EJ Antoni is an economist and fellow at the Heritage Foundation, whose research focuses on fiscal and monetary policy. In this episode, we break down the discrepancies between government data, media reporting, and today’s economic realities.
“Essentially, a third of all the jobs we thought we had added over that year are gone. They never existed. It’s like taking four whole months of job creation and ripping them off the calendar,” says Antoni.
Are the financial models no longer trustworthy?
“We don’t see the numbers quite matching up to a lot of the government statistics,” says Antoni. “And we get into some very perverse situations where the [Bureau of Labor Statistics] actually counts something as an increase in quality when, in fact, it’s a decrease, and the consumer is paying more for it.”
Antoni analyzes various indicators and inputs to determine what the real data reveals about the state of our economy.
Watch the video:
“Where I think this becomes scandalous is the fact that these statistical problems first became evident in the spring of 2022, so more than two years ago, and nothing has been done to correct them.”
Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of The Epoch Times.
FULL TRANSCRIPT
Jan Jekielek:
EJ Antoni, such a pleasure to have you on American Thought Leaders.
EJ Antoni:
My pleasure. Thank you for having me.
Mr. Jekielek:
I’ve been watching your commentary on a whole series of economic numbers over the past months. This update to the jobs numbers was pretty stark. It changed our perception of whether or not we’re in a recession, which is pretty significant.
Mr. Antoni:
You’re referring to the annual benchmark, where the Bureau of Labor Statistics [BLS], part of the Labor Department, looks back over a 12-month period and they essentially re-evaluate job numbers. In this case, they realized that the job creation was overestimated by about 818,000 jobs, which is a lot.
But on top of that, those 12 months were already revised down from their initial estimates. With these jobs numbers, every single month we get a report, and then the previous two months also get revised. You'll have an initial estimate, and then an initial revision, and then a final revision.
Between all of those revisions, which were down, and this annual benchmark, which was a massive decrease, it was 1.2 million jobs. Essentially, a third of all the jobs we thought we had added over that year are gone. They never existed. It’s like taking four whole months of job creation and ripping them off the calendar. Yes, it’s a pretty big difference.
It’s making us question, “Is the economy even really expanding at this point? Are we in a recession? Are we near or entering a recession? How on earth do we get here?” It’s worth looking back and asking, “Have we ever been here before?”
There was only one time when we had a revision that was this big, and it was in the global financial crisis and the Great Recession. Back then the economy was deteriorating so quickly that BLS was having difficulty with their models in keeping up with the changes in the economy. Interestingly, something very similar is happening today, where the BLS essentially has assumptions that worked fine in 2019, and even to a certain extent in 2020, when the economy was reopening.
There are assumptions based on the number of businesses that are being created, the number of firms that are going out of business, and how many people are being employed or losing their jobs in both of those cases. It turns out we have been grossly overestimating the number of businesses in the economy, and therefore overestimating how many jobs are being added by businesses that it turns out don’t even exist.
Mr. Jekielek:
There is some level of fraud around the business creation because of the trillions of dollars that were pushed out to support business during the pandemic.
Mr. Antoni:
Sure.
Mr. Jekielek:
Is that the reason? Was it because people created fake companies in order to access those funds?
Mr. Antoni:
That definitely seems to have played a part. It doesn’t account for everything, but it definitely seems to have played a part. For example, there were PPP [Payback Protection Program] loans, and there was plenty of fraud in the program. We’ve already discovered plenty of fraud, and there’s a lot more that hasn’t even been investigated yet. Given the fraud that we have already found, you can only assume how much more there is in the rest of the program.
In that case, people were essentially creating businesses that never existed. They never employed anybody, but through fraud were able to get a check from the government. Fast forward to today, one of the things that’s interesting is that we are seeing a lot of firms go out of business and not get replaced at the rates they were before the pandemic. Looking at 2020, which is some of the data that the models are currently using, you had a lot of businesses who were just wiped out by the pandemic, but because there was so much government money available, they were able to restart their business.
The problem today is that those businesses are gone because of inflation and high regulatory costs. Those businesses are no longer employing people and they’re not getting replaced. Vice President Harris, now the Democrat presidential candidate, has a plan to increase the number of new business applications for small businesses. Applications aren’t the problem and they are at a historic high. We’ve never had so many applications for small businesses today.
The problem is that almost none of them can get off the ground. With those who do, disproportionate numbers of them are failing. Again, the reason is the high inflation, which has put their costs through the roof. Then you have a regulatory burden on top of that, which just makes it impossible for the small business to cut it today, especially against their big corporate counterparts.
Mr. Jekielek:
The regulatory burdens are quite different across different states, correct?
