What is the Real Debt to GDP Ratio? – Debt Rising v GDP Lags – BOOM’s Policy Hints – Use More Cash – US $ Strength Easing – China Pivots – Xi Jing Ping Clashes with Trudeau – Dangerously Unreliable – [11-20-22]

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THIS WEEK’S EDITORIAL

WHAT IS THE REAL DEBT TO GDP RATIO?  Many people in many nations have become anxious over “terrible levels of Government debt”. They say things like “how will our grandchildren ever pay it back?”, “our nation is bankrupt”, “our government has too much debt” and, in the United States especially, “the US Dollar will collapse because we are bankrupt”. You have all heard similar pronouncements.

They are fuelled by thousands of Internet articles which make the claim that “the US Dollar will collapse and Gold will skyrocket in price as Hyperinflation ravages the US economy”. BOOM has been reading these articles for 3 decades. They inevitably tell readers to “buy physical Gold or Silver”. They never vary and their predictions of doom never come true.

However, nobody really looks at the facts. Many so-called finance “experts” are especially prone to panic their readers with highly exaggerated claims concerning government debt. It is a well-worn path.  Debt-to-GDP Ratios are perhaps one of the most ill understood issues in economics. Let’s take a look at the US Government’s debt situation.

The Total Debt of the US Federal Government is currently US$31.27 Trillion. This sounds like a terrifying sum. And it has increased from $21 Trillion in early 2018. This represents a $10 Trillion increase in the total in just 5 years.  Even more terrifying?

However, $6.83 Trillion of the total is Intra-Governmental Holdings. That “debt” is held by the Government but is also owed to the Government. Therefore, we can discount it completely. Thus, the Net US Government Debt is actually $31.27 Trillion less $6.83 Trillion. This means that the actual Net Debt Total is $24.44 Trillion. Does that sound better?

Now let’s look at the “Debt to GDP Ratio” which many commentators regard as a “terrible situation”

The GDP of the US economy is now approximately $23 Trillion. Thus, using customary calculation methodology, the Net Debt to GDP Ratio is just above 100%.  In other words, it compares $24.44 Trillion of Debt to $23 Trillion of GDP. That sounds a lot better than $31.27 Trillion compared to $23 Trillion which would generate a “Debt to GDP Ratio” of 136%.  Just by excluding Intra-Governmental Holdings, we have reduced the “Debt-to-GDP Ratio” from 136% to just above 100%. But even that is not a realistic assessment.

Let’s look more closely.

The Total Net Debt Outstanding figure of $24.44 Trillion is not due to be repaid tomorrow or even next month or next year. The Bills and Bonds which have been issued by the various US Governments to raise this total have many maturity dates ranging from 1 month to 30 years. The average maturity of the debt is about 6.5 years.

Therefore, in BOOM’s opinion, we should not calculate the US Government Debt-to-GDP ratio by using just one year of GDP.  It makes a lot more sense to compare total net debt to 6.5 years of GDP. This calculation reveals a Debt-to-GDP Ratio of $24.44 Trillion/$150 Trillion = 16.3 %

Now — who can raise a panic over a US Net Government Debt-to-GDP Ratio of 16.3% (?). The answer is nobody.

DEBT RISING WHILE GDP LAGS- POLICY SUGGESTIONS FROM BOOM: Now, let’s look at total debt currently held by the US economy as a whole which amounts to about US$94 Trillion. This includes Government Debt, Corporate Debt, Household Debt, Margin Debt and Student Loans. If you compare the growth in total debt to the growth in GDP over time, you will clearly see that debt has surged in the US over the last 30 years from around $10 Trillion to $94 Trillion. However, the annual Real GDP has grown much less slowly from around $10 Trillion to just $23 Trillion.

This reveals that lots of money has been created in the US economy but it has not found its way into the total of transactions in goods and services which are represented in the GDP number. The average CPI inflation rate during that time has been around 2.5% which is reflected in the moderate rise in GDP. So where has the money gone? The answer is that it has gone into asset prices. Over the last 30 years, the Dow Jones Stock Index, for example, has risen from 6,000 to 36,000 – a six-fold increase in company stock prices. Asset Price Inflation is rarely mentioned in the world of economics.

If the US wants to improve its economic growth to reflect its production of money, it needs to reduce its inflation of asset prices over time. This is a complex problem which is being largely ignored by US policy makers.

The US is also making another major error in setting economic policy. To finance much of its economic activity, it relies too much on the issuance of bonds compared to bank loans. Let’s look at the last 20-year time-frame.

In those two decades, the US has increased Bank Loans from $4 Trillion to $12Trillion. However, China has increased its Bank Loans from US$2Trillion to $30Trillion. When banks make loans, they create fresh new money. If government policy settings encourage it, much of that money can wind up trapped in non-productive existing asset values rather than in fuelling productive investments. It is a governmental responsibility to make sure that the balance is right between these two destinations.

