golden era of protectionist tariffs was there not only no high inflation, but prices actually ***fell*** by 39% or an annualized inflation rate of -1.0%?

https://www.officialdata.org/1865-dollars-in-1913?amount=1

The answer: there was no Fed printing fiat money. And tariffs didn't cause inflation then either.

As we’ve already discussed in earlier articles the effects of tariffs on inflation are like those of oil, with both misunderstood.

When either tariffs or more expensive oil raise the prices of certain goods, especially inputs for other products that get purchased by consumers down the line, consumers ultimately do pay more for them. 

But if the money supply remains constant, then those same consumers will have less money left over to buy other products whose prices will necessarily fall due to decreased monetary demand. British economist David Ricardo understood this even in 1810 during the great Bullionist Debates. Knut Wicksell, F.A. Hayek, Milton Friedman and a plethora of other competent monetary economists have understood this basic principle too.

Yet over two centuries later journalists and even many economists continue to promote the tariff or oil “cost-push” fallacy.

Overall with tariffs or higher oil prices there is no inflation in the general price level... unless one of either two things also happens:

1) The central bank prints more money (the actual cause of the inflation)

2) The higher oil prices or tariffs begin to impact output and real GDP suffers by going negative (not the case in the late 19th century and GDP rose 3% in Q2).

Trump's tariffs are not causing inflation. The Fed continuing to inflate the money supply too fast is, but the Fed’s culpability—for the latest inflation report, for 2021 and 2022’s inflation, for the 2008 financial crisis, for the recent housing bubble, and for the last half century’s multiple asset bubbles and boom-bust cycles—is once again ignored by the press.

Left Coast Correspondent: Canadian and European Glaciers Receding Long Before Cars and Planes; Climate Alarmists Only Disclose 20th Century Info

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3 MIN READ - In a followup to Friday’s article on the retreat of Alaska’s Glacier Bay ice sheet, the Cautious Optimism Correspondent for Left Coast Affairs and other Inexplicable Phenomena uncovers more glaciers that have been receding long before man started driving cars. You’ll want to view the five attached pictures for reference.

For those who missed it, the original Glacier Bay map and analysis post is available at:

https://www.cautiouseconomics.com/2025/08/leftcoast28.html

During the 18th and 19th centuries the industrialized societies weren’t yet able to survey and map every glacier from all remote corners of the planet, but we still have accurate measurements of many glaciers in North America, Greenland, and Europe.

A popular tourist attraction is Canada’s Athabasca Glacier, off the famous Rocky Mountains Icefields Parkway. From the highway you turn off and take a short, narrow road less than a mile uphill. On the way up tourists see many small roadside markers, each featuring the written year indicating the glacier's earlier terminus.

The Correspondent was on that road several years ago and remembers seeing markers for years like 1880, 1890, and 1908 demonstrating the glacier was already retreating before mass production of automobiles and commercial flight began,

But the climate alarmism crowd always uses photos from more recent markers for their political material, like 1948 and 1982—basically any combination of years that frames the glacier’s retreat as having started when humans began producing large amounts of CO2.

A prime example is the first photo (attached) where we can see the glacier has retreated many dozens of yards at least from where it stood in 1992.

But also attached is a second photo which climate alarmists will never show you—from 1843. 

Yes, 1843.

Where’s this marker? Well you have to turn your car around and drive back downhill to the Icefields Parkway. Then you must cross the highway and go slightly uphill on the other side to reach the Glacier View Lodge. The marker is just outside the hotel.

In a straight line the 1843 marker is well over a mile from the glacier… which is probably why the global warming crowd doesn’t want the public seeing it: people might start to realize just how much the Athabasca had already shrunk before humans started driving cars.

There is also data on glaciers in Montana that show significant retreat from 1850 to 1900, or glaciers in Greenland that were retreating in the 19th century such as the Jakobshavn Glacier, although to the Correspondent’s knowledge there are no markers in the middle of the ocean to denote where it was in 1850.

