Fed Deficit as a % of GDP now at new record
For once Trump is right to claim that he has set a new record as the federal deficit is now over 10% of GDP. It is now 10.7% of GDP as compared to the prior record of 10.2% that Obama inherited from Bush.
The deficit is looking more and more like what happened in Japan. Despite ever expanding debt, Japan’s economy stagnated. Expanding federal debt may keep the economy from collapsing, but it can not stimulate growth. The strongest growth in recent decades was under Clinton when the federal government ran a surplus. But the real cause of growth under Clinton was the sharp drop in computer prices and the widespread adoption of personal computers. Clinton followed the wise policy of just stepping aside and letting it happen.
Trump appears to just be following the pattern set by previous Republican administrations with their “starve the beast” strategy. That is to create such a severe deficit problem that when democrats get into office they can not afford to pass new liberal legislation.
The quick and dirty rule of thumb is that when Republican presidents leave office the deficit is larger — as a share of GDP — than when they took office. It is just the opposite with Democratic presidents, that leave a smaller deficit than they inherited. But it is funny that you never have the press question Republican presidents about their claim that tax cuts will be self-financing.
What we did then was just let the debt/GDP ratio erode over time as the economy grew. This is really easy to do when interest rates are below growth rates, which they normally are
Says Krugman.
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We always pay the ten year rate,up until 2009, and we have always paid more than the real growth rate since 1980.. Since 2009 the ten year rate and the real growth rate have tracked. Debt to GDP will drop as Krugman says, in something like 100 years, but believe me no one is waiting. We pay in inflated taxes? no during the period of paying high interest rates we suffered disinflation, taxes tend to drop. And we always end up paying more interest on past debt as new debt drops.
What is new in 2009? Fed taxes, seigniorage taxes which impact retail banking which shrinks.
“…But it is funny that you never have the press question Republican presidents about their claim that tax cuts will be self-financing.”
[Well if you think that is funny then you will be laughing in stitches when you realize that the limousine liberals that own and run liberal media corporations and constitute the majority of elite talking heads are really just closet conservatives. So, whatever happened to class warfare. Well the 1% have no class and the 99% have no means to make war. Power to the republic and dollar for which it stands.]
The deficit is looking more and more like what happened in Japan. Despite ever expanding debt, Japan’s economy stagnated. Expanding federal debt may keep the economy from collapsing, but it can not stimulate growth….
[ Please explain this further when possible. I do not understand the argument, which seems to contradict traditional Keynesian argument. Also, Paul Krugman argued that the stagnation of the Japanese economy has resulted in ever expanding debt. ]
And with that, the Biden presidency was strangled in the crib.
Seems to be a problem with the ‘somewhat stable two-
party system’. Do we need a type of non-binary solution?
How would we get there from here?
The deficit is looking more and more like what happened in Japan. Despite ever expanding debt, Japan’s economy stagnated. Expanding federal debt may keep the economy from collapsing, but it can not stimulate growth….
[ I can find no reason to agree with this argument, while Adam Posen and Paul Krugman have long argued differently:
http://krugman.blogs.nytimes.com/2008/12/01/people-should-be-reading-adam-posen/ ]
Biden strangled??? Hardly.
A big part is the GDP issue. Looks like it is poorly measured and frankly, should be abolished. It’s sorta like online retail. Put a nice sales tax on it with several different items, it’s “innovation” would be toast.
The whole economy since 1983 is a FIRE bubble based around dollar bullying and debt bubbles. It rapes the real economy for a con job of debt based wealth. A 70% “GDP” contraction is needed to balance the system. Which interestingly, would cause health care to go in deflation. But Mr and Mrs Jones would be crushed and the deSuburbanization would be brutal.
Most of the debt is from no multiplier spending and tax cuts. Government share of investment has dropped over 10% since 1973.
Anne
The US position is different from Japan’s because the proportion of US Bonds owned by foreigners is much smaller. Also Japan has a falling and rapidly ageing population and US population is not falling. If Japan wanted to reduce it’s money supply and debt with relatit vely little impact on the economy it could do it by raising inheritance taxes since much of those bonds are held by rich old Japanese. I can’t see how the US can follow this strategy. The deficits are a function of the need to counteract falling domestic demand that can only be offset by government consumption or increased consumption by the young (and in Japan there are ever fewer of them). Redistribution and reduced working hours (more couples both working part-time?) what really be sufficient. The time for UBI has really come.
Reason:
The US position is different from Japan’s because…
[ What an interesting response, about which I will think carefully.
Thanks lots. ]
https://fred.stlouisfed.org/graph/?g=sQNl
January 30, 2018
Age dependency ratios for China, United States, India, Japan and
Germany, * 1977-2019
* Older dependents to working age population
https://www.project-syndicate.org/commentary/argentina-sovereign-debt-restructuring-private-creditors-by-joseph-e-stiglitz-et-al-2020-05?barrier=accesspaylog
Restructuring Argentina’s Private Debt is Essential
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The standard recommended devaluation, well described and is the back stop. Few economists know how to get this working in the USA, and that lack of knowledge is going to be a cause of volatility for years to come.
https://scholar.princeton.edu/markus/publications/fiscal-theory-price-level-bubble
Abstract:
This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy’s growth rate.
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The authors show there is a quick ‘inflation’ reaction, I guess some sudden rise in consumer prices that results in sudden deflation, somehow.
It is not inflation, inflation, central banks have a hard time manipulating a list of consumer prices, if that is the definition of inflation. I have yet to find an economist that actually defines inflation in the context.
It is fewer people participating in the economy, a population loss that causes contraction. . Inflation is a misdirection, an error and is placed into fiscal theory for some reason. Instead the problem is N, fewer trades to support the economy of scale, antifas in the street or childless couples.
This is what Marx was saying, you cannot continually expand economies of scale as you suddenly run out of people and have collapse. Krugman is saying you can. Marx was right.
Reason:
The US position is different from Japan’s because…
[ There is simply no reason that I can find against a Keynesian spending program being just as effective on Japanese growth as on American, that is as the direct effects of the coronavirus outbreak on the domestic economies, significantly lessen. Neither Japan nor America are running out of workers or machines that work, interest rates are remarkably low in each country, debt is overwhelmingly in Yen and Dollars respectively.
Then let the government spend, invest and consume. and the debt will be no constraint in increasing growth. ]
it could just be Trump is a stealth MMT proponent…
The deficit is looking more and more like what happened in Japan. Despite ever expanding debt, Japan’s economy stagnated. Expanding federal debt may keep the economy from collapsing, but it can not stimulate growth….
[ Having again skimmed through relevant work of Adam Posen and Paul Krugman, I can find no support for this conclusion and from a traditional Keynesian perspective consider the conclusion mistaken. ]