A Further Analysis On Deficit To Outlay Spending

 |  Includes: DIA, SPY
by: Katchum

I already talked about how the U.S. budget deficit is skyrocketing in this article. Reason was that outlay spending has outpaced government tax revenues since 2008.

I decided to make another chart of this going to the early 1980's. As James Turk stated, when governments start to borrow more than 40% to fund their outlay spending, then we have come to a hyper-inflationary scenario.

Quote (James Turk) (2011): As further proof that the Havenstein moment is behind us, consider that 58% of the money spent by the federal government in October and November came from borrowed money ($320 billion of debt against $551 billion of expenditures). Monetary history shows that governments are on a hyperinflationary path when crossing the 40% threshold, a level long passed by the federal government.

So I took the data from the Monthly Treasury Statement and divided the monthly deficit/surplus by the outlay spending. I came up with chart 1.

As you can see, during a whole period deficits were manageable (around 20% of outlay spending was borrowed). But since 2008 the chart suddenly shifted to the upside. Now, 40% of outlay spending in the United States is financed by others and we didn't have any surpluses whatsoever like in the 90's. So we crossed the 40% mark already and are on the hyper-inflationary path.

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Chart 1: Deficits (+)/Surplus (-) versus Outlay Spending Ratio

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This chart is evidence of the devastating effect and aftermath of the 2008 economical crisis on the U.S. economy and it will only continue to spiral out of control in my opinion. Imagine what would happen if we get another 2008 event. Chart 1 will have another shift to the upside, possibly to the 60% ratio between deficits and outlay spending. This wouldn't be feasible in the long term. If you want to be prepared, you should monitor the infliction point where hyperinflation would start.

The key measure to follow is money velocity of the broad measures of money supply M3 or MZM (which resembles M3). When money velocity spikes, hyperinflation has set in as people scramble for tangible assets.

From Goldonomic.com:

"Hyperinflation starts when the public is unwilling to hold the money for more than the time it is needed to trade it for something tangible to avoid further loss. A good indicator that Hyperinflation has started will be a sudden increase in the Velocity of Money. [ P = M x V ]. This alone can increase the general level of prices. Even with a falling M3!"

So be warned, when the following graph spikes up (Chart 2), it's time to get into real tangible assets! You can see that in 1980 we had the hyperinflationary crisis where gold spiked into a bubble when everyone feared inflation.

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Chart 2: MZM Money Stock

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.