Friday, May 22, 2009

What don't they get?? Deficits add to private savings!

This growing "need" to balance the budget risks putting us back into recession. It's exactly the mistake that FDR made when he listened to the advice of his Treasury Secretary at the time, Henry Morgenthau. Balancing the budget in 1936-1938 put the nation back into a deep recession. We're facing an uncanny repeat of history here as Geithner proposes reducing the deficit and Obama seems to be going along with it.

It's all the more stunning that this is happening when you consider Geithner's first public remarks as Treasury Secretary, when he said the failures in the past were due to taking away stimulus too soon.

Anyway, what doesn't he get? I know it's politics, but the Administration is now pandering to an electorate that does not understand this, but is completely capable of understanding it if it were explained to them.

The chart below does a good job of this, I feel.

It shows that high deficits equate to high savings rates and government surpluses result in declining or negative savings rates of the non-governmental sector.

The savings rate was strongly positive all through the high deficit years of the 1970s and 1980s (peaking with the Reagan deficits). Then Clinton balanced the budget and look what happened: Personal savings plummeted to zero! (Thank you, Dick Morris.)

Now the deficit is surging and, guess what? Private savings are surging as well. In fact, they just hit a record.

What's so hard to understand, here????

There is nothing mystical about this. It's just a balance sheet relationship. Whatever's on the government's side of the ledger has the equal but opposite value on the non-governmental side.

If government is to "save" (cut its deficits or run surpluses), the non-governmental sector of the economy (you, me, businesses, etc) MUST supply those savings out of our pockets.

However, when the government "dissaves" (runs deficits), WE ARE THE RECIPIENTS of that amount of dissaving to the penny. The facts show this. Why is it, then, that high level policymakers are just flat out ignoring this fact?? It's gonna kill the recovery and kill this country, eventually.


googleheim said...

Don't touch my deficit !

If I am a tax payer on the hook, please don't take away my hook because I will not be able to fish !!

on my yacht in Mar de Plata Buenos Aires that it ...

mike norman said...

No...Make it bigger by spending a lot. Make it bigger, BIGGER!!!

googleheim said...

You are absolutely correct.

How about superimposing your graph on true money printing on top of this one ? it co-relates 1:1 to the personall savings level.

If I were to do it personally by buying capital goods that let me manufacture something for sale - that would a good policy. If it is only on consumption - not good for a person.

But we are talking about our government. They are taking dirt out of the playing field and making us play soccer in doors - functional but cumbersome.

Even the government could have substantially if not absolutely benefitted the tax payer, yes the tax payer, by having spent the TARP and stimulus money last November when everything was dirt cheap.

It also shows the Republicans were wrong not to tap into the National oil reserve to bring the price of oil down two years ago - the lower price of oil would have mitigated the inflation ( really speculation ) back then and enabled folks to pay their mortgage and bills !

And then after the inevitable crunch, buy the cheap oil and replenish the national reserves.

It applies to everything from toilet paper for army bases, to food, to all kinds of contracts - the government could have secured all the capacity which was idle to rebuild the military or the roads with the lower prices.

However, it's all going back up -

where's the pull back in the market ?

it will be there when they reduce the deficit to try to make the dollar stronger.

Only solution is to start manufacturing something(s) - regardless of cheap dollar or strong dollar.