And we have old 19th century photographs from Europe. In the next two photos we see the dramatic retreat of Switzerland's Rhone Glacier from 1850 to 1900, also before cars, planes, and electrical power plants.

Rhone glacier: 1850

Rhone glacier: 1900. Note new structures.

And then there’s some help from artists. Photography may not have been commonly available in 1835, but we have a painting that year of the Arolla and Tsijiore Nouve glaciers, also in Switzerland.

If we compare the furthest extent of the glaciers in the 1835 and 1880 images, and if we disregard climate activist allegations that the 1835 Swiss painter was being paid by ExxonMobil, a common theme appears: glaciers around the world were already observed retreating rapidly in the 19th century or even in the case of Alaska’s Glacier Bay, during the late 1700’s.

Yet when the global warming lobby shows "before and after" pictures of glaciers, they always cherry pick dates right before mass automobile production and dates near present day. Their objective is to convince (and frighten) viewers by factual omission that it's all the doing of those greenhouse gases and the future of humanity demands they hand over trillions of dollars in new taxes to save the planet.

There are many other northern hemisphere glaciers with 19th century records, but the global warming crowd isn’t going to volunteer the information. The process of finding them online is tedious and painstaking, but anyone with a little search engine persistence will find more.

Alaska Glaciers Receding Since at Least 1778, So Why Does NASA Start at 1941? (3 min read)

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3 MIN READ - CO recently posted some spectacular photographs of his vacation cruise sailing into Glacier Bay, Alaska to take in the magnificent ice sheets. 

However, the Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena would like to unapologetically leverage CO’s vacation to illustrate the less-than-honest way in which the climate alarmism lobby has used Glacier Bay in particular to further their global warming agenda.

Glacier Bay, and in particular the Muir Glacier within the bay, is cited by scientists and climate change activists as a stark warning of the dangers of a warming planet. According to them, man’s industrial activity and greenhouse gas production are precisely what has driven the glacier’s rapid inland retreat.

As evidence, NASA’s Climate365 page provides the first photograph (attached) contrasting Muir Glacier’s impressive ice sheet in 1941 which has retreated so far in present day that it’s mostly a watered inlet. 

What more proof could anyone need that we need to be forced into electric cars, lose our gas stoves, and pay trillions of dollars in new taxes? Humans began producing cars and flying airplanes at an accelerated rate after World War II, so it couldn’t be more obvious that mankind is the cause.

However what NASA never posts online is the tiny size of the 1941 glacier compared to its original size in 1778.

Yes, westerners mapped Glacier Bay as far back as 1778, but that’s not important for you to know.

As you can see from the second attached photo (map) Glacier Bay was first mapped by Captain James Cook in 1778, although there wasn’t much “bay” to map back then.

In 1778 the giant ice sheet covered the entire bay all the way out to the ocean, so Cook may not have even realized there was a “bay” there and proceeded up the coast.

In 1794 Captain George Vancouver took a closer look and, according to Gemini AI, “documented the presence of a large glacier filling the bay. At that time, the bay was just a small indentation in the coastline, with a massive glacier extending far into what is now Icy Strait.”

And as you can see from the map, the glacier has been receding rapidly from 1778 into the 19th, 20th, and 21st centuries. In fact, if one looks at the position of Muir Glacier in the 1940’s, the original ice sheet had already lost well over 80% of its length and far more of its volume before World War II, also before humans started driving cars and flying in planes en masse.

It had even lost two-thirds by the turn of the 20th century.

What caused the ice to recede so rapidly in the 18th and 19th centuries?

There were virtually no cars, the very first production internal combustion engine car manufactured in 1886.

There was no commercial aviation.

There was no commercial electricity generation on earth until 1882.

In 1900 there were about 1.6 billion people on earth, compared to 8.2 billion now, and back then almost none of them had cars, flew airlines, had electricity, or took mass transit like buses and only a tiny number had ever ridden a train.

