Sunday, January 5, 2020

Federal debt is not a threat to the economy

Many people are saying that our national debt—which now exceeds $17 trillion and is growing by more than $1 trillion per year—is a disaster just waiting to happen. Right? Well, not exactly. Even though federal debt has soared relative to GDP in the past decade, the burden of the debt is about as low as it's ever been. Still, the growth in debt does reflect some structural problems that are working to keep the economy from achieving its full potential.

Let me put things into perspective:

Chart #1

Chart #1 shows the the swelling size of our national debt, which is correctly measured as the amount of Treasury debt that is held by the public, and that now stands at $17.16 trillion. Too often I see people saying the national debt is over $23 trillion, but that figure is inflated since it includes some $6 trillion which the government owes to itself (i.e., excess revenues that the social security administration has "lent" to the Treasury). You can see the current figures here.

Chart #1 uses a semi-log scale for the y-axis, so that means that a constant slope is equal to a constant rate of growth in nominal terms. Note that the slope of the line for the past 7-8 years has been flat (i.e., the growth rate has been constant). Note also that the slope was steeper in the mid-80s and in the 2008-2012 period. Federal debt is growing, but not nearly as fast as it was growing in other times.

Chart #2

It's common to hear people argue that with so much debt being issued, interest rates will inevitably have to rise. But as Chart #2 shows, the size of the debt (when measured relative to the size of the economy, which is essential, since a bigger economy can support a bigger debt load, just as households can with rising incomes) has tended to move in a very counterintuitive fashion with respect to interest rates. Slower growth in debt tends to coincide with rising interest rates, and faster growth in debt tends to coincide with falling interest rates. What explains this? It's tempting to search for an explanation for this relationship, and I make an attempt later in this post.

Chart #3

Nevertheless, the size of federal debt relative to the economy is far less important than the prevailing level of interest rates, as Chart #3 demonstrates. The true burden of the national debt is not the amount we owe but the ratio of interest payments on the debt relative to our national income (GDP). Because interest rates are at historically low levels, the current burden of our national debt is about as low as it has ever been, even though the debt has soared to 78% of GDP. 

Chart #4

It's worth noting that households' debt burdens (Chart #4) are also about as low as they have ever been. Everyone benefits from lower rates, but in addition, households have eschewed debt while embracing the safety of Treasuries. Total household liabilities have only increased by 11% since their peak in 2008, according to the Fed. Treasury yields are low because the demand for Treasuries is strong: households now hold over $2 trillion of federal debt, up hugely from $300 billion in 2008. Most of the rest is held by corporate and institutional investors, sovereigns, and foreign investors in general. China alone holds some $2 trillion of Treasury debt.

Chart #5

Chart #5 shows why we have come to have a $17 trillion debt. It's simple: government spending has exceeded revenues for just about forever. Note how revenues reliably weaken during recessions and pick up during recoveries. A stronger economy creates jobs, rising incomes, and rising tax payments. Tax receipts thus have a strong cyclical component. One reason for the apparent shortfall in revenues—which began at least a year before Trump's tax cuts—is that the past decade has seen the weakest growth of any expansion in history. 

Chart #6

Spending, on the other hand, is driven largely by transfer payments (medicare, medicaid, social security and income security), which now constitute about 70% of all federal spending (see Chart #6). In the 12 months ended last November, transfer payments totaled $3.2 trillion, while total federal spending totaled $4.5 trillion. No amount of budget cutting is going to make more than a modest dent to federal spending. The elephant in the spending living room is transfer payments, which are paid out according to people's "eligibility," and not according to any Congressional budget appropriations. To control spending will require that Congress change the eligibility formulas for things like social security and medicare. 

