Social experiments and debt repudiation; The government benefits from inflation and crisis

Inflation; The government giveth, and the government certainly taketh

Overview: it’s been over two since the Federal Reserve and US government first enacted their policy plans to battle the COVID pandemic, and the longer-term results of these actions are becoming more self-evident. I wish to take this time to discuss some of my findings, offer some theories behind this recent runup in inflation, and provide the reader with some conclusions.

  • First, it’s much simpler to tax the people surreptitiously through inflation rather than through direct taxation to finance social largesse.
  • Second, while the nominal levels of debt continue to climb, the U.S. government and Federal Reserve purposely engineered a price inflation campaign, while concomitantly suppressing real bond yields to effectively reduce the covid-related financial debt burden substantially.
  • Third, I submit to the reader that the COVID-related monetary and fiscal measures were essentially just social, fiscal, and debt repudiation experiments carried out in real time.

Let’s start by taking a look at some of the data on which I have been concentrating. Looking at the data through a longer-term lens, I have to conclude that the plan is moving along fairly well. Instead of chaos, I see order and a continuation of the trends that existed before the covid campaign.

Chart One
Chart One; The debt burden to GDP has fallen and continues to fall in the wake of the massive covid social spending injection

Inflation is a brutal indirect tax on the people, while it inflates debt burdens away

Let’s take a look at the CPI index data from the above chart (Chart One), and observe how it has helped to diminish the true USG debt burden.

For the sake of simplicity, I downloaded the CPI index chart data, which was indexed at 100 as of July 2012. As of January 2020, the index stood at 112.6. As of June 2022, the value was 128.6. So, let’s take the percent change in the CPI over that timeframe to determine how much we should reduce the real burden of the outstanding UST debt level just prior to the explosion in its amount due to covid-related social spending.

128.6 – 112.6 = 16

16 / 112.6 = 14.2%

Due to the official measurement of CPI growing by 14.2% since the beginning of 2020, we must reduce by 14.2% the nominal public sector debt outstanding as of the beginning of 2020.

Let’s look at total public debt outstanding as of January 2020: $23.224 trillion

Now, we reduce this by 14.2%. I come up with $19,926 trillion

And just like that, the public sector effectively defaulted on $3.3 trillion, and that was just from holdings as of the beginning of 2020. Moreover, we used the official CPI data. When we take the extra debt issuance and the marginal increases in CPI into consideration, the public sector has effectively defaulted on $4 trillion. Bond holders pay the price, as the level of interest payments from the federal government are only a small fraction of the price increases. Furthermore, any interest income the Fed receives net of expenses is generally remitted back to the UST.

The real burden and market value of outstanding USTs and public debt have fallen

Chart Two; Real bond yields have never been lower

Although higher inflation affects nominal interest rates, real bond yields have never been lower in modern history (Chart Two). Since the prices of outstanding Treasuries have fallen as market yields rose, the effective marketable burden to the government is even less (Chart One). We can see this in Chart One to look at the value of outstanding USTs reconciled to market value, rather than face or par value. Treasury holders pay the tax on this one. These holders are willing to accept a much lower interest payment than CPI inflation would normally indicate. The government is effectively taxing the fixed-income investor.

Chart Three: Nominal GDP has lifted off and the economy’s debt burden has been fading

I look at Chart Three and observe at how rapidly nominal GDP has lifted off its covid-related lows. Once again, inflation has done the heavy lifting; but in the bond world, inflation of any kind benefits the borrower with fixed-rate debts oligations.

Chart Four: Real GDP is struggling while nominal GDP is rising nicely. To the USG, a rising nominal GDP is all that matters when it comes to managing its real debt burden. Tax revenue rises substantially.

Nominal federal budget deficits are falling to below pre-covid levels

If nominal federal government budget deficit levels are falling, this means in this current inflationary environment, real deficits are truly getting smaller.

Analysis of notable trends: Over the first nine months of FY2022, the federal government ran a deficit of $515 billion—23% the size of the deficit over the same period in FY2021 ($2.2 trillion), and 69% of that recorded at this point in FY2019 ($746 billion), prior to the COVID-19 pandemic. Strong revenue growth and lower levels of spending contributed to the shrinking deficit. So far this year, revenues totaling $3.8 trillion were $779 billion (25%) greater than over the same period in FY2021. Individual income and payroll tax receipts largely drove this spike, increasing $690 billion (27%) as wages and salaries continued to increase amid a tight labor market. Corporate tax revenues also rose by $41 billion (15%). Unemployment insurance receipts also rose by $14 billion (36%) as states continued to replenish their trust funds, and customs duties and excise tax receipts went up by $16 billion (29%) and $11 billion (21%) respectively, reflecting an increase in imports and economic activity.

