US Fiscal Deficit Projected At 12.3% of GDP In 2009

According to the 2009 budget Barack Obama is sending to congress today, the United States will have a $1.75 trillion deficit this year. The figure represents 12.3 percent of estimated gross domestic product, double the previous post-war record of 6 percent in 1983, and the highest level since the deficit totaled 21.5 percent of GDP in 1945, at the end of World War II. It seems the numbers are about to start getting let out of the bag, and it will be interesting to see how the markets react. You can find many more details here.

Now if you look at the chart below (prepared by Lazard for a presentation on consumer deleveraging) you will see that this is not the first time something like this has happened. The earlier peak in US indeptedness occured (of course) between 1930 and 1933, when total debt peaked at 299% of GDP. In fact total debt expanded quite rapidly between 1930 (211% GDP) and 1933, largely as a result of GDP contraction and price deflation (which is why it would be preferable not to see extensive price deflation this time round). As a result, while private sector debt contracted between 1930 and 1933, public sector debt held steady, and rose from 34% of GDP to 72% of GDP (for better viewing click on image, and try zooming in a bit. Sorry, that’s the best I can do/suggest).

This is the phenomenon we are seeing now. If the stimulus programme is successful then we might see US debt to GDP stabilising around 2013, since the deficit is expected to remain around $1 trillion for the next two years before starting to decline to $533 billion in 2013, according to budget projections.

So what is likely to happen to prices? Well, if we look at the chart below, we can see that US consumer price inflation was pretty lacklustre right the way through from 1920 to 1940 (that’s why I called the whole interwar epoch a deflationary one in my last post), so I guess, if we’re lucky, we might get to see some serious inflation around 2020. If history is any guide that is, which ain’t necessarily the case, but still.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo' is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

21 thoughts on “US Fiscal Deficit Projected At 12.3% of GDP In 2009

  1. I have a very simple – quite possibly simple-minded – view of debt, private and public.

    People right now are excessively in debt. They are saving because they need to. When they have saved enough, they will be in a position to spend again.

    So we see private debt contracting. It is, IMHO, what *needs* to occur.

    But what we also see is the State, “riding to the rescue”, with enourmous spending plans (which, I must observe, consist almost entirely of pork – they are, I feel, not stimulus plans, but cherished political spending plans).

    At the very time spending needs to contract, that taxes need to be reduced to permit the required retrenchment, the State gorges itself – and I think in this way it acts such that is acts directly against the necessary saving that the private sector is performing.

    The State is the problem. It prevents the necessary retrenchment and by doing so, acts to prevent the economy clotting; and so the economy bleeds, weaker and weaker, and the State – ha! – insists on more and more spending to try to solve the problem.

    I seriously need another planet to live on. This one sucks.

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  3. Hi Xavier,

    Well I see, as ever, it is hard for us to agree, but still.

    “People right now are excessively in debt. They are saving because they need to. When they have saved enough, they will be in a position to spend again.”

    I agree with the first part, but I would put the second part like this “When they have saved enough, they will be in a position to *borrow* again (but not as much as before). For really rather tedious life cycle reasons modern economies are driven by credit, without credit there is a lack of demand when compared with savings no matter how much supply.

    “But what we also see is the State, “riding to the rescue”, ”

    What I see, as per the charts above, is that if we divide the years between now and 2015 into a ninety minute football match, is that the next three years will simply be spent soaking up pressure, with what is basically defensive play, as people put their private balance sheet in order (individuals, corporates, financials) while the state provides support to prevent too much long term structural damage being done. Then, in the years between 2012 and 2015, as the opposition gets warn down, we can try and break out and score some goals, but there will be plenty of time to go into how we might do that as the time gets nearer. For now we have plenty on our hands just getting through from one day to the next.

    As to tax cuts, Federal Reserve researcher Gauti Eggertsson has an interesting paper out, where he questions the impact of tax cuts in a zero interest rate environment. Here is the abstract.