Chart #7

Chart #7 shows federal spending and revenues as a % of GDP. Here we see that the trends are relatively flat, and the current levels of spending and revenues are not greatly different from what they have averaged since WW II. Revenues do look a bit weak currently, but this is most likely due to the fact that economic growth in the current expansion has been sub-par (2.2% vs. a long-term average of about 3.1%). Revenues haven't picked up much in the current recovery because it has been a weak recovery and because tax rates were cut modestly for individuals and significantly for corporations in 2017. But tax cuts aren't the whole story: revenues weakened at least a year before Trump's tax cuts took effect, and in the past year revenues have been rising at more than a 4% rate. Corporate tax revenues plunged in 2017 and 2018, as expected, but in the first 11 months of 2019 they are up over 10% from the same period in 2018. The Trump tax cuts were a one-time event which was expected to result in much lower corporate revenues initially, to be followed by rising revenues in years to come as overseas profits are repatriated and increased business investment (of which there are few signs to date, unfortunately) results in rising profits in the future.

A digression on debt:

Broadly speaking, debt is a zero-sum game, since one man’s debt is another man’s asset. Debt is an agreement between two parties to exchange cash now with a reversal of that exchange, plus interest, in the future. If the borrower fails to repay his debt (i.e., he defaults), then the borrower benefits by being relieved of some or all of his debt service obligations, and the lender suffers by not receiving some or all of his expected cash flows. Part of the interest the lender charges the borrower goes to offset the risk of default. Most of the time, debt serves a vital economic function by linking savers with borrowers.

Ideally, the lender expects the borrower to use his money to fund a productive investment, such that the return on the investment will exceed the interest on the debt. If all the money loaned to borrowers is invested productively, everyone is happy—borrowers make money and lenders get repaid with interest. The problems with debt come not when people borrow money but when they use borrowed money to make unproductive investments or to simply finance consumption. (It's not the debt, it's the spending, stupid!) It's not clear at all whether using 70% of federal government borrowings to fund transfer payments is a wise use of borrowed money. Taking money from those who are working and giving it to those who are not working creates unproductive and anti-growth incentives. 

So it's not crazy to think that much of the federal government's debt has been used unproductively, and this is one reason why our economy's growth rate over the past decade has been sub-par. We've been squandering scarce resources (capital) and creating perverse anti-growth incentives. The potential size of this problem is staggering. In the past decade, after-tax corporate profits have totaled about $16.5 trillion, while federal debt has increased by about $9.4 trillion. In a sense, over half of the profits generated by corporate America have effectively been used to finance federal government spending. If the government hadn't borrowed all that money, it might have been used more efficiently by the private sector. Efficient investment, of course, boosts jobs, incomes, and overall prosperity. Inefficient investment leads to stagnation.

Meanwhile, slow growth has made people more cautious and that has increased the demand for money and people's demand for safety—thus the ready absorption of over $9 trillion of Treasury securities at very low interest rates. The Federal Reserve justifiably has accommodated the increased demand for money and safety by reducing interest rates. So in the current environment, slow growth and low interest rates go hand in hand, and the same conditions that drive low interest rates make lots of debt manageable. 

What will happen going forward? If the economy picks up steam, and if tariff wars begin to unwind (as appears to be the case), then money demand should decline, caution should recede, and interest rates should therefore rise. At the same time, a stronger economy would likely result in a further pickup in revenues, a smaller deficit, and slower growth in federal debt. So rising interest rates should go hand in hand with slower growth in total debt even as the burden of debt would tend to rise because of higher interest rates. This is not a recipe for disaster—it's a rosy scenario that we should dearly hope develops!

Chart #8

Meanwhile, nominal and real interest rates are unusually low, which means that the bond market does not yet expect to see accelerating economic growth. In fact, as Chart #8 suggests, the market seems priced to a further slowdown in growth; real interest rates on 5-yr TIPS moved into negative territory this week for the first time since April 2017. 

This market is not overly enthusiastic about the future, which gives me comfort that an optimistic approach to risk should be rewarded.

Things to watch for going forward; Real interest rates on TIPS are key barometers of the bond market's expectations for economic growth in the years ahead. If they rise this would be a good sign. Swap spreads are key indicators of the health of financial markets and leading indicators of economic health; right now they are very low and that is very good. Any rise above 30-35 bps on 2-yr swap spreads would be a flashing yellow light. Credit spreads on corporate debt are key indicators of the market's confidence in the outlook for corporate profits; currently they are relatively low and that is good. Commodity prices have been relatively low, but recently they show signs of perking up; if this continues that could be an indicator that the global economic outlook is improving. The residential construction has been in a period of consolidation in the past year or so, but recently appears to be picking up, and that is good. Any slowdown in the growth of bank savings deposits would be a good sign that risk aversion is declining and optimism is rising, and that would be very good. 

