Above chart is US federal deficit / GDP ratio, 1900-2010. The two prior peaks (1919=17, 1943=28) coincided with WWI and WWII respectively. Currently we are at the 10.64; 3rd highest in the 110 year series, and not declining yet.

The rational will argue the deficits financed the first and second efforts to forever free the world from tyranny. Recalling that financial markets are forward looking, that the options market forecast the 9/11 event [A. Poteshman: Unusual option market activity and the terrorist attacks of September 11, 2001, Journal of Business , 2006] among many other things , one wonders when flags may wave again?

Alex Castaldo adds:

Some cheerful reading from the Congressional Budget Office :

Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels. […]

If the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. […]

[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. [If this were to occur, to] restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.





Speak your mind

3 Comments so far

  1. douglas roberts dimick on July 30, 2010 6:18 pm

    A Consilience Involving Money and Freedom — Deficit Accounts

    In R. Scott’s production of the latest account about Robin Hood, our hero cites before a gathering of King and not so loyal subjects that “nothing comes from tyranny but failure.” The son of a stone mason, Robin states that one builds a country’s future from the ground up, as the key is constructing a solid foundation…

    Whereby everyone’s home is their castle, for it is the cornerstone of liberty. And without liberty, is not any other form of economic prosperity merely a poli-financial construct from which dictatorships so rule?

    I have been living in China for 4 years now. One can see how tyranny corrodes the life forces of freedom and prosperity for the benefit of a few who rule by the forces of darkness and corruption.

    What is the brightline test for such rhetoric? Rule of Law…

    A small example: the cited article in the Journal of Business appears to be blocked by the Chinese Government.

    On a larger scale, what is the PRC central government deficit?

    No one knows as there is no law ensuring independent accounting, for there is no rule of law that operates above the political designs of a single political party.

    But the consilience between Communist government and US Government budget deficits is a matter of both liberty and our future, be it the disenfranchisement of 1.4 billion people or the taxing of future generations yet to be represented.


  2. William Brauer on August 2, 2010 11:15 am

    Don’t agree these are leading indicators. 1943 was producing all the equipment needed for the two front war that really took off. 1919 was the end stage of WW1. Deficits now still involve Iraq and Afghanistan. Perhaps a better question is the guns and butter debates going back to Vietnam. Couild we really afford these efforts by borrowing to pay for them over many years?

  3. Russell Sears on August 2, 2010 2:35 pm

    As Mr. Brauer remarks imply budget deficits do not occur due to market forces, but by Government choices that are immune to true market forces. World War occurrence after a bulging deficit  is therefore a matter of cause and effect, feeding off each other. Or Tranny and freedom duking it out. Rather than looking for war between states, I am looking for it between generations. The old versus the young.



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