The CBO has released their latest estimates for the budget deficit and the news is mixed.  The good news is that the budget deficit is likely to stay large through 2012.  The bad news is that it is expected to drop off “markedly” after that.  They say:

“CBO projects a $1.1 trillion federal budget deficit for fiscal year 2012 if current laws remain unchanged. Measured as a share of the nation’s output (gross domestic product, or GDP), that shortfall of 7.0 percent is nearly 2 percentage points below the deficit recorded in 2011, but still higher than any deficit between 1947 and 2008. Over the next few years, projected deficits in CBO’s baseline decline markedly, dropping to under $200 billion and averaging 1.5 percent of GDP over the 2013–2022 period.”

Their baseline scenario shows a dramatic drop in the budget deficit between 2013 and 2014 with declines to 4% of GDP and then 2.3% of GDP in 2014:

“Under current law, CBO projects that deficits will drop markedly, averaging only 1.5 percent of GDP over the 20132022 period. But under an alternative fiscal scenario, in which some changes specified in current law would not occur and certain current policies would continue instead, annual deficits from 2013 through 2022 would be much higher—averaging 5.4 percent of  GDP”

Why is this problematic?  Well, we know from MMR and an understanding of the sectoral balances that the government’s deficit is the non-government’s surplus.  As you can see in the image below, it’s not a coincidence that the last 10 years of economic malaise were preceded by the government running a surplus with a current account deficit at the same time leading to that sharp drop off in the domestic private sector balance (the blue line circa 1998).  This was partly alleviated by the private sector debt explosion and the Bush tax cuts which blew the deficit out in the early 2000’s.  Ultimately, as the deficit shrank to -3% in 2005 (while running a 6% current account deficit) the only thing keeping the wheels on the bus was the private sector’s incredible thirst for debt (fueled by the housing bubble and an attempt to maintain unsustainable living standards).  We all know what happened next.  The wheels came off and the only thing that stopped the US economy from going into a full bore depression was the government’s massive spending program (again seen in the blue line circa 2009).

So, the good news is that we’re still running large deficits through 2012 as the private sector heals from the consumer credit recession.  We’re even seeing some signs of life on the consumer debt side.  This means the de-leveraging is slowing as consumer balance sheets are repaired.   The problem is, the CBO sees the deficit dropping off substantially in 2013/2014.

I’ve been working on my economic model since the last time I rolled out its preliminary results and and am now comfortable using it to make economic forecasts.  There are a lot of moving parts in here so the model is more of a broad macro outlook, but it should give us some idea of the general trend and where we’re headed and at what sort of trajectory.  I’ve built in the CBO’s baseline scenario to show the impact on real GDP.  The results show the following:

2012: 2.6% RGDP

2013: -0.7% RGDP

2014: -2.4% RGDP

Now, a lot of this is based on the CBO’s baseline projections for the deficit and these figures are notoriously volatile from quarter to quarter as public policy is unpredictable, but the results point to a steady economy in 2012 with an increasingly unstable environment heading into 2013.  We’ll be monitoring this very closely as we move into 2013.  I think the coast is clear in 2012 as far as recession goes, but the economy is growing increasingly at risk as we head into 2013/2014.  Given the margin of error in the model we’re much more likely to see recession in 2014 than in 2013, but full blown recession in 2012 is likely off the table.

The good (?) news is that the balance sheet recession appears to be having an increasingly reduced impact on consumer debt and de-leveraging.  The bad news is that it’s highly unlikely that we’re going to see another debt fueled growth phase like 2004-2007.  That might be a good thing, but without larger budget deficits and the constant bleed through the current account it’s becoming increasingly difficult to envision an economic boom after 2012 (I wish I had a rosier forecast).  2013 is looking like a year of very meager growth if the CBO estimates hold true and 2014 is looking like we could be at substantial risk of recession.  I’ll update the model on a quarterly basis from here on out to provide readers with a steady update on the outlook.

