Debt Denial

February 18, 2019

A few days ago, the national debt hit $22 trillion for the first time, and the above-linked article appeared on CNBC, essentially downplaying the seriousness of the situation.

  • What matters is the debt-to-GDP level, which is not in the danger zone now but threatens to get there before long.

Baloney.  When the people holding that debt – China, Japan, Germany and all the others who use our trade deficit money to buy U.S. debt decide to cash out and demand their money back, are they going to say “Hey, U.S. GDP, we want our money?”  Of course not.  U.S. GDP is an economic measure, not a holder of money.  They’re going to come to you.

Take another look at the picture in the article of the man looking up at the national debt clock.  Not mentioned in the article are the words just below the national debt figure:  “YOUR family share 086858.”  That’s right, the average American family now owes $86, 858.  Measured in terms of debt-to-average household net worth, the national debt has skyrocketed far beyond the average household’s net worth and ability to pay.  The reason that expressing the national debt as a percentage of GDP is so bogus is that, although the GDP has been growing steadily, the average net worth of American households has been stuck at about the same level for decades.

The source of all this debt?  The article provides a half-truth:

The main culprit of public debt is budget deficits, …

Well, yeah, but that’s like saying you owe money on your mortgage because you borrowed it.  The real question is “why do we have to keep running such huge budget deficits?  Why don’t we just stop doing that?”  Think about it.  What would happen to the economy if the federal government suddenly stopped putting a trillion dollars per year into it?  Instant recession – probably one that would quickly spiral into a depression.  Without the federal government putting that money into the economy – and it’s no coincidence that it’s almost exactly the same as the amount that the trade deficit takes out – the economy would collapse.  There are those who would tell you that balancing the budget, without addressing the trade deficit, would somehow prove to be an economic stimulus.  Don’t listen to them; they’re idiots.  The only way to deal with the budget deficit and the national debt is to eliminate the trade deficit.  Period.  Plain and simple.  There are no other options.  Let the trade deficit continue to grow and we’re soon headed for a real disaster.

It’s astonishing to me and scary how few people in the media, and even economists, understand this basic truth.

The Trade Deficit is Bankrupting the U.S.

February 13, 2018

Earlier this past week, the Commerce Department released the trade figures for the month of December.  The news wasn’t good.  The overall deficit jumped to $53.1 billion, the highest since the Great Recession in 2009.  Worse yet, the deficit in manufactured goods soared to a new record of $69.0 billion as a $2.7 billion increase in exports was swamped by a $6.7 billion increase in imports, which rose to $183.2 billion.  Check this chart:  Manf’d Goods Balance of Trade.  This is the 3rd month in a row that the deficit in manufactured goods has set a new record.  This is quite the opposite of what Trump promised during the campaign.  To be fair, the increase in the deficit is due to the improved economy, leaving Americans more willing to open their wallets and buy, and is not due to any trade policy blunders by Trump.  But Trump’s dithering on trade is directly responsible for the lack of improvement.  All we’ve gotten is talk, threats and endless (and pointless, I might add) negotiations (primarily on NAFTA) – nothing more than we’ve gotten from previous administrations for decades.

In another story last week, Congress approved (and Trump signed) a spending bill that ended the brief government shutdown – a bill that grows the national debt by an estimated $1.5 trillion over ten years.  This is on top of the $1.5 trillion added by the Republicans’ tax cut legislation.  And all of that is on top of the $1.5 trillion cost of the American Recovery Act implemented under Obama.  Yesterday, Trump introduced a budget plan that would grow the national debt by $7.5 trillion over the next ten years.

So what’s the relationship?  Why do I bring up the trade deficit and the national debt in the same post?  As I explained in Five Short Blasts, the trade deficit is the root cause of our federal budget deficit.  To understand, draw a line around the United States on a map.  Now, draw arrows that represent cash outflows from that circle and cash flowing in.  The money spent on imports – currently running at about $3 trillion per year – is an outflow.  The money we collect from exports that we sell – currently running at about $2.4 trillion per year – is an inflow.  That leaves a deficit of about $600 billion per year.  If that money didn’t come back in some fashion, every penny of U.S. wealth would eventually be gone.  Every American would be flat broke.  It’s exactly the same as your check book.  Keep taking money out without putting any back in and – well- you know what happens.

