The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 1

By David Stockman

This is getting pretty ridiculous. For old times sake, we recently checked on the Federal debt level during the month we arrived in the Imperial City as a 24-year old eager beaver. That was June 1970 and the Federal debt held by the public was $275 billion.

Mind you, while that number wasn’t exactly diminutive, it had taken all of 188 years to accumulate. That is to say, Uncle Sam had borrowed an average of $28,000 per week during the 9,776 weeks since George Washington was sworn in as the nation’s first president.

We are ruminating about this seeming historical obscuranta because it just so happens that the US treasury this very week will be selling $258 billion of government debt.

That’s right. Uncle Sam’s scheduled debt emission this week will nearly equal his cumulative borrowing during the nation’s first 188 years and its first 37 presidents!

And, yes, there has been some considerable inflation since June 1970. And not the least because exactly 13 months later Tricky Dick Nixon decided to pull the plug on Bretton Woods and the dollar’s anchor to a fixed weight of gold.

Needless to say, the financial discipline of gold-backed money during that interval of guns and butter excess would most certainly have triggered a recession and a heap of inconvenience for Nixon’s 1972 reelection prospects. As it happened, the American economy got a heap of inflation and destructive financialization over the next half century, instead.

Accordingly, the price level today is 5X higher as measured by the GDP deflator. So in today’s dollars of purchasing power, the 1970 debt figure would be about $1.2 trillion.

This is by way of explaining that it hasn’t been for nothing that we have labeled the Donald as the King of Debt and the Congressional Republicans as fiscal Benedict Arnolds. Their now enacted budget plan—-which they have the gall to crow about from one end of the country to the other—-is to borrow as much money in apples-to-apples dollars during the year ahead (FY 2019) as did the first 37 presidents of the United States!

Accordingly, Keynesians, beltway politicians of both parties and Wall Street punters, alike, know this: The US has a monumental debt problem, and it is most definitely not “priced-in”.

So our purpose in this two-part series is to explain how it came to be not priced-in, and why that anomalous state of affairs is coming hard upon its sell-by date.

To be clear, we are not talking about just the $21 trillion of public debt that will be on the books after this week’s borrowing binge, but the entire $67 trillion albatross of public and private debt that now strangles the US economy.

We refer to the latter as the lamentable outcome of the rolling national LBO that the US economy has undergone since June 1970.

The fact is, the $1.5 trillion of total public and private debt outstanding back then amounted to 150% of GDP. And that implicit 1.5X  national leverage ratio had essentially remained unchanged for the prior 100 years of robust economic growth and 25-fold rise in real income per capita.

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