The upside risk to this model lies with a consumer credit binge (which would be temporary and highly destabilizing in the longer-term) or much larger budget deficits for whatever reason.  The downside risks come primarily from government austerity.  Stay tuned.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • apj

    “Their baseline scenario shows a dramatic drop in the budget deficit between 2013 and 2014 with declines to 4% of GDP and then 2.3% of GDP in 2014:”

    wow, so the CBO is effectively forecasting the output gap at zero in 2014. Given the usual and highly reliabble (leading) relationship between the output gap and the budget deficit, there can be no other conclusion. Ballsy is all I can say. Actually … just wrong.

  • http://www.pragcap.com Cullen Roche

    Yeah, they expect a 2% budget deficit and 4% GDP in 2014. I have no idea how they come to that conclusion….

  • Charles

    You’ve stated often that the deleveraging cycle ends around 2013 so the need for the massive deficits should abate.

    Further the CBO believes things like the Bush tax cuts will be rescinded and other such nonsense. The politicos, once giving away a gift, never take it back for fear of their own jobs. To that end we might never see the 2% payroll tax cut rescinded. Which is exactly why expecting these bozos to work in a MMR framework is pie in the sky belief. They would never take back the goodies given out at the required time when needed, and eventually they’d cause massive inflation (not now but in a different kind of era when actual pullbacks to spending and or tax hikes were required). They are no different from the Fed which kept interest rates rock bottom for far too long.

    Expect months of posturing and then extensions of unemployment benefits, food stamps, Bush tax cuts, and everything else under the sun from here to infinity. I’d expect most of the $1.2T “cuts” (which are not cuts but simply slowdowns of spending) that they are supposed to take also to be “accounted” away as the furor at military bases across the country is already rising. “You gonna cut a base in THIS economy”?

    So don’t worry Cullen, the spendthrifts will spend and keep taxes as is for much longer than you believe. Once the economy really grows we’ll get back to those sub 9-10-11% annual deficits but it wont have anything to do with raising taxes or cutting spending, it will only have to do with a larger economy and hence larger denominator.

  • apj

    aren’t you in the US? GET SOME SLEEP MAN!!

  • http://www.pragcap.com Cullen Roche

    Right. The BSR will abate (and it is), but the CAD is still a 3-4% bleed so a deficit is still needed. Not 10%, but 2% is almost certain disaster if things hold….but yes, I agree that the declines in the deficit are probably excessive.

  • http://www.deltafinancials.com Delta Financials

    You’re misrepresnting this thoroughly.

    Identity relationships don’t lead to prescriptive conclusions. In fact, using the same identity relationships, you can arrive at all kind of conclusions. For example,

    (X – M) = (S – I) + (T – G), where

    (X – M) = net exports; (S- I) = private savings and (T – G)= government savings

    Another way of looking at this relationship is that since GDP = C + G + I + (X – M)

    (X – M) = GDP -(C+I+G), that is (X – M) = GDP – Domestic Demand

    It follows that GDP – C – G = I+(X – M), that is to say National Savings = I + (X – M)

    Now, that current account deficit is deeply correlated with a fiscal deficit. The current account plays into everything you’re talking about above, but you’ve completely ignored it. It isn’t an externality.

    The argument for maintaining a fiscal deficit is limited to the BSR argument – which I think is a valid argument. However, there are large dislocations that government action continues to cause. A sustained aggregate demand recovery requires the components of aggregate demand to be on a firm footing.

  • But What Do I Know?

    Not to worry, CR, the Daily Treasury reports don’t indicate an improvement in the deficit anywhere near what CBO is suggesting. Withholding taxes are running flat Y-O-Y with other components up a tad. I don’t see where they’re getting an over $200 billion reduction in the deficit this year from.

  • http://pragcap Michael Schofield

    The key here is that the deficit be appropriate for economic conditions. Do we have any reason to believe that the people in government know how to run the economy? Many think the balanced budget in the late 90’s was a good thing. Cullen, you only have 1 year to finish selling MR.

  • Adam2

    Your conclusion is wrong because “National Savings” are meaningless.