Mr. Antoni:
Absolutely. But there’s also a federal regulatory state, which further complicates things. This is actually becoming a huge problem now in finance. You have banking corporations like JP Morgan, Wells Fargo, and Bank of America who have one set of regulations at the federal level and another set at the state level. The problem is they can contradict each other sometimes.
There will be disclosure laws where a state says, “We want to know what kind of ESG or DEI you’re using in making investment decisions for people’s portfolios. Then the federal regulators are saying, “You’re not allowed to disclose that.” You have issues like that where these firms are between a rock and a hard place, where they have a very liberal regulator at the federal level and a more conservative regulator at the state level who are literally giving them contradictory directives.
You’re going to run afoul of those regulations one way or another. That’s strictly the finance realm. But you do have a tremendous regulatory burden just at the federal level, which adds tens of thousands of dollars to the cost of running a small business every single year.
Mr. Jekielek:
You mentioned inflation as being an important element here. Is this reflected in other sets of numbers that we’re looking at? You deal with a lot of different indicators in your commentary.
Mr. Antoni:
One of the biggest things is when we look at business sales and inventories, including retail sales, wholesale sales, and manufacturing sales, all of these different pieces of information we get from the Census Bureau, people look at these numbers and say, “My goodness, they’re going to the moon. The economy is doing great.” But none of them are adjusted for inflation.
In other words, if I’m a retailer and I have a million dollars worth of inventory and we have very high inflation, next year when I add up my inventory, it’s still a million dollars, but there’s actually less physical stuff in that inventory. The issue is that each individual item in the inventory now is a higher price. When I add up all those prices it’s a million dollars, and each dollar is worth less than it was. We’re seeing that more and more throughout the economy.
The problem is that people forget that these numbers are not adjusted for price changes. They’re adjusted for things like seasonality. If we go into October and retailers have a huge increase in inventory, that’s normal. That happens every year because they’re getting ready for the holiday sales season. Then what happens in January? Their inventory is empty. Why? Because they’re getting ready for all the returns that follow the holiday sales season, so we can adjust the numbers for that kind of seasonality. That’s no problem.
The issue is that we don’t adjust them for prices. Unless you go in manually and do that after the fact, which is one of the things that I try to do on that news feed you were referencing. You will have no idea how much actual value is present in these inventories or in business sales.
Mr. Jekielek:
Because the value could be going down significantly if inflation is up, but you’re measuring it as if it’s the same or higher.
Mr. Antoni:
Yes, you get too focused looking at the dollars and not looking at the value. You’re missing the forest for the trees, as it were.
Mr. Jekielek:
What is the reality of inflation right now, according to your calculations?
Mr. Antoni:
We want to distinguish between these official numbers and the actual real-life data, and this is a broader discussion. But a lot of our official inflation metrics, things like the Consumer Price Index [CPI], which is also produced by the BLS, under normal circumstances, does a decent job of estimating inflation. It’s not great, but it does a decent job. The problem is we are not in normal times today. I can give you a few examples of that.
The way they measure the cost of home ownership is odd. Ever since the early 1980s, they stopped looking at home prices and they stopped looking at interest rates. Then you may say, “Wait a second, those are the two biggest things that determine my monthly mortgage payment. How on earth are you going to determine the cost of home ownership then?”
Essentially, they look at rents and they use rents as a proxy. They will go around and ask people who own their home, “If you were to rent out this home, how much do you think you could get for it?” They use that when they are creating a weighted average for determining the actual rent price for a home. But even then, when they get the change from month to month, or year to year, that increase in price is based on rents.
The problem is that if rents and homeownership costs don’t move up at the same rate, then the metric falls apart. Before the pandemic, they were actually tracking very closely. It was kind of no harm, no foul. Rents were going up five percent. Cost of homeownership was up five percent, just using random numbers. But the idea is they were pretty much moving in lockstep, so the metric worked.
Today, it doesn’t work at all because the cost of homeownership has just exploded relative to the cost of rents, which is pretty bad considering that rent is at an all-time high right now. If you actually look at the cost of home ownership, including home prices and interest rates, and see what is the monthly mortgage payment on a median price home today vs. three-and-a-half years ago in January of 2021, it’s up 116 percent. It has more than doubled. Conversely, according to BLS, their metric for the cost of homeownership is up 21 percent, so you’re off by a factor of five. Those are the kinds of statistical problems that we’re dealing with today in these inflation numbers.
Mr. Jekielek:
You said that you have a few other examples of this.
Mr. Antoni:
Sure. Sometimes you have things which are very, very difficult to measure. Health insurance is a good example of that. Because when I’m trying to evaluate the cost of health insurance, I don’t want to just look at premiums. Let’s say your health insurer doubles your premium, but also doubles your coverage. Yes, you’re paying more in premiums, but your copay goes down and your coinsurance goes down. There are all kinds of procedures and treatments and drugs that are now available to you that are covered by your insurance that weren’t previously.