According to the US Treasury, Debt to the Penny

As of 7/14/2022 – Debt held by public: $23,869,748,457,708, Intragovernmental Holdings: $6,622,970,283,513,  Total Public Debt Outstanding: $30,492,718,741,221

Debt Held by the Public: All federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government less Federal Financing Bank (FFB) securities. Debt held by the public is composed of Treasury Bills, Notes, Bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Domestic Series, Foreign Series, State and Local Government Series (SLGS), United States Savings Securities, and a portion of Government Account Series (GAS) securities.

Intragovernmental Holdings: Government Account Series (GAS) securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank (FFB) securities.

Total Public Debt Outstanding: Total of intragovernmental holdings and debt held by the public.

Source: US Treasury; Monthly Treasury Statement (MTS)

Based on the Fred chart data from Chart One, total public debt outstanding was $30,401 billion as of the end of Q1 2022. Thus, total public debt outstanding only climbed by approximately $100 billion last quarter. What this, as well as the US Treasury data, says is that total public debt as a percent of nominal GDP continues to fall in the wake of the post-covid spending deceleration. This result is not yet plotted in Chart One and Chart Three, Public debt as a percent of GDP.


By their nature,  all social spending campaigns are highly effective at consolidating global wealth while simultaneously making the masses ever more dependent on the government for their handouts. The sad part is that despite all these many trillions of direct social largess, the public-at-large is in a much worse position, but cannot figure out how they lost.

Rather than seeing some sort of out of control inflationary spiral, I see a well-designed social spending experiment coupled with a subsequent defacto debt repudiation of the debt that financed the spending. Hardly anyone sees this obvious outcome, and it is all actually proceeding fairly well with very little blowback. I tip my hats to the monetary and fiscal authorities for being able to pull it off so far.

Keep in mind that these powers are only able to assuage public concern via their media persuasion and conditioning. Currently, the media are positioning these circumstances as a series of unforeseen events, misguided actions, and partisan rancor, but I see it differently.

From relying on WV Senator Manchin, the miserly scapegoat and social spending dissenter, to the receipt of higher capital gains tax revenues and earned income tax receipts from higher wages, the federal government has really been able to steady the ship.

I have to warn the reader that we are not going to give up these gains in price inflation as deflation. This monetary system is not designed to ever make this a reality. Even during the depths of the 2008 manufactured crisis, rents and overall price levels remained stable on a national level, and we never truly experienced outright deflation in the gestalt. We will not experience deflation after this current round of elevated inflation fades; rather we will observe a trend to the long term moving averages over time. The global money supplies, especially the money stock measure growth in nations like Russia and China, preclude that from ever happening. While Fed M2 skyrocketed in the immediate wake of COVID, the latest measures reveal a yoy run rate of barely 5%. Each nation picks up the baton from the other.

Inflation is a government’s best friend and your worst ally if you work for a living. If a person is not able to keep up with inflation, he or she is taxed terribly, yet unsuspectingly. Even worse, while the public is fighting amongst itself, the government, with the help of the Federal Reserve, is effectively defaulting on its own debt. Last time I checked, the Sun is still coming up in the morning.



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18 thoughts on “Social experiments and debt repudiation; The government benefits from inflation and crisis

  1. Asset market alert!!! Asset market alert!!!

    Oil WTI looking weak on the daily here overnight. It needs to get above 100 or that daily bear flag will fail to 85 within a couple days. If it goes below 80, look for S&P eminis to fly fly fly…. Oil in mid 70s will send spoos to at least 4,300 maybe as high as 4,500-4,600 if it hits second target at 65.

    Don’t get caught with your pants down reading Zerohedge and Infowars pro-Russian propaganda.

    1. WTI daily and weekly charts looking crappy for oil bulls. Bear flags flying.

      For the rest of us, this is great news. Commodity prices under pressure for a couple months now. Oil will eventually give in, too.

  2. This is probably the most important economic post I have written in the past couple years.

    I got emails asking me about collapse. Unless there is a nuclear take out of Washington DC, I don’t see any collapse in the financial markets. I am absolutely amazed that this has been able to transpire and continue and the world has not figured it out. I would not want to be short any asset market.

    Imagine if the powers get cocky, they can let inflation rage for a couple years and effectively slash the real public debt burden by 40 or 50%.

