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.