Tim Morgan, a highly respected economist, has completed an analysis of trends of debt and gross domestic product (GDP). This analysis is as important as a study by an astronomer on when the next asteroid may strike earth, creating a mass extinction.
Let’s start with Morgan’s trend in growth of America’s debt. If we examine an average annual growth in debt, this simply totals up the growth numbers and divides that by the number of years. But economists refer to the growth of debt in terms that differ from the average growth. It’s almost an inherent number that can’t be really explained to a non-economist. However, we see only small variations, like from 5.1% to 5.2%, even after significant economic collapses.
This is measured against the GDP at 3.2%. One of the controversial aspects of GDP is how to consider the spending of borrowed money. If you were examining your own finances, you probably would not count money that you borrowed as income because it would be a debt that you had to repay. It would be more of a liability than an asset, especially if it had a high interest rate or were borrowed from an organized crime element.
The U.S. economy currently has a 5.2% compound growth of debt and a 1.8% compound growth of productivity or growth of actual output. A 5.2% debt rate doubles in 13.84 years. And it would take 40 years for our productivity to double at 1.8%. So if we look ahead, we can see that within another 13 years, the amount of debt in the economy will double again. The economy’s productivity won’t double again for another 40 years at this rate. And this tells us that there may be a collapse of the economy just like a balloon that is too full of air. The huge, excessive amount of debt will blow up our economy and will have to be reduced either by massive deflation of prices for goods or by hyperinflation when the value of money is sharply reduced.
Which will it be high deflation or hyperinflation? More than likely, it will be deflation. There is no way to significantly reduce the value of money through hyperinflation without printing trillions of dollars, which does not appear to be in the best interest of America or the banking system. Our system seems to want to borrow money into existence, not print it into existence. And bankers do not want to devalue the debt that is owed them by printing more money.
Let’s think of our economy as 10% assets and 90% debt. If the debts were declared forfeited because of inability to pay, that would leave America with only 10% of its wealth. And even worse if you invested heavily in bonds and there were a major default, you might lose much of what you considered to be an asset in your portfolio.
This whole idea behind conjuring wealth magically out of thin stocks and bonds is destined to fail. And considering wealth as increasing by going further into debt is also a pipe dream that will eventually disappear.
So what is the best course to steer to avoid the hazards ahead? First, pay off all your debts. Second, if we assume there will be high deflation of prices, then cash should be king. The best approach would be to balance cash with specie, preferably silver since it will be lower in value and easier to use in a bartering system.