All Fed up on Peak Debt

The Great Recession

How inflated with debt have we become? How long can we float on our own bloat? Reasonably trim in 1970, the sum of all debt publicly financed by the US government was $275 billion. Last week, the government sought to raise $258 billion in just one week! The weekly financing to keep the government afloat is now about equal to all the debt it amassed over the course of its first 188 years.  

We are Fed up on debt

What went wrong? Well, the very next year, President Richard Milhous Nixon took us the rest of the way off the gold standard, allowing the nation’s central bank to create money at will, cutting the tether that had long restrained the Federal Reserve from going insane with using its powers to enrich its member banks. Since the central bank’s customary way of creating new money in the economy is through the issuance of debt by its member banks, we have seen a huge expansion of debt. Whenever the economy is lagging, the Federal Reserve suppresses the market rate of interest to entice people who don’t want additional debt to take more on so they can juice the economy with more spending.

Some people might try to argue that the much lower debt in 1970 is just a matter of inflation. They’d be partway right and all the way missing the point. In today’s dollars, the debt back then would have been $1.2 trillion — still only one twentieth what it is today. But the point they’d be missing is that the inflation they are using to make 1970’s $275 billion debt sound a lot bigger is nearly all due to Nixon removing the central bank’s tether to gold. So, it is a circular path out of the equation.

While the value of the dollar got ground to dust under Richard Milstone Nixon, total debt (now at $67 trillion of public and private debt), even adjusted for inflation, has risen from 150% of GDP to 350%! Over that same time, the Fed’s balance sheet (money in the economy) has grown at about five times the rate of inflation. (General prices have not inflated nearly as much as the supply of money inflated because most of the money circulated in stocks and bonds, creating inflation in those markets. Money only inflated prices where money flows.) Back in 1970, the Fed’s balance sheet stood at $55 billioncompared to today’s $4+ trillion.

Read the rest here:

The Great Recession

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