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Le coeur a ses raisons que la raison ne connaît point. 
US deficit reached $17 trillion yesterday.
Le coeur a ses raisons que la raison ne connaît point. A story has been echoing around the financial news for a few weeks. One article about it, It’s official: America is now No. 2 by Brett Arends at MarketWatch, came to my attention. Arends asserts that the Chinese economy is now larger than the economy in the US. Here’s what he said.
“We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world.”
With GDP data from the IMF, we can easily see that the US economy is bigger than China’s. The IMF estimates 2014 GDP at $10.4T for China and $17.4T for the USA. So how does Arends claim the contrary? He uses different data that IMF adjusts. By this methodology, the Chinese economy is “really” $17.6T.
Really?
Although Chinese GDP is lower when measured in yuan and converted to dollars, Arends and others claim that this isn’t right. Goods and services are cheaper in China. So they don’t think we should convert yuan to dollars using the market exchange rate. They use a concept called Purchasing Power Parity (PPP). PPP is used to determine a different exchange rate for the yuan than the market rate. This is how they arrive at a “real” Chinese GDP of $17.6T.
We have long been trained to accept purchasing power as the means of adjusting the dollar from historical periods. For example, JP Morgan was worth $68M at his death in 1913. To calculate what that’s worth in today’s dollars, most people would refer to the Consumer Price Index. They use CPI to adjust the $68M figure from 1913 to a $1.6B modern value. As I wrote on Forbes, that approach is wrong. They should use gold which, unlike the dollar, is the same in 1913 as in 2014. Morgan was worth 3.4M ounces of gold, which is $4.1B today.
Adjusting the Chinese economy by PPP is simply applying the consumer price idea to a whole economy. If we use prices to adjust dollar figures from historical periods in the US, why not use them to adjust foreign but contemporary dollar amounts? If we can use consumer prices to measure the net worth of a man who died in 1913, then it seems like we can use them to measure the economic output of China also.
The approach is fatally flawed, because the value of a currency isn’t derived from prices. As an analogy, suppose you are using a steel meter stick to measure a rubber band. When you stretch the rubber band, it gets longer. This is not equivalent to saying that the meter stick gets shorter. You do not measure meter sticks by how many rubber bands fit end to end. Measurement is one-way.
Money is the meter stick of economic value (though this principle is clouded in paper currencies, because they are falling). Prices rise or fall for non-monetary reasons. Prices may be cheaper in China for a variety of reasons, such as lower wages. Money measures these changes, not the other way around.
By the same principle, prices may be higher in New York than in Phoenix. Does anyone dare to say that these are different dollars? Should we adjust New York dollar downwards towards the Phoenix dollar, based on PPP? How about the Scottsdale dollar (Scottsdale is a ritzy suburb) vs. the south Phoenix dollar?
Standards of living certainly vary based on local prices, but that is a separate issue. The dollar is the same in New York as it is in Phoenix. We say that the dollar is fungible—a dollar is a dollar is a dollar, and each is accepted in trade the same as any other.
Arends uses the Starbucks venti Frapuccino as an example, which he says is cheaper in Beijing than in Minneapolis. A cup of coffee produced in China cannot be sent to Minneapolis where it will fetch a higher price. However, money is unlike coffee. It can go from Beijing to Minneapolis instantly. That’s why there is one price for the yuan globally, but a different price for coffee on every street corner. Bulk commodities are of course more transportable than cups of coffee, but even they cost time and money to transport.
It’s an essential property of money that it is quick and cheap to send it somewhere. Money will always move from where it has less value to where it is valued more highly. The result is that money’s value is consistent everywhere.
This consistency allows us to convert the yuan to dollars, to compare Chinese GDP to American GDP. This is perfectly valid (well, if you accept that GDP itself is valid), because the comparison is instantaneous. We do not have to worry about the falling value of either currency that occurs over longer periods of time. We could use gold to compare the Chinese economy to the American, but it’s not necessary in this.
The price of Frapuccino in China may be important to caffeine addicts who travel to Beijing, but it cannot be used to adjust a currency or a country’s GDP.
