Why Hasn’t the Budget Deficit Decline Hurt Corporate Profits More?

One of the more enlightening things you learn from a sound understanding of macro is the Kalecki profits equation which shows that corporate profits are the result of the following equation:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends

What stands out to most people in this is government savings, ie, the government’s budget deficit.  It’s strange to think of the government as a source of profits because some people don’t generally like to think that the government is a large source of private sector profits.  But that really shouldn’t surprise anyone.  After all, when the government pays contractors in Virginia to build planes then those payments get listed as corporate revenues which contribute to the bottom line of corporations.  And when you net out investment, household savings, foreign savings and dividends you get the total of corporate profits.

Now, the government played an exceedingly important role in recent years as the deficit has ballooned in the face of the crisis.  You might recognize this chart that shows the various components of profit sources as a % of GDP:



Normally, domestic investment drives corporate profits.  But when the crisis hit domestic investment (the dark blue bars) tanked as the decline in aggregate demand hurt businesses.  The government filled the void to a large degree.    But the environment today is pretty different than it was in the heart of the crisis and corporations have started to carry much of the burden again.   So let’s update what’s going on.

Last year when the sequester talks were in full swing there was concern that the decline in the deficit could cause big profits pressures.  I said the most likely scenario was for a slow-down, but something more closely relating to the muddle through that we’re seeing at the macroeconomic level.  My profit model was showing low single digit profit growth in 2013 which has been pretty close so far.

Profits have definitely declined to a slower pace (5% YoY in 2013 vs 7.25% in 2013), but it hasn’t been catastrophic even though we’ve seen a pretty substantial decline in the government’s deficit.  Why not?  Well there are a lot of moving parts in the profits equation.  And you can’t really apply the old “ceteris paribus” effect that economists love to apply to certain environments because the economy is non-linear and dynamic.  When one piece of the puzzle changes it’s likely the result of other pieces changing at the same time.

If we look at the components of profits the overall changes (or no changes) since 2012 have been:

    • a substantial decline in overall government deficits (-31% YoY)
    • modestly expanding private investment (+7.2% YoY)
    • a substantial decline in private saving (-15% YoY)
    • some deterioration in foreign saving (-5.8% YoY)
    • a big rise in dividend payments (+40%)

In other words, the two main drivers that have offset the decline in the budget deficit have been dividend payments and household saving declines while investment growth has remained pretty steady in the high single digits.

What’s interesting is if you consolidate dividend payments into net investment you can see how the corporate sector is now driving the boat.  In other words, as the Balance Sheet Recession has ended and households have recovered, it is the business sector that has increasingly picked up the baton to keep the economy going.  This was why, as I mentioned several years ago, we were not nearly as bad off as Japan in the 90’s where the business sector was suffering from excessive debt.  In the USA it was just the household sector and the government was able to ease the strain there by driving the red bar up.   This helped household’s deleverage and kept business from driving the unemployment rate twice as high as it got.

Now the story is changing.  As the household sector heals and picks up the burden it’s the business sector that is running with the baton primarily.  And as the government’s deficit declines (mainly due to higher tax revenues) this is all a sign that the private sector is healing from a very rare debt disease.



My guess is that households are saving less because their net worths are rising again on the back of housing prices and the stock market.   And dividend payments have increased because corporate America is a lot healthier than it has been in a long time.

Overall, profits are up 4.5% as of the latest reading which is down from the high single digit readings we saw for much of last year.  That’s down, but not a disaster.  So the sum of the parts has been a more modest effect on overall profits than we might have expected if all the other pieces had remained the same and the deficit had declined 30%.  In other words, if private saving, dividends and investment hadn’t continued to move higher in the last 18 months we would have seen a substantial decline in profits.  Instead, the decline in the budget deficit has been largely swallowed up by the other components.





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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Frederick

    Great post. Very informative. How sustainable do you think all of this is? Aren’t we relying on dividends and household dissaving too much?

