From 1870 to 1970, the ratio of debt to GDP in the US averaged 1.48. Today, the ratio is 3.47, which means that the economy bears the weight of three times the debt that it did up until 1970. Not coincidentally, it was August 15, 1971 that the President Nixon made the dollar no longer redeemable in gold, which meant that the Federal Reserve could – and has – printed money like there’s no tomorrow.
Notice that the Money Stock growth rate was not great immediately after Nixon closed the gold window. Many members of the Fed knew the importance of not issuing too many dollars relative to the amount of gold held by the US because of the recognition of the need to return to the gold standard “someday.”
Over the decades, though, a country’s gold holdings became less significant. In the 1990s, the Bank of England dumped, literally, millions of ounces below $300 an ounce. Canada today has no official gold holdings, despite being a major gold mining country.
Alan Greenspan, Fed chair 1987 – 2006, ushered in a long period of low interest rates, which were accomplished by the Fed buying – with freshly printed money – bonds. As bond prices go up because of the buying, interest rates go down.
Greenspan was followed by Ben Bernanke, 2006-1014. The “Bernank,” as he became known, made comments about “helicopter money being deposited in bank accounts,” thereby stimulating the economy. It was under The Bernank that the Fed initiated quantitative easing (QE) that resulted in the Fed’s balance sheet growing by $4 trillion in only a few years.
Today, although the official budget deficit looks to come in at about $800 billion this fiscal year, the Treasury will have to borrow in the neighborhood of $1.2 trillion. Yet these numbers are rarely talked about on the many financial programs that abound. It is fair to say that the debt and the deficit are pretty much ignored.
Now Jerome Powell is Fed chair. Under him, in 2018 the Fed hiked rates four times and was set for another when the stock market took a hissy fit in December. That resulted in Powell turning from a hawk to a dove and became known as the “Powell Pivot.”
If the Fed moves to lower interest rates, it will do so by printing still more money and buying bonds, thereby adding to the debt that the economy carries. Interestingly, according to Keynesian theory, the government should be paying down its debt when the economy is robust. But that’s not happening. And, if the Powell Pivot is in effect, interest rates will drop further, resulting in still more debt being loaded on.
When the economy turns down — we’re now in the longest but weakest economy recovery ever — there will be a cry for still more money printing, which will cause a lot of suffering. Gold and silver will see higher prices as fear sets in. The Fed cannot print trillions of dollars without there being a lot of mistakes made.