America's Greatest Crisis Upon Us...Debt-to-GDP Makes It Clear

Authored by Chris Hamilton via Econimica blog,

America in the midst of the greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the "challenges" end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues...resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation's balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed's interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.

The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of "austerity" where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nation's history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.  Instead, the CB's and Federal government wanted perpetual youth...growth without end.  The chart below shows the debt to GDP ratio but this time against the decelerating growth of the total US population as a percentage (black line) but also against the faster decelerating growth of the 0-65yr/old population (yellow line).

Unfortunately, it gets so much worse.  In 1968, the Johnson administration and Congress passed the Unified Budget to count (and spend) the excess tax receipts of Social Security and OASDI.  In so doing, since 1968, the federal government has cumulatively spent (and goosed the economy) by $74 trillion to increase annual GDP to its current $20 trillion (chart below).  This is $53 trillion in unfunded liabilities which should be there now, collecting interest to pay for future distributions.   Instead, this money has already been spent and new debt must be issued if the obligations are to be honored.

If we count the federal debt plus unfunded liabilities (now beginning to come due) against GDP, we have a very unhappy picture.  However, if we juxtapose federal debt and unfunded liabilities versus the annual growth of the total and 0-65yr/old population, a clear inverse relationship is shown (chart below).  Using the Treasury data set, debt + unfunded liabilities (taken from the 2017 Treasury Bulletin) have risen to 380% of GDP and are set to eclipse the previous high seen in 2009 in short order.  Fascinatingly, according to the Treasury, the advent of Obama-Care massively temporarily reduced the unfunded liabilities (shifting the liabilities off the Federal books)...but the temporary reprieve is over.

Put otherwise, the federal government has spent $74 trillion (at a progressively faster rate) over the past 50 years to artificially stimulate the US and world economy.  But now the piper must be paid.  There is no further OASDI surplus to be spent (or to buy US Treasury debt).  All further deficit spending (and Treasury buying) must be funded from the domestic public (as it has been since 2015) so long as the Federal Reserve continues "normalizing" and so long as foreigners and the Intra-Governmental holdings continue to be net sellers.

The Social Security surplus is over and will turn to progressively larger outright deficits from here on.  To maintain deficit spending, the federal government will need to run significantly larger deficits and issue significantly more US Treasury debt just to cover the OASDI deficits.  This will mean significantly larger issuances of marketable debt while nearly all natural sources of Treasury buying have turned to net selling. The Fed's Treasury Holdings...Reviewing Operation Twist-Off or Who Will Buy Those Trillions of US Treasurys???  So, as the growth of the global economy grinds to a halt, banana republic mechanism are now whirring to avoid the truth of the matter becoming plain "Will The Real Global Economy Please Stand Up"

This is the crisis that will define the nation, the world, and determine the course of the world for at least the next century, if not further.  As always, make of this what you will.


Deep Snorkeler Sun, 06/17/2018 - 17:07 Permalink

America the Foundering Empire

A self-inflicted collapse

of a hyper-corporatist state

Military reality is irrelevant

Financial reality irrelevant

Stormy's hormonal musk ox, our Emperor

Do not romanticize decadence and decay

BlackChicken Deep Snorkeler Sun, 06/17/2018 - 17:09 Permalink

“America in the midst of the greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.”

I disagree.  I can handle being in debt or borderline insolvent.  

What I can’t handle are the vast left wing commies, America hating, freedom hating, gun hating, God hating, migrant rape gang loving, hypocritical, intolerant, deranged minded liberals/socialist assholes.  They are a far greater threat to my way of life.

Oh, by the way butt-snorkeler, I’m specifically talking about oxygen burning pieces of shit like you.

In reply to by Deep Snorkeler

JelloBeyonce BlackChicken Sun, 06/17/2018 - 21:12 Permalink

If Donald & the "Republicunts" are MAGA, then why are you such a whiny little bitch?

"I can handle being in debt or borderline insolvent."
Too bad you can't handle your personality disorder.

I'm guessing your anger, & obvious ignorance, are a far greater threat to the American way of life.

Funny you call others out for "intolerance". Not to mention hypocritical.
You have both those covered in one blathering, incoherent sentence.

You should read "Nature's God: The Heretical Origins of the American Republic".

Many of Americas Founders were labeled "God hating" "liberals".

In reply to by BlackChicken

CatInTheHat BlackChicken Sun, 06/17/2018 - 21:15 Permalink

But you love the pro wall street, Zionist loving wars that are the real cause of our massive debt and continue to be? The largest defense budget EVER? A migrant crisis in the EU created by the same fuckers as those breaking us from 17 years straight of MILITARISM and war.