  • http://orcamgroup.com Cullen Roche

    As I said, lots of moving parts in here so this is a very difficult thing to predict. I generally don’t predict out more than a quarter (because I don’t really believe it’s possible) so I’ll say with some certainty that I think profit growth can be sustained in the mid-single digits through year-end. I see no major negative trends so far, but we’ll see how bad this govt shutdown gets. You never know what they’ll do. They could be on the verge of torpedoing the whole recovery if this gets bad enough….

  • Frederick


  • micro2macro


    Grantham says that profits are mean reverting. I was wondering if you had a chart (close at hand) that shows if this is the case, over say the past 5 or 7 years?


  • http://orcamgroup.com Cullen Roche

    Corporate profits have averaged about 7.5% growth historically. So, if we’re mean reverting I think we’re there already. I’ll post a chart tomorrow when I have the data in front me.

  • Suvy

    I think the most difficult part for most people to grasp is that negative real interest rates actually push up the savings rate by allowing corporations, businesses, and governments to use those negative real rates to increase investment which then increases savings. So negative real interest rates increase the national savings rate by effectively decreasing the household income share of GDP(since households consume a larger portion of their income than other groups).

    In the Japanese deleveraging, Japan had to rebalance its economy from excessive investment to a more demand driven economy, so negative real interest rates wouldn’t have helped the rebalancing in Japan. Here, we had the problem of overconsumption, so negative real interest rates help us rebalance in the right direction.

    Great post btw. I basically agree on most everything.

  • Adam P.

    This chart is NOT as informative as Cullen pretends. Corporate profits as an aggregate must be completed by a sectorial breakdown where we can see that the financial industry profits are higher than the industrial sector profits. This is definitely not healthy.

    Statistical analysys must be complete or it’s not useful. It’s like a statistic which shows the rising national wealth without showing other complementary statistics about the distribution and the evolution of that wealth.

    Not sure this blog is doing the right job anymore. Doug Short and others are doing a more complete and less biased analysis these days.

  • micro2macro


  • Hubert K.

    Martin Armstrong writes:

    There is no single relationship that withstands the test of time and circumstance. There are always two dimensions to every fundamental. Yes the government can keep rates artificially low. However, pension funds become insolvent forcing them to invest more into the private sector, the elderly lose their retirement no longer able to live off of their savings, and the spread between bid and ask in interest rates for the real world widen (0.5% for 3 year CDs while secured 3 year car loans are at 4%). There is a huge difference in the spread that emerges and tears the fabric of society apart.

    The real rates will rise when capital shifts from banks into stocks and real estate because the banks cannot be trusted, This is caused by the requirement to earn more to meet obligations by pension funds and the elderly. As that capital shifts, the availability of cash to play with in banks will decline and that will force them to bid higher for deposits that the central banks cannot prevent. Everything is connected within the global economy. This is why artificial manipulations can never be maintained indefinitely. Hence the answer is the opposite. Not whether I can prove markets are “unfixable”, but can anyone please show me even one precedent where they have ever been fixed successfully that extended indefinitely? Sorry, but no government has met that criteria to date.

    What are your thoughts on this?

  • Notagain

    someone will keep trying to do just that ..

  • Adam P.

    Why such a smart guy spent so many years in jail for fraud ? He seems secure about everything, he is telling he can predict the future but he was unable to predict his own faith. Why this guy has so many followers ? Nobody know the future, we can just try to weight some scenarios but not too seriously.

  • Detroit Dan

    But– Both inflation and real GDP growth are much lower now than historically. So profits as a percent of national income are much higher. This is where to expect the mean reversion. Increasing investment is not supported by increasing consumption and only leads to overvalued assets…

  • https://stevehamlin.org Steve Hamlin

    Cullen – Grantham was not referring to ‘corporate profit growth rates’ reverting to the growth rate mean, but rather the level of corporate profits compared to GDP reverting to THAT mean.