    National Savings = Government Savings + Private Sector Savings

    A government who prints in its own currency cannot save in that same currency. What are they saving if they can print? It makes no sense.

    The only savings that matter are to those currency users. Not the issuers.

  • http://www.pragcap.com Cullen Roche

    That doesnt mean the sectors dont sum to zero. C + S + T = GDP = C+ I + G + (X – M)

    If rearranged we can see that these sectors must net to zero:

    (I – S) + (G – T) + (X – M) = 0

    And I specifically discuss the CAD. The real lesson from the BSR is that you can’t run a surplus in budget with CAD and expect the pvt sector to sustain growth without a pvt sector debt boom. So yeah, we could run a small budget deficit and a CAD, but it will likely require a debt bubble again in order for the growth to be sustainable. Perhaps I should have spelled this out more explicitly in the article….

  • Adam2

    He is but on the West Coast. It was only 11:47 pm when you posted that.

  • Dan Kervick

    “national savings” is not “government savings” It’s the whole nation.

  • Adam2

    Dan – I obviously know that, since I wrote the formula in the post. It is just logic from there(Government Savings being a subset of National Savings) that I conclude National Savings as meaningless.

    So Delta Financials shuffled the identities around to make up a meaningless relationship. How does that disprove the meaningful relationships that MMT/MMR have brought to light? It doesn’t. Logic and math don’t work that way.

  • http://bubblesandbusts.blogspot.com Woj


    From my reading about MMT and BSR, the usage of the term “de-leveraging” seems a bit confusing. With regards to the sectoral balances approach, a domestic private sector surplus appears to imply de-leveraging. Within the ideas of a BSR, de-leveraging often seems to refer to reductions in debt (maybe as a % of GDP).

    My confusion stems from the appearance that the domestic private sector can be in surplus while increasing debt, both nominally and as a % of GDP. This would imply that the private sector (and possibly consumer) can be leveraging and de-leveraging at the same time.

    Your work has been a great aid in my economics education. Could you please help reconcile this question?


  • http://clearlyirrational.com Clearly_Irrational

    What does your model say under the “alternative fiscal scenario”? That’s the one that actually matters since it assumes that the politicians won’t actually follow through with all of the silly things they’ve promised but never do.

  • Erik

    The CBO’s baseline projection involves tons of things that will never happen, like all the Bush tax cuts expiring (including below 250K), expiration of the AMT patch, all the scheduled Medicare reimbursment cuts etc. Try the alternative fiscal scenario for a more realistic projection.

  • http://www.pragcap.com Cullen Roche

    BSR always refers to pvt sector debt only.

  • http://www.pragcap.com Cullen Roche

    If we stay somewhere near a 5% budget deficit we can expect 1% growth or so in 2013 and 2014. There’s a margin of error there of about 0.5-1% so the bottom line is that without a debt boom the economy is going to remain weak after 2012….The pvt sector needs to deleverage much more or the govt needs to pick up the slack more. Or the CAD goes away, which it like won’t because of the budget deficit. We’re kind of boxed into a corner of slow growth it seems. My Japan on fast forward thesis will unravel if we don’t maintain the deficits….

  • john

    Dear Editor
    I felt it prudent to share the fleecing that continues to occur in America.
    On November 8th, 2010 I did some bulk purchasing for my pantry from Sam’s Club Online. Having recently seen the massive increase in beef by some 22%, blamed I might add on everything but monetary policy, I thought I would see what the purchase of these same items would cost today. Fortunately, Sam’s keeps my order available for me to download and compare. I submit for your approval the top 13 most used items in our households and the current inflationary increase over 14 months to purchase the exact same product:
    Dakota Maid All Purpose flour 25 lbs. – 30%
    Crystal Sugar® Granulated 25 lbs. – 277%
    Jif® Extra Crunchy Peanut Butter – 40 oz. – 50%
    Golden Star® Jasmine Rice – 25 lbs. – 7%
    Bakers & Chefs Gar den Rotini 6 lb. – 10%
    Idahoan® Mashed Potatoes 5 lb. bag – 16%
    Chicken Flavor Bouillon – 4.4 lb. bucket – 84%
    Freeze Dried Sliced Mushrooms 1.5 oz. – 534%
    Imitation Vanilla – 64 oz. plastic jug – 58%
    Hunt’s® Tomato Sauce – 12/15 oz. cans – 72%
    Del Monte® Whole Kernel Corn – 8/15 oz. cans – 25%
    Hunt’s® Diced Tomatoes – 8/14.5 oz. cans – 90%
    Del Monte® Cut Green Beans – 12/14.5 oz. cans – 18%