Looking ahead, I'm optimistic that the economy will continue to grow. I don't see a risk of recession nor do I see any significant acceleration. I'll be watching the aforementioned indicators to see if things improve enough to get really excited. 


Rjkcfp said...

Thanks for keeping it REAL, Scott....great work.

JF said...

Thanks for the informative posts Scott. Can you please explain why the 6T in intragovernmental holdings is not part of the correctly measured amount of debt held by the public? Does it not contribute to the total debt service burden, or the negative drag on economic productivity? If not, why not? And why then is it included and labeled as "Total Public Debt Outstanding" on Treasury Direct (and other sites)? This is confusing to many non-economist types (myself included). I'm trying to understand this for myself, and before I have to predictably explain it to my friends.

Ian said...
This comment has been removed by the author.
Ian said...

This article is based on misconceptions about government debt that have been overturned by Modern Monetary Theory. The government is not in debt to bondholders as a person is in debt to a bank. The difference is evident when you look at how interest rates behave. The higher an individual's debt relative to his income, the higher the interest rate on the debt will rise. However, this doesn't happen with government debt: debt to GDP keeps on rising, but interest rates keep on falling.

This interest rate behavior indicates that there is no concern that the US government might default on its debt the way that an individual can. The reason is that the US government can create all the money it needs for interest payments. Indeed, the government can go on creating money without any problem until an imbalance between money supply and output arises that causes inflation. So far the global economy has had enough capacity to accommodate the debt that the US government creates.

Other problems are evident in this passage:

"The potential size of this problem is staggering. In the past decade, after-tax corporate profits have totaled about $16.5 trillion, while federal debt has increased by about $9.4 trillion. In a sense, over half of the profits generated by corporate America have effectively been used to finance federal government spending. If the government hadn't borrowed all that money, it might have been used more efficiently by the private sector. Efficient investment, of course, boosts jobs, incomes, and overall prosperity. Inefficient investment leads to stagnation."

This passage rests on the assumption that the private sector funds the government through taxation so that government spending crowds out private investment. However, this is not what happens. No one needs to fund the government. As the controller of the Treasury, the government simply funds itself. The government passes a budget, and then the Treasury creates the money to pay for it.

This type of erroneous understanding of government debt is behind terrible policy decisions. Government spending is high, but it ought to be higher. We ought to be spending to fund Medicare For All, a carbon-free energy grid, and replacements for our aging infrastructure. The misconception that government spending subtracts from more efficient private investment prevents the country from taking on these vital projects.

steve said...

" Government spending is high, but it ought to be higher."

I was wondering where you were going with your inanity. I should have known.

Benjamin Cole said...

The ability of the Federal Reserve to buy US Treasuries, thus vaporizing debt, evidently without inflationary consequences, is fascinating. Nor is this a one-off. The Bank of Japan is doing the same thing.

It may be that the MMT crowd actually understands monetary and fiscal policy better than orthodox macroeconomists. Unfortunately this issue has become politicized, like all issues.

Many members of the MMT crowd are left wing. But actually Japan in the Great Depression applied helicopter drops to build a vast military machine----- in other words, the use of money-financed fiscal programs is not left-wing or right-wing, it simply is.

One might even posit that the United States has financed military operations for years through MMT. That is, the Federal Reserve was buying bonds issued by the Treasury while the US conducted expensive military operations in the Mideast. Money is a fungible commodity, so we can always posit that federal borrowing or money-printing was used to some end purpose. That is, Jack can say federal borrowing paid for welfare programs, while Jill can say federal borrowing paid for military operations.

Personally, I think I am becoming swayed by the MMT crowd though I remain generally opposed to either federal social welfare programs or federal warfare programs.

Jeff Carlson of said...

Debt don't matter if you never pay it back.Especially when You never plan to. WAIT UNTIL WE GET KICKED OUT OF THE CURRENCY BASKET

Ian said...
This comment has been removed by the author.
Ian said...