So the trade deficit puts us in a huge bind.  Fortunately, though, it presents those countries who sold us those imports with an equal but opposite problem.  They’re now collecting a big pile of U.S. dollars that ultimately have value in only one place.  The U.S. is the only place on earth where U.S. dollars are legal tender.  This means that those countries who sold us those imports now have to reinvest those dollars back in the U.S. in some fashion.  For one, they can use them to buy exports from the U.S. – which they do – but obviously not in equal measure.  What to do with the rest?  Invest in American companies?  That makes no sense.  Those are the same companies that their exports are trying to drive out of business.  So they use the money to buy American debt obligations, or “treasuries.”

The federal government then uses the money collected by selling treasuries to finance deficit spending, thus plowing back into the economy the dollars that the trade deficit took out.  In this way, the federal government is able to keep the economy on a positive footing, maintaining an illusion of prosperity in the U.S.  And the biggest way they do this is by collecting less tax revenue from you than it takes to finance their programs.  Essentially, the federal government subsidizes your income.

Check out this chart.  It graphically shows the relationship between the growth in the national debt and the cumulative effect of the trade deficit:  Cumulative Trade Deficit vs Growth in National Debt.  Notice how closely the two parameters track each other.  Also, you’ll notice that any time the growth in the national debt lags the cumulative trade deficit, a recession is the result – the most recent being the “Great Recession” of 2008.  In the run-up to that recession, Congress focused on reining in the deficit and the result was George Bush’s famous “jobless recovery” from the recession that occurred at the turn of the century.  Home ownership was declining and the housing/mortgage industry turned to sham loans to put people into homes – bad loans that nearly collapsed the entire banking industry.  When Obama took office, he correctly blamed global trade imbalances, and world leaders agreed.  What did they do about it?  Not a damn thing.  Like parasites, they could all agree that they were killing the host, but all continued to hungrily feed on it.

So how bad is the national debt?  Let’s begin with a little historical perspective.  In 1929, the national debt was $16.9 billion dollars, which was about 16% of GDP (gross domestic product).  By the end of World War II, it had understandably ballooned to $269.4 billion, or 121% of GDP – unacceptably high.  By 1973, it was whittled back down to only 33% of GDP.  Then it began to grow again.  Not coincidentally, in 1975 the U.S. ran its last trade surplus and became a “debtor nation.”  Soon after, the national debt began to explode.

Some economists have used the benchmark of the GDP to gauge the seriousness of the debt.  As long as it doesn’t exceed 100% of GDP, they would claim, the national debt is manageable.  Where do we stand now?  Take a look at this chart of national debt, measured as a percentage of GDP:  National Debt as Percentage of Chained GDP(2).  We’re back over 100%.  It actually declined slightly last year as the budget deficit shrank a little and as the GDP grew more than it has in years.  We’re not likely to see it decline again any time soon as the national debt is now expected to grow by $7 trillion in the next ten years.  Although it took 32 years to climb from 32% of GDP to 100% in 2013, it will hit 200% in much less time if nothing is done about the trade deficit.

However, the situation is actually worse than that.  The “GDP” isn’t the one who is on the hook for the national debt.  It’s taxpayers – you and me.  So let’s take a look at the national debt in per capita terms – that is, how much of it each one of us owes.  Take a look at this chart:  National Debt Per Capita, 1929-2017.  This should scare the hell out of anyone.  Each of us is now on the hook for $50,000 of the national debt, which is 2-1/2 times the burden of each American at the end of World War II!  And look at this chart:  National Debt as Percentage of Total Household Net Worth.  In 1962, the national debt was only 3% of the total household net worth of all Americans.  Today, it’s hovering near 30%.