In other words, it’s a net wash. It doesn’t actually cost you any more out of pocket at the end of the year. You pay more in premiums, but you get much more in terms of drugs and services. We don’t want to actually count that as an increase in health insurance because you’re paying more, but the quality of what you’re getting has gone up as well.
We want to account for those differences. The way that BLS has chosen to do it is by looking at the profits of these health insurance companies. The idea is if the health insurance company is charging you more, but also giving you more, their profits stay the same. They say, “We’re going to use that as the proxy for the quality of your health insurance.” The issue here is that if something were to cause corporate profits at health insurers to go down, it translates into a decrease in the cost of health insurance within the CPI.
That’s what is happening today. Even though people are paying more for health insurance, the quality of that health insurance has demonstrably gone down. We know that by looking at the things that are covered, and by looking at what people are actually using in terms of things that are covered. Let’s say your health insurance gives you all kinds of coverage, but it’s not for anything you actually need. The quality of the product hasn’t improved for you.
Then we can also look at things like copays and coinsurance. Demonstrably, the quality has gone down and the price has gone up, but the CPI counts it as going down. You ask, “Why is there a 30 percent drop in the health insurance component of the CPI when everything says health insurance costs are going up? That’s why.
We see this a lot with food. We see it with transportation and with cars. Cars might be the best example of what we call the hedonic adjustment, where they want to account for quality changes. The problem here is that if the free market develops a better product and people are willing to pay for that, it’s very clear and it’s very easy to measure how much people value that improvement.
If an auto manufacturer puts in a fancy airbag or other safety feature, and the cost of a vehicle goes up $5,000, and the same number of people are willing to pay that $5,000 extra for the car, it is pretty clear that people value that improvement in quality at that increase of $5,000.
The issue is that when the government mandates something, that is also thrown in as a hedonic adjustment. In other words, if the government imposes a regulation on vehicles, and all of these vehicles must have backup cameras, daytime running lights, or new side curtain airbags, all of those things get counted by the BLS as improvements in quality, even if consumers don’t want them. It doesn’t matter. They still get counted as an improvement in quality, and therefore their cost is actually not included in the CPI.
This is a big reason why over literally a quarter of a century, you had the price of vehicles not changing in the CPI. Basically right up until just before Covid, the price of vehicles didn’t budge. Much of that had to do with the fact that BLS kept taking the price increases that we saw year after year and erasing them by saying that the quality of the car has improved by just as much as the increase in price. Again, government regulation plays a big role in that, because the BLS just essentially assumes away any higher cost of production from regulation, assuming that it’s going to create a commensurate increase in quality of vehicle.
Mr. Jekielek:
The reality is it would probably be a mix. Some of these things would create real value and some of them wouldn’t, from the consumer perspective.
Mr. Antoni:
Exactly. That’s true for most of these government regulations. There is some kind of increase in the quality of the product, except the question then becomes, is it actually the cost of production? The answer is almost always no. The reason being, if the consumer was really willing to pay that, the manufacturer had an incentive to provide it anyway, so they would have done it in the first place.
We get into some very perverse situations where the BLS actually counts something as an increase in quality when, in fact, it’s a decrease and the consumer is paying more for it. Dishwashers are, believe it or not, a good example of this. The government stepped in and said, “You can only use a fraction of the amount of water that was previously used.”
Maybe now you can only use two gallons to wash your dishes instead of using eight. The problem is now the manufacturer has to produce a product that is much more expensive because it needs to use so much less water. It needs to be hyper-efficient, so it’s going to cost the consumer more.
Except the BLS looks at this and says, “We can assume that away, because now it is clearly a better dishwasher,” even though it’s not. You now have people today who have to run their dishwasher twice to get their dishes clean, except that they’re paying more to do so. The consumer is worse off. You’re getting a more inferior product, and you’re paying more for it. By the way, this is why I have no social life. I spend all my time doing these things so other people don’t have to.
Mr. Jekielek:
Different people will have different insight into these various personal cost increases, whether it’s health insurance or car prices. But food is universal and that’s where people would notice it the most. How do things look there?
Mr. Antoni:
This is another case where we don’t see the numbers quite matching up to a lot of the government statistics. Part of this is not so much due to the quality adjustments, but because people are having to change their buying habits. It’s reminiscent of the Irish people during their potato famine when a very small portion of their food budget went to meat. Almost everything went to potatoes because they were poor and that’s all they could afford.
When the potato crop failed, the demand for potatoes actually went up, not down, and the demand for meat essentially collapsed. Despite the fact that potatoes were more scarce and their price had increased, people still demanded them more, the reason being because it was still cheaper than any other alternative.