Japan's government debt to GDP is more than twice the USA's, but the yen is a safe haven.

Scott Grannis said...

The Fed cannot buy unlimited amounts of Treasuries, and its purchases of Treasuries do not make those bonds disappear. Whenever the Fed buys a Treasury bond, it "pays" for its purchase with bank reserves. Band reserves, in turn, are not cash or free money. Under the current regime bank reserves are close substitutes for T-bills, since they are default-free and pay a variable rate of interest which the Fed determines. Only banks can hold bank reserves, and they acquire them only by selling Treasuries to the Fed. The Fed does not purchase Treasury bonds directly from the Treasury! The Fed cannot directly finance the Treasury!

The effective net result of the Fed's purchases of Treasury bonds is to convert (or "transmogrify" as I like to say) Treasury bonds into T-bill substitutes. It's a simple swap: bank reserves for bonds. The Fed has been doing the financial markets a service by effectively shortening the maturity of government debt, creating more short-term securities to fill the market's apparent demand for safe-have cash and cash substitutes. The Fed creates no money in the process.

Benjamin Cole said...

Scott Grannis: a technical point: the Federal Reserve buys Treasuries from the 21 primary dealers, which are security brokerages, such as Goldman Sachs, Nomura Securities, Barclays Capital etc., not commercial banks.

It is true, under current law, the Federal Reserve cannot buy Treasuries directly from the Treasury Department. However researchers recently followed the so-called CUSIP numbers on bonds and found out that recently issued bonds ended up in the Federal Reserve's balance sheet.

Besides that, money is fungible. If the Treasury Department issues $400 billion in bonds, and the Federal Reserve buys $400 billion in Treasury we not believe that the Federal Reserve is financing the national debt?

Another couple key points. When the Fed buys bonds, the interest from those bonds flows into the Federal Reserve. As long as the interest rate on the bonds exceeds the interest rate on the reserves, then the Federal Government is a net gainer. It is not a wash.

Also, I believe we have a fundamental disagreement on what happens when the Federal Reserve buys a bond. I contend that when the Federal Reserve buys a bond, the bond seller gets cash and an equal amount of a reserve is created at a commercial bank. That is, I sell a $1 bond to Morgan Stanley (a primary dealer) which perhaps I reinvest in Apple stock. Morgan Stanley sells the $1 bond to the Fed, and Morgan Stanley's commercial bank account is credited with a $1 deposit which also becomes a $1 reserve. Yes, the Federal Reserve actually created money which is within its powers. There is now $2 where $1 was before. $1 in reserves and $1 that I have, that I choose to reinvest in Apple stock

I am actually not much of a fan of quantitative easing, which I believe is a weak tea. I think the path forward is to money-financed fiscal programs, hopefully enacted through tax cuts on productive people and not through more social welfare spending or more warfare spending.

Some economists, such as Michael Woodford of Columbia University, contend that quantitative easing in combinations with fiscal deficits are helicopter drops anyway. So the MMT crowd is running Washington as we speak.

That's all I have to say, and now I take off my tinfoil hat!

marcusbalbus said...

still the refulgent pangloss without apology you always have been to the point of inanity

Christian S. Herzeca, Esq. said...


I disagree with notion that treasuries held by social security trust fund are not outstanding. while those treasuries are assets held by the government (hence a debit to the treasury credit), those assets are held to defense future social security obligations to retirees. so while you have an obligation, the outstanding treasury, matched against the asset, the treasury held by social security trust fund, you have to recognize those treasuries as assets outstanding are also matched against future retiree obligations. net, net, net, the treasuries are outstanding in the sense that they are held (in trust) for the benefit of holders of claims.


Christian S. Herzeca, Esq. said...


Unknown said...


"This passage rests on the assumption that the private sector funds the government through taxation so that government spending crowds out private investment. However, this is not what happens. No one needs to fund the government. As the controller of the Treasury, the government simply funds itself. The government passes a budget, and then the Treasury creates the money to pay for it."

This is complete nonsense. If the government is not funded by taxpayers then please tell my why there is money being taken out of my paycheck every two weeks?