    That metric is a major outlier, which has not even come close to reverting to normal, and if it ever does, while interest rates are rising (and thus discount rates used by investment managers to price equity cash flows are rising), then watch out below. This effect: current high profits + increased dividends, forecasted as if they will continue unabated, and then DCF’d with a ultra-low discount rate due to low real rates – is why P/Es have expanded and the market is priced so rich. Needless to say, Grantham, Hussman, et al, think this is not going to end well.

    See, for example:




  • http://orcamgroup.com Cullen Roche


    You have a lot of your stats wrong there. Or very misleading at a minimum.

    1) Financial profits as a % of the total corporate profits picture are only about 20%. And they’ve only recovered to pre-crisis levels while nonfinancial corporate profits have surged well beyond their crisis levels.


    2) Non-financial corporate profits have boomed in recent years.

    3) Healthy banks are a good thing. I have no idea why you think that would be a bad thing. As an MMT advocate, maybe you’re just upset that you think the “rentier capitalists” are making money again? I think it’s better to think of the banks as the oil in the machine. Healthy banks are much better than unhealthy banks.

    4) In the aggregate, the “market” doesn’t really care about your nitpicking approach sector by sector. S&P 500 earnings are made up of the aggregate index. If the S&P 500 earns $100 in 2013 the market doesn’t say “but wait, most of that came from only three sectors!”. That’s not how it works. The market is the market. Profits are profits. Where they come from doesn’t matter much as long as it’s there.

    5) No one is making you read this website. I’ve been pretty darn accurate about the macro picture over the last 5 years so if you know someone who is providing better macro analysis I’d love for you to let the readers here know so they can stop reading here and find someone more informative. Fine by me.

  • LVG

    CR, “Adam2″ is a M M T person. I’ve seen him over at Mike Norman’s before. He’s probably just trying to explain away why MMT has been so wrong about the idea that declining deficits would crash the economy and profits.

    And of course he’s upset that banks are making money again. M M Ters hate the financial sector.

  • Adam P.

    You’re wrong, I’m not an MMTer. It’s just another wrong or incomplete theory, like austrian or keynesianism. May be I’m a moralist, may be I judge that a financial system which distributes billions to bad managers who did a lot of damage is just plain wrong. May be that a completely immoral financial sector is not good for a nation, whatever the nation is. May be having 50 millions people on food stamps and a wealth concentration like never before in modern history is not good. May be my dad was wrong in educating me that a thief is a thief even if he is the CEO of an important istitution. For you is just fine, like 99% of people you don’t want to take a position, you’re just passive and happy seeing stocks flying. But you have not studied history, and so you’re condemned to repeat it. Time will tell. Good by.

  • http://orcamgroup.com Cullen Roche

    I am aware of that. And it’s potentially important. When MMTers analyze the economy and make projections about future growth they often times start with the government deficit and provide a very narrow 2 sector view of things. Kelton does it in all of her presentations which is very misleading without further explanation of how the pvt sector is made up of millions of sectors against itself. Net financial assets are key to their world view. So, when the deficit declines they say private sector savings has to decline. Which is true unless the private sector expands its balance sheet against itself. In that case, the banking sector expands its balance sheet and the corporate sector expands its balance sheet, etc. There’s nothing inherently negative about the private sector growing its balance sheet against itself without NFA. But MMTers build their entire world view around govt spending. After all, they’re fiscalists so without govt spending there is no MMT view to begin with. So the way they depict the economy can be very misleading at times because they seem to completely ignore or miss how the economy normally grows by having the pvt sector expand its balance sheet against itself. Saying the deficit decline will automatically hurt everything is just wrong. That’s the real biased view. My move away from the MMT perspective is precisely why I have been able to provide a less biased view of things. I am no longer using the government centric model that is the core of MMT. This view was VERY helpful for a few years during the Balance Sheet Recession, but it’s become increasingly less useful over time as the economy has normalized.

  • http://orcamgroup.com Cullen Roche

    Excuse my other comment then. I always thought you were an MMT person also. Sorry.

    It’s still an important thing to understand so maybe that comment will help you understand where I am coming from here.

