America’s Prolonged Economic Stagflation
The comments below are an edited and abridged synopsis of an article by David Stockman
In the US, real personal income less transfer payments is a serviceable proxy for private market output before the effect of stimulus and distortions caused by transfer payments and government borrowing. After all, earned income is the payment to factors of production for output and therefore it is reciprocal.
The long-term trend is downward. Since the pre-lockdown peak in February 2020, the growth rate has slowed to just 17% of its pre-2000 average.
This dismal trend is a result of the US economy being laden with debt and short of labour, riddled with non-productive speculation and financial engineering and starved for productive investment. Together, this was more than enough to slow growth of the US economy to a crawl.
The government reports slightly higher real GDP growth than the tepid 0.61% reported here. During the 3.25-year period between Q4 2019 and Q1 2023, the per annum growth of real GDP posted at 1.61%. Not much, but it is better than the tiny gain private producers have produced since the pre-Covid peak.
The difference is because of the wonders of GDP accounting—huge transfer payments from producers to non-producers and massive federal spending, borrowing and monetization at the Fed’s printing presses.
But heavily taxing producers today and threatening more future taxation to service the ballooning public debt isn’t a source of sustainable growth. It simply steals economic resources from the future.
Between Q4 2019 and Q1 2023 public debt increased by $8.26 trillion—a figure equal to 1.70X the $4.82 trillion gain in nominal GDP.
After 12 years at these rates of growth public debt would be $100 billion compared to $52 billion of GDP—even as debt service exploded.
How could the weighted average cost of debt could be held to 6% under a scenario in which the Fed’s printing presses remain idle? At the rate of public debt growth during the past 3.25 years, interest on public debt would likely reach $6 trillion per annum over the next decade, equal to the total level of current federal outlays.
The Fed is in a predicament. During the same 3.25-year period in which public debt exploded by $8.26 trillion, the Fed’s balance sheet soared by $4.45 trillion. That means more than 55% of those massive gains in the public debt were monetized by the central bank.
The Fed is trying to shrink its balance sheet. There won’t be any money printing for years to come, even as the US economy sinks into a prolonged stagflation.
The $2 trillion—$3 trillion annual deficits now until 2030 will need to be financed by the bond market, not at the printing press. Accordingly, the weighted average yield on the federal debt is heading relentlessly higher because the law of supply and demand has not been repealed.
