GDP Inflation: The Hidden Cost of Government Spending
Peter Reagan

It’s election season – which means we’re hearing a lot of talk about the economy and government spending priorities. Today we evaluate the impact of federal government debt, show you how easy it is to inflate GDP, and explain exactly how these political games are picking your pocket…

We’re in an election year, and that means, of course, that the party trying to get re-elected is going to tout how great of a job that they’ve done for the voters.

If you’re familiar with what sways voting trends, then, you know that the economy (or, specifically, how that voter feels in their wallet) is the single biggest factor for most voters.

There’s a reason, after all, that Bill Clinton’s campaign focused on the phrase “It’s the economy, stupid!” It helped Clinton win against George H.W. Bush in the 1992 election.

Now, the metrics that governments tend to use to measure the health of the economy are measurements of Gross Domestic Product (GDP) which, if you’re unfamiliar with it, simply means the dollar amount (for the U.S., for example) of all the goods and services that were produced over a quarter or year. 

So, governments (and, therefore, politicians) tend to focus on GDP to know how healthy the overall economy is.

Is GDP the economy?

Great question to ask, and maybe you shouldn’t care about the country’s GDP. Multinational corporations selling billions of dollars of goods isn’t a good indicator of how hard it is to put food on your table.

Even if you don’t care about the GDP, though, governments and the legacy mainstream media focus on it. And that means that governments try to push the country’s GDP higher – then there’s a number they can point at. “GDP growth is prosperity!” and everything is sunshine and unicorns.

But it’s relatively easy to push the GDP up. All you have to do is increase government spending.

The federal government borrows money by offering IOUs for sale to investors, banks, corporations, even the central banks of other nations. That’s how they raise funds to spend on whichever projects they think will get them re-elected. To economists, that counts as GDP growth. 

Generally speaking, economic growth is a good thing. A rising GDP is strongly correlated with increased standards of living, for example. 

There are two problems, though: 

1. The federal government doesn’t have a great track record of spending on economically useful projects.
   
   
2. A huge chunk of federal spending comes from taking on debt. Now, that’s not necessarily a problem – as my colleague Phillip Patrick said, “Debt is not always a bad thing.”

It is a mistake, though, whether you’re a government or just an American family, to take on debt that isn’t financing useful, valuable contributions to long-term prosperity. 

U.S. government spending under the Biden administration has set records – the primary fiscal priority could be summed up as: If you see a problem, throw money at it – if it doesn’t go away, throw twice as much money at it. (I really don’t want to get into the details, they make me too angry.)

The result? Well, the Biden administration has racked up as much debt as the entire Obama administration in half the time! 

Truly a historic accomplishment. 

It’s hard to square this explosion of U.S. debt with media reports of a “strong dollar.” (Which Dr. Ron Paul calls nonsense.) 

Here’s the thing: The rest of the world is in bad shape, too. Courtenay Brown, writing for Axios puts it this way:

Global public debt is estimated to top $100 trillion by year-end – or roughly 93% of global GDP, according to new projections from the fund.

IMF economists expect cumulative global debt will approach 100% of world GDP by 2030, with the two largest economies – the U.S. and China – leading the increase.

The U.S. is pretty much already there, with a debt-to-GDP ratio of about 100%.

“Debt-to-GDP” is how economists measure a nation’s financial health against its ability to pay off loans. It’s sort of like the way a bank evaluates whether a borrower's income can support a mortgage.

A debt-to-GDP ratio of 100% is bad news – remember, we’re not comparing government income to debt. (For 2024, the federal government’s debt-to-income ratio would be 630%!) We’re comparing total economic activity to debt.

When debt grows faster than income, the borrower falls farther and farther behind. Faster and faster. When that borrower is your government it’s not just an accounting problem – it’s a nearly insurmountable financial challenge for all of us… 

Growing debt devalues our dollars

What many people don’t realize is that government spending (which is mostly borrowed) and government borrowing both have the same ugly effect on the average person’s pocketbook.

You’ve been experiencing it over the last few years everytime that you go to the grocery store or go shopping for school clothes in the fall or pay your power bill during the middle of the hot summer or the middle of the cold winter. 

The effect is inflation. 

Not just sometimes, but always inflation. Always.

Here’s a summary of an outstanding summary explaining the link between debt and the inflationary impact:

As John Hussman notes, “Currency and Treasury debt compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government debt are not set independently of each other, but in tight competition.” In other words, regardless of whether a government pays for its fiscal deficit with cash or with debt, the inflationary impact is more or less the same.

Put simply: Unless the government raises taxes to balance its annual budget, deficit spending causes inflation. But taxes aren’t popular! No one has ever won an election by promising to raise taxes. So, instead, the government borrows money – and the subsequent inflation means we all pay the price.

As Michael Schuyler noted in 2014, the federal government’s budget “has habitually run deficits since 1950, except for a few years at the end of the 20th century…” 

That’s nearly 80 years of deficit spending. The national debt is all those accumulated deficits – plus interest expense.

Increased debt crushes economic growth

While governments use spending and borrowing to drive the GDP higher (which causes inflation), the effect of all that borrowing is ultimately to depress the economy they’re trying to prop up.

If you think that I’m kidding, Carmen Reinhart, Vincent Reinhart, and Kennth Rogoff (and these people literally wrote the book on debt problems!) tell us:

…on average, debt levels above 90 percent are associated with growth that is 1.2 percent lower than in other periods (2.3 percent versus 3.5 percent). Importantly, 20 of the 26 episodes lasted more than a decade, and the average duration of debt overhang episodes in the sample is 23 years. 

To put this in perspective – average U.S. GDP growth has been 2% per year since the end of World War II. So a 1.2% reduction slashes growth by more than HALF.

And the depressive effect on the economy lasts, on average, 23 years.

Not one lost decade – but TWO.

Your escape hatch from a dollar-destroying debt crisis

Listen: I’m a patriot. I love my country – but the dollar’s sinking fast and I am not going down with the ship.

It’s not too late for you to join me in the lifeboat. 

Global central banks are already taking steps – rapidly diversifying their reserves (basically, national savings accounts) away from the dollar. Instead, they’re buying gold. MASSIVE amounts of gold. The #1 and #2 biggest years for central bank gold buying in history: 2022 and 2023. 

It’s obvious to me they’re getting ready for a global economic crash (because it’s not just the U.S. dealing with crushing levels of debt). For two decades of total stagnation. 

They’re diversifying with the only inflation-resistant safe-haven asset that’s always been valued throughout human history. Physical gold (silver, too) are just about the only financial assets you can own that are totally immune to default. Their value can’t be inflated away by a bureaucrat or a reckless government’s spending spree.

You too can diversify your savings with physical precious metals. When you do, be sure you’re getting the same assets that central banks trust: physical gold bullion. Because an IOU 

And whether you choose a precious metals IRA or home delivery, you now have a defense against the economic misery destined to sweep the globe in the near-term.

Don’t go down with the ship. There’s room on the lifeboat – but you have to take the first step. Hope for the best, plan for the worst and just maybe everything will work out for you and your family.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

 

 

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