Monday, September 14, 2009

Federal Deficit

The Lehmann Letter ©

In a September 10 posting this blog said:

“Demand will grow sharply when – and only when – buyers begin borrowing freely once more in order to finance their purchases. As long as they scrimp and save, guarding their balance sheets, demand will remain in the doldrums.”

If that’s true for private borrowing and spending, what about public borrowing and spending? Can it take up the slack? Better Yet: Has federal borrowing and spending compensated for the shortfall in private borrowing and spending?

See for yourself.

Chart 7.1 Federal Deficit

(Click on image to enlarge.)

Recessions shaded

Federal expenditures are growing swiftly despite the drop in federal tax collections. That is, the federal government is putting more into the expenditure stream than it is removing from the revenue stream. Consequently the federal deficit has grown rapidly and now stands at a record $1.5 trillion ($1,500 billion) at an annual rate. This is a recent increase of around $1 trillion and is definitely expansionary.

Compare this with the private borrowing chart below.

Chart 6.3 Private Borrowing

(Click on image to enlarge.)

Recessions shaded

Private borrowing has recently fallen by $2 trillion, i.e. more rapidly than federal borrowing has grown. No wonder that federal fiscal policy (the stimulus package) has not yet rescued the economy from recession’s grip. The federal stimulus represents only half the private shortfall.

On the other hand, imagine how much worse conditions would be without the federal deficit. It has replaced private borrowing as the economy’s principal driver.

(The charts were taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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