It’s funny how easy it is to ignore deficit data. But it matters for one simple reason: 2017-2019 is unquestionably the part of the economic cycle where we should be recording surpluses. This is when tax revenues and aggregate incomes are the highest and when we need no fiscal stimulus to keep growth going.

In light of that idea, note the latest from the Congressional Budget Office: “Deficits. In CBO’s projections, the federal budget deficit is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029. Over the coming decade, deficits (after adjustments to exclude the effects of shifts in the timing of certain payments) fluctuate between 4.4 percent and 4.8 percent of gross domestic product (GDP), well above the average over the past 50 years. Although both revenues and outlays grow faster than GDP over the next 10 years in CBO’s baseline projections, the gap between the two persists.”

In other words, when we should be posting a surplus, we are posting the biggest deficit ever, and it’s going to get worse.

That’s important because deficits SKYROCKET in recessions as tax revenues and aggregate incomes dive and we lean on govt resources to spark the economy. It’s an oscillating relativistic data point. And we are now seeing the low end. Nevermind the comical longer-term predictions from the CBD. They generally pretend the economy isn’t cyclical — that we have seen our last ever recession. It’s an absurd framework, but there we are.

In any case, the high end of this range will likely be well over $2 trillion in annual deficits during our next recession (between 10-15% of GDP).

The bond market is now predicting that recession will hit sometime with the next 6-18 months based the deep inversion of the 3-month/10-yr Treasury yield curve — which has predicted every recession for the last 75 years with no false positives at this depth of inversion. It is possible that “this time is different” because of a decade of central bank asset purchases in global sovereign debt markets — ie, they have had a toe on the scale, so the readings may not mean what they have in the past. But there are other indicators, such as contracting PMI’s in every major global economy except India and the US right now and 8 straight months of declining freight rail cargo — which has been another reliable recession warning.

The big point here is this: during the part of the economic cycle when we should be posting a surplus, we are posting record deficits around 5% of GDP. That means, almost certainly, that we will be well over 10% of GDP during the downside of the cycle.

For a little perspective, in the EU, they don’t allow countries to run deficits above 3% of GDP. Those rules exist because EU members can’t print money — they use the Euro, which is centrally managed. But the result is a rule that demonstrates a threshold when fiscal management is possible in a healthy economy without resorting to money printing to paper over profligacy.

The term “Banana Republic” is a pejorative referring to third-world failed states usually with autocracies in place (ie, Zimbabwe) that generally exist on the basis of a single export product (ie, bananas or diamonds or walnuts). Perhaps the defining characteristic of such a state is in its history as a debtor.

I know we generally assume deficits don’t matter, but when the US is running at 5x over the legal limit for the EU, I can promise you it’s going to matter.


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