Behold Ian, another product of the US (Higher Ed.) Keynesian school of economics...

skydude said...

I've been reading this great blog for years and I really like the insights I glean from reading it. But I do think that MMT is onto something. There are two areas I think that MMT is insightful.

First is inflation. MMT has maintained that inflation is endogenous (the result of economic variables other than the monetary base and the Fed's control of it). This seems to be correct. I know that this blog has maintained that inflation could result from a return of confidence within the markets, but confidence has returned and inflation hasn't.

Second, the mainstream premise that increasing federal government deficits would increase interest rates. As this current blog posting correctly pointed out, increasing deficits correspond to lower interest rates. Here is what Randy Wray recently said:

"Government increases spending such that G > T – what is normally called a spending deficit (a flow). The conventional view depends on the model – so let’s first take loanable funds and then ISLM.

a) The additional demand for funds pushes up interest rates and crowds out investment.

b) The additional spending flow raises money demand, pushes up interest rates, and crowds out investment.

I do know that you could come up with special cases where this did not happen but I’m keeping it simple.

The MMT view is that if G > T, bank reserves will have been net credited and hence the pressure on the overnight interest rate will be downward, all else equal.

Again, I am keeping this simple.

So the orthodox approaches predict upward pressure on rates, while the MMT approach predicts downward pressure."

Some of the other political MMT stuff can be dismissed, but I believe the overall macro-view is worth investigating.

Thanks again for the great blog.

Steve said...

Scott - Given the recent growth in the markets it's an excellent time for you to post an updated version of the "Chart of Shame"

Scott Grannis said...

MMT is ridiculous. If Quantitative Easing has not led to higher inflation, it’s because of the market’s very strong demand for money and safety. The supply of money has been generous, thanks to QE, but the demand for money has been intense. With the result that there has not been an excess of money and that is why there has been very little inflation.

Inflation is a monetary phenomenon. Just look at Argentina, where the central bank prints money with abandon and the inflation rate is in the middle double digits.

There is plenty of evidence to support my view that the demand for money has been exceptionally strong in the past decade.

The thing to watch out for is a decline or weakening in the demand for money. That could result in rising inflation unless the Fed takes steps to offset strong money demand (e.g., by raising short-term interest rates).

I’m working on a post to review this subject yet again (as I have many times in the past).

Don’t be misled by the MMT advocates. They know not whereof they speak.

skydude said...

So the supply of money has been generous and the demand for money has also been intense. I get that. Has the intensity for money recently diminished? If not why has inflation not presented itself?

Ian said...


What I wrote about the allocation process for the federal government budget is literally what happens. The government says, "We're going to spend X amount of money," and the Treasury then creates that amount of money for the government.

So why do taxes exist if the government is self-funding?

1. The first reason is that taxes are necessary to create a unified national currency. In a country in which there are a lot of different currencies in use, which is typical of pre-modern societies, the government implements taxation and declares that only the government currency can be used to pay those taxes. Taxation thus means that everyone has to have some of the government currency, and this advantage is significant enough that eventually the government currency drives all the others out.

2. Taxation is necessary to control inflation. If the economy starts heating up and prices start rising due to excess demand, taxation is one of the tools that can be used to cool things back down again. By removing money from circulation, the government reduces demand.

3. Taxation is necessary to promote positive social values. Taxation is used to incentivize behaviors that the society values and disincentivize the behaviors that it doesn't. For example, governments place special taxes on cigarettes and alcohol in order to make smoking and drinking less attractive. More significantly, taxation can be used as an instrument to preserve democratic values and prevent the emergence of an unaccountable aristocratic class. By placing large taxes on the wealthy, the government can prevent them from becoming so powerful that they can tyrannize the rest of us.

Ian said...


If you're going to be publishing an essay criticizing MMT, I'll wait for that to respond. But please don't fall for the old canard that cases like Argentina, Venezuela, and Zimbabwe somehow disprove MMT. Currency collapse and hyperinflation in these countries are due to the fact that they owe money in foreign currencies. MMT economists have said over and over again that deficit spending is only beneficial for nations that are monetary sovereigns, and one of the traits of monetary sovereigns is that they issue debt in their own currency. Immature, developing economies that are forced to borrow in external currencies face constraints and challenges that are very different from those that developed nations face.

randy said...