Bush already emptied social security. Stolen long ago to pay for Israeli parasites and their wars. Why are we giving this Kazharian parasites 38 BILLION A YEAR?

This is not the fault of migrants or the most vulnerable among us. 

Lay it at the feet of the psychopathic banksters who control all of it .

In reply to by BlackChicken

SDShack Sun, 06/17/2018 - 17:16 Permalink

We've been in a World Wide Debt Based Ponzi since before the Dot-Com crash. One engineered bubble after another, all in a desperate attempt to keep the Ponzi going. The bottom line is a Ponzi only has 2 stages, expanding or collapse. You can't taper or reduce a Ponzi. Plan accordingly.

OverTheHedge SDShack Sun, 06/17/2018 - 17:26 Permalink

Something has to change. Will it be inflation, or deflation?

Inflation benefits asset holders over wage earners (assets rise in value faster than wages); deflation benefits wage-earners over asset holders (assets depreciate faster than wages decrease).  I am assuming that we will have inflation, and lots of it, to reduce the debt, rather than deflation and default, if only because the asset owners are calling the shots. This does assume that the guys in charge can keep control of the beast. 1,000 Italian lira are currently worth (if you could find anyone to take them), 60 US cents. Inflation: it's what's for breakfast. Do we even need to talk about Zimbabwe dollars?


In reply to by SDShack

Yellow_Snow OverTheHedge Sun, 06/17/2018 - 18:08 Permalink

There might be deflationary crisis's along the way...  But there's no stopping a Hyperinflationary endgame.

But who knows...  Maybe the USSA government might start pumping out fake data that the debt is magically shrinking...  Why not...  they already lie about every other single economic indicator.  People really believe that our economy is "Great Again"

Only 3.8% unemployment rate  !!!   And MSM says employers are begging sheeple to come work for them  !!!

True Rate is 22%   And wage growth is stagnant... (no begg'n there)

In reply to by OverTheHedge

Farmer Joe in … OverTheHedge Sun, 06/17/2018 - 18:50 Permalink

Why not both..??

With the state of liquidity in the markets these days, you could have a black hole / vortex open in the risk markets overnight. There is very little depth in the market these days. Couple that with HFT's and the uneasy sense that something is about to crack.

And I don't just mean us loonies here on ZH. I work with people from many walks of life every day and I can feel a sense of uneasiness or uncertainty. While many seem to have forgotten the harsh lessons from the last collapse, many still remember (vividly).

We won't know the precise catalyst until afterwards, looking back. But when the spark is lit, this one could go FAST..!!

Deflationary collapse of all risk assets in a vacuum. Huge air pockets and wild swings, but free fall worse than previous collapse. 

...and now, here comes the inflation....

How long before fed cries "uncle"..? 20% correction in stocks? 30%..?

What about real estate?

The fed will be forced to slash rates right back to zero or even negative. They will also certainly put the fed balance sheet back to work. No problem, right? BS jumps from $1trl to $4.5trl in last crisis and they have just BARELY started to unwind that mess. 

Where next..? $10trl..? $20trl..?

There is almost no room on rates to halt the collapse. They are still pinned way too close to zero.

When the fed taps out this time, cuts rates, and initiates QE4...all hell is going to break loose. The world will see the emporer isn't wearing clothes. Good bye, king dollar. 

Deflationary collapse.

Hyperinflationary melt-up soon after.

Thanks. I needed that. Saved me $100 on therapy.

In reply to by OverTheHedge

pocomotion Sun, 06/17/2018 - 17:19 Permalink

We r the greatest nation there ever is, are or was.  This article needs to be rewritten to show that debt is better than everyone else’s.  We have guns...

JelloBeyonce khnum Sun, 06/17/2018 - 21:00 Permalink

I love reading old texts, books, etc.
You can learn a lot about the future by reading about the past.

One common theme....every generation thinks they're experiencing the "greatest crisis".
This has been the standard sentiment since, and within known recorded history.

Relate the contemporary era to say, the Civil War era, where the country was divided & fighting amongst itself, not just with mere words, but deadly weapons. Where families were often torn apart, brothers killing brothers.

Or one of the World Wars, where most nations were engaging one another in bloody, high-casualty conflict, where tens of millions were dying.

Or early Colonial America where entire populations/settlements were being wiped out by disease, cold, hunger, etc.

It's important to realize the current ills affecting any/every generation, but "greatest crisis"?

There are so many more important things in life than money, value, assets, etc.
Unless of course, you lack a meaningful or purposeful life & can only rely on the mindless material crap to make it through & keep you going.

