Tag: reduced federal debt growth

–Surprise: Federal deficit growth precedes GDP growth by 1-2 years

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

GDP growth has many causes. One of these causes is federal deficit growth. (By law, federal debt growth = federal deficits, so while the following graphs literally show federal debt growth, they indicate deficit growth).

The following graphs show debt growth and GDP growth 1971 – 2010 PGS (post gold standard). First, here is a graph showing federal debt and GDP growth:

graph

Then, I split the data in two, and offset the graphs. By drawing vertical lines between the two graphs, you will see an interesting effect: Federal debt growth and declines precede GDP growth and declines by about 1-2 years. There are short term exceptions to this — as I said, GDP growth is subject to many causes — but over the past 40 years the “rule” has held remarkably well, and the 1-2 year period is exactly what one would expect in a cause/effect relationship between federal debt growth and GDP growth.

Grtaph 2
      grraph 1

Annual % change:
2007-2009 Federal debt rose from 3% to 33%
2009-2010 GDP rose from -3% to 33%       ↑
=================================
2004-2007 Federal debt fell from 15% to 3%
2006-2009 GDP fell from 6% to -3%       ↓
=================================
2001-2004 Federal debt rose from -11% to 15%
2002-2005 GDP rose from 2% to 6%       ↑
=================================
1993-2001 Federal debt fell from 12% to -11%
1994-2002 GDP fell from fell from 6.5% to 2%       ↓
=================================
1983-1990 Federal debt fell from 28% to 7%
1984-1991 GDP fell from 12.5% to 3%       ↓
=================================
1979-1981 Federal debt rose from 5%-15%
1980-1982 GDP rose from 7% to 14%       ↑
=================================
1976-1979 Federal debt fell from 28% to 7%
1976-1980 GDP fell from 12% to 7% **       ↓
=================================
1974-1976 Federal debt rose from -2% to 28%
1975-1976 GDP rose from 8% to 25%       ↑
=================================
1972-1974 Federal debt fell from 10% to -1%
1973-1975 GDP fell from 12% to 8%       ↓
=================================
1971-1972 Federal debt rose from 1% to 10%
1972-1973 GDP rose from 8% to 12%       ↑

**During this period, GDP rose as high as 14% before falling, while debt continued to fall the entire period.
————————————————————————————————————————————————

The reason for this series of coincidences is outlined at Introduction, but briefly: Money feeds an economy. A growing economy requires a growing supply of money, and deficits are the federal government’s method for adding money to the economy. Whenever the economy is starved for money, we have a recession. When the economy is “well-fed” with money, we have healthy growth.

Yes, it is possible to “overfeed” the economy, in which case we will have inflation. But currently we are nowhere near that point. Economically speaking, we are much closer to starvation than to obesity. In fact, during the past 40 years PGS, our economy never has been obese. It has vacillated between hungry for money and serious starvation.

For a consistently growing GDP, it is necessary not only for debt to grow, but debt must grow by an increasing percentage. For this reason, calls for debt reduction, deficit reduction, balanced budget, etc., are suicidal for the economy.

Discuss these data with your political representatives and your favorite media writers. Although breaking through the intuition-based bias against federal debt is difficult, the only hope is to continue to present fact after fact after fact, until even the most cement-brained debt-hawk finally concedes.

Good luck. The future of America depends on it.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Danger sign?

An alternative to popular faith

Do we see the first hint of another recession?

In other posts, I have called to your attention the coincidence of reduced federal deficit growth and the start of recessions. History shows this repeated coincidence dates back even to the 1800’s, which arguably indicates a cause/effect relationship.

I also have noted that reduced deficit growth can continue for several years before a recession begins. I searched for a factor, that, when added to reduced deficit growth, would trigger the recession. One such factor seems to be rising energy prices, perhaps more specifically, rising oil prices.

Economics, like meteorology, is complex, so perfect correlations seldom are found, but this correlation is striking:

Debt and energy

The graph shows that when reductions in deficit growth are added to oil price increases, there is a strong incidence of recession.

An exception might be in 1981, though this may have more to do with the arbitrary definition of “recessions.” The recessions of 1980 and 1982, may more realistically be considered one long downturn.

I mention this, because today (Feb., 2010) we see the first hints of reduced deficit growth accompanied by increased energy prices, a possible danger signal. If these mini-trends continue, we may find ourselves on the cusp of yet another recession.

The U.S. government may have two options for preventing the next recession: Keep oil prices from rising, or increase deficit growth. The former might temporarily be accomplished by executing a release from the Strategic Petroleum Reserve. The later can be accomplished in myriad ways, though I tend to favor the elimination of the FICA tax as described at http://rodgermitchell.com/reasons-to-eliminate-FICA.html.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com