It’s been a long time since I posted on this subject – about a year and a half. Some discussion about the national debt jogged my memory, and I was curious to see how my chart would look now.
The following chart tracks the growth in the national debt vs. the “cumulative trade deficit.” It’s an important metric because the trade deficit siphons money from the economy – money that is subsequently pumped back into the economy by federal deficit spending. Countries who run a trade surplus with the U.S. repatriate those dollars primarily through the purchase of U.S. government bonds – bonds that are used to finance deficit spending.
Over the years, these two metrics have tracked very closely together, but not perfectly. Sometimes deficit spending outpaces the trade deficit. Sometimes it lags. But any time that deficit spending lags the trade deficit, a recession is always right around the corner, since the net effect is a drain of money from the economy.
Typically, toward the end of a president’s administration – especially if it’s been a 2-term administration, deficit spending begins to decline as stimulus programs implemented at the beginning of a new administration expire and as pressure builds to rein in the deficit. It happened at the end of the Clinton administration and at the end of the George W. Bush administration. For this reason, I’ve been predicting that the Obama administration would end the same way.
It doesn’t look like it will. Take a look at the chart: growth in nat’l debt vs cumulative trade deficit. Clearly, the Obama administration has felt no compulsion to rein in deficit spending like his predecessors. When it comes to deficit spending, President Obama has kept his foot on the throttle like no other before him, pouring money into the economy. In light of this, it’s not surprising that the economy has managed to hang on by its fingernails to avoid another plunge into recession.
Where has all the concern about fiscal restraint gone? In the early ’90s, during the George H.W. Bush administration, deficit spending raced ahead of the trade deficit. By the time Clinton took office, there was a lot of concern about the exploding national debt, so Clinton worked with Republicans to rein in the spending and actually balance the budget (on paper, at least). He could afford to do it. Thanks to the explosion in personal computer and cell phone technology and manufacturing, the economy hummed along at a brisk pace. But by the end of his administration, the tech bubble burst, the trade deficit began to explode (thanks to NAFTA and China’s admission to the WTO – both of which were Clinton’s progeny), and there was little deficit spending to pick up the slack. His administration ended in a bad recession.
So what’s different now that makes Obama immune to the exploding deficit?
- Interest rates have fallen to near zero. So interest payments on the national debt have actually declined in spite of a growing debt. Zero percent of any amount, no matter how large or small, is still zero. In fact, there’s even some talk of the possibility of interest rates going negative, as they have in Japan.
- Perhaps because of the above or, for whatever reason, all political pressure for fiscal restraint has vanished. No one – not even Republicans – even mention it any more. No one seems to care.
- Central banks around the world – and that includes the U.S. – are getting very skittish about the potential for another recession at a time when their recession-fighting ammo is all spent. They’re pressuring governments to actually step up deficit spending.
In light of this, it’s not surprising that the recession I’ve been predicting hasn’t yet taken hold. What is surprising is that the economy isn’t doing better than it is. Twenty years ago, if you had told economists that the federal government would be running a $1 trillion/year deficit, that interest rates were near zero, that the Federal Reserve would have a $4.5 trillion balance sheet, and that the result of all of this was GDP growth of only 1%, they’d have told you that you were crazy – that it was impossible. Yet here we are.
It’s surprising to many, perhaps, but not to those of us who understand the inverse relationship between population density and per capita consumption, and that all of our efforts to prop up the economy with rampant immigration-fueled population growth are actually eating away at consumption as fast as we can add new “capitas.” The end of growth is at hand. It has often been said in the corporate world that “if you aren’t growing, you’re dying.” The day may be coming when even a “no growth” economy might look good.