We see something similar today where the Federal Reserve Bank of Dallas, in their latest manufacturing survey, one of the survey respondents noted that in the food industry the demand for sausage was exploding and the demand for other types of meat was going down, the reason being is a lot of these people can’t afford steak anymore. They can’t even afford chicken breast. All they’re doing is switching out one type of meat for another, and the cheapest thing available is sausage.
The issue here is that consumers today are not necessarily buying the same basket of goods and services that they did two, three, or four years ago. The problem is now you’re getting a substitution effect on top of an income effect. The income effect is that inflation has caused prices to rise everywhere. Everything has gotten more expensive.
But now there’s also a shift in demand where consumers are substituting A for B. I’m not buying as much steak, but I’m buying more sausage. Now, you have an increase in the demand for sausage, which is causing the price to rise more than it would rise for a beef steak. This is one of the reasons why inflation hits low-income consumers harder than anyone else. It’s because the things that they were buying disproportionately to begin with, the middle class are starting to buy as well. Likewise, what the middle class was buying, more of the upper class is now starting to shift to those buying habits too. Again, you’re getting an increase not only from inflation, but also an increase in price because of that shift in demand as well.
Mr. Jekielek:
You’ve given us several examples here. We’re always using some kind of proxy for trying to understand what’s happening in different parts of the economy. It’s very difficult to measure it directly.
Mr. Antoni:
Sure, absolutely.
Mr. Jekielek:
What does the cumulative effect of these mismatches look like?
Mr. Antoni:
It’s massive. This is why there’s this huge disconnect between the business headlines and what we see in the media and how people are reporting they feel today about the economy. We hear that inflation is down or inflation is under control, but an average person will say, “My cost of living has never been higher. I can’t make it from paycheck to paycheck. I took on a second or even a third job, and I’m still in massive amounts of credit card debt.”
Inflation is cumulative. The three percent inflation that we have is on top of the nine percent inflation we had previously. Every month, prices are hitting a new record high. They might be going up slower than they were before, but they’re still going up. If we remember the fact that these inflation numbers are being undercounted, that means that the three percent inflation might actually be six percent, and that nine percent inflation might have been 18 percent.
Not only is it cumulative, but if every period is worse than we thought it was, and that’s also cumulative, too. huge cost of living increase that just blows away the estimation that we have previously. Again, looking at something like the cost of home ownership, which is the single biggest line item in the consumer’s budget, the fact that that has doubled in just three-and-a-half years, as opposed to the 21 percent official increase, I think that says it all.
Mr. Jekielek:
What is the reality of inflation? Is there a number that you can peg on it based on your calculations at the moment?
Mr. Antoni:
There’s several different ways to go about that, some of which actually seem kind of comical, but are surprisingly accurate. The Big Mac Index jumps to mind. A McDonald’s Big Mac contains a surprising number of inputs. You can look at just the food components; the beef, the cooking oil, the wheat, the lettuce, and all of the ingredients in the condiments.
But then you also have labor costs. You have energy, not just the energy to heat the griddle, but the energy that fueled the truck that got the ingredients to the location. There are the utility costs of running that location, and all of the utility costs of running the different food production facilities that made all those different ingredients. Again, there is labor at each of those stages.
There are a surprising number of inputs across the economy that all go into producing something as simple as the humble Big Mac. What’s interesting is that it provides a remarkably good estimate for inflation, again, because it includes so many inputs across the economy. You look at this and say, “Wow, it’s not up 20 percent. It’s up 50 percent.” You can do that for lots of different things across the manufacturing and service sectors.
Mr. Jekielek:
But the Big Mac Index is a thing.
Mr. Antoni:
It truly is. When people are talking about how they can’t even afford McDonald’s today because the cost of living crisis is that bad, that should clue us in and alarm bells should be ringing here in Washington that there’s something wrong and that these official numbers are not really representative of reality anymore.
Mr. Jekielek:
How does one look up the Big Mac Index?
Mr. Antoni:
Just Google it.
Mr. Jekielek:
You said there’s other ways to tackle this. Are they all based on these multiple inputs across the economy?
Mr. Antoni:
Some of them are. Some of them are like the Big Mac Index where they do that. There are other alternatives, one of which I’m working on publishing right now, where essentially what we do is we take the most problematic areas of the CPI, some of which we’ve talked about already. Things like the hedonic adjustments with cars home the cost of home.
Mr. Jekielek:
What is the definition of hedonic?
Mr. Antoni:
This goes back to that quality adjustment where we say that the quality of the vehicle has increased by a certain amount. We don’t want to account for that portion of the price increase because what we’re trying to measure with the CPI is essentially something that should be constant over time. The problem is these things like vehicles are not constant over time. The Chevy Impala that you buy today is vastly different from what it was 60 years ago.
