What The Great Recession, The Great Depression, and the Previous Depressions in US History All Had In Common

When it comes to US federal government spending, we are constantly told how ‘unsustainable’ federal gov’t deficit spending is, yet the opposite is true. History has shown, time and again, that only US private sector deficit spending can ever reach a point of being ‘unsustainable’…

 

The reason is simple. It is because the federal gov’t is the issuer of dollars, and the rest of us are not. We are users of dollars, we all have to ‘get’ dollars from somebody, from somewhere, while the federal gov’t, the issuer of dollars, the sole monopoly ‘supplier’ of dollars, does not…

 

The one thing that the 2008 Great Recession, the 1929 Great Depression, plus the five previous depressions in US history (the ‘Panics’ of 1893, 1873, 1857, 1837, & 1819) all had in common, was that each of them were preceded (started) by sustained US private sector deficit spending. In addition, there was also that one thing in common that ended the Great Recession and those six other depressions. Each of them were followed (ended) by sustained federal gov’t deficit spending…

 

For the US private sector to avoid being forced to consistently deficit spend (forced to deplete savings which leads to US private sector deficit spending), the US private sector depends on the deficit spending of the US federal gov’t to consistently ‘supply’ newly-created US dollars, known as a ‘dollar add’ that finance newly-created federal gov’t demand (that finance ‘demand-side’ economic policies like new spending in conjunction with ‘supply-side’ policies like tax cuts). However, what we learned from the 2008 Great Recession was, just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go…

 

The non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008…

 

Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (same as saying that all six depressions in US history were preceded by sustained US private sector deficits):

$107B ‘dollar add’ from the federal gov’t in 1996:

$170B surplus to the non federal gov’t / International

(-$63B) deficit from the non federal gov’t / Domestic

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$22B ‘dollar add’ from the federal gov’t in 1997:

$181B surplus to the non federal gov’t / International

(-$159B) deficit from the non federal gov’t / Domestic

_____________

(-$70B) ‘dollar drain’ to the federal gov’t in 1998:

$230B surplus to the non federal gov’t / International

(-$300B) deficit from the non federal gov’t / Domestic

______________

(-$126B) ‘dollar drain’ to the federal gov’t in 1999:

$329B surplus to the non federal gov’t / International

(-$455B) deficit from the non federal gov’t / Domestic

______________

(-$235B) ‘dollar drain’ to the federal gov’t in 2000:

$439B surplus to the non federal gov’t / International

(-$674B) deficit from the non federal gov’t / Domestic

_______________

(-$128B) ‘dollar drain’ to the federal gov’t in 2001:

$539B surplus to the non federal gov’t / International

(-$411B) deficit from the non federal gov’t / Domestic

______________

$157B ‘dollar add’ from the federal gov’t in 2002:

$532B surplus to non federal gov’t / International

(-$375B) deficit from the non federal gov’t / Domestic

______________

$378B ‘dollar add’ from the federal gov’t in 2003:

$532B surplus to non federal gov’t / International

(-$154B) deficit from the non federal gov’t / Domestic

______________

$412B ‘dollar add’ from the federal gov’t in 2004:

+$655B surplus to non federal gov’t / International

(-$243B) deficit from the non federal gov’t / Domestic

______________

$318B ‘dollar add’ from the federal gov’t in 2005:

$772B surplus to non federal gov’t / International

(-$454B) deficit from the non federal gov’t / Domestic

______________

$248B ‘dollar add’ from the federal gov’t in 2006:

$647B surplus to non federal gov’t / International

(-$399B) deficit from the non federal gov’t / Domestic

_______________

 

$161B ‘dollar add’ from the federal gov’t in 2007:

+$931B surplus to the non federal gov’t / International

(-$770B) deficit from the non federal gov’t / Domestic

_______________

 

$458B ‘dollar add’ from the federal gov’t in 2008:

+$817B surplus to the non federal gov’t / International

(-$359B) deficit from the non federal gov’t / Domestic

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

_______________

2013 to present: The non federal gov’t /domestic (US private sector) deficits have returned again, but the accumulated amount of US private sector surpluses since 2009 until 2013 (+$1.770T) is still safely far away from the level of accumulated US private sector deficits prior to the 2001 recession (-$1.787T) and the critical level of accumulated US private sector deficits prior to the 2008 Great Recession (-$2.754T)…

 

Keep in mind that US trade deficits are not to blame. US trade deficits are good. It is better that the US leads the innovation of new goods & services, while most of the factory floor work is delegated elsewhere. It is better that the US depends less on export-led growth and that the US depends more on organic, consumer-led growth (which inoculates you better from economic downturns). However, like the saying goes, ‘It’s not what you make, it’s what you keep’, and the same goes regarding US trade deficits. It’s not what the federal gov’t makes (how many ‘dollar adds’ they are creating into banking system existence), it’s how much the non federal gov’t / domestic (US private sector) keeps…

 

From 1996 to 2008, the US private sector kept nothing, and even worse, sustained deficit spending by the US private sector kept up. In the post-gold standard, post-nafta, modern monetary system, policymakers need to understand that the federal gov’t must overcompensate for those US private sector deficits that larger US trade deficits cause. Policymakers with outdated gold standard mentality fear those US trade and US budget ‘twin’ deficits, and they believe that they should bring them both down, but that is out-of-paradigm thinking. Policymakers need to ‘use’ the positive effects of US budget deficits to control the negative effects of US trade deficits. What really happened prior to the 2008 global financial credit crisis was that, in order to continue lifestyles that they had grown accustomed to, the non federal gov’t / domestic (the US private sector) had no choice but to keep deficit spending year after year (first borrowing against their dot com stocks and then against their home equity) in lieu of no ‘dollar adds’ from the federal gov’t. UNLIKE the deficit spending of the federal gov’t (the issuer of dollars), the deficit spending of the non federal gov’t / domestic US private sector (the users of dollars) does have a real and attached actual debt. Counter-intuitive to mainstream thought, THAT is the deficit spending which is unsustainable…

 

P.S. That was the not-too-distant past. In the not-too-distant future, policymakers may enact a ‘US Federal Balanced Budget Amendment’. Meaning if policymakers actually do this, then they think the federal gov’t (the issuer of dollars) which only needs to balance their economy, should instead be treated the same way as a household (the users of dollars), which only needs to balance their budget. A US federal balanced budget amendment, if passed, would legislate, or in other words, would guarantee, sustained US private sector deficits (and now you know what THAT could mean).  

 

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