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Tuesday, September 27, 2016

How Obama (& Congress) "Saved" the Economy

During Obama's presidency, the US Treasury will issue $10+ trillion dollars in debt by the time the next president takes over).  This $10 trillion dollars (equivalent to nearly 2/3rds of all annual economic activity in America) was spent to pay bills above and beyond what Congress was willing to sign their names to in tax collection or spending cuts.

The chart below shows that over Obama's nearly 8 years, US economic activity was boosted by federal debt spending at an average of 8% annually (a depression is typically accepted as a 10% decline in annual economic activity).  So, Obama and Congress (with the Treasury's help) created new money to delay (not avoid) the inevitable painful restructuring that is otherwise known as a recession or more likely depression.
And since America never pays off it's debt but instead only services it via issuing new debt...we will be paying the interest on this debt indefinitely.  Luckily, the "independent" Federal Reserve just happened to implement ZIRP and buy trillions of dollars worth of US Treasury debt to avoid an interest-rate-armageddon.  And what did we get for this $10+ trillion in new debt fueled economic activity?  The annual economic activity (GDP) from 2009 until 2016 grew by $3.9 trillion?!?  For every $2.65 spent in perpetual federal debt obligations, US economic activity grew by $1.
The chart below highlights the annual economic activity or "growth?!?" minus the annual federal debt incurred.  Only the government could break every accounting rule to count new debt as growth without a very large offsetting asterisk.  On a net basis absent the huge growth in government debt, the US economy  has contracted in record fashion in 7 of Obama's 8 years in office  (and 2016 was the 4th worst in US history).

The problem with this is the GDP (or economy) is the basis for tax collection.  So, if the US issues huge amounts of debt that do not result in a significantly larger tax base with which to pay the principal let alone the interest...then more debt issuance will be necessary to pay the interest on the debt that was just issued.  Slippery slope and this isn't even counting the unfunded liabilities which are now quickly moving to annual deficits...requiring more tax revenue (LOL) or more realistically greater debt issuance.

Anyway, just to put things in perspective, the chart below shows total GDP growth vs. Federal debt issued during each presidents term...and the resultant economic growth minus the debt issued.
Next, the chart below highlights the US economic growth during each presidents term vs. each dollar in federal debt incurred (net).  During Clinton and Carter's terms, for each Federal dollar spent in new debt the economy grew $2.5's.  During Reagan and the Bush's (Sr. and Jr.), for each dollar in debt issued, there was essentially $1 dollar returned.  However, during Obama's term, for every $1 in debt incurred the economy "grew" $0.38.
And since peaking in 2013...the activity spurred by greater Federal debt is trending decidedly in the wrong direction.

Population growth and demographics have and will define presidencies...and the next 8 years will be the worst regardless whether Trump or Clinton become president...outlined HERE.

***For those curious - I use the Dallas Fed "Market Value" of Federal debt.  The par value of government debt, which is reported by the U.S. Treasury Department, reflects interest rates at the time the debt was issued while the market value is adjusted to reflect market interest rates as of the observed period.


  1. Increasing retirement age to 70 could possibly help.

  2. How does the 3.6 Trillion added to the Federal Reserve balance sheet factor in?

    Was this not money "made good", and therefore re-issued to make new debt available via the fractional reserve process?

  3. Chris - Public sector debt is only one way to increase overall debt loads. In a debt based monetary system, debt loads have to continually increase or deflation will set in. The private household debt load (mortgages, student loans, auto debt, and revolving credit) slowed its increasing rate post 2008 with mortgage debt and revolving credit drastically deleveraging. Corporate debt is another matter and has increased quite a bit. Public debt as you look at in this article also increased quite a bit.

    So, the bigger questions is this...with household demographics negative for the next 10 to 15 years and corporations leveraging up over the past 8 years, how much debt with the government have to incur to prevent widespread deflation? If you look at the federal debt as doubling approximately every 8 years since 1981 (the Volcker peak in interest rates) then Trump or Clinton will need to add somewhere north of $15T just to maintain the ability to continually pay interest and principle.

    Interested in your take on the various sectors of debt, the effect of demographics on those sectors, the effect of ZIRP and NIRP on corporate debt, and what the public sector is most likely to do.

    As always, thanks for your analysis Chris!

  4. Federal Reserve balance sheet has an asset side and a liability side. the $3.6T in QE on the asset side was leveled out with $3.6T in highly liquid cash equivalents. A majority of the liability side are sitting in excess reserves earning 0.5% interest on excess reserves. This has prevented higher inflation from taking hold and has completely altered our monetary system moving forward. The 2008 Emergency Economic Stabilization Act was a game changer. This is where most people fail to understand the change and have truly believed the Fed would hike hike hike. Errrrr wrong. The Fed is already tight in our new monetary control system because the rest of the world has eased significantly while the U.S. has stopped. I say cut IOER to -0.25% and let us see what happens!


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