Does 3rd quarter GDP growth of 4.1% mean we’re out of the woods?

Revised GDP numbers say the U.S. economy grew 4.1% in the third quarter of 2013.

Does this prove all the politicians who said we would grow our way out of the debt mess we’re in were right?

Hell, no!

“Grow our way out” is the favorite explanation of the politicians as to why “printing” trillions of dollars is not financially suicidal. We cannot grow our way out of the monstrous and increasing debt we have. The debt is too big and growth—even extraordinary growth—is not big enough to catch up with spending growth and pass it so that the nation’s debt-to-GDP ratio falls.

Let’s do the math.

Here is a quote from Tradingeconomics.com:

The Gross Domestic Product (GDP) in the United States expanded at an annual rate of 4.10 percent in the third quarter of 2013 over the previous quarter. GDP Growth Rate in the United States is reported by the U.S. Bureau of Economic Analysis. From 1947 until 2013, the United States GDP Growth Rate averaged 3.2 Percent reaching an all time high of 17.2 Percent in March of 1950 and a record low of -10.4 Percent in March of 1958.

First we need a goal. The Eurozone requires a debt-to-GDP ratio of 60% or less to join, or at least they say they do. For want of a better number, let’s pick that 60%.

Our GDP is now $16 T. 60% of that would be 60% x $16 T = $9.6 T of U.S. national debt.

We are currently at 108% of GDP or $17.254 T of debt. http://www.usdebtclock.org/

So we need to pay down $17.254 T - $9.6 T = $7.654 T of debt. To do that in, say, 30 years we would have to pay down $7.654 T ÷ 30 years = $260 billion per year.

This year’s deficit is $653 B so we would have to run a surplus of $653B + $260 B = $913 B this year to pay down $260 B of debt.

How much additional tax revenue do we get from 4.1% GDP growth? According to Hauser’s Law, 19.5% of GDP becomes tax revenue. It matters not which party is in power or what the maximum tax rates are or any of that. 19.5%.

So the incremental tax revenue from incremental GDP growth of 4.1% is 4.1% x $16 T = $660 B x 19.5% = $128.7 B of additional tax revenue.

Ooops! Not enough. We need $913 B. What growth rate would that take? $913 B ÷ 19.5% = $4.682 T of additional GDP which is a GDP growth rate of $4.682 T ÷ $16 T = 29%!

So, what is our conclusion, class?

The U.S. government and the U.S dollar are toast financially.

It will try to “print” the money to pay these massive and growing bills for as long as it can get away with it. It already is. That’s what “Quantitative Easing I, II, and III” are. That will destroy the value of all USD and USD-denominated assets around the world (About $83 T). Then they will default on U.S. bond payments. Then they will be forced to abandon most federal spending on entitlements and defense.

We cannot grow our way out of it. We cannot tax our way out of it. We cannot borrow our way out of it. We cannot “print” our way out of it. The debt is way too big for any of those “solutions” to work. The only way out is for the U.S. government to crash and burn. Only then will the American people have the political will to cut entitlement spending.

John T. Reed