    This paper shows that at zero short-term nominal interest rate tax cuts reduce output in a standard New Keynesian model. They do so because they increase deflationary pressures. Policies aimed at stimulating aggregate demand work better. These policies include (i) a temporary increase in government spending and (ii) a commitment to inflate. The multiplier of tax cuts goes from positive at positive interest rates to negative once the interest rate hits zero, while the multiplier of government spending not only stays positive but becomes many times larger at the zero bound. The model suggests policy today should not be based on empirical studies that use post WWII data because that period is characterized by positive interest rates.

    You can find the full paper here. Of course, as he points out, the model is very abstract, and you can’t simply draw “instant conclusions”. But:

    The standard New Keynesian model is too stylized to draw any specific conclusions about taxation as I discuss further in the conclusion of the paper. The general conclusion I want to stress is that the principal goal of policy at zero interest rates should not be to increase aggregate supply. Instead, the goal should be to increase aggregate demand — the overall level of spending in the economy. This is because at zero interest rates output is demand determined, at least according to the model presented here. At zero interest rate aggregate supply is mostly relevant in the model because it pins down expectations about future inflation. Policies that aim at increasing aggregate supply can create deflationary expectations and thus be counterproductive. Turning to aggregate demand, I show that it can be increased by either temporarily increases in government spending, or a commitment to inflate the currency.

    So the possibility they are only going to make things worse should give people food for thought. But then I see that for you it would already be hard to make things worse.

    “I seriously need another planet to live on. This one sucks.”

    So again we disagree, since I am happy with the planet I live on, warts and all, and despite massive ecological abuse, and simply luv life, especially in these exciting times of crisis.

  4. > Hi Xavier,

    Hey.

    > Well I see, as ever, it is hard for us to agree, but still.

    Haven’t read your reply yet, so will see.

    > > “People right now are excessively in debt. They are saving because they need to. When
    > > they have saved enough, they will be in a position to spend again.”

    > I agree with the first part, but I would put the second part like this “When they have saved
    > enough, they will be in a position to *borrow* again (but not as much as before). For really
    > rather tedious life cycle reasons modern economies are driven by credit, without credit
    > there is a lack of demand when compared with savings no matter how much supply.

    Well, that’s properly tantamount to the same thing – I don’t have a problem with that. However, it does mean that a financial structure to provide that credit must exist.

    > > “But what we also see is the State, “riding to the rescue”, ”

    > What I see, as per the charts above, is that if we divide the years between now and 2015
    > into a ninety minute football match, is that the next three years will simply be spent soaking
    > up pressure, with what is basically defensive play, as people put their private balance sheet
    > in order (individuals, corporates, financials)

    Sounds good.

    > while the state provides support to prevent too much long term structural damage being
    > done.

    Ah. Here we diverge :-) I think the State is spending a lot of money – which comes from tax – which is the money people are trying to *save*. People are trying to close the tap just as the State tries to open it.

    > As to tax cuts, Federal Reserve researcher Gauti Eggertsson has an interesting paper out,
    > where he questions the impact of tax cuts in a zero interest rate environment. Here is the
    > abstract.

    [snip]

    I really don’t agree with Keyneism at *all*, so I doubt the correctness of such papers.

    > The general conclusion I want to stress is that the principal goal of policy at zero interest
    > rates should not be to increase aggregate supply. Instead, the goal should be to increase
    > aggregate demand — the overall level of spending in the economy.

    Hang on. Two things – firstly, I *absolutely* regard economies as consumption driven. So I regard that as right and proper – BUT, right now, I think consumption will drop and *should* drop, because people need to set their finances in order. I think trying to *stimulate* consumption now is absolutely harmful – that it interferes with the healing process. It is simply the case there is now a period of reduced growth.

    > So the possibility they are only going to make things worse should give people food for
    > thought. But then I see that for you it would already be hard to make things worse.