“Total household net worth” includes some very wealthy households, like those of Bill Gates, Warren Buffet and other billionaires.  Where does your household’s net worth fit in?  Take a look at this chart of household net worth, as measured by the Federal Reserve in its tri-annual survey of household finances:  Household Net Worth.  While the “mean” (or average) household net worth has grown nicely  from $163,000 in 1962 to $692,000 in 2016, the “median” value remains stuck at about $100,000 where it’s been for two decades.

You need to understand the difference between “mean” and “median.”  If nine people have $1 in their pockets and a tenth person has $100 in his pocket, then the “mean” value of what these ten people have in their pockets is the total divided by the number of people which, in this case, is $10.90.  The “median” represents the value at which half of the people have more and half have less.  In this case, the “median” value of how much these people have in their pockets is only $1.  Half of these ten people have $1 or less, and half have $1 or more.  (One of them has a lot more!)

This means that the household net worth of at least half of all Americans is $100,000 or less.  And, in all likelihood, most of the other half don’t have a whole lot more than $100,000.  The median value is skewed by only a small percentage of households.

On average, a household has 3.2 people.  Remember that each American “owes” $50,000 of the national debt.  That means that each household owes about $160,000 on the national debt.  Compare that to the median household net worth of $100,000.  In all likelihood, if the amount you owe on the national debt were subtracted from your net worth, you’d be completely broke.  You’d actually be “in the hole” by about $60,000!

To be honest, I’ve been hearing warnings about the national debt for all of my nearly seven-decade life.  So far, nothing really bad has happened.  At some point, you have to begin to wonder if those who claim that the national debt doesn’t matter are right.  Who knows how this might actually turn out?  Nobody knows.  Will Americans ever have to pony up the money to pay the debt?  I doubt it.  It’s in no one’s interest to bankrupt Americans.  After all, the rest of the world depends on us continuing to buy their products.  What is likely to happen, in my opinion, is the same thing that has happened in other cases where nations have been unable to repay their debts.  There will be a “debt-forgiveness” program of some sort, perhaps overseen by the World Bank, that will let us off the hook, but will come with some extremely harsh concessions – a Greek-style austerity program as a minimum.  The U.S. will become a slave-state for the rest of the world, never again able to exert any influence over world events or even our own destiny.

Is that what we want?  There’s only one escape from this dilemma – the restoration of a balance of trade.  The only way to make that happen is through the use of tariffs.  It’s exactly what Trump proposed during his campaign but now seems unwilling or unable to implement.  Where is the media outrage over this situation?  Instead of the news being dominated by stories of our looming economic demise – which it should be, all we get is stuff that more properly belongs in tabloids or on page 20 of The Times, at best.  It seems that our journalists are either too ill-informed on the subject of economics to probe the issue, or are too lazy to bother looking into it.  The salacious “she said, he said” stuff is easier and sells better.  It’s not exactly “fake news” but, in the grand scheme of things, it’s certainly trivial news.  There are much more important things, like the trade deficit and the national debt, that needs our focus.

A $22 Trillion Economic Stimulus Plan That Costs Nothing

December 12, 2011

On Friday morning, the Bureau of Economic Analysis released its monthly report of the U.S. balance of trade for the month of October.  The October trade deficit marked a very significant, sad milestone that went completely unnoticed by the media, perhaps because I’m the only one tracking this data.  In October, the cumulative U.S. trade deficit since our last trade surplus in 1975 reached $11.01 trillion (expressed in current dollars). 

It’s no mere coincidence that the growth in the cumulative trade deficit tracks closely with the growth in our national debt over the same time frame.  Deficit spending is used by the federal government to offset the economic drain caused by the trade deficit.  Dollars spent on imports return to the U.S. in the form of purchases of treasury bonds – bonds used to fund deficit spending.  The following is a chart of the growth in the cumulative trade deficit vs. growth in the national debt.  (Note that the trade deficit figure for 2011 is through October, while the national debt figure is current.)

Cumulative Trade Deficit vs Growth in National Debt

Now, imagine the effect on our economy if we had that $11 trillion back – real money invested in the economy instead of bonds held by China, Germany and Japan.  No one would be talking about the solvency of Social Security and Medicare.  There would be no unemployment problem.  There woud be no debt problem. 