    Of course, it all hinges on whether or not real bond yields and interest rates can remain subdued. And I say they can, because the powers can conjure up another crisis.

    My readers need to embrace what I am attempting to articulate in this article.

    1. One would think high miles and long term use would lower the prices, but that obviously doesn’t apply to certain items. All the collapse doom articles seem to be distraction. All those BTC to 10k articles last few weeks yet it upticks, although that could selloff come back down. What’s the catalyst? Covid variants and vaccines mandates in the headlines but will the masses buy into that again? The SOS had to fake a war in the Ukraine, Hollywood movie style and stage those supermarket school shootings, it is Not happening naturally. Those FRED charts do point to an longterm uptrend to stay invested. I don’t think next weeks FED announcement of 75bps is going to get as big of a reaction this time around.
      GOOG post split is now looking good for some trades.

      1. I think of 9% CPI and the ff rate is 1.75%. Talk about dragging their asses. 10 year at 3%. The budget deficit is down to the mid 2010s level. The government has really cut back this year, and the Fed is letting inflation rip. The PTB have provided a lot of diversions with war and Russia global decoupling, but the USG makes out well and is able to effectively write off at least 4 trillion from the resulting inflation. And that level may continue to rise all year.

        I read stories about rents falling, but I am not seeing that. My 2/2 condos, which rented for 1600 three years ago are now going for 2300. I see no let up.

        I went to the local Giant a couple days ago, and hadn’t been there in about three weeks. The grocery prices just escalated. The store doesn’t even bother to change the price tags anymore.

        I see no blowback from anywhere. No one I see in person complains. Maybe online, but not in person

      2. BTC looking fine. Housing market prices look okay. Prices may not keep up with inflation, but they will probably rise in nominal terms.

        You see how the market in crypto was washed out. When all we read about is bankruptcy and Cramer screaming, the short term bottom is in, perhaps cycle low.

    2. It’d be interesting to know the amount of debt households have compared to their annual spending. It seems to me if their debt is higher then households come out ahead?

      1. …of course the amount of households’ savings/pensions that is invested in debt would increase the “tax” burden…

        1. Indeed, fixed income investors are getting hit here. If we looked at the multidecade slide in bond yields, bond holders were more amenable to holding, since they experienced continual cap gains. Now that yields are rising, the cap losses make the paltry interest payments very glaring. It has been taxing; mentally and financially.

      2. That’s as long as they can service those debts. I can run a couple charts to see how household debt is faring.

        From what I do recall, domestic household debt burdens are less than in the other developed nations, and that is because US real estate prices when compared to household income is the lowest of all other nations, save South Africa or Saudi Arabia.

  3. Everything is in the green this morning! Have we past the bottom of the market now? Probably are as long as i don’t put money into the stock market funds. 😉

    1. Based on what I wrote here, I would not be short for any length of time. The dollar is fading well and has been helping commodity and stock prices.

    2. I think of the massive gains in all asset prices over the past decade. Not only does this help silence any potential dissent to hostile government policy, but it keeps the capital gains taxes coming in to government coffers.

    1. Anything that causes inflation right now is alright by the fiscal and monetary policymakers. The created diversions are too great for virtually all to figure out.

      The Fed wasn’t ignorant with its policy maneuvers. It wasn’t misguided. It was very deliberate and it is still behind the curve. It’s on purpose and it’s to help the United States government effectively default on its debt without the public figuring it out.

      If it also consolidates the wealth of the world, so be it.

      1. Chris,
        You made this comment, in reference to a question concerning housing & rent:

        “inflation will come down, but not prices. We will not get deflation. Too much decoupling in the world in the build up to war.”

        Would your statement be the same regarding vehicle prices, both new and used?
        Or is vehicle pricing more subject to supply and demand?
        Used inventory at least seems to be building up quite a bit.

        Thanks much,

        1. New vehicle prices will not come down. Not just are the requirements for production always getting costlier, but the auto firms would only drop prices on the margins.

          As for used autos, we could get a glut that would raise supply. But based on supply and demand remaining in equilibrium, we would not see any everlasting price drops. I think the monetary authorities have shown me that they can raise inflation whenever they want and the monetary system is now much different than the pre-2008 one.

          I suspect the central banks are in the process of helping the nation states default on their own debt to stay in business.

        2. I have a tenant who just gave notice on one of my rentals. She rented the property in the fall 2019 for 1895. That detached house now rents for 2800. I will list it for 2775. Bought it for 135k in 2002.

          Thank you, inflation and defacto debt repudiation.

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