Fed Chair Powell “Very Worried” about the National Debt

January 11, 2019

https://www.cnbc.com/2019/01/10/fed-chairman-powell-says-he-is-very-worried-about-growing-amount-of-us-debt.html

As reported in the above-linked article, Federal Reserve Chairman Jerome Powell is very worried about the national debt.

“I’m very worried about it,” Powell said at The Economic Club of Washington, D.C. … “it’s a long-run issue that we definitely need to face, and ultimately, will have no choice but to face,” he added.

Then he’d better start raising alarm about the trade deficit, by far the biggest cause of the federal budget deficit.  And he’d better start being more supportive of Trump’s efforts to impose tariffs in an effort to restore a balance of trade.  That’s not just my opinion.  More economists are beginning to see the light.  This op-ed piece appeared on CNBC just a few days ago:  https://www.cnbc.com/2019/01/07/central-banks-are-not-the-fixers-of-last-resort—commentary.html.  Economist Michael Ivanovitch writes:

“… a rapidly improving trade balance is the only thing that could serve as a strong prop to U.S. economy.

That’s what Wall Street should be rooting for, instead of carping about Washington’s trade wars. Losing half-a-trillion dollar of purchasing power on an annual basis, America has been a victim — a trade war victim — of Chinese, European and Japanese mercantilist policies. Remember, those trade deficits are subtractions from the U.S. GDP. Over only the last five years, trade deficits have reduced the U.S. economic growth by a total of about 2 percentage points.

And the U.S. stands accused of waging a trade war!? “

Consider this:  Over the past ten years, the growth in the national debt is approximately $12 trillion.  Growth in our nation’s GDP (gross domestic product) during that same time frame has been approximately $6.3 trillion, rising from $14.4 in 2008 to $20.7 trillion in 2018.  So without the growth in the national debt (caused by the federal budget deficit), U.S. GDP would have collapsed by $5.7 trillion, a decline of nearly 40%.  In other words, without the federal budget deficit and growth in the national debt, we’d have been in a depression worse than the Great Depression for the past decade.

Over that same ten-year period, the cumulative trade deficit has totaled almost $5 trillion.  It’s no mere coincidence that the cumulative trade deficit, when added to GDP growth, almost exactly equals the growth in the national debt.  Federal deficit spending has just barely been able to offset the monetary drain caused by the trade deficit while also providing some illusion of economic growth.  Look at this chart, showing the growth in the national debt and the cumulative trade deficit:  cumulative trade deficit vs growth in national debt.  Notice how closely the two lines have tracked.  Whenever the growth in the national debt has dropped below the cumulative trade deficit, a recession has ensued.  Whenever the growth in the national debt exceeds the cumulative trade deficit, we’ve experienced an “economic expansion.”  For example, since the financial market collapse and “Great Recession” of 2008, we’ve experienced steady economic growth.  The difference between the two lines – between growth in the debt vs. the cumulative trade deficit – that you see in 2018, accounts for all economic growth since 2008.

It’s absolutely unconscionable that the Federal Reserve and the broader economic community, instead of mocking his tariffs, haven’t given Trump more support for his efforts to restore a balance of trade.

 


Weak Headline Number Masks Strong March Employment Report

April 8, 2017

The Bureau of Labor Statistics yesterday released its employment report for the month of March.  The headline jobs number was weak.  “Only” 98,000 jobs were added in March – about half of what was expected.  But unemployment dropped by two tenths (a fairly big drop) to 4.5%.  The data underlying the unemployment figure was quite strong.  The “employment level” (the number of people reporting being employed in the household survey portion of the report) rose by 472,000 in March.  (It rose by 447,000 in February.)  And the labor force grew by 145,000 – outpacing the growth in the general population for the fourth month in a row.

Last month, Trump hailed the strong February employment report as “real,” as opposed to the “fake” reports produced by the Obama administration.  (The Obama administration did lean heavily on claims of a shrinking labor force to prop up its unemployment figures.)  Was that claim just bluster or has the reporting methodology actually changed for the better?  It’s two early to tell but, at least for the second month in a row, the BLS claims that the labor force grew (as it actually does, of course) and the numbers seem plausible.  Time will tell.

