Amerika

The US Debt Clock measures the extent to which US Government spending exceeds revenues accrued to date. Our current figure is equal to $19,411,632 Million and it will increase noticeably by the time this piece has been published. This is an obvious problem. What is less obvious, is the knock-on problem caused by our government’s current solution. That solution involves our government utilizing an official inflation rate that understates what the common American experiences in daily life. Charles Hugh Smith explains below.

In our household, we measure inflation with the Burrito Index: How much has the cost of a regular burrito at our favorite taco truck gone up? Since we keep detailed records of expenses (a necessity if you’re a self-employed free-lance writer), I can track the real-world inflation of the Burrito Index with great accuracy: the cost of a regular burrito from our local taco truck has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.

If we did an Independent Cost Estimate (ICE) on Charles’ favorite burrito under the assumption that the USG was reporting an accurate rate of inflation that applied to all commodities equally, we would believe based on our estimate that the burrito should cost $3.40. If we define the term reality deficit as the delta between an observed cost and a should cost based upon the good faith of the USG annual inflation rate, we get a burrito-based reality deficit equal to $3.10.

Employing some mathematical prestidigitation, we can back out a fourteen-year cumulative rate of inflation equal to 36% for the ICE. The actual rate of increase on the burrito equals 160%. Economists will point out that one data point never defines a trend. Besides, once you’ve added enough Tabasco Sauce, the burrito tastes the same either way. Smith points out that similar reality deficits occur with college education and healthcare. Economists will argue computers and communications systems are cheaper. But as a heckling reporter once told Alan Greenspan; “I can’t eat an iPhone.”

So why would we understate official inflation? To borrow at a lower rate of interest by deliberately underestimating the time preference of money. The lending interest rate will consist of two priced risks. The default risk and the time value of money risk. The US Dollar is the global reserve currency of last resort. This drops our default premium near zero. The US pays the monetary time preference when it borrows internationally. Successfully under-reporting this time preference allows the USG to short customers on Treasury Bond Interest Rates. An artificially low return on Treasury Bonds becomes a form of reverse usury.

So what happens when your paycheck is going up at a notch or two above reported inflation while food and healthcare continue to rise at an accelerated rate? People can’t afford very nice toys anymore. They spend more and more to keep up, so spending diverges from actual economic growth. People also eat their seed corn as their burn rate increases more rapidly than their remuneration. The LA Times cheerleads all of this below.

Consumer spending remained strong in June, increasing 0.4% as incomes continued a slow but steady increase, the Commerce Department said Tuesday. Last month’s spending increase matched May’s, as did the 0.2% growth in personal incomes.

With spending outpacing incomes, Americans saved less in June. The percentage of disposable income saved decreased to 5.3%, the fourth-straight monthly decline.

That difference between spending and economic growth? That’s a negative impact of our current reality deficit. We spend more, get paid less and receive less in real value. We wind up saving less just to live today at the same level of expenditure. So the differential between what the Government admits to in inflation and what we experience in our daily lives is effectively a tax that covers the difference between what the government pays and what the government should pay to borrow money it does not have to cover current year spending.

Unlike the national deficit that will never be paid in an honest fashion, the reality deficit will always be paid in full until such a time that it becomes unaffordable. Once this reality dhimmitude becomes unpayable, the system will collapse. This has recently happened in The Soviet Union, North Korea, Zimbabwe and is currently ongoing in Venezuela. Only a historical illiterate would assume that it will not eventually happen to Amerika as well. Reality reacts really poorly when you fail to pay up the vigorish.

Tags: default, deflation, devaluation, economics, inflation