Deficits (Digging Holes) All Over The Place

Bargais/iStock via Getty ImagesThere are new governments or re-elected governments everywhere these days. Germany and Italy had elections not too far in the past. Great Britain just recently had an election. France’s final election this time around took place on Sunday. And, the United States has a presidential election coming up in November. In all countries, there seems to be a problem, lurking in the background, that was…or is…not being addressed in any serious manner. That problem? The lurking shadow of the growing amount of debt all these countries have amassed…or, are still amassing. The recognition of the problems seems to be coming after the elections are over. The recognition of the problems has pretty well stayed out of the headlines. Tom Fairless addresses the issue in The Wall Street Journal. “Public debt is close to multidecade highs on both sides of the English Channel, where voters were electing new parliaments.” “In both France and the U.K., government spending and budget deficits as a share of gross domestic product are significantly above pre-pandemic levels.” “Economic growth remains lackluster, borrowing costs have surged and demands on the public purse are rising.” “All that means fiscal restraint will be necessary, economists say.” “But politicians haven’t prepared electorates for that.” “On the contrary, they have signaled bold new spending plans.” “Even Germany has swung to large deficits from the surpluses in the 2010s.” And, “The U.S. picture is worse….” Then there is Italy, which also has had its “colossal deficits.” What kind of a picture does this paint for the future? Maybe if no one talks about it, the situation will go away. But, the problem with debt is that it doesn’t just go away. And, if it doesn’t go away, it very often comes back and becomes a burden…and in many cases, a huge burden. Then there is the private debt that has been issued. New records have been reached all over the world. What is going on there? Some analysts have raised a concern that commercial banks and some other financial intermediaries are experiencing problems in the area of commercial real estate. But, so far, nothing has really come from this other than warnings. Still, the deficit loan continues to rise. Deeper Into Debt (Wall Street Journal)And, no one is really addressing the debt. The Future The bottom line of this presentation is that sooner or later, these governments are going to have to deal with these debt loads. And, if the past is any guide to the future. The outcome will not be a pretty picture. But, the thing about debt is that you seem to always be able to push the problem further and further down the road, making the problem of the collapse, someone else’s problem. And, people like me…and Mr. Fairless…are looked upon as grumpy analysts who are just pessimists, painting a black picture. Well, I have gone far enough. For the last 15 years or so, I have been writing about how the government has been getting through the period following a policy of “credit inflation.” That is, the government’s emphasis has been upon pushing up asset prices thorough “credit inflation,” while avoiding, as much as possible, consumer prices. Thus, stock prices have increased, housing prices have increased, commodity prices have risen, and the price of gold has gone up and up and up. The compound rate of consumer price inflation during the 2010s was around 2.2 percent. Not bad at all. And, although consumer price inflation flew out of control during the COVID-19 pandemic and subsequent recovery, the Federal Reserve seems to be bringing consumer price inflation back toward 2.00 percent. This seems to be exactly what former Fed chairman Ben Bernanke aimed for as he set out during the Great Recession to get the economy moving again. The problem, however, has been with fiscal policy. Deficit budgets, which were once looked down upon, grew into favor beginning in the early 1960s. President John F. Kennedy brought the idea over from England and John Maynard Keynes. President Lyndon Johnson expanded the deficit idea as he spent and spent on guns and butter…Vietnam and the economy. President Richard M. Nixon claimed that he was a Keynesian, just like anyone else. Only, to get re-elected, Mr. Nixon killed the idea of budget deficits in recessions and budget surpluses in periods of economic expansion. President Ronald Reagan brought sunshine to America as he generated deficits to stimulate the supply side of the economy. Only President Bill Clinton got the American budget back into surplus territory. Since the start of this century, no president has really contemplated running any surplus budgets. It has just been deficits all the time And, this is just the experience of the United States. European countries can tell their own stories about how they got into the habit of constantly running deficit budgets with little or no effort to produce a surplus anymore. Germany earlier in the century tried to do this, but as mentioned above, it too, fell into the deficit, deficit,…, and deficit habit. Well, the imbalances are building. And, no one in a position of authority seems to have any concern about them. Debt is good until it isn’t. You don’t want a debt collapse on your watch. But, like any other addiction, the amassing of debt is very, very hard to stop. Hopefully, some of our leaders will learn this fact, accept this fact, and try and do something about the current situation. In the current situation, the “credit inflation” of the recent past has created one of the largest increases in income/wealth inequality in the history of the United States. Maybe the discontent coming from this situation of expanded inequality will provide some of our leaders with the idea that something must be done. Maybe things will just go along as they are until some sector or some market collapses.

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