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The Deficit, Consumer Credit and Other Macro Thoughts

Cullen Roche -

Let’s connect the dots on some big macro topics if we can:

  • The June CBO report on the deficit showed a $512B budget deficit through June (that’s the first 9 months of the government’s fiscal year starting in October 2012).  That was down 24% from the year ago period, but still substantial and on pace for almost $700B for the full year.  Actual government spending is not on pace to decline.  Rather, the deficit is shrinking because tax receipts are increasing.  Remember, this means that the government is actually spending or redistributing the same amount of inside money,  but is ADDING FEWER net financial assets in the form of bonds as a result of the shrinking deficit.    In other words, the flow of funds from government spending remains very strong, but the additional net financial assets in t-bonds is slowing (though still expanding).  This isn’t going to help the economy a whole lot, but I also don’t think it’s as negative as some might presume since there are signs that the balance sheet recession is healing.
  • Yesterday’s consumer credit report showed a big surge in consumer credit. There are mixed interpretations on the data, but overall I think it’s consistent with the trend we’ve been seeing in recent quarters where households are beginning to take on more debt.  Remember, the healing of the BSR is a process, not an event.  And the propensity of the private sector to borrow is offsetting the government’s reduced borrowing.  
  • I think this is all basically consistent with the story I’ve been telling for the last few years.  The BSR is slowly in the process of healing, the economy is operating below capacity because of the slow BSR healing process, we’re continuing to see growth (ie, no technical recession) and the private sector is slowly running with the baton.  It’s all a marginal net positive for now.

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