  • Ilya

    FRom what I understood reading this site we are too timid. Let’s run deficit of 2000% and we will all get rich in 2012. maintaining it at 100% after that annually will get us to nirvana. I hope to get a one way ticked somwhere else right before this happens

  • http://www.napawealth.com Tim Ayles

    And yet…… Cullen comes out with another classic.

    Thank you!

  • http://breedinginstability.com Mountaineer

    “FRom what I understood reading this site”

    Obviously, you understand very little.

  • http://www.pragcap.com Cullen Roche

    Sounds like you want to cause hyperinflation. I don’t agree with your idea of hyperinflating us…

  • Ilya

    I am trying to understand why if 13% deficit is good for tyhe economy why 26% is not better? Is there a “perfect” deficit? Somwhere in the same book as “perfect” lefel of inflation? If growing productivity at 3% is good for the ecomony than 6% is even better. Why in the money creation world there is always that elusive perfect level? Who gets to decide? The braniacs in DC? Mr. Bernanke? I am just a little surprised. I do try to understand the site. It gives a lot of structure to what I used to view as complete insanity. Still trying to understand it though.

  • Ilya

    My issues are on the philosofical level. I did not mean to offend anyone

  • http://www.pragcap.com Cullen Roche

    Ilya, you’re not offending anyone. Thanks for your question. The thing we have to understand is that the govt’s deficit is the non-govt’s surplus. So, if the govt taxed us 100% tomorrow they’d eliminate all dollar denominated assets. Obviously, that would be bad since our economy is based on a dollar denomination. What we know is that the govt can’t “run out” of money so its constraint is not solvency, but inflation. If it prints too much money they can reduce our living stds and potentially cause hyperinflation.

    What we also know right now is that there are substantial idle resources and excess capacity. Inflation becomes problematic and likely to reduce living standards when we spend in excess of our productive capacity. So, the reason why the govt spending isn’t causing horrid inflation is because we’re operating so far below capacity. There’ just not enough demand. The govt can help by adding net financial assets to the pvt sector via spending or tax cuts. Or, as we’ve seen in Greece, they can hurt via austerity.

    Have you read my primer on this? It’s all in there. It’s a tough read for the novice, but all these topics are covered thoroughly.

  • http://breedinginstability.com Mountaineer

    All spending is income; all wages, profits, and investment are derived from someone else’s spending. Your paycheck is only possible because someone else spent a portion of their income. Total economic income is a function of aggregate spending, or the total spending of households, businesses, and government (foreign and domestic). The deficit is good because it means the government is providing income to the private economy (businesses and households) in excess of what it is taking away in taxation. This means the government is raising national incomes, and therefore supporting aggregate wages, profits, and investment. When private income is flat to falling, as it is now, the addition of government income supports economic growth and investment.

  • http://breedinginstability.com Mountaineer

    You didn’t, my response was rash and inconsiderate. Your comment just read like some of the typical “trolling” that fills posts about the benefits of the government deficit. My fault. Apologies.

  • john

    Would I be a benefit to the system if I produced and spent perfect counterfeit bills into the system? I realize that there is only one counterfeiter allowed by law in this country, but I would be benefitting everyone if I were to do so in the current environment. Maybe even a patriot. I am not sure the court system would take MMT as a defense, but it would get an outlet for the MMT crowd to prove their position that we are not devaluing the currency fast enough to properly destroy production of actual monies.

