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Inflationary Financing and GDP
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.
Introduction
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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Can We Stop the Government Borrowing & Just Print Without Inflation?
The conservatives are going nuts about raising the debt ceiling as if this really matters. They claim: “The United States is effectively bankrupt, but that doesn’t matter to the GOP. Once evangelists of fiscal responsibility and scourges of deficit spending, Republicans today glory in spilling red ink. The national debt is now $20.6 trillion, greater than the annual GDP of about $19.5 trillion. Alas, with Republicans at the helm, deficits are set to continue racing upwards, apparently without end.”
What they fail completely to grasp here is until the system is completely revamped and we adopt the way the Roman Empire was funded from 280BC to 68AD, just creating the money to fund the government instead of borrowing it, there is no hope in solving this issue. In a recession, Keynes argued borrowing can be beneficial in creating economic stimulus and shortening the recession. Governments used that statement to then perpetually borrow year after year.
In 1940 a Cadillac sold for $1675. Currently, the low-end Cadillac is $35,000. This is almost 21 times the 1940 price level. The US national debt was $51 billion before the war and it is now $20 trillion. The debt has risen 392% compared to 20.89% for a Cadillac. The minimum wage in 1940 was 30 cents per hour. Today, the minimum wage is $10.10 per hour in 2018, which is a rise of 33.6%. However, if we look at collectibles, the famous 1804 silver dollar sold for $30,000 around 1940. In 1999, one sold for $4.14 million. Here we had an advance of 138%.
Then there was the Peter Paul Rubenswhich just sold for $58 million in 2016. The owners had tried to sell during the Great Depression. Nobody was interested. They then lent to a monastery where it hung in a hallway for 20 years. Other than that exception, nothing has advanced in proportion to the national debt.
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