Persistent U.S. Federal Budget Deficits

In various posts as well as seen in the "America's Trojan Horse" discussion, I have discussed various aspects of both the federal deficit and federal debt.  Both of these issues remain highly problematical in many ways.  At the same time, many aspects of the problems and their future implications lack recognition, either partially or fully.

One notable chart that I recently came across depicts, on a long-term basis, the level of the federal deficit as a percentage of GDP.  This chart is from the Peter G. Peterson Foundation, and is dated March 10, 2016:

(click on chart to enlarge image)

I find the depiction above to be notable in many ways.  As one can see, prior to 1950 (substantial levels of) deficits corresponded with wartime periods, and many other periods showed budget surpluses.  Beginning at around 1950, deficits became not only commonplace but also increasingly larger as a percentage of GDP.

Also notable is that over (roughly) the last 15 years, the U.S. has been unwilling and/or unable to produce a federal budget surplus.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2082.78 as this post is written

Four Erroneous Phrases

Over the last few months, four phrases have been used frequently in describing our economic condition.  I find these phrases to be inaccurate and misleading.

Here are the four phrases (in italics) and some brief commentary:

"the Great Recession"

Many people have labeled the economic weakness (ended by the subsequent purported economic recovery) as "the Great Recession."  This appears to be in recognition of a deep recession that in many ways seemed to be second only to The Great Depression as far as severity.

I believe the phrase to be inaccurate as my analysis indicates we have yet to experience the full extent of the economic weakness -  and as such categorizing weakness to date is premature.  Also, I find the term "Great Recession" to be rather glib and flippant, as it minimizes the extent of our economic difficulties.

"employment is a lagging indicator"

This phrase is heard constantly.  It seems as if the more it is said, the more accepted it becomes.  I believe that although employment may have been a "lagging indicator" in the past, during our current period of economic weakness it is either a coincident or leading indicator, depending upon the time horizon and other guidelines used.

"saddling our children / grandchildren with debt"

This phrase, and variants, is often heard in relation to the expansion of deficits and national debt.  While I don't believe it is wholly inaccurate, I think it embodies various mistaken beliefs.  Among these mistaken beliefs are that we as a country will not face near-term repercussions from our amassing of debts; and that the worst consequence (and only one worthy of mention) of our current economic actions with regard to future generations' prosperity is our amassing of debt.

The broader, and more important question -  which is seemingly never mentioned - is whether we are acting as "good stewards" in relation to the economic condition that will be faced by future generations.  In essence, is the current generation promoting an economic environment that will bode well for future generations?  I will likely discuss this topic in the future.

the "Flash Crash"

This phrase has been frequently used to describe the sudden, deep decline of the stock market on May 6.  I don't think the phrase is accurate for a number of reasons.  Again, the phrase sounds glib and implies that the decline lacked (lasting) significance or happened without significant reason or provocation.
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There are many other erroneous phrases used frequently to discuss our economic condition.  In the future I will highlight others that I believe have outsized significance.

back to home

SPX at 1074.33 as this post is written

"Is America In Decline?"

I found this exchange on last Sunday's (May 9) "60 Minutes" to be interesting.  It is between Scott Pelley of "60 Minutes" and Hillary Clinton.  For now I will simply post the exchange, and may comment upon it later:

Pelley:  "Larry Summers, the president's economic advisor, asked this question: 'How long can the world's biggest borrower remain the world's greatest power?' Is America in decline?"

Clinton:  "No. We're not. But it's a question that has to be answered."


SPX at 1157.44 as this post is written

Debt And Taxation

On Saturday The Wall Street Journal had an editorial titled "Escape from Taxation." The link is here.

In the editorial, it is mentioned that higher-income people are moving out of New Jersey as the tax rate is increased.

In my article "America's Trojan Horse" found at this link, I discussed the widely-held fallacy that debt and deficits are almost inconsequential because governments can always increase taxation to service and repay debt.

What is happening in New Jersey is an important example of how this "increasing debt / increasing taxation" dynamic plays out in the "real world" - especially during times of prolonged economic stress and high indebtedness.

The implications are very far-reaching with regard to the resolve of heightened levels of indebtedness.