Chinese GDP is a lot smaller than American GDP. Will that change? Maybe, but it’s not the job of economists to embed such speculative assumptions into the data.
The US government’s debt is getting close to reaching another round number—$18 trillion. It currently stands at more than $17.9 trillion.
But what does that really mean? It’s such an abstract number that it’s hard to imagine it. Can you genuinely understand it beyond just being a ridiculously large number?
Just like humans find it really hard to comprehend the vastness of the universe. We know it’s huge, but what does that mean? It’s so many times greater than anything we know or have experienced.
German astronomer and mathematician Friedrich Bessel managed to successfully measure the distance from Earth to a star other than our sun in the 19th century. But he realized that his measurements meant nothing to people as they were. They were too abstract.
So he came up with the idea of a “light-year” to help people get a better understanding of just how far it really is. And rather than using a measurement of distance, he chose to use one of time.
The idea was that since we—or at least scientists—know what the speed of light is, by representing the distance in terms of how long it would take for light to travel that distance, we might be able to comprehend that distance.
Ultimately using a metric we are familiar with to understand one with which we aren’t.
Why don’t we try to do the same with another thing in the universe that’s incomprehensibly large today—the debt of the US government?
Even more incredible than the debt owed right now is what’s owed down the line from all the promises politicians have been making decade after decade. These unfunded liabilities come to an astonishing $116.2 trillion.
These numbers are so big in fact, I think we might need to follow Bessel’s lead and come up with an entire new measurement to grasp them.
Like light-years, we could try to understand these amounts in terms of how long it would take to pay them off. We can even call them “work-years”.
So let’s see—the Social Security Administration just released data for the average yearly salary in the US in fiscal year that just ended. It stands at $44,888.16.
The current debt level of over $17.9 trillion would thus take more than 398 million years of working at the average wage to pay off.
This means that even if every man, woman and child in the United States would work for one year just to help pay off the debt the government has piled on in their name, it still wouldn’t be enough.
Mind you that this means contributing everything you earn, without taking anything for your basic needs—which equates to slavery.
Now, rather than saying that the national debt is reaching $18 trillion, which means nothing to most people, you could say that the debt would currently take almost 400 million work-years to pay off. Wow.
When accounting for unfunded liabilities, the work-years necessary to pay off the debt amount to astonishing 2.38 BILLION work-years…
And the years of slavery required are only growing.
As an amount alone the debt is meaningless, but in terms of your future enslavement it can be better understood.
To put this in perspective even further—what was the situation like previously?
At the end of the year 2000, the national debt was at $5.7 trillion, while the average yearly income was $32,154. That’s 177 million work-years.
Again—wow.
So just from the turn of the century, we’ve seen the time it would take to pay off the national debt more than double. That means that more than twice as many future generations have been indebted to the system in just 14 years.
It sounds terrible, and it is. But remember, your future generations will only be indebted if you let them be.
What the US government does may affect everyone, but it’s up to you whether or not you and your children are directly enslaved and tied to the system.
Break your chains while you can and set yourself and your offspring free.
US deficit reached $17 trillion yesterday.
About time to raise taxes on the 1% to help it!
Wasn't it only 1 trillion not that long ago. I seem to remember us all talking about a 1 trillion dollar note.
Wasn't it only 1 trillion not that long ago. I seem to remember us all talking about a 1 trillion dollar note.
Wasn't it only 1 trillion not that long ago. I seem to remember us all talking about a 1 trillion dollar note.
It was 8 or 9 when Obama was elected. It was since Obama, if I recall, when talk of that was first heard?
To start things off, the CBO says the deficit this year will be $506 billion, or 2.9 percent of GDP. In 2013 it was $680 billion, so that’s a pretty steep drop. And in terms of GDP, not only is that slightly lower than the average deficit of the last 40 years (3.1 percent), it’s also a 70 percent decline from Obama’s first year in office, where because of the Great Recession, which brought both the need for more spending and a plunge in tax revenues, the deficit peaked at 9.8 percent of GDP.
You tell them WB
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