Per capita employment (the employment level divided by the population) climbed above 47% for the first time since November, 2008.  (Here’s the chart:  Per Capita Employment.)  The “detachment from reality index” – my measure of how much the unemployment figures were distorted by the “mysteriously vanishing labor force” tactic used by the Obama administration – fell to its lowest level since January, 2013.  (Here’s the chart:  Detachment from Reality Index.)

This is great news, but it has more to do with a burst of confidence among consumers (likely driven by a burst of confidence among investors which has driven the stock market higher) in the wake of Trump’s election.  The fundamentals of the economy haven’t changed.  The trade deficit is as bad as ever.  And interest rates are on the rise which will pull the economy down if Trump isn’t able to make headway with tax and trade reforms.  And the jump in stocks that have propelled the economy has already stalled, now waiting to see if expectations of Trump policies actually materialize.

I hope that what appears to be honesty with the factors that make up the employment report (based on a scant two months’ of data) continues.  But without the “border tax” that Trump promised, the good numbers won’t.

By the way, for some time now, the Federal Reserve and others have been proclaiming the economy to be at full employment.  If that were true, then how does the economy continue to add jobs at a faster rate than the growth in the labor force, and how does the unemployment rate continue to fall?  It’s because they were all sucked in by the “detached from reality” employment reports produced by the Obama administration.  The fact is that an honest reading of unemployment (one that grew the labor force in proportion to population growth) has unemployment at 7.3% – nowhere even remotely close to “full employment.”


Deficit Spending Holding Recession at Bay

August 26, 2016

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.

 


October Employment Report Belies a Stalled Economy

November 6, 2015

This morning’s release of the October employment report by the Bureau of Labor Statistics (BLS) blew away expectations.  According to the BLS, the economy added 271,000 jobs in October vs. expectations for an increase of 190,000.  It even handily beat the top end of the range of expectations – 240,000.  And unemployment fell by one tenth to 5.0%.  The economy must really be on a roll!

Well, maybe not.  A little perspective is in order.  First of all, unemployment didn’t really fall.  In September it was 5.051%.  In October it fell to 5.036% – a decline of only 0.015%.  Rounding the number to two significant digits makes it look like it fell from 5.1% to 5.0%.  Secondly, at the beginning of the report, the BLS observes that:

Over the past 12 months, the unemployment rate and the number of unemployed persons were down by 0.7 percentage point and 1.1 million, respectively.

While technically true, the BLS arrived at these numbers through heavy use of its favorite employment-enhancing trick – claiming that people have dropped out of the labor force.  A true accounting reduces these numbers to 0.3% and 410,000 respectively.  And a true accounting of unemployment puts the number at 8.8%.  The BLS admits in the report that the employment to population ratio is unchanged in the past year.  That’s true.  Take a look at this chart:  Per Capita Employment.  Per capita employment has risen five times in the past twelve months and dropped seven times, for a net loss of 0.03%.  October’s rise was barely a blip.

And the number of unemployed Americans is actually worse than it was ten months ago.  Here’s the chart:  Unemployed Americans.  Again, October’s decline is a barely-noticeable blip in the longer trend.

Earlier this week, Donald Trump took heat for claiming that the Federal Reserve helped the Obama administration with low interest rates and three rounds of quantitative easing.  The implication was that the Federal Reserve did some sort of political favor.  Probably not true, but the end result is the same – it definitely helped Obama with the economy.

A couple of days ago, Janet Yellen, chairperson of the Fed, made clear that an interest rate rise was definitely in the cards in December, leaving analysts scratching their heads over why.  Most of the economic data has been pointing to a slowing economy.  But, I believe, the Federal Reserve is getting desperate to get back in the game, since some are beginning to question its relevance in affecting the economy.  Interest rates at zero and $4.5 trillion of monetary easing have yielded nothing but the weakest economic recovery of the post-war era.  Is the October employment report a quirk, or does Trump have it backwards in this case and perhaps the BLS just threw the Federal Reserve a bone to help it justify its case?


Americans Continue to Grow Poorer During “Recovery”

September 19, 2014

http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf

One of the consequences of the inverse relationship between population density and per capita consumption is declining incomes as the demand for labor fails to keep pace with the growth in supply.  As per capita consumption goes, so goes employment.