Clearly something other than human CO2 made the glaciers melt before 1900. Some scientists argue the planet has been warming for quite some time, coming out of the “Little Ice Age” of the 16th through 19th centuries, but don’t know for sure, just as the climate alarmists clearly don’t know for sure themselves. 

If you look at the map’s other inlet glaciers, the numbers are even worse. Many of them had already receded 90% from the ice sheet’s original ocean terminus by dates like 1892 and 1912, and the retreat has slowed dramatically since then.

This tactic of parading glacial retreat exclusively between recent dates that coincide with mass automobile, air travel, and electricity production is used over and over by the climate alarmist crowd—including NASA (i.e. the federal government). They showboat dramatic ice loss from glaciers around the world, but deliberately conceal the even greater ice loss that preceded large scale human greenhouse gas activity. After all, we must all believe glacial retreat only started when lots of humans started driving cars.

ps. Although westerners weren’t present to map every glacier in every remote corner of the earth in the 18th century, the Left Coast Correspondent has seen very old data on many glaciers in Canada, Europe, and Greenland that show the same pattern. 

In a followup he’ll later post a typical 20th century retreat photo of the famous Canadian Athabasca Glacier—a popular tourist attraction—alongside another photo of what he’s seen firsthand at the glacier but which the climate alarmists never show the world: far more distant retreat markers from the mid-1800’s.

Left Coast Correspondent: Pro-Gun Control San Franciscans Support "Confront the Intruder Yourself" Police Unions

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From the Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomenon (who lives in San Francisco and gets to watch the zoo animals up close).

From the Correspondent’s Nextdoor email feed (see photo).

Keep in mind liberal San Franciscans are the same crowd that:

1) Supports taking guns away from law abiding citizens to “just let the police handle it.”

2) Supports government employee unions which has led to many police sergeants earning over $600,000, $700,000, even $828,000 a year (see Transparency California: San Francisco government salaries), followed later by mathematically predictable excuses of “chronic understaffing” from both SFPD and the Sheriff Department.

3) Supports leniency for criminals. Outside the galvanized anti-crime Asian voting bloc, a majority of San Franciscans still voted to retain far left progressive District Attorney Chesa Boudin in 2022.

4) Complains that the police didn’t show up when the called 911 and told the elderly citizen to confront the criminal themselves.

Can Trump get super low interest rates by replacing Jay Powell?

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs comments on recent speculation about Federal Reserve Chairman Jerome Powell’s replacement and Trump’s efforts to get lower, even 1% interest rates.

Trump: "Lower that to one percent"

Longtime readers of Cautious Optimism have probably noticed the Economics Correspondent’s columns lean heavily towards money, banking, and central banking. So given all the recent headlines about Donald Trump’s criticism of Federal Reserve Chairman Jerome Powell it seemed like a good time to discuss whether or not replacing Powell will clear the way for super low interest rates.

First a little background. Despite his heavy criticism of Jay Powell, the Fed chairman was actually Trump’s pick to head the central bank back in 2017, beating out former Fed governor Kevin Warsh and Stanford economist John Taylor (both Milton Friedmanites). At the time the press speculated Trump chose Powell because he was a Republican, but so too are Warsh and Taylor.

Once Powell cleared Senate confirmation Trump quickly called on him to lower interest rates to zero or even negative rates. Powell ignored those pleas, instead continuing the Fed’s ongoing gradual incremental rate hikes from seven years of zero under Barack Obama plus a meager one-quarter percent in 2016.

Some conservatives began to suspect the Powell Fed was deliberately acting to hurt the economy, and by extension Trump. However the stock market got spooked by rising rates in late 2018 and the Fed immediately stopped hiking followed by three rate cuts in 2019.

When Covid struck in early 2020 the Fed slashed rates to zero, suspended all bank reserve requirements, and flooded the banking system with trillions of dollars in reserves above the 2008 Fed’s record response to the Great Financial Crisis.

The Correspondent sees all these moves as consistent with the Fed’s playbook—a flawed playbook in his opinion but nevertheless consistent—and not those of a central bank conspiring to politically destroy a president. If the Fed really wanted to hurt Trump it could have continued hiking in 2019. Or handed the golden opportunity to sink a vulnerable president the Fed could have refused to slash rates during the 2020 election year pandemic, but it didn’t.

