Magazine article The International Economy

The Inflation-Debt Scam: A Peek Inside the Unreal World of Economic Analysis

Magazine article The International Economy

The Inflation-Debt Scam: A Peek Inside the Unreal World of Economic Analysis

Article excerpt

The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams of ShadowStats ( provides inflation estimates based on previous official methodology, when the Consumer Price Index still represented the cost of a constant standard of living. The low percent inflation measure used to deflate nominal GDP in recent quarters is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction in GDP growth than the 2.9 percent contraction released recently by the Bureau of Economic Analysis. The two main causes of inflation's understatement are the substitution principle introduced during the Clinton administration and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5 percent. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5 percent.

Realistic economic analysis is a rarity. The financial press echoes Wall Street, and Wall Street economists are paid to help sell financial instruments. Gloomy analysis is frowned upon. Even negative quarters are given a positive spin.

Years of understatement of inflation has resulted in years of overstatement of GDP growth. Thinking about the many years of misstatement, we realized that the typical computation in nominal terms of the ratio of debt to GDP is seriously misleading.

Consider that debt is issued in nominal terms and repaid in nominal terms (except for a few Treasury bonds with inflation adjustments). However, nominal wealth or nominal GDP overstates real economic strength. The debt is growing, but both the nominal and real values of the output of goods and services are not keeping up with the rise in debt.

To understand how risky the rise of debt is, nominal debt must be compared to real GDP. Spin masters might dismiss this computation as comparing apples to oranges, but such a charge constitutes denial that the ratio of nominal debt to nominal GDP understates the wealth dilution caused by the government's ability to issue and repay debt in nominal dollars. We know that inflation favors debtors, because debts can be repaid in inflated dollars.

Figure 1 shows three different debt-to-GDP ratios. The bottom line is nominal debt to nominal GDP, the financial press ratio. The middle line is the ratio of nominal debt to the official measure of real GDP. The top line is the ratio of nominal debt to Shadowstats' corrected measure of real GDP that puts back in some of the inflation that is no longer included in official measures. The basis for this corrected measure is also 2000, but as the GDP number for 2000 is lower due to correction, this graph begins with the ratio at a slightly higher point.

The nominal debt-to-GDP ratio shows that as of the end of the first quarter of 2014, total U.S. Treasury debt outstanding is 103 percent of US GDP.

The ratio of Treasury debt to official real GDP shows debt at 136 percent of GDP.

The ratio of debt to real GDP deflated with a more realistic measure of inflation, one more in keeping with the experience of consumers, puts U.S. public debt at 185 percent of GDP. In other words, the burden of U.S. debt on the real economy is almost twice the burden that is normally perceived.

The ShadowStats adjustment we made to real GDP does not fully correct for what we believe has been a growing understatement of inflation since the 1980s. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.