NYSE traders (Getty photo)

Adjusted for inflation, stock prices topped out in the late 1990s and have never really moved higher. Is that a surprise?

Not to financial analyst Rob Arnott, chairman of Research Affiliates, who makes the case that debt-financed spending has taken over our economy. Credit and consumption isn't growth, says Arnott, explaining how “structural GDP” masks the underlying “real GDP” that really matters.

“Our structural GDP has grown nearly 100-fold in the last 70 years. Most of that growth is due to inflation and population growth; a truer measure of the prosperity of the average citizen must adjust for these effects,” he writes in a recent note to investors.

Arnott figures that our real GDP per capita is closer to the 2007 peak. As a result, the way the economy “feels” to people has been at a virtual standstill for several years now.

Subtract government spending, and the prosperity of the average American hasn’t improved since the middle of the second Clinton administration, 13 years ago.

“Few would argue that a healthy economy can grow without the private sector leading the way,” Arnott writes.

Erase federal, state, and local spending, and the resulting “private sector GDP” is “bottom-bouncing, 11 percent below the 2007 peak, 6 percent below the 2000–2003 plateau, and has reverted to roughly match 1998 levels.”

Are we Japan and don’t know it? The parallels are interesting. And is there any exit? The Japanese have had to give up on the idea of a “lost decade” from 1991 to 2000 and admit that what they are living instead has been “lost years” from the early 1990s through the present.

And, like the United States, it began in Japan with a government debt that was equal to GDP (we are there), a finance system that was deemed too big to fail (ditto), massive government stimulus programs and bailouts (ditto), and, despite cheap money via zero interest rates, corporations that were more interested in saving than borrowing in order to grow (getting there).

Another huge fight over U.S. public sector debt levels is ahead. The White House says a deal can be reached by June but that the debt ceiling — which sets how much the government can borrow — must be raised.

If the government cannot agree to raise the current $14.3 trillion limit, bond holders could decide that the United States has defaulted, leading to a huge sell-off in U.S. Treasurys. Interest rates would skyrocket.

“We're just going to let the United States government go in default, tank the economy, send the economy into recession, not just domestically but globally. That would be the height of irresponsibility," White House spokesman Jay Carney told reporters Thursday.

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