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Inflationary Financing and GDP


This article demonstrates that only government borrowing in the US and UK drives GDP growth. This surprising conclusion is confirmed by long-run statistics. GDP does not represent economic progress, nor does it include the expansion of activity in the non-financial private sector, because that marries up with larger trade deficits, which are excluded from GDP. These findings have important implications for how the global downturn will be reflected in national statistics for the US and UK and the eventual prospects for the dollar and sterling.


We tend to think of a nation’s accounts as being split between government and the private sector. It is for this reason that key tests of a nation’s economic sustainability and prospects for the currency are measures such as a government’s share of a nation’s economic output, and the level of government debt relative to gross domestic product.

While there is value in statistics of this sort, it is principally to give a quick overview in comparisons with other nations. For a more valuable analysis it is always worthwhile following different analytical approaches in assessing the prospective evolution of a currency’s future purchasing power.

Bald comparisons between government and non-government activity are a bad indicator of the true position. A more practical approach would admit that government finances are inextricably linked with the private sector. As Robert Louis Stevenson might have put it, a public servant is a Mr Hyde, who is a non-productive cost on productive society, while being a Doctor Jekyll spending his salary into the private sector as a consumer and contributing to a nation’s production in a demand role. The source of Mr Hyde’s income is the production of others, and increasingly his pay is made up by the debasement of everyone’s currency. Governments also spend money acquiring private sector goods and services, further distorting the overall picture. It all takes some untangling, a long way beyond a simplistic or conventional approach.

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