  • hangemhi

    From what I gather China is testing the limits of money printing.

    There is the problem of spending too little. There is the problem of spending too much. And then there is something in the middle. That middle, at least from what China appears to be doing, can be quite large.

    I’m curious just how much the massive money printing that China does effects the rest of the world. The only currency or economy the gold bug inflationists focus on is the U.S. But if seems as if China should be the one they focus on. Same with inflation in just about anything the Chinese consume.

  • Pierce Inverarity

    I don’t have the knowledge yet to do the hard math, but you can tell from Cullen’s analysis and comments that there isn’t an *exact* ideal deficit amount at any given time.

    That said, you can quantify the Current Account Deficit (same thing as a trade deficit, just in econospeak) and the spare capacity the economy has available (I believe Cullen said somewhere that we’re currently around 78% utilization rate?). For zero economic growth, you’d either need the CAD to shrink to zero (not happening in the short term) or the government to spend enough to make up the difference. In order to achieve economic growth, in the case of a deleveraging economy such as ours, you need the government to step in above and beyond just plugging the CAD hole. But that’s where it gets tricky. You’re asking, how much above should we spend? Ideally enough to pick up the slack productive capacity and decrease unemployment. Once done, the government should cut back or risk bringing on inflation.

    Re-hashing a lot of what was said above, but hopefully this helps.

  • Johnny Evers

    Yes, it would benefit the economy … right up until the people who accept your bills realized what you were doing!
    However, if the people who are accepting your counterfeit bills (let’s call them ‘banks’) agreed to pretend they didn’t know what you were doing so that they could then pass the bills along to other unsuspecting people, then it would work.
    But … once the guy in the bar who never pays attention to the news gets the messsage, then the game is over.

  • Ben Wolf

    I’m going to make this simple:

    The Quantity Theory of Money is false. So relax.

  • beowulf

    Right, it can be measured in different ways. Looking at full employment, using below 4% as the goal (which actually it is under the Humphrey-Hawkins Act) and Okun’s law, our $15T GDP has an output gap of 7.65% ($1.1 trillion). Because the CBO doesn’t feel itself constrained by Acts of Congress, they target 5.2% as full employment, by which we’d have an output gap of 5.61% ($840 billion). The lower we set full employment goal then, the bigger the output gap.

    Looking at idle capacity, that’s even simpler, 22 is actually 28% of 78. GDP of $15T x 1.28% is $19.2 trillion, implying a $4 trillion gap from full capacity production.
    $840T is too low and $4T is too high but the hole in the bucket is somewhere in that range.

  • Pierce Inverarity

    Thanks beowulf. I knew someone smarter than I would put the numbers to my narrative.

  • Anonymous

    And what exactly would I be doing? Differently than the fed that is? Because I would not be asset swapping? I would be swapping labor for worthless paper, just like the fed. In theory the currency in supply should equal the amount of money in the system, but we are way beyond that and many people think we need more currency in the system because they believe that we have too much money and not enough currency. I love following these people because they believe they have stumbled on a secret recipe of currency manipulation taking the place of actual money to expand a society, good stuff.

  • Pierce Inverarity

    What is your point here?

  • beowulf

    You’re welcome, I didn’t mention multipliers (if govt spending has a multiplier of, say, 2.0, $500B in spending would fill a $1T output gap) simply because nobody agrees on how big they are at any given time. Seems to me the thing to do is peg tax rate to unemployment instead of this or that budget target.
    Just like the Fed targets price (interest rates) instead of quantity (money supply), Congress and Tsy should think of unemployment rate as the price and and whatever amount of deficit spending is required to get there as quantity, and treat accordingly.

    You’re right about the trade deficit. Cutting it reduces the output gap dollar for dollar without increasing budget deficit. With balanced trade, instead of, say a $1.1T output gap, we’d have only a $500B gap to fill.

