Article originally appeared on The Daily Reckoning (here).
Those who focus on the U.S. national debt keep wondering how long this debt levitation act can go on.
The U.S. debt-to-GDP ratio is at the highest level in history (106%), with the exception of the immediate aftermath of the Second World War.
With growth now fading after the Trump tax cut boost, the debt-to-GDP ratio is now up to 106%, since debt is growing faster than GDP.
The national debt has registered compound annual growth of 8.8%, but only 6.3% for GDP. That’s not a sustainable situation. And it’s not at all clear that GDP will close the gap.
Basically, the United States is officially broke.
I don’t say that to be hyperbolic. I’m not looking to scare people. It’s just an honest assessment, based on the numbers.
Right now, the United States is roughly $21.6 trillion in debt. We have about a $20 trillion economy, which means our debt is bigger than our entire economy.
When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or ends up like Greece?
Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.
They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…
At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth.
Again the current U.S. debt-to-GDP ratio is 106%. We have long surpassed the danger zone already.
We are deep into the red zone, that is. And we’re only going deeper. We’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers which makes it a mathematical certainty.
How do we get out of it?
There’s only one solution left, inflation.
Now, the Fed printed about $4 trillion over the past several years and we barely have had any inflation at all on main-street, even though it does appear to be percolating lately. The bottom line is that not even money printing really worked to get inflation moving.
Is there anything left in the bag of monetary tricks?
There is actually. The Fed having authority over the global reserve currency could actually cause inflation in about 15 minutes if it used it.
The Fed can call a board meeting, vote on a new monetary policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.
They could make that new price stick by using the Treasury’s gold in Fort Knox (if it’s still there) and the major U.S. bank gold dealers to conduct “open market operations” in gold.
They will be a buyer if the price hits below $5,000 per ounce or less and a seller if the price hits above $5,000 per ounce or higher. They will print money when they buy and reduce the money supply when they sell via the banks.
The Fed would target the gold price rather than interest rates.
The point is to cause a generalized increase in the price level. A rise in the price of gold from today’s price to $5,000 per ounce is a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy.
Don’t think this is possible? It’s happened in the U.S. twice in the past 80 years. The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold.
He did this to break the deflation of the Great Depression, and it worked.
The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.
Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. The value of the dollar was cut in half in those five years.
History shows that raising the dollar price of gold is the quickest way to cause general inflation. It’s not likely that this could happen anytime soon, especially with inflation beginning to show up here and there.
But if it doesn’t prove sustainable and we enter a deep recession— which is very likely — the Fed could reach deep into its bag of tricks for the golden inflation cure.
Now after hearing a possible scenario of what the FED could? What will you do? Stay alert, attentive and take action. #GetYourWeightUp