  • http://orcamgroup.com Cullen Roche

    I think you have to be careful throwing the baby out with the bathwater here. Most of the financial services industry is not the criminal enterprise you make it out to be. In fact, most of the financial services is just basic services like market making, payment processing and other mundane boring stuff that isn’t as sexy as trading derivatives, etc. But every time one of the guys trading derivatives blows up you guys throw the whole industry in the line of fire.

    When you really understand the nuts and bolts of the financial services industry you realize it’s a lot of unsexy operational stuff that just keeps the economy moving smoothly. The actual “rentier capitalist” component of it is small or vastly misportrayed. Eg, if someone charges you a fee for a vital economic service (like your ATM card that you CHOSE to use) then let’s be careful about how we demonize these entities. I’m not the world’s biggest fan of the banking business model and I’ve made that clear over the years, but we have to be careful about saying the whole industry is rotten just because of some bad apples.

  • Johnny Evers

    The formula basically says that debt = corporate profits.
    If the individual borrows and spends it will benefit corporations and if the government borrows and spends it will benefit corporations.
    I have an objection to calling debt ‘savings’ because to most of us savings are excess production.
    I also don’t see a category for the public spending their savings. Median net worth is way down in the past 10 years, as people are eating their net worth in order to subsist (and boost corporate profits.)
    But the formula is true enough as long as the economy continues to grow so the debt can be rolled over and financed.
    That is the question that goes unanswered in here — we’re borrowing faster than we’re growing, so how long can we safely do this? We had a debt crisis in 2008 and we’re back on the same path.

  • http://orcamgroup.com Cullen Roche

    Well, total credit market debt happens to correlate highly with GDP, but it doesn’t mean it is the driver of corporate profits.

    You might have an “objection” to to calling debt savings, but that’s how the financial system works. Someone’s liabilities are someone else’s savings/assets.

    Corporate profits are largely made up of retained earnings which is the sharesholder’s equity component of the balance sheet. It might help not to think of this as a “liability”, but to think of it as a contra-asset. Shareholder’s equity isn’t a negative claim on the corporation in the same way, that say, corporate debt is. It comprises a big chunk of net worth so while accountants will say shareholder’s equity nets out to zero on a balance sheet (because balance sheets balance!) it really is rather misleading to view shareholders equity or retained earnings as a liability.

    Also, we’re not borrowing faster than we’re growing. Total credit market debt and GDP are almost exactly in-line with one another and generally correlate closely.

  • Johnny Evers

    You might have an “objection” to to calling debt savings, but that’s how the financial system works. Someone’s liabilities are someone’s else’s savings/assets.

    Two points: I see an asset as something that doesn’t necessarily have a liability. If I grow oranges, my crop is an asset. If I’m a plumber, my business is an asset.
    All you’re doing is measuring the numbers on one side of the ledger and numbers on the other side. If that’s your template, then all borrowing is good, because it creates an asset and a liability.
    You never have to ask the question: ‘Does this debt create lasting wealth’ because you’re not measuring that. You don’t have to ask the question: Can this debt be paid back, because it’s always neutral and because you view debt as something with real value.

  • CharlesD

    A minor point is that profits increased sharply for banks in Q2. Without the banks, profits would have been closer to flat in Q2. Cullen is right that the markets shouldn’t care where the profits
    came from. In this case, though, my understanding is the sharp increase was due to an increase in the loan loss reserve – which is just accounting – and can help to explain why profits can diverge a bit from the “Kalecki” equations over the short turn (if my thought process is correct).
    Another nuance is that the GSEs made a “one-time” payment to the Treasury for about
    $90 billion (my recollection). This reduced the deficit but not corporate profits. That is,
    the “operating deficit”, if you will, did not decline. This would also help to explain why profits
    have not declined, despite the large drop in the deficit.

  • http://orcamgroup.com Cullen Roche

    You’re talking about two different things. Real assets aren’t financial assets. We have a monetary system that is comprised of financial assets that help us obtain real assets. We’re only after the financial assets so we can get at the good stuff, the stuff we can hold or the stuff we can eat, hug, kiss, etc.

