So says Rob Arnott of Research Affiliates, a Newport Beach, Calif., investment management firm with some $50 billion under management. He argues in his monthly newsletter that, contrary to popular belief, the roots of our current malaise predate the financial crisis – and not by a little bit.

Arnott says the U.S. economy actually went off the rails more than a decade ago. What’s more, many of us have failed to realize it because the most widely watched economic indicator, gross domestic product, actually tracks consumption, irresponsible or otherwise, rather than real wealth generation.

Accordingly, Arnott takes little solace in the observation that inflation-adjusted, per capita GDP has recovered to within just a few percent of its 2007 peak. While that statistic suggests the economy is recovering steadily, if a little less quickly than we’d like, Arnott contends that most of the GDP gains we have seen since 1998 are attributable to debt-financed spending, rather than real wealth creation.

We are, in a word, considerably poorer than we imagine – something politicians of all stripes should, but probably won’t, consider as they grapple with our massive deficit.

“GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity,” Arnott writes. “Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.”

That seems hard to believe. The late 1990s are sometimes remembered as the last time the U.S. economy was consistently doing things like generating wage gains for people other than CEOs, and even the housing bubble-fueled 2000s are widely assumed to have not been a total wash.

But the signs are there. Since 1998, real gross domestic product has risen at a 2.2% clip, according to Fed data  — less than a third of the rate at which debts owed by U.S. public and private sectors have grown (see chart, right).

Arnott says we can blame this addiction to leverage on both parties, who took the turn-of-the-century explosion in capital gains tax collections as a sign money would continue falling from the sky forever. But while spending continued to grow at a rapid clip, tax collections fell off a cliff.

Real per-capita tax receipts are at 1994 levels, Arnott says. No wonder we have a trillion-dollar deficit problem.

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One way to look at it is to strip out deficit-financed consumption – a method that leaves us with a result Arnott tabs structural GDP. Alternatively you can eliminate the government spending component of GDP, which yields what he calls private sector GDP.

Either way, Arnott estimates, true, wealth-generating U.S. output is at 1998 levels.

While the solution to that problem surely lies in more responsible policy – lower spending, a less ridiculous tax code — Arnott says it’s imperative we start using more meaningful economic statistics, lest politicians miss the message S&P tried to send this week.

If we continue to focus on GDP, while ignoring (and even facilitating) the decay of our Structural GDP and our Private Sector GDP, we’ll continue to borrow and spend, mortgaging our nation’s future. The worst case result could include the collapse of the purchasing power of the dollar, the demise of the dollar as the world’s reserve currency, the dismantling of the middle class, and a flight of global capital away from dollar-based stocks and bonds.

Even Democrats and Republicans can probably agree, with only a few hundred pages of riders and stipulations, that that is an outcome best avoided.

Also on Fortune.com:

• The unsinkable bond market
• Here comes $4 gasoline
• Oil at the tipping point

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