In reply to by khnum

Loki The Trickster Sun, 06/17/2018 - 17:28 Permalink

The relevant quantity to plot is US Total debt divided by GDP divided by working age population. It is the correct measure to determine how fast Joe six pack needs to pedal to keep the hamster wheel turning. 

Salmo trutta Sun, 06/17/2018 - 17:31 Permalink

This is a non-issue.  Why?  Because income is the ingredient from which debt is paid.  The way you increase income is to gradually drive the commercial banks out of the savings business.  That's where secular strangulation originates, with idled savings.

Frictionless / expeditiously propagated financial perpetual-motion, involves putting savings uniformly and efficiently back to work (connecting pooled savings with borrowers), productively transferring and completing the circular flow of income [uni-directional “Brownian ratcheted” mechanical inputs and outputs, savings “prevented from rotating in the opposite direction”, viz., the opposite of dis-intermediated], as opposed to the destruction of funds (backwards résistance), or savings being frozen (all DFI held savings are un-used and un-spent), and dissipated in financial investment (the transfer of title to goods, properties, or claims thereto), which perpetrate leakages from the main income stream.

The Fed uses more money as its carrot, Instead of higher money velocity as a circuit analogue.

Oldwood Salmo trutta Sun, 06/17/2018 - 18:35 Permalink

Financially conservative people seek to save as a means of security, but saving cash soaks up money, and money was not created for saving, it was created to expedite commerce. In a healthy economy where hard assets were considered safe...and liquid, money would not be our primary savings method. We would invest our money into farmland or other assets that could actually earn.

They have crashed the markets, they have crashed real estate, and regardless of recovery, trust has been lost. Speaking for myself I have almost half of my life's assets sitting in cash, simply because I trust nothing else more (which isn't saying a lot). 

For us to have a strong economy we need to invest our savings into real assets, preferably physical assets (not stocks or paper) and keep our currency in motion.

Rather than worry about debt/GDP, we should worry as to if we have the assets to cover that debt. What I earn is only relative if I lack the assets to cover my debts.

In reply to by Salmo trutta

HurricaneBrasky Oldwood Sun, 06/17/2018 - 20:02 Permalink

Oldwood: I like your perspective on cash being only a temporary store of wealth. Cash seems best served when it is limited to being a medium of exchange. I wish the economy made enough sense to me that i only needed to keep a small amount of my total wealth in cash...if 1's and zeroes in computer screens count as cash.

In reply to by Oldwood

MrButtoMcFarty Sun, 06/17/2018 - 17:38 Permalink

Anyone else remember that Steve? guy who used to post here about US GDP/Debt all the time?
He sold everything to bet on the crash.
Wonder what bridge he lives under these days?

Salmo trutta Sun, 06/17/2018 - 17:40 Permalink

There will come a time (unpredictable) when it will be impossible for the government (federal) to collect enough in taxes to pay all of its expenses, including interest on the national debt. The Gov't can of course borrow an indefinite amount through the Fed. (Concealed green backing) given a few changes in existing law. But that would lead to hyper inflation - i.e., a collapse in the credit of the Gov't.

So the easy way, is the way the French did it in 1960. Simply say that beginning Jan 1 (or any other date), new dollars will be issued, and that each new dollar is worth 100 old dollars. Then follow that up with a largely state controlled economy.

In 1960, the French economist / mathematician Jacques Rueff, during Charles de Gaulle's presidency, converted the old franc, to a nouveau franc, equal to 100 of the old franc. However, even with this substitution, inflation continued to erode the currency's value, though at lower rates of change, in comparison to other countries. And this new franc equaled 20 cents to a U.S. dollar. The old rate was 5.00 to a dollar.

In 1960, the French franc, which was one of the weakest currencies, overnight, became one of the strongest. Correcting policies included plans to 1) balance the budget, 2) stabilize the currency, and 3) eliminate currency controls.

The gold content of the franc increased 100%, & 1) foreign exchange rates, and 2) France's internal prices, reflected the conversion overnight. Internally, prices dropped about 90 per cent, and the foreign exchange value rose from about 0.238 cents per franc, to about 20.389 cents per franc.

Domestically, France was on a managed paper standard; externally, on a modified gold bullion standard. With the new policies, France's economy strengthened, and the franc became fully convertible @ approximately its gold par, into gold for foreign exchange and into foreign currencies.

With the introduction of the Euro, the franc in Jan. 1, 1999, was worth less than 1/8 of its Jan. 1, 1960 value.
After default, it might be beneficial to transfer many of the Federal powers back to state-controlled powers.