The Crash Course

As we close in on The Most Important Election Ever, it has become like every other presidential election: long, repetitive, painfully boring, and about the economy. Both candidates claim to have the fix and purport that the other’s plan will only perpetuate the troubles, but do either really understand the problems? We’re often told our economy is strong because debt-to-GDP is low or inflation-to-GDP is low. Well, here are some things I didn’t know before last week:

When the Fed calculates inflation, three subjective factors are present: the craziest and most influential of which is hedonic adjustments. They measure pleasure/utility: paying the same price for a better product is really like paying less for the same (your wallet disagrees). These lower the calculated value of inflation more than twofold.

When the Fed calculates GDP, two subjective factors are present: hedonic adjustments and imputed values. Hedonic adjustments are now made in the opposite direction and imputed values estimate what you get without paying, e.g. you don’t pay yourself rent on your house and free checking is free so you’re not paying what those could cost you. None of this money is ever transacted nor does it ever exist, yet it is 35% of our reported GDP.

Total credit market debt has historically been below 200% of GDP with a spike to 270% during the Great Depression. Today it’s pushing 350%. At the same time this debt shot up, the personal savings rate plummeted. Prior to its decline, the average American household was saving about 9% of their income. Today it’s less than 1%. By comparison, Europe saves 10% and China saves 30%. But it’s not just private citizens that don’t save; all levels of government and corporations have a combined shortfall of at least $55 trillion. Everyone is spending money they don’t have.

With inflation understated, GDP overstated, and debt mounting, it’s no wonder the US economy functions like one that doesn’t have low debt-to-GDP and inflation-to-GDP levels.

Where does all this debt and inflation come from? Well, since banks loan a single dollar many times, there is much more debt than dollars. If it all gets paid back, everything’s cool. But that old sin of usury means that more money is needed to zero the balance. When you don’t have that money, a default happens and you lose your house. For the Federal Government, the situation is a little different: enter fiat currency. Whenever the Fed needs money, it writes a check, and thus creates money out of thin air (would that we all had that option). The result is rampant borrowing, which creates lots of debt, and a huge money supply, which creates lots of inflation. To wit: it took until 1973 to have $1 trillion of money. That means everything ever done in the US up to 1973 was done with less than $1 trillion in money supply. Our 13th trillion took just the last few months. This all adds up to your dollar buying less and you needing to borrow more.

Hopefully these few facts and statistics shed some light on the larger economic troubles facing the US and how the rampant borrowing over the past few weeks is likely to exacerbate the situation. I wish I had learned all this by visiting a campaign website, but I didn’t and I’m afraid that’s not possible. Neither candidate seems aware of these problems as both call for more spending of money that we don’t have. I urge all of you to visit www.chrismartenson.com and take The Crash Course to get the full story (FREE!). It will entirely change your way of thinking about the economy and better prepare you to deal with the future you will inherit.