  • Anonymous

    To figure out yours

  • dgc

    I’m sorry, but I find it the argument that we can achieve full employment year after year, just by having the federal government spending enough money, to be completely wrong. Had the government spent an extra $1 trillion in 1992 or 2002, it would have had a huge effect, and I expect that we would have had a boom … but only for a while.

    The problem is that with each successive year that extra $1 trillion just won’t have the same impact as it did before, until inflation becomes obvious and damage to the economy undeniable.

    Currently, we will have an annual deficit of well over $1,000,000,000,000 and yet you say that even that is not nearly enough. We have millions fewer people working today than we have had for years even with our ever-growing population. Many people have given up looking for work, and many others have now retired. This approach is not working.

    What has happened is that Bernanke and the federal government have already so corrupted the economy that the savings of my generation have essentially been destroyed. The typical investor will never again be able to earn 5% on their savings. If the federal government had to pay 5% to service their $16 trillion in debt, they would have to add another $800 billion every year just to monetize their interest.

    When the government has too much debt, what needs to happen is that painful and significant reductions in spending need to occur over a span of many years to get that spending under control. With each passing year, the corrective actions that are needed are becoming more onerous. To simply increase federal spending indefinitely will lead to disaster.

    The federal government will not be reducing its spending as our economy becomes “under control.” As time passes, the spending of our federal government will continue to grow until someone has the courage, foresight, and will to take the actions that are necessary.

  • I’llHaveADouble

    So are you trying to suggest that monetary policy made your beef expensive?

  • Dunce Cap Aficionado

    “I’m sorry, but I find it the argument that we can achieve full employment year after year, just by having the federal government spending enough money, to be completely wrong”

    No one’s saying that, enlarging the public sector deficit can be done by *either* additional gov’t spending or reducing taxes…

    I think a lot of people here would advocate the later over the former. I do.

  • Dunce Cap Aficionado

    If you take into account the complete circularity of your non-argument/non-comment you will find it nets to 0 meaing.

    A lesson in horizontal trolling expansion.

  • Don Levit

    Mountaineer wrote:
    When private income is flat to falling, as it is now, the addition of government income supports economic growth and investment.
    Well, that’s what the $1.4trillion deficit last year was supposed to do, as well as the deficits each and every year.
    According to a later blogger, this surplus of oincome over taxes is a positive for the private economy.
    I guess the deficits should have been larger, huh?
    That must be our problem.
    How come our leaders haven’t thought of that?
    Sometimes the obscure takes time to figure out.
    It is the obvious that takes a much longer time.
    Don Levit

  • scone

    Remember, this is an election year. Scenario A = our guy wins. Scenario B = the other guy wins. It’s not as if the CBO is above the fray. That’s why the numbers seem like they’ve been plucked out of the air.

  • I’llHaveADouble

    In theory the currency in supply should equal the amount of money in the system

    No. According to janky money multiplier theory, the amount of money in the system will be, at the limit, some multiple (determined by the reserve ratio) of the base money created by a central bank. But everyone who knows anything about anything knows that that’s BS and reserve ratios aren’t a real constraint.

    Money is spent into existence by the fiscal operations of the government and obliterated by the fiscal operations of the government. The central bank can buy assets, thus changing the amount of reserves, and set rates. Lending is constrained by capital requirements.

    That’s it.

  • Pierce Inverarity

    Because our leaders are under the impression that the U.S. can run out of dollars. So, rather than reducing the tax burden on the populace, or coming up with truly stimulative spending programs, they gnash their teeth over baseless concerns about the government’s solvency. So yes, the deficits should have been larger. How that comes about (tax cuts or increased spending) is what the politicians SHOULD be focusing on.

  • Gerald P

    DGC, despite what you say about Bernanke, long term investment grade bonds alone in a portfolio today yield a compound interest rate of 5%. If the economy doesn’t make enough growth this year, that rate will likely continue.

  • hangemhi

    DGC you said “Had the government spent an extra $1 trillion in 1992 or 2002, it would have had a huge effect, and I expect that we would have had a boom … but only for a while”.