Fast forward to 2025 and Jay Powell’s second term is almost complete, officially ending in May of 2026.

Everyone knows Trump won’t renominate Powell and the focus has shifted to his potential successor. Will it be Treasury Secretary Scott Bessent? Director of the White House National Economic Council Kevin Hassett? Whoever it is, many believe he or she will have to toe Trump’s superlow interest rate line to get nominated since he’s said repeatedly rates need to come down to as low as 1%.

By now CO Nation probably knows the Economics Correspondent is no fan of the Fed and believes interest rates should be set not by the Fed, but by the free market of supply and demand. That is: the supply of loanable saved funds and demand for loans intersecting at whatever interest rate allows all savings to clear the credit markets, not by edict of a handful of PhD technocrats guessing every 45 days where to set by far the most important price in the economy.

The Correspondent also thinks Powell turned out to be a pretty clueless Fed chair in his first term. For example, when inflation took off in 2022 Powell was asked in Congressional testimony whether continuing to expand the money supply at a 12-13% annual clip had anything to do with rapidly rising prices.

In an answer that Kevin Warsh recently said would have “outraged” the late Milton Friedman, Powell answered the ballooning money supply had virtually nothing to do with inflation.

”There was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time... the correlation between […] M2 and inflation is just very, very low.”

-February 2022 (when annualized inflation was at 7.1% and still rising)

Later that year Powell reversed himself, stating:

”We now understand better how little we understand about inflation.” (June 29, 2022)

Today inflation is still running above the Fed’s 2% target, and as some in CO Nation think the government is reporting lowballed inflation numbers the Economics Correspondent personally thinks forcing the Fed’s policy rates down from 4.33% (as of July 21) to 1% is a bad idea. However the focus of this column is primarily on whether or not Trump’s new Fed chair can make 1% interest rates happen or not.

And in the Correspondent’s opinion, replacing Powell isn’t going to get Trump anywhere close because under the Fed’s voting structure one chairman just isn’t enough. 

Here’s how it works.

THE FOMC STRUCTURE

The Federal Reserve’s policy interest rates—the discount rate, interest on reserves (IOR)  rate, and the subsequent federal funds rate—along with the pace at which the Fed creates or destroys bank reserves by buying and selling securities, are all set by the Federal Open Market Committee (FOMC) eight times a year. This is the same meeting where Jay Powell announces on a Wednesday that rates are going up, down or not changing.

The FOMC was created by the Great Depression-era Banking Act of 1933, also known as the Glass-Steagall Act, and it has twelve voting members.

Although Jay Powell is chairman of the Federal Reserve System, he only has one FOMC vote.

And who are the others?

The FOMC is comprised of seven members of the Federal Reserve Board of Governors (of which Powell is one), the president of the New York Fed, and the presidents of four of the twelve regional Federal Reserve banks that change on a yearly rotating basis.

Side note: the Federal Reserve has a strange hierarchy where governors rank higher than presidents. Most overseas central banks are headed by a governor.

The Fed governors, just like the chairman, are nominated by the U.S. President and confirmed by the Senate. However, they serve fourteen year terms. Although the Fed chairman only serves four year terms, his governor seat lasts fourteen years.

So how many voting governors are up for exit and potentially replaceable during Trump’s term? 

Just two of seven.

Adriana Kugler’s term expires in 2026 and Powell’s term as governor in 2028.

Therefore five of the seven voting governors will not change under Trump.

As for the regional bank presidents, they serve five year terms and a few of those will expire during Trump’s term. New York Fed president John Williams’ term expires in 2026. A couple of others expire soon like the Atlanta (2026), Chicago (2027), and Dallas Fed presidents (2027).

However most of those presidents will opt to serve for another five year term, and even if they choose to retire the U.S. President has no say over who is nominated to replace them. New regional bank presidents are nominated by the regional bank’s Board of Directors and confirmed by the Federal Reserve System’s Board of Governors.

