Some Brief Thoughts on the CBO’s New Budget Projections

Understanding the importance of the Federal budget Deficit in recent years is really very simple.   In a healthy economic environment private investment is one of the primary drivers of economic growth and improvements in living standards.  But what happened in the Great Recession was highly unusual.  Private investment collapsed in an almost unprecedented fashion.  When GDP was contracting in the 2008/2009 period it was driven almost entirely by this collapse in gross private domestic investment.  So, getting the economy back on track was largely about replacing or healing this decline in the private sector driver of growth.

How was that done?  Simple, the government ran huge budget deficits.  So, spending as a percentage of GDP surged.  Government consumption expenditures surged in the same period as private investment collapsed.  As you can see, government expenditures have remained high though they’re trending down.  This has kept the economy moderately strong as the private sector healed.  But, as we can see above, private investment is still far below its historical average and below levels seen during any past recession.

At the end of the day, the economy is just a series of flows.  Consumers spend, businesses invest, government spends, all of this generates income, revenues, cash flows, and as long as the flow is steady and strong the economy expands and life appears all fine and dandy.  But when private investment collapsed the flow was weakened substantially.  Had we not kicked in the government spending to turn the flow back on we likely would have experienced an economic environment that would have resembled something closer to Spain or Greece as opposed to this muddle through we’re currently experiencing.

This is, in essence, the core to understanding the balance sheet recession theory (in addition to understanding WHY private investment collapsed the way it did – due to the debt bubble).  It’s not terribly complex.  So, you can understand why I am at least moderately concerned by the CBO’s latest projections:

“The federal budget deficit, which shrank as a percentage of GDP for the third year in a row in 2012, will fall again in 2013, if current laws remain the same. At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at 5.3 percent of GDP, it would be only about half as large, relative to the size of the economy, as the deficit was in 2009. Nevertheless, if the laws that govern taxes and spending do not change, federal debt held by the public will reach 76 percent of GDP by the end of this fiscal year, the largest percentage since 1950.

With revenues expected to rise more rapidly than spending in the next few years under current law, the deficit is projected to dip as low as 2.4 percent of GDP by 2015. In later years, however, projected deficits rise steadily, reaching almost 4 percent of GDP in 2023. For the 2014–2023 period, deficits in CBO’s baseline projections total $7.0 trillion. With such deficits, federal debt would remain above 73 percent of GDP—far higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled just 36 percent of GDP.) Moreover, debt would be increasing relative to the size of the economy in the second half of the decade.”

In order to get back to the normalcy of the pre-GFC days we need to see that first chart above get back to its historical average of about 0.16.  That’s a lot to ask given the time its taken just to improve back to current levels.

I’ve stated in the past that I though the balance sheet recession would end by 2013/2014.  And while debt trends have definitely improved we’re still seeing a very tepid private investment environment.  We could definitely see further improvement there, but I still think the downside in the deficit is the largest risk to economy at present.  I’ve probably been a bit overly optimistic about the improvement in the balance sheet recession as I see private investment remaining weak well into 2014.  And that means the private sector will need continued help as it heals.


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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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  • Hammertime

    You state “private investment”, but what you should say is ” private malinvestment”, because with free money courtesy of the FED, that is what will always result.

  • William Bedloe

    Don’t worry – Obama and Congress have a plan to save us all. Spending cuts and even more tax increases (aside from all the wonderful Obamacare increases coming into affect in 2013 and 2014) will help right the ship.

  • Ilya

    At the end it is all about us. Cullen tries to explain what has been going on, but nobody cares – they need to tell what THEY think. Mainly vent out their frustrations.:( Yes, IMHO there is always misallocation of capital with the “free money”. But Cullen’s point is: “What’s the alternative? Do nothing and go down the death spiral and hope for the best?” And what’s the obsession with the Obamacare? Compared with existing Medicare, it’s peanuts. At the end Obamacare can be looked at as an investment in the human capital. Like education, for example. Looks expensive and wasteful at the moment, but pays out down the road. My opinion, do not pretend to know The Truth.

  • bart

    Is this the same CBO that saw surpluses ahead for years in 2000?


  • John Lemieux

    The long term deficit problem is due to three things: health care, health care, and health care.

  • Johnny Evers

    Technically, it’s more accurate to say the long-term deficit problem is due to the federal government paying the health care bills for more and more Americans by borrowing money (creating Net Finacial Assets.)
    The sad thing is that all that spending really hasn’t made much of an impact on public health — most federal health care spending just flows to the medical/pharma industry through the consumer.
    Also it’s diverted resources from the young to the old.

  • Geoff

    What long-term deficit problem? I think the point of the post is that we have a private investment problem.

  • DJ

    “But when private investment collapsed the flow was weakened substantially. Had we not kicked in the government spending to turn the flow back on we likely would have experienced an economic environment that would have resembled something closer to Spain or Greece as opposed to this muddle through we’re currently experiencing.”

    Partly correct, the US is not Greece in that the economy can correct because it prints it own money and the exchange rate is free. You say this all the time yourself, but why do you miss out on the fact that because of this, austerity (and not tight liquidity) would not lead to a Greece situation because markets would eventually clear and self-correct. Yes, the downturn would be similar to Greece or Spain, but that is not the problem. The problem is whether we can have an upturn on sound fundamentals, after washing away all the debt in a downturn. That cannot happen in Spain/Greece because the monetary union perpetuates the problem. That is not the case for the US, increasing the likelihood of a better quality recovery after getting rid of the debt (through liquidations/bankruptcies, whatever).

  • Mike Sax


    ObamaCare is actually a social good.

    You’re still bullish though I hope Cullen. I was talking today about houw you and I are the only bulls left-I need your bullishenss to give mine respeictability.

  • Mike Sax

    The deificct problem as I understand it is that it may not be enough. Then you have the drop in the ECB balaance sheet Cullen mentioned in that other post

  • Tom Brown

    How come you’re Mike here but otherwise evil?

  • sixpack

    Actually, Germany in the thirties was very radical in it’s solution. their finance minister (schadt?) wasn’t a national socialist.

    He limited private sector dividends that a company could issue, the balance was required to purchase govt bonds. This stimulated pay and investment and the govt – now with very strong financing – embarked on major public investment. The autobahns were born for example.

    Within 4 years the economy was booming, wages, tax revenues [progressive tax system] all received a huge boost. Shame the proceeds were used to build a war machine but of course that is a choice not an inevitability.

    Economies are not as “closed” as they were then of course but coordinated action would work. Those with power and influence don’t seem to want it to happen. They are too busy grabbing their slice of the pie through bubbles, while investment renewal in our social infrastructure is as pressing as ever – if not more.

    Hitler chose to build a war machine – we chose to save the banks.

  • Ted

    Right, and I think the question is whether we want to invest in pumping grandma full of medication and care in the last year of her life, or can we redirect it into something more productive long-term. Not pleasant to think about, but worth a discussion…