    First, much of todays Gov debt is yesterdays private sector debt. Loose lending standards when the Gov was either not spending enough and/or removing money via surpluses, led to private sector money creation – the kind of “debt” we should be worried about. AND the private sector did the very thing that so many are afraid the Gov will do – they malinvested and wasted it – building McMansions and Wall St gambling.

    So had the Gov spent more last decade, and the FIRE industry hadn’t been “modernized” the Gov debt and deficit wouldn’t need to be so high today. $1T spent productively, while also not allowing crazy speculation, in ’92 or ’02 probably leads to a productive boom that does last.

    So the question is NOT cutting back now – the wasteful spending is behind us. It is too late. Now, the Gov must help the private sector heal from their wasteful party and massive hangover. And if you want an analogy – the private sectors debt was alcohol. The Gov sectors debt is water. Both liquids, but one drunk in excess causes severe and immediate problems. The other can kill you, but man oh man do you have to drink a lot. And if you refuse to drink any water when you have a major hangover, well, you won’t be feeling better for a very, very long time.

    My math may be off, but the way I see it is that $1T is $3,000 per person, or $9,000 per household. And households have well over $100,000 in debt on average. Unfortunately the $9,000 per household that the Gov is spending can’t all go to paying down debt – some will be sent to China in trade, some will get spent and end up in the bank accounts of the wealthy and large corporations, and only some will go to paying down debt. So $1T is but a drop in the bucket – and is again money that is being spent to make up for past malinvestment. Don’t spend (drink water) now, and the debt hangover (alcohol in our system) will be with us for a long time.

    (For those more knowledgable than me, please correct any of my comments as I write here to learn. Teaching is the best method of learning, but if I’m teaching falsehoods let me know.)

  • hangemhi

    Apparently this style of counterfeiting did happen. The American revolution wasn’t just about taxes. It was about having to pay those taxes in a currency they could not create. So against the law they created $200M in American notes. During the war the British got the brilliant idea of counterfeiting to create inflation to debase and ruin the American money and burgeoning economy. They apparently printed up 4x to 5x of what was in existance. Because of the output gap that money was sopped up and sparked a productivity boom that helped the Revolutionaries win the war.

    So go ahead – print some counterfeit. You’ll be in jail, and your new money will grease the wheels of current idle capacity.

  • hangemhi

    “how come our leaders haven’t figured that out?”

    Well, like you, they believe the US Gov debt is a burden on our grandchildren. And that US Gov debt is inflationary.

    The problem with this line of thinking is that the US Gov debt is someone elses savings. So for the debt to create inflation, those who are sitting on lot of money must suddendly spend. So who is sitting on lots of money? And what will they spend it on, and when will they spend it?

    If you can answer those questions in a way that results in inflation, then let us know. I’m still trying to learn all of this, so I’m all ears.

  • Mr. Market (aka Willy2)

    My take on the shrunk budget deficit is that it’s the result of lower interest rates.

    GDP growing at ~4% ? What are they smoking ? The infamous “”green shoots”” (of 2009 ) a.k.a. “Weed”” ?

  • WolfePaq

    okay… so what about the trillions on the fed balance sheet- that is not someones savings… IF they did not purchase, rates would rise and savers would be rewarded and drain the inflation out of the system.

  • dgc

    To hangemhi,

    Concerning “Wall Street gambling,” a recent example is the dot-com bubble. I would not put the blame for that on the federal government; however, I think that Greenspan, in his tenure at the Fed, does bear some responsibility. He famously noted that the market had irrationally high valuations; however, he ignored the problem and did little until finally in 2000 he finally raised interest rates and helped to burst the dot-com bubble. Much of the damage to the economy occured in the final year of the bubble.

