Longtime readers of this blog are quite familiar with the following graph:

It shows the relationship between U.S. federal debt/deficit growth (green line) and U.S. recessions (vertical gray bars).

You can see this relationship detailed at: The relationship between federal deficit spending and GDP growth, but in summary, recessions follow a period of reduced federal debt/deficit growth, and are cured by increased federal debt/deficit growth.

The reasons relate to these fundamental truths:

  1. Every form of money is a form of debt. Debts require collateral. The U.S. dollar is a debt of the U.S. federal government. The collateral for the U.S. dollar is the full faith and credit of the U.S. government.
  2. Economic growth requires debt/money growth. Large economies have more money than do small economies. To move from smaller to larger, an economy must have an increased supply of debt/money.
  3. To cure a recession requires growing the economy which requires increasing growth in the debt/money supply.
  4. Federal deficits add money to the economy, and federal surpluses take money from the economy.

The above is why every depression in U.S. history has been introduced with a period of federal surpluses. (See item #3 of “To understand economics, you must understand Monetary Sovereignty.”),  and every depression has been cured by federal deficit spending.

We have discussed these facts many times with respect to federal deficits and debt.

However federal debt is only a fraction of total deficits and debt.

The above graph compares federal debt (green line) with the total debt of all sectors (blue line — state & local governments, domestic non-financial sectors, etc.).

While federal debt currently approximates $20 trillion, the total of all sectors approximates $75 trillion.

While federal deficits and debt are under direct federal control, and can be made to fluctuate significantly, “all-sectors” debt is not directly controlled, and has much greater inertia.

Though federal debt is an important source of U.S. dollars, there can be periods when federal debt changes in one way, while all-sectors debt changes another way.

Because the origin of money has less economic effect than does the existence of money, the all-sectors data (blue) most parallel Gross Domestic Product (red line in the below graph).

Total debt % annual change of all sectors (blue); GDP % annual change (red).

Yet, in a September 2, 2019 article in Fortune Magazine, you can read:

“We do know that there is a recession coming,” said Cindy Kuppens, the COO of O’Brien Wealth Partners. “Maybe next year, maybe 2021. We’re coming to the end of a business cycle.”

We could even be in a recession now without knowing. Economists have to wait for the data to measure GDP and new estimates come as additional information arrives. A previous quarter can slide in hindsight and a current period may be starting to slow.

That is just one example of numerous “recession is coming” predictions based on “this can’t growth go on forever” pontificating.

But “this can’t go on forever” is not a prediction. Nothing goes on forever. The world can’t go on forever. Predicting a recession because we haven’t had one recently, is the height of ignorance.

So pay no attention to the “it can’t go on forever” Chicken Littles.

Then there are the more scientific types, as in the article: “Is there a recession coming? Keep an eye on these key indicators.  They talk about such factors as: Yield curve inversion, employment figures, unemployment figures, housing prices, construction rates, housing supply, Consumer Confidence Index, manufacturing numbers, business sentiment, and a summary index like the Conference Board’s Leading Economic Index.

So which is/are the most important predictors, and how should these factors be weighted? No one knows, but we do know this: The U.S. economy, and indeed all economics, is ruled by money.

With federal debt growth, all-sector debt growth, and GDP growth all increasing, there are no signs of a coming recession, and until we see growth declining in at least one of the three, there absolutely will not be a recession.

The GOP, despite its long-time opposition to federal deficits, especially when a Democrat was in the White House, has now created what is predicted to be a $1 trillion deficit — and that is a good thing for the American economy.

Ironically, it will be remembered as the sole beneficial act by President Donald Trump’s administration.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY