Armchair Economics 101

This is a technical analysis blog, but a topic came up in my office that I thought I should share. Skip this blog if you have no interest in basic economics. This will be the only blog of the week, as I am on vacation.

 

A long timed client, Bob, recently came into our office.  Many of my clients are astute individuals, and Bob’s one of them. Our talk got into the high debts that the US / CDN governments have & are accumulating. I thought it might be fun to give you all of the digits involved with these numbers for the USA.

  • The total debt in the US stands around $67,700,000,000,000 –a big chunk of which was accumulated over the past number of years after it evoked various monetary policies. These policies, such as the quantitative easing, easy money and neartermed spending were enacted to stimulate the economy as it came out of the 2008 crisis.
  • The current US deficit sits well over $5,500,000,000,000. All of this data came from this source, which I strongly encourage you to view: http://www.usdebtclock.org/

 

Of course, that debt might be justified by the fact that the act of digging this financial hole has in fact stimulated the US economy out of recession. In fact, the US GDP is growing at just over 2% – nothing to be too excited by, but a positive growth nonetheless – especially considering the crisis in 2008-9. Unemployment sits at a reasonable 4.4% as of the last report in July. So things are progressing. But are they and will they ever move fast enough to pay down the debt?

The criticism is that if growth does not accelerate from here, debt continues to grow. And therefore, the USA will struggle to ever pay it back. The website link I’ve provide above shows how the hole keeps getting bigger. Like a runaway credit card balance–the interest gets added to the debt and piles up exponentially. The requirement for growth becomes greater over time just to keep up – if you in fact can keep up. Like a person with too much debt -eventually, your credit rating is in peril, and your creditors put their foot down – aka Greece, Italy, etc. As David Wilcox sang in his song “Bad Apple”–“I’ve got a lesson for you. And it goes like this: The longer you wait, the worse its gonna taste”. 

Bob (my client) noted that Canada had not been facing this same situation that the US faces — until fairly recently, that is. In fact, we had a balanced budget just 3 years ago. Here’s a link to the Canadian debt clock: http://debt.ca/debt-clock.

As I noted in this blog – the Canadian deficit is growing, thus leading into a greater debt. Like the USA, Canada will be facing the never-ending debt spiral if we do not curtail the spending. Read Alexandre Laurin Research Director of CD Howe Institute’s comments on the blog noted above.  Greece and Italy might relay the truth of Laurin’s comment: “…we will have to pay for this. How are we going to pay for this? Through tax increases and cuts in spending – spending we have become accustomed to. So it’s going to be painful”

Bob went on to tell me that he conducts informal “surveys” by asking many people he meets if they understand the difference between the National debt and National deficit. Bob feels we should need to write a test proving you understand the basics of these things before we are allowed to vote. He has found that even educated folk are not so informed on these two terms. I share his concerns here. If we don’t understand how these key elements work, we won’t understand how they will affect our future. Thus, we may make bad choices when we elect politicians. We might even elect vacuous, narcissistic politicians who know nothing about the economy (theoretically speaking, of course). So I promised him that I might add to a few peoples knowledge base by defining these terms here.

 

Deficit vs. debt—in simple terms

 

The following was copied from http://www.davemanuel.com/investor-dictionary/debt-vs-deficit/

 

 

If the government spends more than it takes in over the course of one year, then it has run a deficit. A deficit applies to just one year.
So, if the government takes in $10 trillion dollars but spends $13 trillion dollars in one year, then it has run a $3 trillion dollar deficit.
When the government runs a deficit, then it must borrow money to make up the difference.
A debt is completely different. Think of debt as accumulated deficits.
If the government has to borrow money every year, then its debt will continue to grow year-after-year. This debt does not disappear unless the government elects to try and pay it down (rare occurrence).
The debt usually grows year-after-year. With each additional deficit, the debt continues to grow.
Some people think that if a government takes in more money than it spends in one year, then it suddenly doesn’t have any debt. This is not the case. This simply means that the government has managed to run a surplus (opposite of deficit), but any accumulated debt is still there.

 

 

So there you have it. It’s the same lesson we learn when we buy too much stuff on our credit cards. Except some people still don’t get it.

