Steve Blitz Morning Notes

Nine trillion in borrowing over the next ten years sounds like a lot of money, and it is, but the reaction reminds me of David Stockman and his $250 billion deficits as far as the eye could see. Where does that $250 billion stack up today relative to GDP? In 1983 that kind of deficit was about 6.5% of GDP. Today, 6.5% of GDP is about $930 billion -- or $9 trillion divided by ten. So we are back to Reagan-era deficit spending. Of course we never got $250 billion as far as the eye could see, if fact after Gramm-Rudman in 1986 the deficit began to shrink in absolute and relative terms until 2001, when the era of disinflationary monetary and fiscal policies ended. During, I might add, Republican rule of the White House, the Fed, the Congress and the Supreme Court.

The chart below plots out the unemployment rate, the amount of Federal borrowing and the dollar amount equal to 6% of GDP. I chose 6% because that was effectively the peak of the Reagan era. Note that borrowing doesn't start to fall until the unemployment rate decline. Considering the extent of the current recession in terms of its damage to household and business spending, odds of a quick decline in unemployment is small -- and so too are the odds of drop in Federal borrowing. You can also add to this a major difference between the 1980s and 90s versus now -- the buildup in the Social Security trust fund that financed a good part of the Federal budget is finished. Over the next 10 years dissaving by the trust fund means more borrowing irrespective of base Federal spending and revenues.

As for those worrying about the takeover of the Federal sector, remind yourself that at present there is no net new private sector borrowing to speak of and without Federal spending the economy would be in much worse condition. There is always a cyclical ebb and flow to borrowing by the Federal government, nonfinancial businesses, households, and state & local governments (see pie chart below). As for crowding out, below is a scatter plot of Federal borrowing against household and business borrowing. It is quite clear that the volatility on the private side occurs even though Federal borrowing stays is a relatively narrow range.

In sum, deficit forecasts are notoriously poor and the present collection will turn out no better. The amount sounds large, but it is not sufficiently different from the Reagan error. Instead of lowering high marginal tax rates and starving government, the current plan is for government to spend instead. Considering the sharp difference in the condition of the economy then and now, it might prove to be a pretty good idea -- the overburdened household balance sheet means someone has to spend in order to keep the economy growing.