I published Five Short Blasts in 2007, just before the onset of the “Great Recession.”  That unemployment rose and incomes declined during the recession was no surprise and provided no proof of my theory.  But a report released last week by the Federal Reserve does.  The Fed released it’s 2013 update to its tri-annual “Survey of Consumer Finances.”  (Link provided above.)  The latest survey shows the changes in consumer finances during the 2010-2013 period, a period of recovery, following the previous release which covered the 2007-2010 period of recession.

The survey found that while Americans grew substantially poorer during the 2007-2010 period of recession, they have continued to grow poorer during the so-called “economic recovery.”  Median incomes fell yet another 5% after falling 8% during the recession.

Median net worth fell another 2% during the “recovery” after falling 38% during the recession.

Wealthy Americans, the top few percent of wage earners, have fared much better.  Their incomes have risen 4% during the recovery and they have completely recovered their much-smaller loss in net worth that occurred during the recession.

Economists are baffled.  I’m not, and you shouldn’t be either.  As long as the U.S. continues to mis-apply free trade to nations grossly overpopulated and as long as we continue to exacerbate our own worsening population problem, declining incomes and worsening unemployment is inescapable.  People living in crowded conditions consume less.  It’s impossible to avoid.  When people consume less, less is produced and employment declines.  It’s all really quite simple – simple to anyone willing to open their eyes and ponder the economic consequences of a growing population – something that economists are still unwilling to do.


Why Incomes are Stagnant or Declining

August 5, 2014

OK, it’s time for something completely new and original.  This began with the release of 2nd quarter GDP (gross domestic product) a couple of weeks ago.  The Bureau of Economic Analysis (BEA) announced that the economy grew at a 4% annual rate in the 2nd quarter – the most impressive economic performance of the supposed recovery from the deep recession of a few years ago.  Of course, that slightly bigger pie is now shared by slightly more people – 1% more each year – so in per capita terms the economy grew by 3%.  But even that is decent growth.  Here’s a chart of real (adjusted for inflation) per capita GDP:   Real Per Capita GDP.  Looking at the chart, you can see that per capita GDP has recovered, but is barely above the level of 6-1/2 years ago.

Last week, the BEA also announced that the economy added more than 200,00o jobs in July, adding to a string of such results.  But the report also noted that wages barely budged in July, rising by only a penny per hour.  When you consider that the top 1% of wage earners are rolled into that data, you realize that wages for 99% of us are in decline.

What gives?  How is it that wages aren’t rising in an economic environment of 4% growth and consistent monthly job gains of 200,000 plus?  It’s a question that has vexed economists and the Federal Reserve.

It boils down to a question of what drives the demand for labor.  Growth in per capita GDP should translate into growth in the demand for labor.  But there’s another factor at work that I touched on in Five Short Blasts but I’ve barely mentioned since – productivity growth.  So I thought it would be interesting to go back and calculate the annual rate of growth in per capita GDP, minus the rate of growth in productivity.  Although GDP and population data go back further, productivity data is only available as far back as 1947.  So that’s the base year for my data, and is assigned a value of “1.”  Each succeeding year, that figure is reduced or increased, depending on whether the combination of per capita GDP growth and productivity growth yielded a slightly positive or negative percentage change in this “demand for labor.”  Here’s the chart of the results:  % Change in GDP per capita minus productivity.

From 1947 until 1963, there was a general downward trend.  Then, over the next 36 years, an upward trend reversed the losses of the previous 16 years, reaching a peak in 1999 at a level clearly above that of 1947.  But what really blew me away was what happened next.  Beginning in 2000, this figure fell like a rock and, in ten short years, wiped out all of the gains of the previous 36 years, and continued falling to a record low reached in 2010.  Since then, it’s begun to recover, but ever so slowly.  Last year it was still below the previous low reached in 1963.

Now this is a piece of data that rings true.  Doesn’t it feel like what’s been going on?  Remember the “jobless recovery” for which President Bush took so much criticism?  This shows you that it was real.  And it shows you just how much damage the recession that began in 2008 did to the economy.

