Four short notes on the link between private wages and public debt...
BETWEEN V.E. Day in 1945 and June 1947, the United States shrank its
armed forces from twelve million people to around
1.5 million.
The impact on the economy - and on the US Treasury's then record debts - is
hard to overstate...
Indeed, at either end of our chart, national debt - as a proportion
of gross domestic product - shows a mechanical relationship with private-sector
income. Because it falls as wages rise, and vice versa. That's unsurprising,
given that privately-generated income is always the prime source of net tax
receipts.
But the chart shows three further things, however, which Washington's planners
(if not private and foreign Treasury-bond holders) might also consider:
#1. The share of GDP going to private-sector US wages has
steadily declined since the post-war demobilization. Yes, there's been a boom
in corporate profits. Yes, GDP clearly counts many more activities today than
it did. But there has also been a steady nationalization of the US economy,
and it is accelerating.
#2. Outside total war, private incomes have never been smaller
compared against public debt. Falling from a ratio of 2:1 as the Great Depression
began to hold steady around to 1:1 across the 1960s, '70s, '80s and '90s, private
incomes have now sunk to four-tenths the size of the national debt. The record
low, hit in 1945, was 0.32.
#3. Demobilization was vital in the mid-to-late 1940s to
a) stemming debt growth, and b) also paying debt down. Lacking any such shock
today, however, the current administration may as well target 4% annual GDP
growth in its forecasts. But even that growth would merely curb the debt (or
so it's hoped) to $20 trillion by the end of this decade.
Still, what chance of demobilization today? Returning 10 million people to
the private jobs market, amid the current economic debate, ain't going to happen.
So neither will a turnaround in America's fast-rising trend of debt-to-GDP.
Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold today vaulted
in Zurich on $3 spreads and 0.8% dealing fees.
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