We’re getting a little tired of using the word “unprecedented,” but no other word captures the recent trends in both deficit spending and money supply expansion. Also unprecedented are the stratospheric prices for cryptocurrencies. And there are good reasons to believe that these violations of precedence are not merely coincidental, but rather logically related to one another.
To see how, let’s start with debt. The following chart represents our national public debt in dollars (purple line, and units are the scale on the left of the chart) and then that same debt expressed as a percent of GDP (blue line, and units are on the scale on the right of the chart). The bottom axis is time, starting in 1966 and proceeding to the latest update on the St. Louis Fed web site as of this writing.
What we see is that not only has debt risen a great deal since the mid-1960s, but also that debt levels have taken an exponential upturn recently. Now, of course, debt sustainability is relative to wealth creation too. If someone has $200,000 in debt, are they in trouble? If they make $500,000 per year, probably not. If they make $10,000 dollars a year, they are in a much worse position.
So we are comparing the national debt to the national economic output, or at least the most popular aggregate for national economic output for now. On other words, we are comparing debt to a particular measure of income. But doing that, ‘normalizing’ debt according to wealth production, offers no reassurances. In fact, looking at the upper right section of the chart, you can see that debt as percent of GDP spiked almost straight up during the recent COVID crisis. Although it has dropped a tiny bit in the last month shown, it is still roughly twice as high as it was before the Great Recession.
If we zoom in on the right side of the chart, we can see all that more clearly. And we can also see that from the beginning of 2020 to the most recent data, debt as percent of GDP grew faster than debt:
This makes perfect mathematical sense when you realize that GDP is in the denominator. So, if GDP goes down a lot (like it did during the worst of the COVID crisis), then even if debt stayed the same, the ratio of debt-to-GDP would have gone up a lot. But debt didn’t stay the same, it increased dramatically. So the numerator went up, and the denominator went down – two things making the debt-to-GDP ratio worse.
So, where did we get that almost $4 trillion in money we borrowed? Did we get it all from money savers? Not really. Of course, many Americans put their savings into Treasuries as did many foreign investors, but a substantial amount of the money lent to the U.S. government came from another part of the U.S. government, the Fed. Technically the Fed is not entirely part of the government. It is quasi-public, meaning privately owned but under Congressional supervision, and with key appointments being made by the President. The Fed has the legal authority to create accounting entries on the books of member banks, which are then used to buy various assets, but mainly Treasuries. This is called ‘debt monetization’ which is a technical-sounding term for the idea that money is ‘created’ and then injected into debt markets. Traditionally that referred to short-term, usually just overnight, banking transactions. But with the Great Recession there was a shift towards buying Treasury bonds under various programs which are generally known as Quantitative Easing.
The chart below is M1 money, which refers to cash and cash equivalents. You can see an inflection point upwards at around 2008. That inflection point would look much more dramatic if it were not for the vastly more dramatic inflection points since the COVID crisis which shift the scaling upwards. From mid-2008 to now, M1 has gone from roughly 1.4 trillion to 6.7 trillion. A year ago, that number was roughly 4 trillion.
Is it any surprise then, that gold, a traditional haven against currency debasement, also spiked upwards?
Is it any surprise that non-traditional ‘assets’, such as Bitcoin and Ethereum, also spiked upwards? Interestingly, Bitcoin went up in value so dramatically that if you put Bitcoin and gold on the same chart in the same units, the gold which we see spiking above looks relatively flat by comparison.
This is not a recommendation to invest in Bitcoin or gold, nor a recommendation not to. It is a recognition that these investments, both of which are thought of as alternatives to paper currencies such as the dollar, are sending out a warning signal which we believe not coincidentally coincides with, yes, unprecedented increases in debt and in money supply.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.