US Federal Debt Is Lower Now Than It Was In 1970

Several months ago a restaurant opened here and offered hamburgers made from a recipe that was popular in our first drive-in.  (back in the early ’60’s)  At the counter, I mentioned to the cashier that $5.49 seemed a lot because the last time I bought a “Royal Burger” it was 40 cents.  Her reply.  “So was a gallon of gas.”

You have to love smart, young people.

We can learn from that exchange.  Information, e.g. prices, is useless until you know what it means.  Usually the meaning is found by finding connections to other things – context.  In this case, in terms of gasoline, hamburger prices are unchanged.

Something to think about.

Is the current US federal debt level good, bad or indifferent?

It is somewhat north of $16.2 trillion.  In 1970, the debt was $370 billion.

But upon examination of context, we find that in 1970 the price of gold was $37 per ounce so it took 10 billion ounces of gold to pay off the debt.  On November 2, gold is around $1,677.  It takes only 9.66 billion ounces to pay the debt now.  Emphasis on ONLY.

So what happened?

Anyone who held the debt lost purchasing power in terms of gold.   Who won?  The issuer of the debt.  The money they borrowed was more valuable than the money they repaid.  Given that a large share of the debt was and still is held by foreigners, it is possible that the most valuable US export has been inflation.  Can you reasonably believe that the saga will continue forever?

Within the US, the prices of the things money buys have risen but not as much as the price of gold. Cheaper consumer goods from Chine and elsewhere, and cheaper resources from countries who lack the price leverage to demand more, cushioned the blow.  Not to mention the gain on the debt that accrued to Americans.

Some examples.

In 1970 a barrel of  oil cost $3.18, now it is about $85.  Half price.  1/11 of an ounce 40 years ago, versus 1/20 of an ounce now.

In 1970 a new teacher made about 125 ounces of gold annually.  Today about 25.  Partly because of the cheaper cost of living and partly because of the supply side effect.

Some things to think about

  • You cannot tell what is happening when the measuring device (the dollar) is changing in size.  It is like a fisherman’s ruler.  The readings are not useful
  • If you tend to focus on the numbers, you can easily draw the wrong inferences.  How expensive should a thing be, is a difficult question.
  • It is hard to know where to direct your attention when you cannot understand what you see.  Prices have always been an indicator of supply/demand.  If price goes up then there is more demand.  You cannot use that rule today.
  • You cannot predict the future value of your money with any expectation of being right.  It is like trying to predict the temperature next July 15th when the size of the degree is changing at an unknown rate.
  • Letting politicians influence the money value is insane.  There is always a short term win for them from depreciating the currency.
  • Inflation is merely a tax on people who own money or money denominated securities or pension plans.

Some say that things are not worth the money; the truth is that the money is not worth the money.

You will need to think about your strategic financial plans in a different way.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.