What’s driving this decline?  The growth in per capita GDP has fallen dramatically since 2000.  It’s no longer keeping pace with the growth in productivity.  To illustrate the point, here’s the average change in per capita GDP by decade:

  • 1950’s = 2.43
  • 1960’s = 3.17%
  • 1970’s = 2.17%
  • 1980’s = 2.20%
  • 1990’s = 2.21%
  • 2000’s = 0.62%
  • 2010-2013 = 1.50%

Meanwhile, productivity growth has remained fairly constant at around 2.2%.

This slow-down in per capita GDP is even more remarkable when you consider the extraordinary measures that have been taken in the last few years to prop up the economy.  Since 2000, the national debt has more than tripled from $5.7 trillion to over $17 trillion today.  And, in the past few years, the Federal Reserve has poured in an additional $4 trillion.  That’s over $15 trillion of “stimulus” since 2000.

One has to consider the possibility that the inverse relationship between population density and per capita consumption is at work here, and we’ve reached the tipping point where leaning on population growth to fuel the economy is backfiring and eroding per capita GDP.

 


July Jobs Report Further Evidence of “Deep Structural Problems” within America’s Economy

August 5, 2013

The Bureau of Labor Statistics released another humdrum, “new normal” employment report for the month of July on Friday morning.  Non-farm payrolls added 162,000 jobs – below expectations and the lowest level in four months.  The unemployment rate dipped by 0.2 percent to 7.4% – the best level in 4-1/2 years.  However, though the labor force participation rate improved very slightly, it has barely budged since the depths of the recession.   What this means is that the economy has barely added enough jobs to keep pace with the growth in the labor force caused by immigration-fueled population growth. 

Commenting on the report, New York Times columnist David Brooks, a conservative, commented during the PBS Newshour’s “Brooks and Marcus” segment on Friday night that, in the wake of this report, “… the structural problems are becoming super-obvious … we’ve got some deep structural problems …”  Obama bashing by a conservative columnist?  No.  His liberal couterpart, Washing Post columnist Ruth Marcus, agreed with him.  Brooks went on to comment that “something really fundamental has shifted in the economy,” that no one seems to have answers and that our political system is ill-equipped to deal with it.

Brooks cited some factors, but can be forgiven for missing the real issue (since even economists don’t recognize it) – that continued population growth is whittling down per capita consumption, adding workers to our labor force at a pace incommensurate with the economy’s ability to absorb them. 

This weak employment report is corroborated by the equally weak preliminary report of 2nd quarter GDP growth, released two days earlier, which showed the economy grew by a measley  1.7%, on top of an even weaker 1st quarter growth of 1.1%.  What’s amazing is that this economic weakness is in spite of the Federal Reserve pumping a trillion dollars into the economy over the past year.  Something is indeed “structurally wrong” when the economy fails to respond to such unprecedented stimulus.

The following are additional high-lights from Friday’s employment report that underscore the weakness of the report:

  • Both the May and June reports were also revised downward by a total of 26,000 jobs.
  • The number of long-term unemployed was unchanged in July.
  • The employment to population ratio was unchanged.
  • The number of people employed part-time for economic reasons was unchanged.
  • The number of discouraged workers, 988,000, is up 136,000 from a year earlier.
  • The job growth was concentrated in low-wage sectors:  retail (47,000 jobs), and restaurants and bars ( 38,000). 
  • Manufacturing employment was flat, in spite of a growth of 9,000 jobs in the auto industry.  This means that the rest of manufacturing actually contracted by the same number.
  • Employment in the health care industry has stalled, as I’ve long predicted it would.  In 2012, health care added an average of 27,000 jobs per month.  In 2013, that’s fallen to an average of 16,000 jobs.  In July, it fell to zero. 
  • The average work week fell by 0.1 hours in July.  In manufacturing, it fell by 0.2 hours and overtime declined by 0.2 hours to 3.2 hours per week.
  • Average hourly earnings fell by 2 cents.

Something is structurally wrong with the economy.  It’s structured around trade policy based on flawed trade theory that’s guaranteed to result in a huge trade deficit in manufacturing goods.  And it’s structured around a reliance on population growth to stoke economic growth, a flawed strategy that’s now destructive and self-defeating.


Another “New Normal” Employment Report

May 3, 2013

This morning the stock market is soaring on news that the economy added 165,000 jobs in April (slightly more than expected) and unemployment fell to 7.5%.  These aren’t stellar numbers.  The jobs added barely exceeded the rate necessary to keep pace with population growth, and the unemployment rate’s “detachment from reality” index (more on this later), inched down only slightly from the record high set in March.