SPX at 1083.50 as this post is written

The National Debt - A Few Comments

In August, I wrote an article titled "America's Trojan Horse" (which can also be found listed along the right-side of the homepage.)

This article had to do with various facets of our national debt, many unexplored. Here is an excerpt that I would like to further comment upon:

"The first of these concepts is that the financial markets have allowed us to grow and perpetuate our debt loads, absorbing this debt issuance at reasonable, if not low, interest rates. While this continual absorption of ever-increasing debt at lower rates is counterintuitive, it has nonetheless occurred. Why this counterintuitive event has occurred is largely unknown. Although it appears to be a long-term market anomaly (a propitious one at that) it might also be a concatenation of short-term market anomalies. The latter supposition is certainly a troubling facet to ponder, as it would likely make our ability to sustain such debt levels more tenuous."

Here is a long-term monthly chart of the 10-year Treasury yield. As one can see, the trend in yields has been down:



Chart courtesy of Stockcharts.com

Various economists have recently stated the national debt is at roughly $6 Trillion, or roughly 40% of GDP. They view the "danger point" as the national debt to GDP ratio of 100%, meaning that we can incur an additional $8 Trillion in national debt (to roughly $14 Trillion) before reaching the 100% level. Given that $8 Trillion in additional national indebtedness would likely take a few years to incur, it would appear based off of this reasoning that we have some time before the 100% "danger point" is reached. I don't agree with these figures (IMHO the actual level of debt is far higher) as well as the line of reasoning. No one really knows at what time or level the national debt hits a critical level.

It currently appears that the amount of the national debt is "tolerable" and is not causing undue concern in the markets. Metrics that cause me to draw this conclusion include the subdued level of interest rates on government debt (as seen by the above chart), seemingly low price levels of the sovereign credit default swaps of the United States, and a general lack of concern shown by the public and Congress, despite ever-increasing deficits that appear to be heading for at least $1 Trillion annually for the foreseeable future. It wasn't too long ago that a $500 Billion annual deficit was considered exceedingly high.

However, is this national debt level really as "acceptable" as it appears? Do we have a number of years at current deficit levels before we hit the "danger point?" When we do approach the "danger point," how long will we have before there are repercussions, and how serious will these repercussions be?

These questions are difficult to answer, as they appear contingent upon a number of complex, interrelated factors. I have some theories as to how and when the "danger point" will be reached, as well as the repercussions. However, these theories are still in the "formative" stages and thus I do not wish to explicitly specify a number or timeframe.

However, I will say that I am led to believe that the level of national debt, as well as our present propensity to accrue it, is not as "tolerable" as it may appear. In other words, I believe the "danger point" and subsequent repercussions may be reached sooner than the consensus believes.

If this "danger point" does present itself relatively quickly, of course it would have ramifications in many areas. Stimulus-based deficit spending, as well as other deficit spending, could likely become prohibitive. As well, other tangential effects could include higher interest rates. Furthermore, there may be a sudden need to actually reduce significant portions of the national debt.


SPX at 1087.27 as this post is written

Tax Increases And Our Economic Situation

Lately there has been quite a bit of activity in either increasing or proposing increasing taxes (also increases in fees, fines, etc). This activity is occurring at all levels, i.e. local, state, and national.

These tax increases are very noteworthy given our current period of economic weakness. I will be addressing various aspects of this in the future.

For now, I would like to highlight the dynamic between taxes and the national debt, which is especially important. I discuss this in the "America's Trojan Horse" for those who haven't read it.



SPX at 1086.22 as this post is written

The Latest 10-Year Budget Projection

Yesterday, The Wall Street Journal came out with a story titled "A Decade of Debt" that can be found at this link:

http://online.wsj.com/article/SB125119686015756517.html

It discusses the latest 10-year budget projections that amount to a cumulative addition of $9 Trillion in debt.

I would like to briefly comment on this latest budget projection:

-As seen in the article, there are no projected budget surpluses throughout the entire 10-year period.

-Historically (at least the last couple of decades) these projections always seem to be too optimistic - meaning that the deficits realized are usually higher than planned. I wouldn't doubt this to be the case for this budget as well. The economic projections of the last budget were criticized as being too optimistic, and as seen in the chart indicated in this article, economic projections to 2012 assume a very favorable economic climate including robust GDP growth and low inflation.

