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Demobilizing the National Debt

The obvious link between private wages and public debt...

of the Allies' victory in Europe in June 1945, the United States shrank its armed forces from twelve million people to around 1.5 million.

The impact on the economy – and on the US Treasury's then record debts – is hard to overstate...

As you can see, at either end of our chart, national debt shows a mechanical relationship with private-sector income, when each is cast as a proportion of gross domestic product. Debt falls as wages rise, and vice versa...which is unsurprising, given that privately-generated income is always the prime source of net tax receipts.

Our chart shows three further things, however, which Washington's planners (if not private and foreign Treasury-bond holders) might want to consider today:

  1. The share of GDP going to private-sector US wages has steadily declined since the post-war demobilization. Yes, there's been a boom in corporate profits. Yes, GDP clearly counts many more activities today than it did. But there has also been a steady nationalization of the US economy, and it is accelerating.
  2. Outside total war, private incomes have never been smaller compared against public debt. Falling from a ratio of 2:1 as the Great Depression began to hold steady around to 1:1 across the 1960s, '70s, '80s and '90s, private incomes have now sunk to four-tenths the size of the national debt. The record low, hit in 1945, was 0.32.
  3. Demobilization was vital in the mid-to-late 1940s to a) stemming debt growth, and b) also paying debt down. Lacking any such shock today, however, the current administration may as well target 4% annual GDP growth in its forecasts. But even that growth would merely curb the debt (or so it's hoped) to $20 trillion by the end of this decade.

Still, what chance of demobilization today? Returning 10 million people to the private jobs market, amid the current economic debate, ain't going to happen. So neither, we guess here at BullionVault, will a turnaround in America's fast-rising trend of debt-to-GDP.

Ready to buy gold...?

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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