17 Comments

  • So , where the goverment goes to borrow money when they run deficit ? Arn’t they the law and order and banking system watchmen ? Can they just print more money ? …or they just do

    Reply
    • In the US, the Federal Reserve tries to determine if when and how much they print, and other monetary policy –it is a democratic process subject to vote (not so much in Canada) – but they/ the members are still subject to their own bias and flaws

      Reply
  • I agree with what you have written. The question is how did it happen. Money is created by treasury debt.
    ” Give me control of a nation’s money and I care not who makes it’s laws” — Mayer Amschel Bauer Rothschild
    Prior to the creation of the Federal Reserve the U.S had decades of stable prosperity. We have given our sovereignty to the international bankers by allowing them to create money. Fiscal policy, in my opinion, is not the major driving factor, The bankers can expand and contract the supply of money at will to control the country. So what is the solution. They should print money to pay off treasury debt as it comes due. To prevent inflation, they must increase the reserve ratio of the banks. This history of central banking and solution can be found by viewing Moneymasters by Bill Still on YouTube. I am inclined to believe that Trump knows about this and that is why the establishment hates him so much.

    Reply
  • This is so informative! I have to admit that I did not know the differences between debt and deficit, your article gives clear explanation. Hopefully, more readers will read this one ro allow them make smart election choice.

    Reply
  • The USA does not have to worry about its debt. It can simply print money and slowly wipe out the debts. If and when economies normalize then government can increase taxes and simply recollect the excess money that was created, accumulate as a surplus and then simply destroy the surplus later. Then reduce the taxes later, when the ledger book is empty.

    But that will cause hyper-inflation, like South America did !
    Only if you create too much money too quickly.
    But a country’s currency will be depreciated and cause price inflation !
    That is only true for small countries like Canada that are heavily export/import driven.
    US is much more localized and more diversified that others.

    Sounds like voodoo economics !
    No actually it is called shadow book-keeping.
    For more details ask the Chinese or the CIA.

    p.s. I am not being funny. It can actually work and when there are too many zeros,
    then switch from US dollars (USD) to US trickets (UST).

    Reply
  • I think it is beneath your dignity to quote a 4.4 % unemployment rate. It does not jive with the labour participation rate. Here is what Paul Craig Roberts has to say about that.
    “The rosy unemployment picture is totally contrived. The unemployment rate is 4.4% because discouraged workers who have not searched for a job in the past four weeks are not counted as unemployed”
    ” most of these alleged jobs are the product of the birth/death model that adds by assumption alone about 100,000 jobs per month. In other words, these jobs come out of a model, not from reality”
    It is what some people look at. BLS changes it methodology to serve it purposes. Apparently Shadowstats using consistent methods places the unemployment rate in the low 20’s.

    Reply
    • Good point (well, not so much about my dignity…)–but you are correct about the labor participation rate…thanks for that

      Reply
  • Nothing will be done about the long term debt until an outside influence of some sort comes to bear and governments are forced to act. Voters are very short-sighted and simply keep voting for whoever promises the most and governments continue to play along. Voters don’t care who pays as long as its not them. Meanwhile the party continues…

    Reply
    • John–you nailed it! “OPM”–Margaret Thatcher said “The problem with socialism is that you eventually run out of other peoples money”

      Reply
  • Here,here to electing fiscally responsible politicians. Are there any out there? Bob for prime minister. Unfortunately Canada is aligned with the U.S. Economically and will be dragged along into the abyss.

    Reply
  • Tax free world; We strongly ask gov’t to balance budget and plan to reduce debts for i.e., US federal debts $20 trillion.

    Debt trap – slow GDP growth – eating saver’s interest income by below below normal interest rate.

    Reply
  • I am amazed that people don’t understand this. I think basic Finance/Economics should be mandatory in high school.

    Reply
  • US federal debt to GDP ratio now is $19.9 t divide by $19.3 t GDP = 103+%.
    In 1995 US debt to GDP was 65, Italy 118 +-.
    US total national debt $67.7 trillion / $19.3 GDP is 350%.
    Federal spending is $3.983 t – federal tax rev. $3.3 t = $683 billion deficit this year.
    Debt rises faster than GDP growth that is holding fed fund rate increase back I assume.

    Reply
  • We are investigating what a deficit causing factor in US degrading our financial life.
    US trade deficit is about $769 b.
    If not now when US balance budget?

    Reply

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