"MMT is ridiculous."

Scott has always been carefully measured with his posts and arguments. (Something I've learned from.) Such a direct statement as "ridiculous" says something about how annoying MMT must be to him.

MMT bears resemblance to so much liberal policy - elegantly complex arguments that take both the believer and non-believer far away from reality and make it tiresome to refute. I'm sure the kings of history had some persuasive alchemists. That's what MMT seems like.

dd said...

Before you tackle MMT could you comment on the Fed repo temporary intervention that may become a permanent facility. We might not have a debt problem but it sure looks like a funding problem with the Fed providing short term lending to finance the Treasury output and all other asset sectors. Perhaps household appetite was unable to absorb the last round and it was left to the repo market and the arbitaguers. A temporary dislocation now seems more permanent and that has morphed into greater financial sector access to Fed low rates that no doubt increases money demand.
It's beyond my meager analytic abilities but it certainly has dampened my optimism!

randy said...

Correction - I shouldn't pick on liberals in my above comment. Conservatives are just as guilty in areas of policy when it suits us.

Benjamin Cole said...

Randy: I concur with you that both parties have become fraudulent and intellectually crapulent.

By the way, MMT is neither a liberal or a conservative idea. In the Great Depression in Japan, the Bank of Japan printed money to finance and effect a military buildup and then horrid occupation of China and other parts of Asia. Japan was the lone developed nation to sidestep the Great Depression.

For me, helicopter drops, also known as money-financed fiscal programs, make a lot of sense if they are effected through tax cuts on working or investing.

It is worth noting that the world's largest investment house, BlackRock, and the world's largest bond manager, Pimco, and the world's largest hedge fund manager, Ray Dalio, have all recently come to support some sort of money-financed fiscal programs.

bt1138 said...

I look forward to hearing from you all about how the debt and deficits are a historic threat to the nation, just as soon as the Republicans are not running things.

You would think that the doubling of the budget deficit by the current crew of Conservative Republicans would come in for at least a little scolding in the meantime, just to maintain a light sheen of intellectual consistency.

The Cliff Claven of Finance said...

Of course federal debt is a threat to an economy if it keeps growing by a large amount every year !

Many economies have collapsed, and needed to be rescued, from too much debt.

It happened here in the US, 2008, or did you forget ?.

The debt is permanent.

The interest payments on the debt are permanent.

Debt comes from deficit spending.

Deficit spending allows governments to spend more than they take in.

By using deficit spending, politician are emboldened to make promises of transfer payments / welfare / other programs that they can not afford.

People want "free stuff" and lower taxes !

The result of deficit spending is much more government spending than taxpayers would be willing to pay for themselves..

Want to win an election ?

Promise things like free college for everyone.

Let the government pay for it by borrowing the money.

Deficit spending is tool to promote socialism.

Free stuff for everyone !

Without higher taxes !

The government will just borrow the money !

If a household earned 36,000 a year, and spent 47,000 a year, would that bring financial success ?

How about a government "earning" 3.6 trillion and spending 4.7 trillion ?

Is that good economics ?

Or do deficits and debt matter ONLY when a Democrat is president ?

Last time I looked all levels of US governments were spending 38% of GDP.

Do we want that percentage to go higher?

If so, "painless" deficit spending can help !

steve said...

Off subject but check this out;

Trumps idiotic trade tariff nonsense has finally been tested and called what it is; the most mindless and stupid trade policy imaginable. I still find it truly unbelievable that in a country with so many talented executives that our choice is between this comedian and the even worse dolts on the left.

Seriously, WTF?

randy said...

The WSJ summarizes Mankiw on MMT.

Sid Pools said...

If you are unable to get past the WSJ paywall (like me) here's a summary of MMT that Mankiw prepared for a recent presentation...

skydude said...

Here's a response to the article Mankiw wrote:

It's part two of three but I found the read worthwhile. Parts one and three are hyperlinked in the article itself.

