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.

 

Advertisements