David Stockman on America’s Stagflationary Mess

Guest Post by David Stockman

There can be no doubt that the US economy is struggling with a serious bout of stagflation (a period of high inflation rate and slow economic growth), and that’s notwithstanding the foul-ball GDP print for Q3 2023. Fully half of the reported 4.9% annualized real GDP gain was due to a huge inventory buildup (+1.32%), health care (+0.33%) and government spending (+0.79%). We’d suggest these items are neither stable from quarter to quarter nor the ingredients of what actually fuels rising living standards and societal wealth.

In fact, during the last six quarters the print for real GDP minus these three volatile/dubious items has averaged only 1.80% per annum. Relative to historic growth of 3–4% per annum during the heyday of American prosperity, the recent “core” GDP trend representing fixed investment, domestic consumption and net exports has been nothing to write home about.

Annualized Real GDP Change Excluding Inventories, Government Spending and Health Care:

• Q2 2022: +1.79%.
• Q3 2022: +2.36%.
• Q4 2022: +0.31%.
• Q1 2023: +2.56%.
• Q2 2023: +1.26%.
• Q3 2023: +2.46%.

This leads back to Donald Trump’s disastrous economic stewardship from 2017 through 2020. Since Q4 2016 the price level (CPI) has risen by 27% owing to the massive monetary and fiscal stimmies that Trump superintended, while actual output as measured by the industrial production index (manufacturing, energy and mining, and utilities) has gained only 4.6%.

The latter figure computes to an annual rate of just 0.67% per annum, which is only one-fifth of the 3.0% per annum rate that prevailed over the 69-year span between 1949 and 2016.

That’s screaming stagflation by any definition.

Index of Industrial Production Versus CPI, Q4 2016 to Q3 2023

Moreover, this stagflationary outcome is hardly the half of it. The fact is the four-year span of Donald’s term (2017–2020) encompassed the final years of the post-Great Recession recovery. Even by the lights of milquetoast Republicanism it was therefore supposed to be a time in which monetary and fiscal policy would be resolutely normalized — fiscal consolidation and monetary normalization.

To be sure, we hate the idea that financially cleansing recessions like the downturn of 2008–2009 should be aggressively countered with large-scale fiscal deficits and central bank money pumping. That’s just a longstanding Keynesian cover story for incessant expansion of the state enterprise by Washington’s permanent ruling class of careerist Uniparty pols, Deep State apparatchiks and mainstream media shills.

Nevertheless, modern-day Republicans have usually been on the watered-down “stimulus” bandwagon during recessions, with the brief interlude of 1981–1982 being the only exception. During those years, the “stimulus” cure was explicitly rejected by Ronald Reagan’s brand of small-government Republicanism. He was old fashioned enough to recognize that recessions are needed to purge inflationary excesses of debt, overspending, malinvestment and speculation and therefore must be allowed to run their courses, even as unemployed workers and families are temporarily supported by unemployment insurance, etc.

Not Donald Trump, however. Even before the egregious fiscal insanity of the 2020 pandemic stimmies, the Trump deficit had soared to $983 billion by FY 2019.

Thereafter, of course, it was Looney Tunes time. The FY 2020 and FY 2021 deficits soared to a combined total of $5.9 trillion. Both years were drastically inflated by Donald’s stimmy measures, including their extensions in Biden’s American Rescue Plan. Actually, the total for these two years is equal to the entire public debt incurred on the watch of all 43 presidents during the first 212 years of the nation!

Let that sink in. That $5.9 trillion will saddle US taxpayers for generations to come and is therefore just unforgivable madness under any circumstance. But it is flat-out unacceptable behavior for any politician elected on the Republican ticket.

For avoidance of doubt, check out the federal deficit chart below. The deficit was marching downhill in typical cyclical recovery fashion and then went bat-shit crazy.

Federal Deficits, FY 2009 to FY 2021

Needless to say, this Trump borrowing spree fostered serious distortions on the Main Street economy. The only silver lining is that The Donald’s storm of red ink-financed stimmies did end up repudiating the Keynesian delusion that artificially goosed consumer spending (PCE) causes sustainable economic growth.

Index of Real Personal Income Less Transfer Payments Versus Real PCE, February 2020 to September 2023

But that was for no lack of trying. The level of total PCE was first massively bloated by all the Trump stimmies, including the $1.6 trillion of unpaid-for tax cuts. In fact, between February 2020 and September 2023, real PCE growth (black line) of 2.6% per annum was more than double the growth of real personal income from wages and salaries, interest, dividends and owners’ earnings.

Of course, the gap between income and spending was compensated by a massive explosion of payments under The Donald’s multiple rounds of multi-trillion-dollar stimmies.

Editor’s Note: Unfortunately, there’s little any individual can practically do to change the trajectory of this trend in motion. The best you can do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation.

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