Scott Grannis said...

steve, re Navarro: I agree that Navarro is an idiot. Tariffs are a stupid and clumsy policy tool. But if Trump is using them to force China to behave itself, and if he doesn't plan on keeping them in place forever (which I seriously doubt he will), then despite their stupidity they could end up being worthwhile IF China does come around (which looks like the case). I don't think you can brand Trump as stupid for using Navarro as a foil to threaten China. Besides, what other policy tool/lever does Trump have at his disposal, and over which he has virtually total control? I argued in a post awhile ago that in Trump's mind tariffs are irresistibly attractive for that very reason. They're a clumsy (but possibly quite effective) means to achieve a worthwhile end.

Frozen in the North said...

Dude no offense but you made it a HUGE issue during the Obama years! Justify all you want, the truth is that you may be right (maybe) the facts are may be with you, but you are still a hypocrite! Finally, let us be clear one of the single largest expense over the past 20 years has been America's continual "war" in the Middle East all paid on the credit card!

Justify all you want it remains that you said the exact opposite during the Obama years. Although you didn' say that we would have uncontrolled inflation (although we did have asset inflation)

Scott Grannis said...

Frozen: Awhile back I recognized (in the Comments section to a post) that I had incorrectly measured the burden of the federal debt during the Obama years. I made the classic error of comparing a stock (the debt) to a flow (GDP), when in fact I should have measured the burden by dividing the cost of the debt (interest payments, a flow) by GDP (a proxy for national income, also a flow). So yes, you are right, I was a hypocrite in a sense, but in this post I have corrected my error. As anyone can see, the burden of the debt today under Trump is substantially similar to what it was under Obama, thanks largely to the fact that interest rates have fallen (See Chart #3).

But the fact remains that the sheer volume of spending in the early years of the Obama administration (which were in part mandated by the Bush administration) undoubtedly served to weaken, rather than strengthen the economy, for the simple reason that when the government commandeers a substantial portion of the economy’s income for purposes of redistributing that income, then the whole economy suffers because of the inefficiency of such a transaction and because of the perverse incentives which it creates.

Ian said...

"But the fact remains that the sheer volume of spending in the early years of the Obama administration (which were in part mandated by the Bush administration) undoubtedly served to weaken, rather than strengthen the economy, for the simple reason that when the government commandeers a substantial portion of the economy’s income for purposes of redistributing that income, then the whole economy suffers because of the inefficiency of such a transaction and because of the perverse incentives which it creates."

The facts seem obviously to suggest the opposite of what you're saying here. In the wake of great financial crisis, the Obama government enacted substantial stimulus spending, which the governments of the UK and Europe did not do, preferring austerity instead. And the subsequent economic growth of the USA was much stronger than it was overseas. Both the UK and Europe have been experiencing very slow growth over the past decade, dipping in and out of recession. The USA, which runs relatively high government deficits, has vastly outperformed.

Conservative, monetarist economics casts government spending as harmful because it is inefficient and crowds out more efficient private investment. Keynesian economists argue that high government spending is necessary to get an economy out of recession. Government spending actually encourages private investment for Keynesians because the knowledge that the government is supporting the economy makes private investors more confident in taking risk.

The GFC was a kind of real-time experiment in the effectiveness of economic policy and the Keynesian Obama seems to have won hands down. It's hard to see how anyone could deny that. However, you seem very confident of yourself, and so you must have strong evidence of the superiority of government austerity as a response to recession. I would very much like to see you present that evidence for your side, as I don't believe you have before.

Frozen in the North said...


An interesting view of the risk of the size of US debt is that the market is no longer in price discovery mode, rather the central banks are managing the market and artificially keeping rates low. One of the first signs that the debt market is in trouble could be the Repo market. Since its an "extreme" indicator and a strang market that the Feds actually don't control.

The Repo market is important but not large, but it could be the canary in the coal mine! I hear too many explanations about what is going in the Repo market that seem self-serving. Finally, I simply don't agree that the flow is manageable, I'm sorry but you cannot take the view that the total size of the debt, its growth (over 5% of GDP) is a long term acceptable outcome

Have a nice day