You have to wonder:  is Wall Street reacting so positively because the news is so good or because it isn’t?  What’s really been driving this bull run on Wall Street is the Federal Reserve’s quantitative easing policy, pumping trillions of dollars into the markets.  And the Fed has tied the end of that policy to an unemployment rate of 6.5%.  Is Wall Street cheering the fact that the official unemployment rate crept down by 0.1% in April, or that it didn’t drop more?

Speaking of the unemployment rate – what’s known as “U3” – it’s a calculation of the “employment level” divided by the “civilian labor force,” factors determined by the monthly household survey conducted by the Bureau of Labor Statistics.  It’s a simple matter to make the unemployment rate look lower than it really is by claiming that workers have dropped out of the labor force and given up looking for work.  Of course, that’s nonsense.  Whether they’re looking for work and not finding it, or have given up looking because there’s none to be found, they’re just as unemployed.  A more accurate gauge of unemployment – what I call “U3a” – holds the work force at a constant percentage of the population.  After all, everyone needs a source of income. 

Over the past two months, the “civilian labor force” has declined by 290,000 while, at the same time, the population has grown by 350,000.  This kind of creative accounting has resulted in an unemployment rate that is ever more detached from reality.  Here’s a chart of these unemployment rates:  Unemployment Chart.  And to drive home the widening gap between U3 and U3a, this month I’m introducing a new chart, what I call the unemployment “detachment from reality index” – the difference between U3 and U3a.  Here’s the chart:  Detachment from Reality Index.  As you can see, it’s barely off from the record set last month.  Instead of 7.5% unemployment, a more realistic figure is 10.5%. 

The economy isn’t getting better.  If anything, it may be getting worse, as all of the other economic indicators have been telling us.  Only an hour-and-a-half after this unemployment report was published, the monthly report of factory orders fell by 4%, corroborating other reports that show a slowing manufacturing sector. 

Even this supposedly rosy employment report had some bad news.  No jobs were added in either manufacturing or construction in April.  And the average workweek slipped by 0.2 hours. 

Don’t buy all the economic hype.  Unemployment isn’t getting better.  Our trade policy is as broken as ever and rampant immigration is aggravating overcrowding and declining per capita consumption.  I doubt that this illusion can be maintained much longer.


Unemployment Rises 0.1% in December

January 4, 2013

http://www.bls.gov/news.release/empsit.nr0.htm

This may get a bit rambling because much has happened since the holidays, and to break these issues into separate posts would only assure that all but the most recent would quickly scroll out of view.

So let’s begin with the big economic story of the day – the employment report.  The headlines read something like “Economy adds 155,000 new jobs; unemployment rate holds at 7.8%.”  Regarding the latter claim, it’s only technically true because the figure is rounded to only one decimal place.  Unemployment actually rose by 0.1%, from 7.75% in November to 7.848% in December.  That’s thanks to a paltry increase in the employment level compared to the growth in the labor force.  Unemployment remains stuck in the “new normal” of about 8% (the official “U3” rate, manipulated to understate unemployment by claiming that more and more people drop out of the labor force) or, more accurately, around 10-1/2% when the labor force is held steady at a percentage of the population, which is constantly growing.

Here’s the chart:  Unemployment Chart  (Notice how “U3” has been trending down, creating the illusion of a recovering economy, while “U3a” is holding steady around 10.5% – a more accurate depiction of a sour economy stuck in neutral.)

Per capita employment, the employment level as a percentage of the population, remains near its lowest level of the recession.  Here’s the chart:  Per Capita Employment

And take a look at this chart:  Labor Force & Employment Level.  Notice that the employment level remains several million below the start of the recession, while the population and labor force have grown by 13 million and 6 million respectively.  In other words, not a single worker (out of six million) added to the labor force in the last five years has found work.  In fact, three million workers have lost their jobs in the last five years.