    Real wealth is not necessarily financial wealth. Reread my monetary system paper. I explain all of this in there.

  • Johnny Evers

    I am focused on real wealth.
    In this particular post you talking about corporate profits being generated by borrowing (what you are calling ‘savings.’)
    So, no increase in real wealth — except for you and your clients, who own stocks. Is that your primary concern?
    There are times when corporate profits grow because real wealth is being produced, but I’m not sure this particular profit equation can show that.

  • Adam P.

    I’m aware of this. I worked in corporate finance, my last position was a CEO of a 400 millions holding with interests in energy and plants. It doesn’t matter that just a few are gangster, when those gangsters are so powerful and reckless to blackmail the country that was the nation of rights. Sorry Cullen it happens than now your country is a much weaker country than in the past and mostly because of this unregulated financial market. I know you’re not defending it, I know that probably you, me and the others can’t do a lot about it, but an unregulated reckless finance will burn everything again and remember that in spring 2008 things looked bright (at least to most of the analysists); in a global, interconnected world, weakened by the last and not absorbed crisis, a recession can be triggered in so many ways and so fast… and recessions do happen with or without Bernanke or Draghi or Kuroda san.

  • http://orcamgroup.com Cullen Roche


    Corporations make goods and services. They make the things you say you want. And they book financial profits so they can continue to provide more of the things you say you want. The odds are, if profits are rising it’s because they’ve produced more of the stuff you say you want and they’ve been compensated for it. Does that always mean the quality of goods and services are high or necessarily improving living standards? Not necessarily. But you still don’t seem to be seeing the connection between the two….

    Maybe that helps a little?

  • Adam P.

    “Total credit market debt and GDP are almost exactly in-line with one another and generally correlate closely”

    In “The illusion of the perpetual money machine”, Didier Sornette tells something completely different. See figure 5, page 8. There are many other papers and books with the same picture (from Schilling to the FED itself). Someone is wrong.

  • Johnny Evers

    Yes, I see that corporations are providing goods and services and booking profits.
    I don’t think you see that in the current climate, the public is losing net worth because they are a) eating assets to buy these goods and services and b) working for corporations for reduced wages or losing their jobs.
    You need a formula that measure whether debt is creating real value.
    I believe there are numbers that show each dollar of debt is creating less GDP.

  • http://orcamgroup.com Cullen Roche

    We produced more goods and services in the last 15 years than we did in the previous 250 years combined. Sure, the law of large numbers might be starting to kick in. You can’t grow at 10% forever. But I don’t think that’s necessarily a sign of something really negative occurring. It just means the economy is maturing.

    And no, the public isn’t losing net worth. Net worth is at all-time highs….

    I would like to help you better understand some of this stuff, but you don’t seem to ever try to be open-minded about seeing the world in any way other than the way you want to see it. So I don’t know if there is much point in us pursuing future discussions. I’ve tried very hard with you over the last year, but you don’t seem to absorb anything I say….Which is fine. You don’t have to agree with me, but you should better grasp the basic accounting of a lot of this stuff by now. After all, we’ve only had these types of accounting discussions a million times….

  • Johnny Evers

    The median household income is down and median net worth is down.
    You know this.
    You even posted a Fed chart the other day that showed the standard of living is flat the past 15 years.
    Yes, financial assets are rising in total because financial assets are being concentrated in the top 10 percent, and only if you ignore the liabilities of those financial assets (to the other 90 percent.)

  • Geoff

    “You need a formula that measure whether debt is creating real value.”

    Johnny, debt creates dick. People with good ideas and work ethic create value. Debt/money is just a means to an end. I think we all agree that the “end” is real stuff.

    Johnny, you sound a bit like an Austrian today. Are you beginning to lean that way?

    Not that there’s anything wrong with that. :)

  • http://www.odumcapital.com capitalistic

    Technically, there shouldn’t be any hard correlation between government deficits and corporate profits, if so, the correlation would be short term.