So let’s say Trump nominates a new Fed chairman who agrees to do his bidding and push interest rates down as far as the White House asks.

First we have to assume that, like some Supreme Court justices or even Jay Powell himself, the new Fed chair doesn’t just tell the President what he wants to hear and, once he’s in office (sorry for the PC crowd, I’m just going to use “he” to make it easier from here on out), decides to march to his own beat.

We also have to assume that if, as nominee, he’s suspected of advocating super low interest rates he doesn’t fail to secure enough Senate confirmation votes.

Then, if he survives all that and really does want to cut rates to 1%, he’s still only one voting member on a policy committee of twelve. Granted, the chairman has more influence on the committee than any other single member, but if his policy is viewed as too radical he can be, and historically has been, outvoted by his colleagues. 

This famously happened during the Jimmy Carter presidency. Carter handpicked Fed Chair G. William Miller, an industrial CEO with no experience in money or banking matters which made him malleable to White House direction. Carter demanded a high inflation policy that he believed, incorrectly, would end a decade of stagflation. At first Miller accommodated with a faster and faster printing press and even pushed for more when inflation had surpassed 10%. Eventually the ultra-dovish Miller was being outvoted by the rest of the FOMC and he was replaced by Paul Volcker.

Meanwhile Trump will have minimal influence over the other eleven FOMC members.

Five of the seven governors are going nowhere during Trump’s term because their terms don’t expire until 2030, 2032, 2034, 2036, and 2038 respectively.

Most of the rotating regional voting presidents aren’t going anywhere either, although it’s possible that of the two or three whose terms expire soon some may choose not to stay on.

But then their replacements are selected by the regional Fed bank’s Board of Directors, not Trump, and confirmed by the Board of Governors. The Board of Governors has seven members five of whom aren’t changing during Trump’s term, so there’s no way he can load it up with allies to get a handful of voting Fed presidents he wants.

The bottom line is that simply changing one Fed chairman isn’t going to give Trump nearly the degree of control he wants over monetary policy. Absent a recession or crisis, Trump probably won't see 1% rates anytime soon.

And in this case, even though the Economics Correspondent is anti-Fed, that’s probably a good thing. Inflation is still too high, and pushing rates from 4.33% down to 1% will only accelerate the pace at which the Fed and banking system create new money.

Perhaps sometime soon the Correspondent will revisit the subject of money creation under our fiat banking/central banking system, a complicated subject in and of itself.

To learn more about the FOMC’s members, go to:

https://www.federalreserve.gov/monetarypolicy/fomc.htm

Why Don’t Republican Politicians Seem to Care About the National Debt?

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs provides a time-tested explanation why so many Republican politicians (and Democrats) talk a great talk about reducing the deficit but never back it up with action. 

Trump, Mike Johnson, and John Thune

Note: This is a continuation of an article posted in early 2023: “Yes, Uncle Sam Can Now Run $1+ Trillion Deficits Forever,” but updated with higher 2025 numbers.

Many in CO Nation have expressed displeasure with the Big Beautiful Bill’s projected deficits and spiraling federal debt. While most seem to like the tax cuts and the work requirement for Medicaid, projections of annual $2 trillion deficits for a decade are unpopular with conservatives who hoped for a change from Biden’s four years and $8.1 trillion of new debt.

WHY?

So why do so many Republicans in Congress seem to be OK with blowing up the national debt by another $20 trillion over the next decade?

Comments in CO articles suggest many Republicans in Congress are RINO’s.

They wouldn’t be wrong.

Other comments suggest some Republicans really want to cut spending but are afraid they’ll be punished by voters in the midterms, especially if they represent politically unsafe states or districts.

That wouldn’t be wrong either.

But a universal reason politicians virtually never mention is the cold hard math of debt devaluation using growth and inflation. Specifically, that politicians the world over are happy to drive up their national debts because they believe future economic growth and inflation will bail them out later.

