The Big Fat Lie of GDP

The Big Fat Lie of GDP
A man waits at a bus stop that displays the official national debt of the United States in Washington on June 19, 2020. (Olivier Douliery/AFP via Getty Images)
Tim Collins

Well that didn’t take long.

Back in November 2021, as the national public debt was hovering around its hard limit of $28.5 trillion, Treasury Secretary (and former Fed Chair) Janet Yellen took Congress to Defcon 1:

“While I have a high degree of confidence that Treasury will be able to finance the U.S. government through December 15 and complete the Highway Trust Fund investment, there are scenarios in which Treasury would be left with insufficient remaining resources to continue to finance the operations of the U.S. government beyond this date.”

The United States government would not be able to pay its bills.

Dutifully, congressional leaders cut a deal to raise the debt ceiling another $2.5 trillion to roughly $31 trillion.

On Feb. 1, the national debt officially crashed through the $30 trillion glass ceiling. Professional politicians, like Mitch McConnell, issued strongly worded letters before the Senate blaming Democrats for the additional baggage.

The only problem with Mitch’s condemnation is that this isn’t the first debt wall Congress has run into. In fact, Congress since 1960 raised, extended, or revised the debt ceiling 78 times prior to 2021, including in 2019, when it voted to suspend the debt limit for two years.
It’s business as usual.

Draining the Life Blood of an Economy

The disaster this government has perpetrated on the American people is now unprecedented.

In a matter of months, the debt has increased another half trillion dollars. And the ramp up is only going to accelerate from here. There is no reverse gear in this economic transmission.

Think of it like this: Borrowing is a mortgage against future earnings. There is a thing called “real value.” You go to work. You build cars. You fix plumbing. You create a better mousetrap. Whatever.

You produce value. That value is real wealth.

You can then exchange that value for some other value—food, shelter—the usual stuff. (Side note: To simplify this exchange of value, history has developed a mechanism called currency.) But here’s the thing:

If your personal store of wealth isn’t enough to pay for the goods and services (others’ value) you need, then you have to borrow to make up the difference. And that difference becomes a tax on the future value you haven’t created yet.

When growth exceeds spending, it creates wealth. Wealth means prosperity. When prosperity increases you’re able to leave your apartment and buy a home in the suburbs. You’re able to afford a new car (and the gas that goes in it). You’re able to put food on the table and pay for your children’s education.
But when spending exceeds growth it creates debt. A call against future wealth. Bottom line: where there’s debt, there is no wealth.

When you have $70,000 in debt and only $50,000 in income, you generate no wealth. And, as my dad used to say, you have to run to stay even—in other words you suffer.

But when the government does it, everyone suffers. Because they’re basically borrowing against the whole economy.

GDP Is a Fraudulent Number

By doing what it’s done the past half century, the government has essentially borrowed against future earnings and negated the entire GDP of our country.

In January, the Bureau of Economic Analysis reported that the American economy had expanded by 6.9 percent in the fourth quarter of 2021. For the record, it was the “advance” calculation and is subject to two more revisions.

But you can throw that report out the window. The country’s GDP is actually negative because our expenditures are more than the value we created. We’ll be working to create value to pay off that debt for decades to come.

This kind of situation makes it more than challenging for investors—when your money is chasing inflation. A defensive strategy as the debt piles up and the dollar continues to dwindle in value would be to look more toward value stocks. Cyclical stocks, like those in the consumer discretionary sector, should perform well too.

Tim Collins worked for years as a financial advisor before establishing his own hedge fund, one that would acquire shares in companies like Facebook, Twitter, and AirBnB in the private markets before they went public. He now co-authors Streetlight Confidential investment newsletter with Bob Byrne, and his writing and commentary has been featured on RealMoney and RealMoneyPro on for over a decade.
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