  • Detroit Dan

    This is what I was going say, and then some. From http://www.marketwatch.com/story/are-third-quarter-earnings-set-to-disappoint-2013-10-04:

    The dire warnings have spooked analysts, which have lowered their year-over-year earnings growth expectations from 8.5% at the start of the third quarter to 4.6% now. Industrial stocks are leading the way down, with 13 negative pre-announcements to only one positive and one in-line…

    Another wrinkle in all this is that while Knapp is looking for S&P 500 earnings to grow 4.6% over 2Q12, the number drops to 2.9% without the financial sector. And the financials have been increasingly reliant on the release of loan loss reserves to boost earnings.

  • Mark A. Sadowski

    “This was why, as I mentioned several years ago, we were not nearly as bad off as Japan in the 90′s where the business sector was suffering from excessive debt. In the USA it was just the household sector and the government was able to ease the strain there by driving the red bar up.”

    This deserves to be clarified. The implication is that both the corporate and household sectors increased their financial surplus in Japan in the 1990s. This is not true.

    The Bank of Japan has financial transactions data going back to 1964. Where more than one data series was available (1998Q1-1999Q1) I have used the more recent series. The following is a graph of calendar year averages of the financial surplus as a percent of GDP for the non-government sector (which includes public financial institutions and corporations), general government and the rest of the world:


    As can be seen the non-government sector was in significant financial surplus from 1993 through 2005, averaging 8.9% of GDP. The largest swing towards surplus occurred between 1990 and 1998, going from 0.5% of GDP to 12.6% of GDP with both ratios being the extreme values for the calendar year averages.

    The next graph shows the non-government sector financial surplus disaggregated between the household/nonprofit sectors (what the Japanese term the “personal” sector, and which itself is only available in disaggregated form for 1998Q1 on) and what Koo terms the “corporate” sector (the financial and non-financial sectors combined):


    Here you can see very clearly what Richard Koo thinks is the primary symptom of Japan’s “Balance Sheet Recession”, the shift by the corporate sector from a 9.2% deficit in 1990 to 9.8% surplus in 2003, or a total of 19.0% of GDP. Note that the corporate sector was always in financial deficit prior to 1995 and has almost always been in financial surplus since. Also note that the financial surplus of the household sector is smaller since 1996 than any time prior to that. Thus the corporate sector accounts for the entire non-government sector shift towards financial surplus from 1990-98.

    Given the substantial structural differences between the balance sheets of the financial and non-financial sectors I find it curious that Koo lumps the two together under the “corporate” nametag. Here is a graph of the corporate sector financial surplus disaggregated between these two sectors:


    Yes the financial sector ran both its largest financial surplus and deficit during the volatile years of 1998-2000, but mostly the financial balance of this sector is relatively small which explains why the non-financial corporate sector accounts for almost all of the changes in balance of the corporate sector. In fact the non-financial corporate sector shifted from a financial deficit of 8.9% of GDP in 1990 to a surplus of 2.8% of GDP in 1998 accounting for 95.7% of the non-government sector shift towards surplus between those years, and the shift to a financial surplus of 9.2% of GDP in 2003 means that the non-financial corporate sector accounts for all of the corporate sector shift towards surplus from 1990-2003.

    So not only was the household sector not part of the private sector’s shift towards financial surplus in Japan in the 1990s, the financial sector was not really part of the private sector’s shift towards financial surplus. It really only involved the non-financial corporate sector.

  • http://orcamgroup.com Cullen Roche

    I’ve always said that Japan’s BSR was a corporate sector specific event (not a pvt sector event as you seem to think I am implying). I probably should be more specific when discussing it (as you have been here). And Koo has been more specific than you give him credit for. He’s been posting this chart for years which shows the distinction you discuss:


  • mateo

    I feel like Cullen doesn’t worry very much about the economic effects of wealth concentration or at least not currently. But, like J Evers, I worry that ‘precarity’ is growing for the majority. Cullen, you talk about balance sheets and net worth – but how do you factor in the economic effects of individuals living more or less hand-to-mouth? Is a food stamp nation adequately modeled by profit and net worth calculations?