And sadly, the math has worked in the politicians’ favor for nearly a century. For example, the imminent disaster that was predicted when the debt hit $2 trillion under Ronald Reagan never materialized, nor did "just around the corner" hyperinflation when the debt hit $10 trillion at the end of George W. Bush’s presidency.

To explain, let’s start with today’s numbers. 

As of Q1 2025 America’s nominal GDP was $29.9 trillion, meaning that by now Q2 nominal GDP is already well over $30 trillion.

The national debt—debt held by the public, foreign investors, and intra-governmental agencies like Social Security and the Federal Reserve—stands at a whopping $36.2 trillion.

So the public debt stands at about 120% of GDP.

Now throw in that nearly every elected politician, all Treasury secretaries going back to the 1930’s including Scott Bessent and Steve Mnuchin, and all Federal Reserve governors and presidents factor projected real GDP growth and inflation into their assessments of the debt and future deficits.

It works something like this.

Assuming real GDP—the inflation-adjusted value of all goods and services produced by the U.S. economy—grows an average of 2% compounded a year for the next decade…

And assuming the Federal Reserve succeeds in its mandate of 2% price inflation compounded a year for the next decade, something it has far surpassed going back to 2021…

Then in 2035 U.S. nominal GDP will be (1.02^10) x (1.02^10) = 48.6% larger, or $44.6 trillion

At the same 120% of nominal GDP, the national debt will be $53.5 trillion in 2035.

Since the national debt is currently $36.2 trillion, that means the Treasury can rack up $17.3 trillion more in debt over the next decade with no change in the overall debt’s size relative to GDP.

That’s an average of $1.73 trillion deficits every year with, according to politician thinking, no financial consequences; i.e. “sustainable.”

The two sleights of hand that make this work are of course growth and inflation.

The growth part isn’t great, but it’s not horrible either. It’s kind of like borrowing more today in anticipation of earning a higher salary in a decade, and if that really works out then at least it’s a halfway honest way to manage higher debt (if not a bit optimistic).

But the dishonest part is the inflation. Half the formula is debasing the real value of the debt by effectively robbing Americans of their money’s purchasing power via the printing press. In fact, the last four years the formula has been closer to two-thirds inflation since real GDP has risen 11.6% while inflated prices have risen by 19.4%. Hence inflation is appropriately called “the stealth tax,” a fiscal trick that goes all the way back to ancient Greece.

See Economics Correspondent’s articles on world history’s first debt-reneging inflations at:

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

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

If we embrace more optimistic projections from the White House and assume real GDP growth will hit 3% the numbers get even bigger.

Also if we assume, as many Cautious Optimism readers do, that the government’s official inflation numbers are lowballed, and factor in a higher inflation rate of 2.5%, the “sustainable” debt ceiling rises even higher.

Because with these new numbers U.S. GDP will grow in a decade by (1.03^10) x (1.025^10) = 72% higher, from $30 trillion to $51.6 trillion.

And a national debt equal to 120% of $51.6 trillion will be $61.9 trillion.

Yes, assuming 3% GDP growth and 2.5% inflation, the national debt can grow by $25.7 trillion over the next decade with no change in its size relative to GDP. That’s $2.57 trillion average deficits for the next decade.

Now obviously the Economics Correspondent doesn’t approve of this sleight of hand, but it’s a trick Washington, DC has been using since at least World War II and you should be aware of it.

A big moral problem is this debt “sustainability” uses the central bank to rob Americans of their money’s purchasing power year after year. A practical problem is it assumes these economic growth rates can be sustained ad infinitum with no “speed bumps” to slow them down like a recession or a crisis.

As evidence during Trump’s first term the economy did manage to grow close to 3% a year, about 2.9% for the first three years, despite rising interest rates. Then in the last year Covid and lockdowns came and the entire formula was blown up. By the time Trump left office the debt-to-GDP ratio, which had stayed fairly stable during his first three years, had spiked from 102% of GDP to 124%.