And don’t be fooled into thinking that things will improve this year.  Though the “fiscal cliff” deal made permanent the Bush tax cuts for about 98% of Americans, it didn’t stop the payroll tax from rising by 2%.  So virtually every American worker took a 2% pay cut on January 1st.  That’s likely to shave about 1% from GDP – not good for an economy that, by most estimates grew at only a 1% rate in the 4th quarter.  In other words, the economy is likely to stall for that reason alone, not to mention the big spending cuts that were delayed by only two months.

But there’s bigger reasons brewing to be pessimistic about the economy.  We’re facing another debt ceiling crisis in less than two months.  The last time this happened, in August of ’11, the stalemate in Congress very nearly drove the nation to default.  Markets plunged violently and the economy very nearly sank into recession again.  This time, it could happen.  President Obama has already said that he won’t negotiate over the debt ceiling, and House Republicans have already signaled that they won’t raise it without getting big spending cuts in return.

Secondly, the Federal Reserve is getting cold feet about its quantitative easing, which has pumped $3 trillion into the economy in the last few years.  Fed governors are worried about unintended consequences.  It may be no coincidence that their concern is intensifying as the debt ceiling fight approaches.  They may be worried that the Fed’s massive holdings of treasuries may make default seem less scary to lawmakers, who may rightly believe that the U.S. could choose to default selectively on only the debt held by the Fed, sparing foreign investors from any pain.  That would be a truly dangerous precedent.  So, although one of my “long shot” predictions for 2013 was that the Fed may reverse course, only 4 days into the year we’re already hearing rumblings that it could happen.  Any of these scenarios – big spending cuts, another near- or actual default, or an end to quantitative easing by the Fed – would surely drive the economy into recession.

The economy is painted into a corner from which there is no escape without tackling the trade deficit that put it there in the first place.  Mark my words, the economic gimmicks that have been used to create an impression of a recovery following the Great Recession have just about been exhausted.  The economy we have right now – the new normal of high unemployment – may be as good as it gets for a long time.


The National Debt: How Big and Who Pays?

December 17, 2012

In light of the intense debate over the “fiscal cliff” – triggered by unsustainable federal budget deficits that are growing the national debt at an alarming rate – this might be a good time to revisit the national debt and put that problem in perspective.  Just how bad is it?  Who’s on the hook to pay it?  What’s the best way to fix it? 

Most economists relate the national debt to our gross domestic product, or GDP – in other words, the size of the economy.  So let’s begin there.  The following shows the growth in our national debt vs. growth in GDP:  National Debt vs. GDP, 1929-2012.  (Source:  U.S. Bureau of Economic Analysis.)  Note that the two have grown in tandem but, beginning in the early 1980’s, the national debt began to catch up to GDP and the lines crossed in 2010. 

To make it easier to understand, let’s look at the national debt as a percentage of GDP:  National Debt as Percentage of Chained GDP.  (Source:  U.S. Bureau of Economic Analysis)  The war effort (World War II) skyrocketed the national debt to 120% of GDP but, once the war ended and federal spending returned to normal levels, growth in the economy steadily outpaced growth in the national debt until the national debt fell to only about 33% of the economy in 1981.  Aside from a brief period in the late ’90s, when a bubble in the stock market and in the PC/cell phone/internet businesses generated a ton of federal revenue, resulting in balanced budgets, the national debt has grown steadily as a percentage of GDP, but really began to accelerate in 2008 when the “Great Recession” took hold.  Now the national debt exceeds our GDP, a milestone where some economists begin to fret.  How much debt is too much?  I don’t think anyone really knows.  As a percentage of GDP, some nations’ debts are actually much larger than that of the United States.  Interest payments on the debt are still a relatively small part of the federal budget, though growing. 

But who’s really on the hook for this debt?  If holders of America’s bonds decided to cash them in and demand repayment of their principal, where would the money come from?  The federal government would have to extract revenue from “the economy” in order to come up with the cash.  But that’s misleading.  Almost all federal revenue comes from the pockets of individual taxpayers.  Any revenue generated by taxing business simply gets rolled into the cost of their products and we still end up paying.  So, what’s more significant than the percentage of GDP that the national debt represents is your share of it.  How much do you owe?  Would you be able to pay it?  Here’s a chart of the national debt per capita, and how it’s grown from 1929 to today:  National Debt Per Capita, 1929-2012.  (Sources:  U.S. Bureau of Economic Analysis and U.S. Census Bureau)

Yikes!  Now that’s scary!  On average, every man, woman and child owes about $44,000 on the national debt – a new record in 2012, and climbing really fast.  That’s more than double what it was at the end of World War II.  If you’re the breadwinner for a family of four, your family owes $176,000.  Could you afford to pay that?  Few could.  Virtually no one could by having a percentage deducted from their pay in the form of taxes.  It’d have to come from your net worth – your home and your savings. 