  • http://orcamgroup.com Cullen Roche

    It’s not that I don’t worry much about inequality. It’s just that I think a lot of the data that people use is intentionally manipulated. For instance, here’s the data from the Fed Survey of Consumer Finances on median household income and net worth:

    Median Income ($ thousands):

    1989 25.7
    1992 26.7
    1995 30.7
    1998 33.5
    2001 39.9
    2004 43.2
    2007 47.3
    2010 45.8

    Median net worth ($ Thousands):

    1989 46.9
    1992 49.5
    1995 57.8
    1998 71.7
    2001 86.6
    2004 93.1
    2007 120.6
    2010 77.3

    So I don’t see the huge problem that many other people see. Sure, the gap between the 1% and the 99% is growing, but the median household income and net worth is NOT declining. And bear in mind this survey was last done in 2010 so that net worth figure is way up.

    Plus, this data is all confirmed by the Social Security Administration which also shows a steady rise in median incomes. So someone has the data wrong here and I think it’s those people who are politically motivated to manipulate it.

  • Suvy

    The Fed’s QE program is probably sustaining the dividends and capital gains even though the deficit is falling. That’s what it’s gotta be: the monetary offset.

  • Auburn Parks

    How much private debt do you think the economy can sustain as a % of GDP?

    I only ask because I too watched Ray Dalio’s video on the economy. I found that he did a much better job than most people. One of the three main concepts he talked about was the long-term debt cycle (along with productivity growth and the short-term cycle). As far as I can tell we still haven’t gone through a full deleveraging. Private debt has not gone down at all except for that little blip that was the actual recession. You’re right that households have gotten their balance sheets in much better shape pretty quickly. I’m wondering which of these three options you think is most realistic and why for explaining the lack of a true debt deflation.

    1) Have we made the long term debt cycle a thing of the past given the mechanisms the Fed and Tsy have to stave off true deflation.

    2) Are we just delaying the inevitable?

    3) Or do you think we’ll just have a sustained period of very low nominal private debt growth, essentially holding the numerator constant while GDP grows and thats the way the private debt to GDP ratio will decrease over time.

    If you think number three is most likely, care to venture a guess on how long we’re looking at this muddle through. After all the private sector created something like $15 trillion worth of private debt each decade since the 1980’s and even with that we’ve only been able to get to 5% unemployment during 3 short periods totally only 7 years out 33. I like steve keen’s private debt to GDP graph (he really casts the widest net possible so probably need to discount it a little bit) but in his projection he has it taking like 20 years to get to the bottom of the debt cycle (75%). Thoughts?

    Household debt to GDP:
    Total credit market instruments all sectors:

    Steve Keen’s graph:

  • Auburn Parks

    Cullen, this follows up on my comment above about the potential for an extended muddle through with high unemployment rates.

    If you graph out the median household real incomes over time from the Census bureau, the rises and falls in median household incomes correlates pretty darn closely with the unemployment rate getting down to 5% or below. If unemployment stays high, there is probably a very good chance that median incomes will stay flat or decline in real terms for the forseeable future. This could be a real problem with such high private debt levels and a 70% consumer spending economy.


  • Johnny Evers

    Notice that the numbers Cullen shows there are not adjusted for inflation, as others have posted in other threads.
    Once you do that, the slump is obvious.

  • http://orcamgroup.com Cullen Roche

    Johnny, prices and wages are VERY highly correlated. Saying that the real median wage doesn’t outpace inflation over the long-term is like saying that spending doesn’t outpace income over the long-term. OF COURSE IT DOESN’T! The spending is what causes the income! We should expect that the median wage would correlate very closely with the rate of inflation since that is all the median family can afford to buy in the first place. So your point is void of value once adjusted for inflation. It just proves that you cherry pick the data where possible.

    As for net worth – well, the latest Fed data was from 2010 when stock markets were 50% lower and house prices were 20% lower so I think it’s safe to assume that median household net worth has likely jumped back to 2004 levels or so. Either way, you’re either misconstruing the data to make your point sound more reasonable or you’re just wrong on the net worth statement.

