Many in the mainstream media believe that the US economy is on the road to recovery. They cite the apparently positive data from the past few months, namely the fall in official unemployment claims, the increase in consumer spending, low inflation and the rise in stock indexes such as the S&P 500 and the Dow Jones Industrial Average. These analysts claim this is proof that loose monetary and fiscal policies are working.
WHAT THE GOVERNMENT HAS DONE
Following the principles of Keynesian economics, the American government has continued to dramatically increase its national debt, which has now exceeded the Debt-to-GDP ratio of 100% and currently stands at a monstrous US$15.566 trillion. This does not include unfunded liabilities, which far exceed the US’s current debt levels. No efforts have been made to cut the public debt or unfunded liabilities, and the economic plans put forward by Obama and the Republican candidates (with the exception of Ron Paul) are cuts on projected increases in spending. While US treasuries and bonds are at record low yields and interest rates are near 0%, the government can continue to service this debt – until, of course, rates and bond yields inevitably rise to market levels.
The Federal Reserve has been complicit in these shenanigans. By keeping interest rates near 0% and increasing the money supply via “quantitative easing” and other measures, the Fed has increased inflation throughout the economy and is in the process of creating a bond bubble which will ultimately burst, as all bubbles do. Consequently, the US dollar will no longer be seen as a safe haven and a currency crisis may occur. Rather than recovering, the US economy is getting sicker.
WHY THE DEBT IS IMPORTANT
One of the key factors that is often overlooked when discussing recent data has been the growth in the US federal debt. Individuals across the world have already witnessed the effects of high debt levels as illustrated in Greece. According to the New York Times, in Obama’s budget proposal for the 2013 financial year, the “Interest on the Public Debt” is estimated to be US$472.0 billion, an increase of 4.8% from the previous budget. Direct revenue to the Federal government in the 2013 budget is estimated at $2.9 trillion, meaning that debt financing will consume 16.27% of total revenues even at these record low yields. Interest rates cannot remain near zero forever, and when they inevitably rise, the US government will have to either pay more to service its debt, default honestly or pay off its debt by printing more money.
The US government is already bankrupt and is already defaulting. A government can default in two ways: by either declaring bankruptcy honestly and forcing creditors to take losses, or by defaulting through inflation. The federal government is already doing the latter thanks to the Federal Reserve. According to investor Jim Rogers, the M2 figures of the United States’ money supply reveal an increase by 20% since November 2008 to December 2011. While conventional economics states that inflation is the increase in prices, adherents of the Austrian-School argue that inflation is actually the increase in the money supply.
When the ratio between the quantities of money in an economy rises faster than the increase in the number of goods and services produce, a greater quantity of money chases fewer goods and services, leading to a shift in the demand curve to the right and thus an increase in prices. By significantly increasing the money supply, the Federal Reserve has been able to subsidise the borrowing costs of the federal government. Ultimately this will worsen an already unsustainable fiscal situation.
For years after the GFC, economic data indicated a stagnating economy on the brink of a double-dip recession. For instance, the official US unemployment rate rose to 10% in October 2009, falling only 1% to 9% in September 2011, three years after the Collapse of Lehman Brothers. This was despite the enormous economic stimulus initiated in response to the GFC. Research from Eric Sprott reveals that in 2010, the GDP growth estimate was $US 463 billion, while the estimated increased in the deficit was $US 1.63 trillion. By the fall of 2010, the federal government had injected $US 7.9 trillion into the economy, yet unemployment remained high and home sales fell to a “seasonally-adjusted annual sales pace” of 288,000 in August 2010.
Nevertheless, as a result of yet more Keynesian 'stimulus', a consensus has emerged among mainstream economists that the US is finally recovering. The Obama administration praises the fact that 227,000 new jobs were created in February 2012, and unemployment has fallen to 8.3%. Furthermore, the Federal Reserve claims that the CPI is only around 2%, within the target range. The Economist (2012) describes the state of the global economy with optimism, claiming “There are tantalising signs of good news in the world economy”.
The data though, is very misleading.
Keynesian stimulus spending does provide the economy with a short-term boost, where both GDP and consumer spending increase and unemployment falls, however, over the long-term, stimulus merely exacerbates the misallocation of resources in an economy. Further, the increase in the money supply unleashes inflation in an environment that should be experiencing deflation and deleveraging.
In any case, the official data is not entirely accurate. True unemployment is far higher than what is reported. This occurs as a result of the US government excluding hidden unemployment in its official numbers. While the official unemployment rate fell to 8.3%, the participation rate fell to 63.7%, the lowest in over 10 years, meaning that the hidden unemployment rate had increased substantially. According to the SGS alternate unemployment rate, the real unemployment rate in the US is over 20%.
Moreover, the official Consumer Price Index is also inaccurate, with its definition manipulated significantly since the 1970s. While the original definition measured the change in price for a fixed basket of goods and services, the current CPI includes a geometric weighting that is based on the belief that when prices increase, consumers would switch to substitute goods. Furthermore, the Federal Reserve uses “Core Inflation” as its official measurement of inflation. While the original CPI used to include food and fuel, the Core Inflation Index does not, thus ignoring the significant increases in both the price of food and fuel. According to Michael Pento, President of Pento Portfolio Strategies, both “food and gas prices are up 5% and 12% respectively” on a year over year basis. History has also shown that inflation can increase very rapidly within a period of time. For example Amity Shlaes argues while inflation was low in 1972, it quickly jumped to 11% in 1974. Thus, when Ron Paul recently addressed Ben Bernanke in a congressional meeting, he suggested that the real CPI is around 9% when calculated using the old measurement.
While the official government figures might indicate a recovering economy, in reality the situation is much darker.
Originally published 30 June 2012.