So let’s take a look at household net worth to see just how many people could afford this.  This chart shows both the median (the point at which half of the people have higher net worth, and half have lower net worth) and the mean (average) net worth of households:  Household Net Worth.  (Source:  U.S. Federal Reserve)  First of all, as an aside, notice that the median net worth hasn’t grown at all since 1983, the year the Federal Reserve first began tracking this data on a triennial basis.  But the mean has grown nicely.  This means that the net worth of the top few percent of households has grown at a phenomenal rate.  In 2010, the median household net worth was about $77,000.  But, on average, each household owes $176,000 on the national debt.  In other words, if your net worth is anywhere near the median or less, you’re broke!  You just don’t know it yet. 

In actuality, though, the national debt wouldn’t be spread evenly across all households.  The rich would have to shoulder much more of the burden, since their net worth is much higher.  So how much would each household owe if the percentage of net worth was the same for everyone?  To calculate this, we divide the national debt by the sum total net worth of all households combined.  Here’s the chart:  National Debt as Percentage of Total Household Net Worth.  (Sources:  U.S. Bureau of Economic Analysis and U.S. Federal Reserve)

As you can see, this figure held fairly steady for decades in the 12-20% range.  But, in 2010 (following a brief period during which if fell, thanks to the bubble in housing market), it jumped to 28%, thanks to a big jump in the national debt and a fairly big drop in household net worth in the wake of the “Great Recession” a few years ago.  The point is that, if we’re all to pay an equal amount in terms of percentage, we’ll all be called upon to fork over 28% of our net worth. 

What are the odds that all of America’s creditors will want to cash out at the same time?  Slim to none.  Why would they?  They’d be paid in dollars.  Then what?  What do they do with those dollars which, ultimately, can only be redeemed in the U.S.?  Nevertheless, as the debt goes higher, so too does the risk that more and more creditors will become uncomfortable and will want their money back.  One way or the other, the debt has to begin coming down at some point, whether it’s done by the government through tax increases and spending cuts, or by creditors cashing out.

In essence, you owe 28% of your net worth to the federal deficit spending that has taken place over the decades, propping up the economy and making us all feel wealthier than we really are.  And, bear in mind that the median household net worth hasn’t risen since 1983.  Were it not for that deficit spending, most of us would actually be 28% poorer.  The unraveling of the national debt process is going to be painful.  Even if it occurs over many years, it will be a matter of the federal government withdrawing stimulus from the economy.  It’ll leave all of us poorer than we would be if the deficit spending continued – something that can no longer be sustained.

Of course, there is a way that the national debt could be cut painlessly – a way that no politician or economist has dared to address – a way that addresses what necessitated the deficit spending in the first place – and that’s fixing our trade policy to restore a balance of trade.  As I’ve discussed many times in the past, it’s no mere coincidence that the growth in our national debt closely tracks the growth in our cumulative trade deficit.  You’ll notice that, in all of these charts, things took a turn for the worse in the early 1980s.  That coincides closely with the beginning of our string of 37 consecutive annual trade deficits that began in 1976, sapping nearly $12 trillion from our economy.  Here’s that chart once again:  Cumulative Trade Deficit vs Growth in National Debt.  (Source:  U.S. Bureau of Economic Analysis)

Without tackling the trade deficit, any meaningful progress toward reducing the national debt is impossible without throwing the nation into recession.  Both parties know it.  Neither wants to address it.  Republicans love our trade policy because it’s in the best interest of their rich, corporate benefactors.  Democrats love it too – perhaps not to the same degree – because it makes people more dependent on government largesse.  But now both parties are stuck.  The most likely action is some token, trivial revenue increases and spending cuts in return for mutual agreement to address the problem in a more meaningful way, perhaps after the next election.  And the next time the debt is tackled again?  The result will be the same.