If your car is going to last longer, be safer, be faster, have better performance, have Sirius XM radio, have the backup camera, have blind spot monitoring system, and have all the bells and whistles and things that hadn’t even been invented when the model first appeared on showroom floors, how on earth do we account for that increase in quality? Because if you’re paying the same amount from one year to the next, but you’re getting a better product and you’re getting more for your money. We actually want to show that as a decrease in the cost.
Mr. Jekielek:
Okay, got it.
Mr. Antoni:
Essentially, you want to look at all of the most problematic areas of the CPI, and you want to reevaluate them using real-world data. With the caveat, by the way, that just as the current way the BLS measures these things is imperfect, any other way in which we try to measure them is also going to be imperfect as well. Maybe we can devise something that over the last four or five years works very well, but in other circumstances might not work so well.
Mr. Jekielek:
You have to stay on top of this. You’re working on an index right now, correct?
Mr. Antoni:
Yes. Again, it incorporates things like this huge increase in the cost of home ownership compared to the very small increase that’s shown right now in the BLS estimates.
Mr. Jekielek:
We often hear about legacy media not doing a good job of representing reality in different areas. It creates a kind of disquiet in society, where you’re not sure if you can trust what you’re seeing, especially when it comes to economic numbers. In general, how much can we trust the statistics that we are seeing?
Mr. Antoni:
Unfortunately, a lot of the numbers that we get today just aren’t very trustworthy. Sf that we can know simply by looking at one set of official numbers and comparing it to another. You can simply compare the official numbers from the government and see that we have a mismatch. If we could go back to the jobs numbers, we have a really good example there.
Ever since the spring of 2022, when a lot of these red flags first started appearing in the BLS statistics, that was when the establishment survey and the household survey just started this unprecedented divergence.
What are those two? You have a survey of business where we simply ask businesses, “How many people are on your payroll?” Then we have a survey of households where we ask things like, “Are you employed or unemployed? How many people are in your household? How many of you are actually in the labor market?” We don’t want to count a six-year-old as being in the labor market, for example.
We saw that despite this very steady rise in the number of payrolls, the number of people employed has not kept up. In fact, lately, it’s been going down. There are fewer people employed than there were just a few months ago. You have to ask, “Why is there this disconnect?” Now it’s not uncommon that in any particular month, one of those numbers will go down and the other up. In other words, maybe the number of payrolls went down last month and the number of people employed went up, and then the next month it reverses.
But essentially, these two track together very tightly over time. The fact that there is this divergence today of literally millions between the number of people employed and the number of payrolls is a significant statistical issue. You can have a hypothetical situation where there’s very high inflation and you say, “I can no longer make ends meet. I have to go out and get a second or even a third job.
I am now still the same person employed, but every additional job I get, even if it’s a part-time job, gets counted as another payroll.” The double counting of workers has actually become somewhat of a problem today. Whereas, if we increase the number of multiple job holders, you’re increasing the number of payrolls.
The other issue is that if I already have two jobs and I go out and get a third, you’re not even increasing the number of multiple job holders at that point. But you’re increasing the number of payrolls, so even the number of multiple job holders is now underestimating the impact on payrolls. You’re also in a situation today where, as the labor market is slowing down very quickly, businesses are getting rid of a lot of full-time workers and replacing them with part-time ones.
In fact, over the last year, we’ve lost over a million full-time jobs in the economy. All of the jobs that we have added have been part-time jobs. Again, every time I lose a full-time job and replace it with two or three part-time jobs, I’m worse off, but the payrolls go up.
Mr. Jekielek:
In this case, they both track. Because both the payrolls and the number of people employed go up, unless they’re multiple job holders.
Mr. Antoni:
Exactly. I lost my full-time job and I replaced it with three part-time ones. When we count payrolls, it doesn’t matter how many hours you work, it’s still a payroll. As long as you are on the books on whatever payroll period includes the 12th of the month is the way they do the statistics. That has become a big, big problem today. Again, we also have this issue we talked about earlier, the birth-death model, where we’re looking at the birth and death of firms. That has been grossly overestimating the number of jobs being added.
Mr. Jekielek:
What is the birth-death model?
Mr. Antoni:
That’s when we look at firms being born and firms dying. In other words, firms being created and a firm going out of business. We can ask, “If this business is created, how many jobs is it going to add to the economy? Likewise, if it fails, how many jobs are going to be lost?’ The problem today is that we are grossly overestimating the number of businesses within the economy, and therefore we’re overestimating the number of jobs that those businesses have created, to the tune of hundreds of thousands just this year alone.
By some estimates, you can wipe out half of the job growth we’ve seen this year by essentially correcting for the faults in that model today. It’s a model that worked reasonably well before. It’s not as if this has always overestimated the number of jobs in the economy. The problem is that the underlying assumptions behind that statistical model don’t represent reality in today’s economy, and the BLS still hasn’t corrected for that.