    Not at all. I have no doubts whatsoever about the ability of the State to magnify a crisis or disaster.

    > > “I seriously need another planet to live on. This one sucks.”

    > So again we disagree, since I am happy with the planet I live on, warts and all, and despite
    > massive ecological abuse, and simply luv life, especially in these exciting times of crisis.

    Personally, I’m deeply frustrated with Governments. I’ve had enough of them and I want somewhere to go where the place is run decently, both in terms of political economy and ethically. Unfortunately, we don’t have such a place here.

  5. “In the end we’re all dead” discussion

    If you want the consumers to lessen spending, the banks to put a strain on finances, business to stop overborrowing (and investing) and then also the government to stop stimulating the economy…

    Where do you think the economy is headed then? A crash indeed. In the long run there might be an upward swing again but guess what Keynes says…

    “In the end we’re all dead.”

  6. Waldo wrote:
    > If you want the consumers to lessen spending,
    > the banks to put a strain on finances, business
    > to stop overborrowing (and investing) and then
    > also the government to stop stimulating the
    > economy…

    I don’t *want* anything – except people to be free to do what they want to do. Freedom underpins everything. What’s the point of having a fantastic economy (if you could get one this way, which you can’t) if it requires people being forced, directly or indirectly, to do what they do not wish to do?

    And indirect forcing here means the Government spending bazillions of dollars or pounds or euros of money taken from people by tax, when people want to *save*.

    Consumers are spending less, because they want to.

    Banks are trying to conserve funds, because they want to.

    Businesses on the whole are probably getting the short end of the stick – they’d like to borrow, but they can’t. But for them to borrow would require them to *force* someone else to do something they don’t want to do.

    Government however wants to spend – it always does – and it does indeed force other people to give it money, so it can do so.

  7. Hi again Xavi,

    “It is simply the case there is now a period of reduced growth.”

    Well I think this is the point. Between now and 2012 I only see, by and large, contraction. That doesn’t mean that all economies will contract in every quarter, or in every year, but that this will be the general environment. The correction we are talking about is a large one.

    I think we need to contain levels of unemployment, although even this is not easy, since the German’s have a scheme in place to keep people at work, but looking at the latest GDP details inventories are piling up, so this can’t go on much longer.

    After 2012 is when I see the period of low growth, as we put the state balance sheet back in order, and the governments pay savings back to the people who saved. Then this money can go into investment. Large scale investment, ramping up capacity, at this point is stupid, as Eggersston argues, since the excess over demand only fuels deflation and makes the problem worse. The main enemy we all face now is not Herr Hitler, but the entrnchment of deflationary expectations among the population at large. If we allow that to happen we can be struggling with this well past 2012.

  8. The fundamental flaw in Keynesian economics is the belief that all government expeditures have value similar to non-government expenditures. The stagflation of the 1970′s showed that folly.

    In the ’30s, people’s expectations/values were different than today and they needed the government support programs put in place. Once in place, these programs/supports became entitlements and form the base from which we are now discussing Keynes II.

    Pork-barreled spending simply moves unattractive/uneconomic projects and programs off the back burner and funds them with future tax payments. There cannot be any mitigating these programs in the future without political change: these programs become new entitlements.

    Too much pork causes investment decisions to change. Likely investment decisions will move funds to investor friendly economies and leave the others to wallow in their “enlightenment”.
    There will be no government paying “savings” back to the people who saved. This has never happened before and it is folly to talk such tripe

  9. Canucklehead wrote:
    > The fundamental flaw in Keynesian economics
    > is the belief that all government expeditures
    > have value similar to non-government
    > expenditures.
    > The stagflation of the 1970’s showed that
    > folly.

    Amen to that, brother.

    It’s worse than that of course; for Government spending also means loss of economic freedom. It means people work, what they own from that work is taken from them and spent by someone else.

    That is profoundly wrong.

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