And why is the debt-to-GDP ratio down slightly to 120% today? All that inflation during the Biden years courtesy of the Fed.

Perhaps the only saving grace is that every time media reporters, who were silent during the colossal Biden deficits, scream “the Trump plan could add another $3.9 trillion to the national debt” you know how small these numbers really are within the context of the government’s debt and inflation game. That is, the media is trying to shock viewers with a number like 3.9 trillion without mentioning that, under the same CBO forecasts, the debt-to-GDP ratio will barely move.

Finally, two quick corroborations of this cynical math from 20th century U.S. history.

PROOF IN HISTORY

1) At the end of World II the federal government had accumulated what was by far the largest debt in American history—both in nominal terms and as a share of GDP: $260 billion or 120% of GDP.

To Americans in 1945 these numbers were unbelievable. Many people doubted the debt could ever be repaid.

Today tax-and-spend Democrats love to tell us “Eisenhower embraced 90% tax rates to pay down the debt,” but in fact the debt was never paid down. By the time Jimmy Carter left office the national debt had nearly quadrupled to just shy of $1 trillion.

And from 1945 to 1980 the federal government ran deficits for 27 of 35 years which is not paying down anything.

Yet while the debt nearly quadrupled, the government’s fiscal position managed to improve dramatically. The debt-to-GDP ratio plummeted from 120% in 1945 to a meager and very manageable 31% by 1980.

And how did that happen? America’s nominal GDP grew from $228 billion in 1945 to $3.0 trillion in 1980.

Did the American economy really grow thirteen-fold in 35 years? No, it grew about 2.8-fold due to population growth and productivity increases.

But what really bailed the government out was inflation: prices rose 360% over the same period courtesy of the Federal Reserve. Hence 180% real GDP growth plus 360% inflation resulted in a thirteen-fold growth in nominal GDP (2.8 x 4.6 = 12.9).

2) Lastly, this strategy of using growth and inflation to keep racking up government debt for years, decades, and even forever was not only well underway by the 1940’s, it was openly advocated by economists, usually of the big-government persuasion.

Harvard’s Alvin Hansen, a famous economist known as “the American Keynes,” wrote in the 1940’s that:

“It can be shown mathematically that if the government continued to borrow indefinitely on the average X per cent each year of the national income, and if the rate of growth of increase was Y percent (of the national income), and if the average rate of interest on government obligations continued at Z percent, then the interest charges would never exceed A percent of the national income. In other words the government could continue to borrow, on average, X percent of the national income indefinitely without the tax burden, caused by the public debt, ever rising above A percent of the national income.”

But politicians will almost never make statements like this because they don’t want the public to realize that inflation is not “good for you” or “optimal for a market economy” as we’re told by government technocrats and Ivy League economists, but rather because it’s their main tool for running giant deficits while minimizing real repayment.

WaPo/Great Depression "expert" predict Trump's tax cuts will create another Great Depression... in 2017

Click here to read the original Cautious Optimism Facebook post with comments

Now that the Big Beautiful Bill has passed and made the Trump 2017 tax cuts permanent, the Cautious Optimism Economics Correspondent wonders if anyone has seen this WP headline?

https://www.washingtonpost.com/news/posteverything/wp/2017/11/30/im-a-depression-historian-the-gop-tax-bill-is-straight-out-of-1929/

No, that’s not from this week. It’s from 2017.

Nearly eight years later and I’m still waiting for the next Great Depression the 2017 tax cuts were supposed to spawn.

From the author:

” In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression.”

The author, a “Great Depression historian,” fails to mention Herbert Hoover’s giant tax hike in 1932—when the top income tax rose from 25% to 63% and all other income levels saw at least a doubling of their tax rate—that plunged the economy into Great Depression. The year after the tax increase was the worst year in U.S. economic history with the unemployment rate reaching 25.9%.

The Economics Correspondent has a copy of Robert McElvaine’s book “The Great Depression” and it’s hundreds of pages of “the free market doesn’t work” and “massive state intervention, mostly government spending, promotes economic recovery and prosperity.”