Mr. Jekielek:
Hopefully, they will watch this episode.
Mr. Antoni:
Doing it quickly is key, because you have major decision makers who rely on this data, whether they should or not. It is everyone from the Federal Reserve to the major investment houses. They’re all trying to use this data that is supposed to be reasonably accurate and available in a timely manner. The problem is that accuracy just doesn’t exist anymore today. We’re having to rely on much more accurate quarterly census data in order to look back months after the fact and realize, “We were way off.”
Let me first say I have absolutely no evidence that anyone is cooking the books at BLS or doing anything untoward there. In fact, I actually know some BLS folks and have no indication from them that anything nefarious is going on. Where I think this becomes scandalous is the fact that these statistical problems first became evident in the spring of 2022, more than two years ago, and nothing has been done to correct them. We need to have some kind of mechanism to correct them in a timely manner. The problems have been evident to those of us outside of BLS. I have to assume they have also been evident to the folks who are hip deep in the data.
Mr. Jekielek:
With the advent of AI and the automation of data gathering, we are spitting out results based on the models that we input into these systems. As our society has become more dependent on this type of process, it becomes even more important to make sure that the underlying assumptions of the models are correct.
Mr. Antoni:
Absolutely. It’s important to understand these models are extremely consistent, but that doesn’t mean they’re accurate. Those are two very different things. They’re extremely consistent over time, but what would be accurate in one instance can be terribly inaccurate in another. We sometimes have to sacrifice that consistency in order to make them more accurate. In other words, we have to be able to change the models and methodologies over time in order to try to be as reflective of reality as possible, because that’s the goal.
You talked earlier about proxies. We want these things to be proxies for reality. We wish we could observe reality in its entirety, but obviously we can’t. We don’t know precisely how many jobs exist in an economy every second throughout the year. But we want to get some feel and some estimate for that and we want that estimate to be as close to reality as possible.
Mr. Jekielek:
In one of your posts, you were concerned that recent economic growth is in reality a debt bomb. Please explain that for us.
Mr. Antoni:
Looking at federal finance and the economy as a whole can be confusing. If we look at it in terms of family finance, it can make a lot more sense, so let’s do it from that route. You have a family who is not making enough money to buy everything they want, and so they get a bunch of credit cards and start racking up credit card debt in order to increase their spending today. What they’re essentially doing is pulling future income into today to increase today’s consumption.
The problem is that you can only do that for so long and eventually that debt starts to catch up with you. You have the cost of servicing that debt, and eventually that debt needs to be repaid, so you end up having to sacrifice future consumption in order to pay down that debt. Your future income now needs to be used to not only provide for that future consumption but pay yesterday’s consumption as well.
Now, in some cases, this is highly desirable. There are plenty of instances where we go into debt, like to buy a home, in order to increase our consumption today, particularly when we can anticipate in the future having a higher income than we do today. Unfortunately, what we’re doing right now at the government level is the equivalent of that family going into much more credit card debt than they even have in terms of annual income, to the point where just the cost to service that debt, in other words, the interest on those credit cards, is starting to eat into their budget.
They are spending so much just in monthly finance charges that now they’re having trouble paying their rent, paying for groceries, and putting gas in the tank of the car. That’s where we are today. Eventually, all of that debt has to get paid back. The fact that it’s already starting to bite means that the debt bomb is already starting to go off.
It is now at a point where the family is paying so much in interest on the credit cards that they have to do a balance transfer to a new card.
They keep having to move the debt around and do the same thing month after month. They are going into more debt just to pay the interest. It’s a big downward spiral. Eventually, when the debt collector comes knocking, you have to drastically cut back your consumption, even of necessities. You have to cut back in order to pay down some of this debt and it’s going to be really, really painful.
Now, where the analogy breaks down is the fact that the family can’t run a counterfeit operation in their basement and just print pieces of paper and call it money. But the federal government can do this and we call that inflation. What the Federal Reserve has essentially been doing to help finance this runaway debt for the federal government, is to create out of nothing money for the Treasury Department to spend.
When they do that, they devalue the dollar. They are essentially siphoning off a small portion of the value of all the dollars that are in existence and putting it into the new dollars that they create for the Treasury to spend. But it does provide Congress with the money that they wanted.
Mr. Jekielek:
In these situations with shifting debt to new credit cards, eventually, there’s a company that comes along and says, “I can help you write off some of this debt. We’re going to charge a small fee and take care of it for you.” But there’s no such external mechanism with the Federal government and they have to deal with it. Is that correct?