In fact, the effect would be doubled, since the effect of the trade deficit upon GDP (gross domestic product) is understated by half.  Why?  Because the trade deficit is merely a subtraction from GDP.  As an example, suppose someone buys a Japanese car for $20,000.  That reduces our GDP by $20,000.  So, if that person forgoes the purchase of that car and buys nothing at all, our GDP rises by $20,000.  However, if that person then buys a domestic vehicle for $20,000, then another $20,000 is added to GDP.  That’s a $40,000 swing in GDP.  So if $11 trillion in imports were replaced with domestically-made prodcuts, our GDP would grow by $22 trillion.  Compare that to the economic stimulus programs the Obama administration has pushed to jump-start the economy, programs of a few hundred billion.  Now it should be clear just how damaging our trade deficit has been.  Simply changing our trade policy to assure a balance of trade would have the same effect as a $22 trillion economic stimulus plan, but would cost absolutely nothing. 

* * * * *

By the way, notice that the growth in the national debt has raced ahead of the growth in the trade deficit before, back in the early 90’s, when the economy was also mired in a recession.  It appears that we’re repeating the same pattern.  The growth in the debt is likely to be slowed in the next few years, given the pressure to rein in our spending.  But it’s unlikely that there will be any let-up in the growth in the cumulative trade deficit, barring a radical change in trade policy.  So I expect these lines to converge again.

The Truth about Prospects for Cutting The National Debt

July 15, 2011

Given the bitter and stalemated debate in Washington about the debt ceiling and the national debt, it’s a good time to take a close look at the issue to see whether it’s really as bad as our political leaders would have us believe.  Or is it possible that it’s even worse? 

Most economists talk about the national debt as a fraction of our Gross Domestic Product, or “GDP.”  The reason it’s getting so much attention now is that the national debt is about to exceed our GDP, the point in economists’ minds where a nation’s ability to deal with its debt is called into question.  The following is a chart of our national debt relative to our GDP, dating back to 1929 and projecting forward (using Congressional Budget Office projections) to the year 2021 – ten years from now.  (All of the debate in Washington right now is focused on this ten-year projection.)

National Debt as Fraction of GDP

As you can see, the national debt has been here before, quickly soaring to 120% of GDP during World War II, driven by the massive war effort.  But once the war was over, spending fell to a fraction of its war-time level and a post-war economic boom cut that figure to 32% by 1974.  Then it began slowly rising again.  Not so coincidentally, the U.S. had its last trade surplus in 1975.  Since that time, deficit spending has been used to offset the negative economic effects of the steady outflow of money from the U.S. 

So, as a fraction of GDP, it isn’t such an ugly picture after all.  We’ve been there before and we recovered.  We can do it again, right?  Maybe not.  The problem is that it isn’t the GDP that will have to pay back the debt.  It’s the American citizens.  In other words, it’s you.  While lawmakers and economists may conclude that we merely need to raise revenues to some larger fraction of the GDP, every dollar of that revenue will be paid by you and me.  If it’s revenue generated by taxes on business profits, those taxes will be passed along to consumers in the form of higher prices.  One way or the other, you’re going to pay.  Therefore, what really matters is the national debt expressed in per capita terms (that is, divided by the population).  Here’s a chart of the national debt per capita over the same time frame:

National Debt Per Capita

Yikes!!  Looks a little scarier now, doesn’t it?  Right now, every man, woman and child owes about $44,000 on the national debt – about $176,000 for every family of four.  By 2021, those figures rise to $78,500 and $314,000 respectively. 

But, to be honest, much of what you’re seeing here is merely a measure of inflation.  Personal incomes have also increased a lot over this same time frame and, if the CBO is to be believed, will continue to grow at the same pace.  I have serious doubts about that, but let’s suppose the CBO is right.  The following chart shows the national debt relative to your ability to pay it; that is, as a fraction of personal income.

