Confusion Reigns After GDP Revisions
Did the economy grow or shrink in the first three months of the year?
On Thursday, the Bureau of Economic Analysis (BEA) released a revised estimate of the first quarter's economic performance. The most popular economic indicator, Gross Domestic Product (GDP), had its annual growth rate revised up to 1.3 percent. Gross Domestic Income (GDI), however, was reported to be declining at a pace of 2.3 percent annually.
These two measurements ought to be comparable conceptually. Inputs used to calculate GDP include final purchases and changes to inventory. The money produced by those expenditures is measured by GDI. However, because they are created from several information sources, they usually diverge in practice. The distinction is referred to by economists as the "statistical discrepancy."
The discrepancy for the first quarter is unusually large. According to Harvard economist Jason Furman, it is the sixth largest difference since 2003.
Simply averaging them together is one way to address the discrepancy. This would result in a first-quarter decrease of 0.5 percent. Additionally, as Furman notes, the average of GDI and GDP has indicated a decline in four of the previous five quarters.
This would reinforce the idea that the economy has been in a recession for a considerable amount of time, a view that is held by a sizable portion of the people but mocked by the majority of economists. The continued strength of consumer spending and the healthy labor market make the claim that we are in a recession appear improbable. This year, we have added almost 220,000 jobs per month on average, which is a lot for a recession-hit economy. In the first quarter, consumption growth was a very healthy 3.8 percent, which is also not what you would anticipate in a declining economy. - Brietbart Business
Three Lies They Are Telling You About the Debt Ceiling
Republicans Want Austerity
In the political discourse of Washington, the term "cut" often pertains to minor decreases in the projected rise of expenditure. For instance, if the Pentagon's annual spending has been increasing by 2% (the average rate for the past decade), a rise of 1.5% next year would be labelled as a "cut" by some. However, this isn't a genuine reduction as the spending still escalates. Yet, in the perspective of Washington policymakers, any slowdown in the stream of freely available funds is perceived as a "cut".
This underlying logic can be observed in current debates around the endless augmentation of the debt ceiling, with protestations over so-called "cuts" to Social Security or other welfare programs. As part of this debate, Republicans have expressed a desire for "less spending than last year" for the fiscal year 2023, and a subsequent "cap" on spending, with 1% increases each year for the next decade.
Before anyone concludes that this is a significant "cut", it is crucial to examine the federal outlays over the last twenty years. Following some decrease in spending during Obama's second term, expenditures spiked again during Trump's tenure, reaching unprecedented highs as Trump amplified spending in response to the Covid crisis. This trend persisted throughout Biden's presidency, with spending remaining far above the usual trajectory. To revert spending to the pre-2019 trend would necessitate substantial budget cuts surpassing a trillion dollars to the annual budget.
In the current political climate, such massive budget cuts are unlikely. Instead, Republicans aim for a marginal reduction in spending from the Congressional Budget Office's 2023 forecast of $6.4 trillion to slightly below 2022's expenditure of $6.27 trillion. Despite this minor deceleration, the 5-year moving average is not expected to drop beneath its 2022 level.
As per the GOP plan, after the proposed minuscule reduction for 2023, annual spending would return to a rate of increase of 1%. However, this "cap" is not binding for future Congresses, which have the power to disregard past agreements and boost spending based on perceived "needs". Consequently, the "cuts" often discussed are likely to resemble the "sequestration" of 2013, which was supposed to herald an era of austerity but instead saw federal spending and debt nearly double over the following decade. As such, claims that Republicans aim to reduce spending hold true only in the short term, with spending remaining substantially above even Trump's considerable 2019 budget increases, and post-Covid mega-spending is likely here to stay.
The U.S. Has Never Defaulted
The ongoing debates around the US debt ceiling and budget often highlight the urgency of finalizing negotiations to prevent the US from defaulting on its debts, as it's claimed that the country has never missed a debt payment. However, this assertion is inaccurate, as there have been several instances in US history when the country did default on its obligations. The first instance dates back to the aftermath of the American Revolution when the US defaulted on domestic loans and renegotiated past debt on less favorable terms after the constitution was established in 1790. Another example is the Greenback default of 1862, when the US Treasury failed to honor the redemption demand for $60 million in notes.
A particularly striking case is the Liberty Bond default of 1934, where President Franklin Roosevelt decided to default on the entirety of domestically-held debt by refusing to redeem it in gold for Americans, simultaneously devaluing the dollar by 40 percent against foreign exchange. This refusal to fulfill the bond contracts equates to a default. A more recent default occurred in 1979 when the US, amid computer malfunctions and increased demand from small investors, failed to make timely payments on about $122 million in Treasury bills. Although the Treasury portrayed the issue as a delay rather than a default, it still led to a jump in short-term interest rates and a lawsuit from bondholders for contract breach.
Given these historical incidents, assertions by prominent figures like Joe Biden or Janet Yellen that the US has never defaulted are fundamentally misleading. The US has indeed defaulted on its debts in the past, an essential context to bear in mind during discussions surrounding the nation's debt ceiling and budgetary constraints.
Default Is The End of The World
Claims of imminent economic disaster tend to accompany discussions of default, and such predictions have typically preceded endorsements for unrestricted governmental bailouts and spending. This pattern was evident during the financial crisis of 2008-2009, when the administration argued that trillions of dollars should be allocated for bailouts to support bankers, automakers, and financiers. The central bank was similarly urged to generate vast sums of money to purchase government bonds and mortgage-backed securities, supposedly as a means to "fix" the economy. When the recession nonetheless proved severe, the "experts" contended—without concrete evidence—that the outcomes "would have been worse" without the bailouts.
The narrative is now being repeated amid discussions about potential default on the colossal $32-trillion national debt. The common refrain is a demand for unconditioned increases in the debt ceiling to avert an alleged economic catastrophe. Such alarmism is also employed to push for bailouts or substantial new spending, as was the case when former President Trump insisted on the $2.2 trillion COVID "rescue plan." The supposed absence of alternatives and characterization of any opposition as "reckless" encourages immediate approval of new spending, with the promise of dealing with consequences "later" — a point which seemingly never arrives.
However, it's time to question this narrative and demand greater transparency about the unmanageable and unpayable federal debt. Interest on the debt is gradually engulfing all other federal spending, with a study from the Committee for a Responsible Federal Budget indicating that by 2053, net interest will consume about 7.2% of GDP, or nearly 40% of federal revenues. The government's strategy appears to revolve around devaluing the dollar through easy money to reduce interest rates and repay the debt in devalued dollars, effectively hiding a type of default.
Instead of resorting to such indirect and dishonest strategies, a more honest and logical solution could involve explicitly defaulting. The government could admit its inability to fully repay its debt, perhaps offering 90 cents on the dollar or less, rather than attempting to discreetly inflate away the debt obligation. Although this would likely lead to an increase in interest rates, it would align them more accurately with the actual risks associated with investing in government debt.
The current political system prioritizes protecting investors over taxpayers, who ultimately bear the financial burden. The strategy of converting debt into inflation effectively transfers the impact of unchecked spending to ordinary savers and consumers, who experience the tangible costs of inflationary default in the form of price inflation, unaffordable housing, stagflation, and falling real wages. When experts warn of the disaster an explicit default could bring, they may be more concerned about their allies in Wall Street and government than about ordinary Americans who are currently facing a creeping inflationary crisis. - Ryan McMaken