This blog had it right all along. Matt Franko and I had been focusing on what mattered--gross, topline government spending. We never wavered from our bullish forecasts.
The people who have been looking at the shrinking deficit for the past two years just don't get it. It's not about the deficit. All the deficit is, is what's left over after all spending and taxpaying is done, i.e. financial savings.
It's all about how much is being spent and not even that important as to who is doing it, so long as some entity is spending.
We are light years ahead of the other forecasters here. They're stuck.
-Mike Norman
while I really like the added value of looking at the topline spending figures in our analysis, you are way over the top here Mike. History is not kind to your "top-line govt spending is THE key metric for forecasting" theory, the deficit has been much more reliable predictor historically of recessions. The Govt deficit has been larger than the trade deficit every year since the GFC until last year. How long can this go on? 1-2 years without a marked increase in private sector credit growth? In other words, its way too early for this victory dance of yours:
ReplyDeleteDeficit:
https://research.stlouisfed.org/fred2/graph/?graph_id=212993
Total Federal Govt expenditures:
https://research.stlouisfed.org/fred2/graph/?graph_id=212994
Clearly the deficit chart is a better predictor of the recession likelihood than federal outlays.
If you had been short or out of stocks for the past two years based on the shrinking deficit and all the bearish forecasts tied to that, you would have been ruined. How long do you stay bearish? Three, four, years and then when (if) it happens, maybe because of something totally unrelated, you declare victory? That's not a reasonable approach.
ReplyDeleteThis comment has been removed by the author.
ReplyDelete"If you had been short or out of stocks for the past two years based on the shrinking deficit and all the bearish forecasts tied to that, you would have been ruined."
ReplyDeleteThats a huge leap. Being aware of significant downside risk in the stock market because the deficit is shrinking below the trade deficit and credit growth is muted, is not at all the same thing as short stocks. And the market hasnt even done that well this year, 5% up in 2014 isnt killing it by any stretch of the imagination. T-bonds did better than this is I remember correctly.
"Three, four, years and then when (if) it happens, maybe because of something totally unrelated, you declare victory? That's not a reasonable approach.
"
On the contrary Mike, its you who are declaring victory. If you look at nothing but topline Govt spending (which has never gone down yoy in post 1971 America until 2011) You would have missed every major recession.
Thats not a reasonable approach
Interestingly, the economic indicators have been declining rather nicely in tandem with the drop in the deficit. I'd say that indicates something wrong with the idea that scavenging the unburdened currency out of the economy. We need more cash, not more private debt. The private debt is the problem, not the deficit.
ReplyDelete--zapster
Auburn,
ReplyDeleteWe dont measure "outlays"... we measure cash basis net withdrawals from the TGA.... (total withdrawals minus UST security redemptions...)
There is no public domain data series on what we measure that I am aware of.
I've talked to the FMS dept down at Treasury to see it they keep track of this and could I get an export but they told me they would like to but can't afford it.... they have no money to do it....
This data is just one input to what is going on in the system.... system liabilities are another factor ... if system liabilities grow at a pace that exceeds the growth in this leading govt spending (which is highly probable as no one in the financial sector even knows what the heck is even going on... those morons just "dance while the music is playing"...) , then we can have problems in the financial sector as that sector would be establishing liabilities more rapidly than incomes are growing... this could create failing liabilities, etc at some point ... probably a recession if this mis-match becomes severe and the financial sector wipes itself out...
right now the system is being supplied pretty consistently at about a $4.2t annual pace for the last few years so accordingly we see no credit growth either... banks can only leverage the growth in this data series (too bad for them no more "NINJA" loans.) ... no meaningful growth in this data series, then no meaningful growth in credit either....
"Its about price NOT quantity" also plays a role in this as govt price setting functions are not acknowledged either by the people allegedly regulating this system....
We could be doing a better job of quantifying these phenomena ... we have to up our game we are not moving the ball and are getting ZERO yardage.. .... and move on from all of this mostly qualitative/rationalist analysis we have been doing....
rsp,
Government and the external sector were very, very strong indeed.
ReplyDelete"Real exports of goods and services increased 4.5 percent in the third quarter, compared with an increase of 11.1 percent in the second. Real imports of goods and services decreased 0.9 percent, in contrast to an increase of 11.3 percent."