National Debt as Fraction of PI

Now it looks like the first chart of the national debt as a fraction of the GDP, but a little worse.  The debt already exceeds the average personal income.  And, using the CBO projections, it’ll exceed personal income by 30% by 2021.  And that’s if the CBO projections, a bit rosy in my opinion, are correct.  What if, instead of growing by an annual rate of 3%, GDP grows by only 2.5%?  And what if personal income rises at a rate of only 2.5% (just keeping pace with GDP growth), instead of the CBO’s average projected rate of increase of 3.65% which, in my opinion, is wildly optimistic given the current state of unemployment.  If that were to happen, the per capita national debt would soar to nearly 150% of personal income by 2021. 

OK, back to the debt ceiling/deficit reduction negotiations in Washington.  Two scenarios that have been discussed involve cutting the deficit by $2 trillion over the next ten years and the other scenario – the one the president was pushing for – the “big deal” – would cut it by $4 trillion.  Just exactly what would that do to the trajectory of the national debt?  Here’s how it would look under the first scenario, assuming that the $2 trillion reduction is spread evenly over those 10 years:

2 trillion cut from debt

It goes a long way toward slowing the growth in the debt as a fraction of personal income, but it continues to grow.  What if the president got his way, and the debt was cut by $4 trillion over 10 years? 

4 trillion cut from debt

Yeah, it helps, but barely.  As a fraction of personal income, the national debt does begin to decline ever so slightly but, by the end of that ten-year period, you can see that it starts ticking up again.  And, make no mistake, cutting $4 trillion from the deficit, whether it’s done entirely by spending cuts, tax increases or some combination of the two, is going to be a tremendous hardship and will likely drive the economy into recession, which would really send the debt skyrocketing again.  And that’s exactly what Federal Reserve Chairman Ben Bernanke has warned of in the last couple of days.  The point I’m trying to make is that we can never “get there from here.”  We can never make any serious headway on the national debt by focusing only on spending and taxes.  If anything, it’s likely to make matters much worse. 

But there’s an alternative.  What if we focused on restoring a balance of trade instead of on spending and taxes?  Our trade deficit is currently $600 billion per year.  What if, through the use of tariffs, we were able to eliminate it?  The results would be:

  • GDP would be boosted by $1.2 trillion per year.  Why twice the trade deficit?  Because imports are a subtraction from GDP.  Eliminate those imports, and GDP rises by $600 billion.  Now, manufacture those products domestically, and GDP rises by another $600 billion.
  • Revenues from tariffs would easily bring in an additional $400 billion per year, assuming an average tariff of 20% on $2 trillion worth of imports.
  • Revenues from the increase in GDP would bring in approximately another $200 billion, using the CBO average rate of about 17% of GDP.

Even if spending isn’t cut at all, here’s the effect on the national debt projection (again, expressed as a fraction of personal income):

trade balanced

With a balance of trade restored, now we’re making real progress on the national debt, and with no pain – no spending cuts and no increase in tax rates.  And isn’t it interesting that, under this scenario, the projected rate of decline in the national debt mirrors the rate in decline following World War II, when the U.S. still had a positive balance of trade?  This lends credibility to the projection. 

In summary, the approach to reducing the deficit and the debt now being negotiated in Washington barely has any hope of slowing the rise in the national debt at all and, in all likelihood, will actually make it worse by driving the ecnomy into recession, reducing revenues and increasing the need for more safety net spending.  It’s simply impossible to make headway on the national debt without first addressing our enormous trade deficit.

Obama’s “Grand Bargain”