Mr. Antoni:
This is where we go back to the Federal Reserve, which is the external mechanism that the federal government uses to pay down its debt. Now, to be clear, it’s not paying down the number of dollars. This goes back to that question we were talking about earlier with inventories. The dollar amount of the inventories may stay the same, but there’s less physical stuff there.
In this case, with things like the federal debt, we can go back to the 1970s, even into the early 80s, when the federal debt was exploding, but the actual value of the debt was going down, not up. The reason for that is because the rate of inflation, the devaluing of the dollar, exceeded the rate of increase in the debt.
Now, we had very painfully high inflation back then, but we’re seeing something similar today, where you are seeing the value of the dollar go down so quickly that it’s eclipsing the increase in the actual debt. The official numbers which grossly understate inflation show the dollar has lost about a fifth of its value in less than four years. That’s horrific. But it also means that all of the debt that existed before that time has now decreased in real value by about a fifth as well.
Mr. Jekielek:
There are also all these holders of this debt. Communist China holds a lot of U.S. Treasury bills, although they’re selling them off pretty quickly.
Mr. Antoni:
By the way, this is actually a big reason behind Russia’s timing in terms of the war with Ukraine right now, the fact that they sold off all of their U.S. Treasury debt. Because if you do have a lot of U.S. Treasury debt, to a certain extent, you’re beholden to the Treasury. You may think, “Shouldn’t it be the other way around?
No, the Treasury can say at any moment, “We’re not paying that debt back. Those bonds that you hold are now worthless.” I would not be surprised if China, in their race to get rid of all their U.S. Treasury holdings, is waiting until that process is complete before they do something like move against Taiwan. Because if they do that right now, the U.S. government can say, “Those hundreds of billions of dollars in U.S. debt that you have, we’re not paying it back. We’re writing it off. We’re canceling it.”
Mr. Jekielek:
Right. It is because we don’t like their foreign policy.
Mr. Antoni:
Exactly. But it’s part of the politicization of the dollar, which is threatening the dollar’s reserve currency status. Unfortunately, you have a lot of Americans that have been holding U.S. Treasury debt as well, and those folks have gotten absolutely crushed. Countless Americans in retirement had U.S. Treasury bonds paying very low rates of interest with very low yields. When you have a bond that is only paying you two or three percent, and inflation, even just the official numbers, is five to eight percent, you’re actually losing money on that deal.
You’re essentially paying the government for the privilege to lend them money. It’s ridiculous, but that’s what has happened. All those poor folks who thought they had enough money saved for retirement are now finding out the hard way that they don’t. They may have had enough money, but not enough value.
Mr. Jekielek:
There has been a lot of discussion about the debt being too large. There doesn’t seem to be much effort being made to deal with that. How do you view it?
Mr. Antoni:
There is not much appetite on either side of the aisle to really deal with the debt. Part of that is because it’s just too politically easy to let the Federal Reserve deal with it. If you’re in Congress, it’s a lot easier to let the Federal Reserve deal with the problem than for you to have to deal with it. Because if the Fed deals with it, they create inflation. Now, everyone is trying to figure out, “Why the heck is my cost of living going up so much?” They have a very difficult time following the path all the way back to the Fed and to Congress that’s spending too much money.
Conversely, if Congress is going to deal with it, then how do they deal with it? It’s by reducing spending. That’s very tough to do in an age when politicians typically get elected by playing Santa Claus and promising to give their constituents all these different goodies, never mind the fact that you’re the one paying for everyone else’s goodies, so it’s a net wash.
But if Congress is going to cut back spending and really deal with the problem, they have to go to their constituents and say, “You’re not going to get as much federal largesse as you used to.” That’s very, very tough for elected officials to do. The American people have suffered for many, many years under a dumbed-down education establishment that has really robbed a lot of our fellow Americans of critical thinking skills. At this point it’s very hard for them to realize what is the impact of federal spending, and what is the impact of the federal debt.
I recently had a conversation with some folks that said, “The federal debt is over $35 trillion. It’s going to hit $36 trillion before the end of the year, and we’re all still here. What’s the problem?” I said, “Are you paying more for groceries or for gas in your car? Is your rent exploding right now? Are you in a cost of living crisis?”
One person said, “Absolutely. I have four roommates. I used to have my own apartment. Now, we all have to rent this four bedroom together.” I said, “Do you know why that is? It’s because of the federal debt that you don’t care about. That’s why.” These things have real impacts on people’s lives. The problem is just that we don’t connect them and see how you get from A to Z.
Mr. Jekielek:
We have to rein in spending. That’s my conclusion from our discussion today.
Mr. Antoni:
On a personal level, it’s not so much that I am spending too much, because I can only spend as much as I take in. I don’t have the option that Congress does, where I can go to the Fed and say, “Hey, Jerome Powell, Mr. Chairman, please print me off a few trillion dollars because I have this massive hole in my budget.” If I’m going to go into debt, I eventually have to pay that debt off. Otherwise, that debt collector is going to come knocking and I'll be in a world of hurt.