    Regarding “building McMansions,” Greenspan brought the Federal Funds rate to 1% in 2004, ensuring low cost financing and helping to fuel an international real estate boom. At the time, homes were appreciating and other investments not so much. Moreover, Freddy Mac and Fanny Mae were actively pushing the American dream that everyone, rich and not so rich, could afford the American dream of home ownership. A significant fraction of the mortgages were to be funded to people who were not considered credit worthy. This was actively supported by Congress. Then, mortgage-backed securities were born, but those too were ignored by the government. So, the Federal government and the Fed have major responsibility for the sub-prime mortgage crisis and the real estate bubble.

    For examples of government-sponsored spending, we need only remember the $535,000,000 failed loan to Solyndra. Also, there is the Chevy Volt. Even with federal support, GM sold only 7700 in 2011! I heard today that the average purchaser of a Chevy Volt had annual income of over $170,000. Why are the tax payers subsidizing car purchases for these people?

  • jonf

    What am I missing here? The primary budget deficit I’m looking at is 7.1% in 2011, 5.5% this year and 2.2% in 2013. The primary deficit excludes interest. (table 1-1)

  • jonf

    You’re right. looking at these kind of projections after a few years is mostly a worthless exercise. But I am a little worried about 2013 since unemployment is still high and that deficit of 585 b doesn’t seem to cover the current account. So we may head to another recession late next year.

  • jonf

    The deficit bleeds off to imports. As the economy improves (if it does) a good deal of it goes for imports. We are financing someone else in a sense.

  • http://www.pragcap.com Cullen Roche

    It’s really only useful about 1 quarter in advance since predicting future policy is rather useless. More of a rough estimate. The main takeaway for me. No recession in H1 2011.

  • jonf

    Food and energy are inflating. The world food supply is under stress due to climate changes (floods and droughts and the like)and hence shortages and the oil supply is controlled by a monopoly. So those two items are going to go up in price faster.

  • jonf

    Oh yeah. I love inflation. I got a grocery basket to fill with dollars when we get to those thousand percent deficits

  • dgc


    I believe that the following is correct.

    Demand-pull inflation occurs when there is too much money chasing too few products. I believe that we currently have demand-pull inflation for commodities.

    There is also cost-push inflation which cannot occur without increases in wages. We currently have significant unemployment and under-employment, so we don’t have cost-push inflation.

    Many people and companies are currently flush with cash but are concerned about the impact of potential problems with Europe, potential new taxes and regulations, and possible increased medical expenses. Therefore, they are reluctant to spend or invest.

  • dgc

    Sorry, I neglected to state that the balance sheet recession continues and acts as a brake on consumer spending.

  • http://deltafinancials.com Delta Financials

    You either didn’t read my post, or you’re making my point for me.

    I started by making my only point. “Identity relationships don’t lead to prescriptive conclusions. In fact, using the same identity relationships, you can arrive at all kind of conclusions.”

    My identity juggling is as meaningless as treating any identity relationship prescriptively. Can you run a fiscal surplus without causing economic harm? Sure, if it’s mixed with a current account surplus. Ultimately, monetary and fiscal policy combined draw the choice between consumption and savings. You can have a lot of healthy economic growth by encouraging savings, overall (something which itself mitigates a CAD). Deficit financed “growth” is always anemic for very sound first principle reasons.

    At some point, you have to question the trade component of the overall economic architecture because that’s the source of glaring imbalances. This is a currency crisis.

  • hangemhi

    DGC – I am in full agreement that the Gov mismanaged and overlooked many things. To me it goes back to banking deregulation. The final act was the “Financial Services Modernization Act” of 1999, but that was just the final nail in the coffin. They’d been stripping away protections for a while before that.

    Add not understanding MMR, or what the private sector was capable of, rating agencies that were clueless, etc, and we have the mess we have today.

    But your point was that more spending isn’t the answer. My point is that is all behind us, and today more spending is the answer. Yesterday’s answer was also more spending, with with normal interest rates, and no financial deregulation, from a smart government who understands MMR. We obviously didn’t get that then as you clearly state. But we’re getting some of what we need now – lending standards are a lot tighter, there is some banking regulation, and the deficit is high enough to at least give us modest growth. But we need a LOT more Gov spending to help the private sector delever out of their debt hangover.