January 12, 2009
While being interviewed by George Stephanopolous yesterday on ABC’s “This Week,” Obama admitted that, at some point in his administration, in order to restore some fiscal sanity while pursuing his agenda, he will have to reach a “Grand Bargain” with Congress and the American people – sweeping legislation to put the brakes on spending and raise taxes to eliminate the deficits and begin paying down the debt. “Everyone will have to share the pain,” he said. “Everybody has to have some skin in the game.”
I don’t know if he’s thought this through yet but, contrary to what some “economists” may be telling him, cutting spending and raising taxes by themselves will seriously erode the purchasing power of consumers. As consumption declines, so too will employment. It’s a recipe for making the recession (or depression?) even worse, unless one more step is taken – eliminating the trade deficit. When he speaks of everyone “sharing the pain” and having “skin in the game,” is he including the exporting nations who have gotten a free ride in the American economy? Cutting the purchasing power of Americans doesn’t mean that they’ll simply stop buying imports. Go to WalMart and take a look around. See any luxury items? Of course not. Everything you see is necessities. And, aside from most of the grocery items, do you see anything that’s manufactured in the U.S.? Again, no. Sure, there’ll be fewer imported cars purchased, but sales of domestic models will decline just as fast. It’s services where the pain will really be felt – services provided by American workers.

In recent decades, as free trade policies eroded our manufacturing base, the big lie that we could somehow still have a vibrant economy was swept under a rug of debt. Americans could be made to feel just as prosperous by swapping savings for debt. We sold everything we could think of to foreign investors to raise the cash for easy credit. When we finally resorted to selling them subprime mortgages, the whole scheme came crashing down and the rising tide of unemployment that we had held at bay for so long is now topping the levee and inundating us.

Mr. Obama is a very smart man. In his efforts to restore some sanity to our fiscal mess, how long can a line item written in huge, bold red caps escape his attention? Unless Mr. Obama wants his “Grand Bargain” to accelerate our economy’s downward spiral, he’ll have no choice but to finally turn his attention to our massive trade deficit, now totaling $9.2 trillion since our last trade surplus in 1975. And, being a smart man, will he look at our decades-long strategy of complaining about currency valuations and cajoling our trade partners to abide by the spirit of agreements, and say to himself, “gee, this is working really well?” “Let’s keep doing it!” Or will he finally conclude that, just perhaps, it may be time to take some positive action – like tariffs, for example – to restore some balance? The last “skin in the game” may be the global trade welfare state.


Advice for Obama: Choose Your Advice (and Advisors) Carefully

July 3, 2008

Bill Gross, chief investment officer of PIMCO, is likely correct that Obama will be our next president, given that the economy is literally crumbling around us. But his advice to Obama on how to deal with the economy is miles off the mark.

Gross’s July investment outlook letter was addressed to Obama, as if he had been elected.

“Dear President Obama,” the letter began. “You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans,” Gross wrote. “He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love.”

No arguments here so far. But this is where Gross’s advice goes astray.

The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.

“You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions,” he wrote. “Your administration will produce this nation’s first trillion dollar deficit.” …. “what you need now is fiscal spending and lots of it,” Gross wrote.

… “This economy will need an additional jolt of $500 billion or so of government spending real quick,” he wrote.

We can only hope that Obama sees this kind of advice and similar advice from other corporate leaders for what it is – a lot of self-serving crap from people who care nothing about the U.S. economy and are only interested in their corporations’ profits and their own outlandish compensation packages. What else would one expect from someone in the business of trading bonds? Of course he wants more deficit spending, requiring the government to crank out hundreds of billions and even trillions of dollars more in bonds! Who cares if it bankrupts the nation, as long as PIMCO gets to execute more bond fund trades?

My advice to Senator Obama? It’s just as I laid out in Five Short Blasts. First and foremost, as quickly as possible, institute trade policy reforms – specifically a population density-indexed tariff structure – that will gradually eliminate our trade deficit in manufactured goods. This will inject $500 billion into the economy not once, but year in and year out, without bankrupting the nation as Bill Gross’s plan would do. The economy will rejuvenate like a starved dog in a meat-packing plant!

Second, begin cutting legal immigration – that’s right, legal immigration – to bring the supply of labor in balance with demand, allowing for real wage growth. Third, begin a national conversation on population and challenge our nation’s government and corporate leaders to explain how any of our most critical goals – eliminating our trade deficit in oil, reducing greenhouse gas emissions, etc. – can ever be achieved if we continue pursuing policies of rampant population growth.

Choose your advisors carefully, Senator, and consider their motivations. Are they motivated by a desire to see you and the nation succeed or are they motivated by more selfish interests?