As well, an additional issue is presented, one that I have commented on as recently as my post of August 21. There seems to be a "growing insensitivity to higher deficits and debts." No one seemed especially surprised or aghast upon release of these numbers. It appears that as time goes on, ever-larger deficits and debts seem to "legitimize" even larger deficits and debts, to the point where even a Trillion dollars, once inconceivable as an annual budget deficit, now almost seems "normal."

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For those who may not be aware, I recently wrote an article titled "America's Trojan Horse - A Different Look at The National Debt" which can be found listed under the Pages section on the right-hand side of the home page.


SPX at 1018.35 as this post is written

Expanding Upon Two Concepts

I would like to briefly expand on a couple of points I made in my recently posted "America's Trojan Horse" article (which can be found listed along the right-hand side of the main page.)

First, I wrote, "There also appears to be a growing insensitivity to higher deficits and debts." This is alarming, as sums of money that recently (as of 1-2 years ago) would have been considered exceedingly high are now seen as relatively low. An example of this was the $150 Billion tax rebate (stimulus) that was distributed in the late spring and summer of 2008. At the time, an $150 Billion stimulus was considered very substantial. However, with the stimulus and interventions that have been enacted since, this $150 Billion amount almost seems relatively small by comparison.

I fear that we, as a nation, may be losing our perspective and comprehension of the sums involved here. While spending, or committing, $1 Trillion and multiples thereof (or $1 Billion for that matter) has become rather commonplace during this period of economic weakness, one should be mindful of the difficulty in earning (as in profit) these amounts of money.

The second concept I would like to expand upon is that of "Intellectual Leadership." I devote a paragraph in the paper to this concept. The phrase is not one which is often heard, which is unfortunate. Nonetheless, I think it is a very important concept, especially during this period.

SPX at 1007.37 as this post is written

Healthcare - A Few Thoughts

As President Obama said during his July 22 Press Conference, healthcare is "a problem that Washington has failed to solve for decades."

I want to make a few random comments about healthcare. Any substantive discussion on my part would be exceedingly lengthy as this is a complex subject.

I do believe that there has to be major changes made, and quickly. There are many large problems with the healthcare system in a variety of areas.

However, I think that in order to make effective changes, there has to be a greater understanding of the problems inherent in the current system. As well, there should be an examination of some of the current assumptions being made.

Some questions I would ask are:

Should government be involved in healthcare? Why?

What are the underlying problems of the healthcare system?

Do we fully understand the problems of the healthcare system?

What would be the attributes of a perfect healthcare system?

Are there models analogous to the healthcare scenario that a person faces? What can we learn from them?

Also, I wanted to exhibit this recent op-ed from The Wall Street Journal. John Cochrane makes some interesting points that are worthy of contemplation:

http://online.wsj.com/article/SB10001424052970203609204574316172512242220.html


SPX at 982.51 as this post is written

The FDIC Situation

Ever so often I come across a story concerning the FDIC and its wherewithal to be able to cover its potential commitments.

It appears to be exceedingly thinly funded in relation to potential liabilities. This may not be a big issue going forward if the economy improves; however, it could become a very large issue if the economy deteriorates from here.

While there is little doubt that the government would lend additional funds to the FDIC, if needed, it is one more item that could serve to significantly bolster the nation's level of indebtedness.

One is led to wonder how purchasers of U.S. debt view the rising level of indebtedness, as well as the potential for all of the various federal "guarantees" of assets to add to the debt level.



SPX at 997.08 as this post is written

The National Debt and Deficits

The National Debt and Deficits
Tuesday, June 9th, 2009

John Taylor wrote the following article “Exploding Debt Threatens America”:

http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html?nclick_check=1

Although I don’t agree with some of his figures and reasoning, the central point is important: This debt level is a serious problem.

It also illustrates the difficulty of ridding ourselves of this level of indebtedness.

These issues will likely get greater attention now that sovereign debt levels are coming under renewed scrutiny.

Furthermore, a question that should be asked is whether amassing ever-greater deficits and debt levels is compatible with the concept of sustainable prosperity.

I’ve been meaning to write an article about our national debt, as I think the topic deserves much greater discussion.

SPX at 944.37 as this post is written