- The Federal deficit is down for the third year in a row.
- Modest economic growth, higher tax revenues and some slowdown in spending have contributed to the decline.
- Predictions are for one more year of decline, then deficits will rise to over $1.0 trillion by 2023.
I do not believe that there is another chart that captures the economic/financial picture of the past fifty years in the way this chart does. This is the chart of the Federal Government's surplus or deficit.
(click to enlarge)
I have used the term "credit inflation" to describe the economic policy of the Federal Government since the early 1960s. It began in the Kennedy administration. In an effort to "get the economy growing again," the Kennedy administration intentionally created budget deficits in accordance with standard Keynesian thinking in order to spur on the economy to faster growth and lower levels of unemployment.
Creating deficits became the standard operating procedure for the Federal Government in the years following this period as Republicans as well as Democrats attempted to out do one another in showing concern for the unemployed…and, for those individuals that did not own their own home.
The one exception to this behavior came in the 1990s during the time Bill Clinton was the President.
Note that for the last three years the budget deficit has been getting smaller.
However, I would not say that we have reached the end of the era of credit inflation. There are other aspects of credit inflation, like monetary policy. And, one cannot say that the monetary policy of the Federal Reserve System has been anything less than supportive of credit inflation over the past five years as the Fed's balance sheet has gone from around $935 billion in early August 2008 to around $4,450 billion in early August 2014, an increase approaching 400 percent.
Over the past three years the budget deficit has gotten smaller due to the modest growth in the economy, an increase in tax receipts, and a slight slowdown in government spending.
This reduction in the Federal Deficit has resulted in the rate of increase in the Federal debt to decrease...and the decline has been fairly substantial.
Year-over-year, in 2009 total Federal debt rose by 15.1 percent; in 2010, the year-over-year rate of increase was 13.9 percent; in 2011 it was 8.5 percent; in 2012 it was 7.9 percent; and in 2013 it was 5.6 percent.
In the first quarter of 2014, the year-over-year rate of increase was only 4.9 percent.
For the first ten months in fiscal 2014 the budget deficit was $460.45 billion, down 24 percent from the same period one year ago. In fact, this was the smallest deficit through ten months of the fiscal year since 2008.
Right now, the forecast for the full 2014 fiscal year is $492 billion…the April estimate of the Congressional Budget Office.
To put this into context, from 2009 through 2012, the deficit exceeded $1.0 trillion in each fiscal year.
To further put this into context, for the week ended August 7, 2014, the Federal Reserve added about $435 billion of US Treasury securities to its balance sheet!
If the budget deficit number is actually hit for fiscal 2014, the debt will total 2.8 percent of Gross Domestic Product, the smallest amount since 2007.
Now, we shouldn't get too excited about these numbers for two reasons. First, although the Federal Deficit is expected to decline in fiscal 2015, the Congressional Budget Office foresees the deficit starting to rise again after that. And, it is expected to continue to rise, reaching over $1.0 trillion again by 2023.
Second, the reduction in the deficit has been achieved without any kind of comprehensive fiscal planning on the part of the Federal government. That is, the President and the US Congress has basically done nothing intentional to achieve this decline!
And, with a lame duck president in the White House for the next 2+ years, little can be expected in the way of a coherent approach to the fiscal stance of the government.
Where does that leave us?
In my estimation, it leaves us roughly just exactly where we were. There really has been no change in the thinking of the Federal government. To me, the philosophy of credit inflation still exists…in both parties. And, there is absolutely no indication that this will change anytime soon.
So investors and financial markets can expect more credit inflation now…and, more credit inflation in the future.
The interesting situation is in Europe. Angela Merkel, Chancellor of Germany, has provided the stern leadership to introduce discipline back into the fiscal…and monetary…policies of the eurozone. Right now there is a test of whether or not others will fall in line. Italian Prime Minister Matteo Renzi has said that he is going to introduce the reforms needed to put Italy back into a competitive position. If he is able to bring Italy along, he will provide an example that will be hard for others to ignore.
If Ms. Merkel and the eurozone re-establish some kind of discipline in policy making, the United States may have to re-address the approach to its policy of credit inflation. And, that would be mind-boggling!
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