The Stark Budget Reality, In Pictures

by: Karl Denninger

If you read my Ticker from earlier in which I went after Marco Rubio and called him a fraud, along with both the Democrat and Republican parties in general (and, incidentally, the Libertarians as well), you were issued a challenge to de-credit-expansion GDP and then apply that to the budget.

Why is this important, you might ask? It's critically important because it is the only way to figure out the real impact of these programs on the economy ex monetary games. That is, how they "feel" to you as an ordinary citizen. You probably didn't want to do the work, even though it only takes minutes.

Here's the "punch line" chart from the previous Ticker, once again:

But this understates the problem -- dramatically so -- even though the blue line shows the growth in federal medical spending, and makes quite clear exactly how bad that really is. But notice that the rest of those lines are not really all that scary. Or are they? If you read the rest of that Ticker, you know they are, because GDP is not really output. It is a ratio.

That is, the classical GDP equation:

GDP = C + I + G + (x - i) is not actually a value, because each of the items in the equality are valued in "dollars", and yet GDP is in fact represented to be in an invariant unit!

That is, if GDP[time 1] = $10,000 and GDP[time 2] = $20,000

then the representation made is that

GDP[time2] > GDP[time1]

THIS IS NOT NECESSARILY TRUE!

In order for it to be true since all money is debt and all debts must have both a credit and debit, then the above assertion is only of necessity true if:

DEBT[time2] is less than or equal to DEBT[time1]

across the entire economy!

If there is more debt at [time2] than at [time1] then we do not know whether GDP has actually increased in invariant units until we adjust GDP for the destruction or addition in value of each unit of credit and currency that is represented by the addition (or subtraction) to credit in the system.

Remember that money only has "value" because it is scarce in both relative and absolute terms. That is, if I wave a magic wand and double the amount of "money" everyone has, the price of everything in the economy will, on average, immediately double since the value of each unit has been cut in half. This is easily demonstrated; if you could cut each dollar bill in your pocket in half and yet spend it as if it were a whole bill, all merchants would insist that you present both halves to buy what used to be bought with one entire bill. Whether this is done electronically or physically does not matter.

Now some will challenge me, I'm sure, on the premise that credit expands the monetary base and thus the value of money exactly as does emitting actual currency. Anyone who does so is arguing with themselves since virtually everyone has a credit card or three in their wallet.

That credit card spends exactly the same way as does the $20 bill in your wallet and thus it is utter lunacy to argue against the primary point of this Ticker.

So, assuming 1980 as a baseline (and I can cleanly argue that 1980 is entirely too generous, incidentally) what does the percentage of invariant output -- that is, actual output of persons and firms in the United States -- look like for these government programs when adjusted for credit debasement by both government and private banking interests?

Those four programs consume 42.89% of all productive output in the United States economy today, adjusted for the currency debasement effects of both Federal Deficit Spending and unbacked private credit issuance using 1980 as a baseline -- and that date is being generous.

If you want to know why we're utterly screwed it is because almost half of everything the economy produces is instantly sucked up by these four government programs, standing alone.

It's not half the Federal Budget folks, it's nearly half of the entire economy.