The Federal Reserve may engage in what has been mocked by investors as “the twist,” a bond buying program intended to reduce long-term borrowing costs by soaking up long-dated Treasury issues. Of course, no matter the short-term goal, the real goal is to monetize the entirety of the US debt loads.
In 2011, the debt to GDP ratio for the United States will cross the psychologically important ratio of 1:1, meaning that the entirety of economic production in the United States is equal to that of the public debt. For each dollar of economic production, the United States government (not including personal debt) has one dollar in existing debt.
Debt to GDP is one of the few ways for investors to understand the importance of national debt in an economy. It’s also one of the few metrics that allows us to see the efficacy of fiscal stimulus programs, which have thus far provided a negative change in GDP for each new dollar of debt.
However, what is most important is how the United States can reduce its total debt load relative to gross domestic product. The United States and its citizenry could increase their productivity, produce more, and thus reduce the importance of debt. Or, in a more likely case, the United States could print money to replace the debt, essentially inflating away the $14 trillion debt as it currently exists.
The US government previously reported that it would sustain some $7 trillion in new budget deficits over the next 10 years to 2021. Those figures have since been revised upward to $9 trillion, or 64% of the current debt load.
In our calculations, we should give the government the benefit of the doubt that the deficit will grow 64% for the next ten years. Using this as a guideline, the US government will have to grow the economy by 5.07% per year for 10 years, or produce inflation equal to 5.07% for 10 years. A combination of both, of course, would keep the debt to GDP ratio in balance.
In the first two quarters of the year, the United States posted nominal growth rates of 3-4%. Inflation was less than 3% at the time. Now, with the dollar losing value, the United States saw CPI-U inflation of 3.7% in August. This should be the new normal.
In order to sustain a relative plateau in the debt to GDP ratio, the Federal Reserve will have to make up for the short-fall. With real growth lagging in at inflation-adjusted readings of .7%-1% in the first half of the year, the Federal Reserve’s new mandate must be a steady inflation rate of at least 4%, otherwise the US government will have a sovereign crisis of its own.
Those of us who invest in alternative investments should realize the profit potential of such policies. The United States is now actively engaged in propping up its own economic vital signs with inflation. Bonds are negative yielding, as are the best dividend stocks. Gold and silver are the only safe havens when the basis for wealth—dollars and cents—are losing money as a result of intentional policy to devalue the dollar.