In comparison, Bond issuance does not create any fresh new money. It finances governments, companies and municipal bodies from investors’ money that is already in existence.  BOOM would like to see the US government incentivise the use of bank loans rather than bonds as a means of financing government, corporate and municipal spending. And there should be an emphasis on borrowing to make productive investments rather than speculative ones in pre-existing assets. If these policy adjustments were made, the US economy would become more robust and more stable over time.

USE MORE CASH: Another policy improvement involves the use of more cash in an economy as compared to credit money. Currently, in advanced economies, the ratio of Credit Money to Cash is 98%:2%. The Cash component is way too low. Governments should encourage the increased use of Cash as it is non-interest bearing and does not fuel asset price inflation.

Thus, it can be a stabiliser for an economy. However, it must contribute much more than 2% of the money supply. BOOM would like to see it head back towards 50% of the money supply which is what happened in the 1950’s. In such a scenario, any economy would be less likely to swing up and down in its growth outcomes and in its tendency towards CPI inflation. Recessions and CPI inflation swings could become a thing of the past. All it needs is more thoughtful management of the money supply.

US DOLLAR STRENGTH IS EASING – ENERGY PRICES EASING – GOOD NEWS SUMMARY:  The US Dollar is starting to ease back in strength against most currencies since its peak in late October. In fact, the US Dollar Index has depreciated by 7% over the last 8 weeks. This is a welcome development, especially for nations with high or rising CPI inflation.

Energy prices are also easing with the West Texas Crude Price falling from US$130 in March to $81 last week. That downtrend was re-confirmed during the week by further negative price action. US Gasoline price dynamics were also weak. These are more welcome signs for the global economy.

The cost of charter for container ships has notably stabilized over the last 6 weeks. This augurs well for a resurgence of global trade. It is also a sign of possible renewed strength in the Chinese economy which is particularly sensitive to shipping costs, both inbound and outbound.

Let’s summarise the good short term news. It looks like the Peak of US CPI inflation is behind us, energy prices are falling, the US Dollar is falling, container ship costs are falling plus the war in Ukraine is heading into a bitter winter which will allow breathing space for peace negotiations to take place. In that regard, it appears that the US is slowly tiring of Zelensky’s demands and is urging Ukraine to come to the Peace table.

This change of attitude from the US has been strengthened by Zelensky’s recent behaviour in blaming the Russians for the missile attack on Poland and by his undemocratic actions taken against journalists and opposition politicians. His days as President of Ukraine appear numbered if the US and NATO slowly withdraw support.

CHINA PIVOTS — TRUDEAU CLASHES WITH XI JING PING: There are reports coming out of China referring to “sweeping relaxation measures on property and Covid controls”. This is very good news. BOOM strongly suggested this to China in the editorial dated 30th October titled “CHINA MUST CHANGE DIRECTION”. Since then, China has taken note and changed direction.

“BOOM’s advice to China is to abandon all Zero Covid policies immediately and to again encourage wealth creation for all of its citizens.“  BOOM also suggested the following — “It must abandon all connections to the World Economic Forum and its anti-human ambitions. The injectable “vaccines” that cannot work against respiratory viruses and are promoted by the World Economic Forum must be abandoned. Klaus Schwab and his guru, Yuval Harari, must be denounced. This is the pathway forward to a healthy and wealthy China. Economic productivity will be restored.” The next step for China is to follow BOOM’s advice about abandoning the World Economic Forum (WEF).

Last week, there was a public altercation between Xi Jing Ping and the Prime Minister of Canada, Justin Trudeau, at the G20 meeting. That altercation received blanket coverage all over the world. The Chinese had been offended by Trudeau’s leakage of sensitive diplomatic communications and they wanted to make plain to Trudeau that this was unacceptable behaviour.

In the video seen all over the world, the Chinese translator can be heard saying to Trudeau “everything we discussed was leaked to the paper(s), that’s not appropriate.” Trudeau responded by saying “in Canada we believe in free and open and frank dialogue” but the point was made for the entire world to see. Heads of State should be able to have confidential meetings or else there is no diplomacy.

Notably, Trudeau seems to have forgotten that he crushed the free and open speech of the Canadian truckers in their now famous Ottawa protest.

Trudeau is a very strong supporter, a leading light representative of the World Economic Forum’s various transhumanist, technocratic agendas. Thus, this apparently innocuous short conflict in public view was, in fact, a very meaningful event. It was indicative of the coming clash between all Sovereign Governments and the WEF.

BOOM hopes that both Trudeau and China learned a lesson from it. Trudeau should have learned to keep his mouth shut about confidential discussions between world leaders. And China should have learned that the WEF and its flag-bearers are dangerously unreliable and do not respect the Sovereignty of nations.

In economics, things work until they don’t.  Until next week.  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans). https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how global banking systems really work.

AND Watch for 4 minutes, this Bank of England explanation: Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This video describes what money is today.

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.  EMAIL: gerry{at}boomfinanceandeconomics.com

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