I’m not so much worried about the consumer as I am worried about Congress, because Congress has that option of the Federal Reserve. If we didn’t have that, then Congress would eventually bump up against these hard stops where they have no other option but cut spending, raise taxes, or some combination of the two. Unfortunately, today they can always pick door number three, and that’s inflation. Inflation is fundamentally a tax.
It’s a hidden tax because Congress didn’t vote on it and the president didn’t sign a bill, but it is still a tax because it’s a transfer of wealth from the people to the government. I don’t know a better definition of a tax than that.
That’s why we need Congress to cut the spending. All government spending is paid for. It’s just a question of how do you want to pay for it? You can raise taxes now, or you can sell bonds now and raise taxes in the future, or you can just inflate everything away. Sadly, they keep choosing the third option. At least that’s what they’ve done the last four years or so.
Mr. Jekielek:
You don’t sound very hopeful here.
Mr. Antoni:
Hope may not be warranted right now. But we’ve been in some really tough scrapes as a nation. Somehow or other, America has survived and I’m hoping that’s the case right now. I don’t know for sure. The numbers do not look good, I can tell you that. And every day that goes by where we kick the can down the road, we’re actually rolling the snowball down the mountain. Every inch it goes, the more it’s accumulating, the bigger it’s getting, and the harder it’s going to be to eventually stop it.
Now, is it impossible? No, it’s not. Is it painful? Yes. But again, we’ve been through this before. The 70s were terrible. It took three pretty lousy presidents to give us Ronald Reagan and the tremendous economic expansion that followed. To get inflation under control, Paul Volcker had to deliver back-to-back recessions and 20 percent interest rates on mortgages. It got pretty painful, but we did get through it.
Mr. Jekielek:
You’re saying there is no way around significant austerity.
Mr. Antoni:
It will be painful. Every single dime of spending has to eventually be paid for. It might not be today, and it might not be tomorrow. The laws of supply and demand are no different than the laws of physics. We somehow think that society has advanced to a point where we can get around these laws or they don’t apply to us anymore.
We somehow think we can outsmart them, as if jumping off the roof of this building means we can defy the laws of gravity. Again, it may not be today, it may not be tomorrow, but these immutable laws of the universe always catch up to you.
Mr. Jekielek:
With this runaway federal debt and the snowball effect you described, there’s a cliff down the road at some point. But what does that actually look like?
Mr. Antoni:
It looks like the Weimar Republic in Germany, where initially everything seemed great. People forget that before the hyperinflation in Germany in the early 1920s, they had the greatest stock market boom in the history of the world and all of that inflation caused a massive bubble in asset prices. We’re seeing that today with equities, stocks, and real estate. We have all kinds of bubbles throughout the real economy courtesy of inflation.
It’s very common that those things happen before the inflation trickles down into consumer prices. It’s not as if those things move in lockstep together. They don’t. You typically get the asset bubbles before you get the consumer price inflation. Looking at today, how does this all unravel?
Unfortunately, if we continue down this road where we just let the spending snowball and let the debt snowball, the interest payments will also snowball. Today, you mentioned the $35 trillion debt. The cost to service that is about $1.2 trillion a year. That’s just the interest, not even a dime towards principal, just paying the interest on the debt.
It’s consuming more and more of the tax revenue, and leaving less and less for the actual government spending. Therefore, more and more of that government spending needs to be paid for with more and more inflation. Again, that’s where you get into that downward death spiral of finance, similar to what the family faces with all the credit card debt. You have to go into more and more credit card debt every month just to finance your existing credit card debt.
That’s how you get to a scenario like they had in the Weimar Republic, where Germany essentially had to run the printing presses harder and harder every month, to the point where they were creating paper shortages in order to create enough money, with nothing to back it. They were just creating enough money to pay the government’s bills. In that case, it was war reparations. In the case today, it’s largely nonsense, but it’s still government spending, regardless of how they are wasting it.
Mr. Jekielek:
Is there a hopeful note at all in all of this?
Mr. Antoni:
The hopeful note is the ingenuity of the American spirit and the fact that we have been through some very dark days. We’ve been through a civil war and have been able to overcome that. Sometimes it takes us a while to get there, right? Winston Churchill said, “You can always count on America to do the right thing after she has tried everything else first.” Sometimes it’s really painful to make those mistakes. But somehow or other, at the last minute, we’ve always been able to course correct, so fingers crossed we can do that again.
Mr. Jekielek:
EJ Antoni, such a pleasure to have you on the show.
Mr. Antoni:
My pleasure. Thank you for having me.
This interview was edited for clarity and brevity.
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