"Real federal government consumption expenditures and gross investment increased 9.9 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. National defense increased 16.0 percent, compared with an increase of 0.9 percent. Nondefense increased 0.4 percent, in contrast to a decrease of 3.8 percent. Real state and local government consumption expenditures and gross investment increased 1.1 percent, compared with an increase of 3.4 percent."
The external sector might be less strong as the oil/gas advantage is depleted from the Saudi demands for production cuts, along with a strong dollar and tightening offshore-dollar credit conditions.
Previous Republican controlled governments talked about deficit reduction but spent money like sailors on a drunken holiday. The Dems conservative environmental base abhors all development and can't get any projects through congress, where as Repubs are the opposite, very very progressive on spending on economically beneficial but expensive projects that will provide real growth [to reduce the deficit in the long run ;)]. Whatever their motivations, who cares, spending is spending.
Dems could very easily be advocating for more $$ for education/college students.... as "environmentally friendly" fiscal support.. instead of yoking up our young people with debt to finance the "educational industrial complex".... 10s of $k in student loans at "prime plus 2" as Liz Warren thinks is "a good enough deal for the taxpayer"...
ReplyDeleteBut Ryan, this "full Europe" thing that Mike is looking at is the real deal....
they could blow this whole thing up in March if they go this way and slash this spending flow by 100s of $B.... we have really watch that issue...
rsp,
Matt-
ReplyDeleteAgain, I will repeat what I said. Looking at the daily tsy spending flows is useful. It adds a piece to the puzzle. And I am grateful for your efforts in that area.
However, also like I said, spending has never decreased yoy between 1971 and 2011, so if you were basing your analysis on this metric, you would have missed the last three major recessions. Which is why I disagree with Mike's over the top claims about the efficacy of this one metric.
Useful, but lets not get carried away.
"However, also like I said, spending has never decreased yoy between 1971 and 2011, so if you were basing your analysis on this metric, you would have missed the last three major recessions."
ReplyDeleteAuburn I cant find data that far back I'd like to examine that actually... but as far as 2008 goes, pretty much the financial sector blew it self up and it led to a bit of a recession...
(I'd like to see what was happening in the late 70's into the early 80's but no data....)
In 2008 The financial sector was contributing about 40% of SP500 earnings at that point ("music was playing".. morons were dancing, etc....) so when that went away the index fell by 40% but the non-financial sector just kept going because this number kept chugging along... actually it was increased by about $1T annual.... so we recovered pretty quickly...
Financials are now back to contributing about 20% if they blow themselves up again the index could fall 20%... if this top line number is steady to up that would be a buy at that point again...
Its a complex system for sure, but I dont think "the deficit" is very meaningful/causal as far as trying to positively correlate it with higher periods of economic growth...
If the govt was increasing this number by about 100b to 150b annual I'm fairly certain we would have a much better domestic economy, less cops assassinated, etc... no matter what the deficit number ended up being...
rsp,
Ryan, I have no clue what this means:
ReplyDelete"The Dems conservative environmental base abhors all development and can't get any projects through congress, (WHO? and WHEN did this happen??) where as Repubs are the opposite, very very progressive on spending on economically beneficial(on what planet?) but expensive projects that will provide real growth [to reduce the deficit in the long run ;"
Matt-
ReplyDeleteThere is no meaningful difference between your net withdrawals from the TGA and Govt outlays. So you can find total Govt expenditures from a number of sources, FRED, like I provided in my first comment
https://research.stlouisfed.org/fred2/graph/?graph_id=212994
or Office of mgmt and budget:
http://www.whitehouse.gov/omb/budget/Historicals
Either way, YOY topline spending growth has flatlined for the federal Govt, for the first time in the pure fiat era. If anything, this means economic growth should be tepid, not bullish.
This comment has been removed by the author.
ReplyDeleteAuburn yes tepid... but I still dont see how high saving is supposed to help growth..
ReplyDeleteIf you increase the control voltage to an electric motor while this increases the output the motor will often get warmer due to resistive loss characteristics of the motor ... but we shouldn't interpret that as some how the motor getting warmer is making the pump increase its output...
We have more work to do.... rsp
Total spending on stuff made in the USA minus total spending on stuff made elsewhere is what matters to GDP. So I would write it like this: GDP= (C+I+G+EX) - (IM).
ReplyDeleteForecasting comes down to putting together the pieces that are accelerating vs. those that are decelerating.