  • Johnny Evers

    Here is the data:

    The middle quintile is flat since the mid 70’s

    Here is a news story describing the past four years:

    You say that you would expect income to rise with prices, but the data shows this is not happening. Or at least, the income is going to the top, because the income is highly related to ownership of financial assets.
    Also, as GDP rises, the median should be able to purchase more, not just the same.
    As for the net worth, yes, the median net worth is primarily in real estate. The median household doesn’t own stocks.
    The key thing here is that the money machine is creating financial assets and deposits for the wealthy.

  • http://orcamgroup.com Cullen Roche

    That second chart shows the real median household income rising from $40K to $49K. Which is almost exactly what you should expect. The median income isn’t going to outpace inflation by much, if anything. I am actually surprised it’s positive at all.

  • Johnny Evers

    It should rise at least as fast as GDP growth.
    You’re telling me that your expectation is that the median will only rise with inflation — in other words, that despite economic growth that the median won’t improve their standard of living at all?

  • http://orcamgroup.com Cullen Roche

    The data doesn’t show that the financial living standards of the median hasn’t improved at all. Besides, financial living standards are not synonymous with “living standards”.

  • Johnny Evers

    I see in the charts that real household income in the middle is essentially the same as 1990.
    Meaning the median is buying the same basket of goods, with their income, right?

  • http://orcamgroup.com Cullen Roche

    I guess it depends on what point in the 90’s you focus on. If you cherry pick the bubble top then you’re right. If you choose 1990 then you’re wrong.

    Look, I am not saying that the US economy is an equitable system at present. I think there is clear inequality and its grown worse over the last 20 years. I don’t deny that. But is this the cause of all our economic woes and do we need to panic over it and scream about it in the media? I don’t think so. I’m a proponent for taxing savings (what most people think are investment) more heavily. I don’t think that lax tax treatment on secondary markets makes much sense. So yes, raise the capital gains tax to the personal income rate and you’d redistribute a lot of that upper class income to the middle class. I doubt this would hurt economic growth at all and it would stop the upper class from having an unnecessary tax break. And you can stop accusing me of looking out for myself, my assets and those of my clients.

    There, your problem is solved. Happy?

  • Mr. Market

    My personal take is that the budget deficit has shrunk due to the rising stock market (=capital gains).

  • Johnny Evers

    No, because that solution doesn’t address why the economic gains are going to the top.
    That solution allows the top to continue to collect economic gains while trying to redistribute those gains back to the middle through tax policy. It doesn’t work because A) people don’t want handout and B) if you want to go the way, then why not go all the way and start confiscating the assets of the wealthy.
    If you don’t like 1990, you can look at any point on the chart that you want and it shows that real income gains are barely going to the median. That’s because the debt creation machine that you love to promote creates financial assets primarily for the wealthy, which they use to buy stuff.

  • http://orcamgroup.com Cullen Roche

    Okay, so what’s your solution then?

  • Johnny Evers

    Don’t know what the solution is.
    But it’s a start if we understand there is a problem.

  • Detroit Dan

    Good discussion. Johnny– thanks for the data references. Cullen– I like your open-mindedness and asking Johnny for his opinion.

    My opinion is that we should start by acknowledging that greater income equality should be a goal in and of itself. I belief that empirical data support the propositions that societies with more equitable income distributions are more healthy.

    Secondly, we should discourage the financial sector from getting so big and powerful. A financial transactions tax, aimed at speculation such as high frequency trading, would be a good start.

    Third, we need to acknowledge that a chronic trade deficit is not healthy. We are allowing corporations to increase profits by utilizing cheaper labor in other countries. These other countries manipulate their currencies and the value of the U.S. dollar to maintain this situation, which reduces the income from labor in the U.S., and increases financial income. Beowulf often mentions a Buffet proposal to tax imports and reduces taxes on exporting companies, so that might be a good starting point.

    We certainly don’t want Communism, but we do want a healthy capitalism with checks and balances and a thriving middle class, including laborers…