Third Quarter Economic Commentary: Fun With Numbers
3rd Quarter Economic Commentary:
Fun With Numbers
by Roger Marshall, Fixed Income Managing Director
Someone said a picture is worth a thousand words, so I would like to say that a graph is worth a thousand numbers. And the graph below shows a lot. In 1992 the federal government was running a deficit of more than $250 billion. That was considered huge. By 2000/2001 that deficit was converted into a surplus. Since then, the deficit has ballooned to levels nobody would have considered possible.
First Quarter 2010—the federal deficit is running at a $1.347 trillion dollar rate!
How are we going to finance this gap? Well, let’s look at the next graph, Federal Debt Held by Foreign and International Investors.
As this graph illustrates, the amount of U.S. debt held by foreigners rose steadily through 2000, and then with the U.S. running budget surpluses for about two years, the foreign holdings actually declined. However, that respite was short lived. Since 2002 the foreign holdings of U.S. debt has soared. We are all aware now of just how important these buyers of U.S. debt are. Could we run such huge deficits if they were not willing to buy our debt? Hmm.
The next graph is probably worth more than a thousand numbers. It shows the U.S. money supply growth, or lack thereof. I say lack thereof because I find it amazing that in these hard times the money supply in the U.S. is actually falling.
Since most people would be expecting monetary policy to be somewhat easy in tandem with fiscal policy and reflecting the high level of unemployment, finding out that our money supply is actually contracting should be surprising to just about everyone.
So, why isn’t the Federal Reserve Board letting the money supply grow? Is the economy overheating? Is it growing too fast?
The GDP graph below certainly does not support the thesis that growth is too robust.
Maybe unemployment isn’t too high? The graph below clearly suggests otherwise.
So, maybe despite a lack of growth, and despite high unemployment, the inflation rate is too high?
The graph of CPI shown below does not support that conclusion either.
In fact, inflation is at the lowest levels we have seen since before the 1970′s.
Conclusion
The U.S. economy is growing slowly. This growth is primarily due to the federal government running huge deficits, which are being funded to a large degree by foreign investors.
Despite slow growth, low inflation, and high unemployment, the U.S. money supply is actually shrinking rather than growing.
We need money supply growth. We need monetary stimulus. We need meaningful growth in the money supply.
When money supply starts growing meaningfully and income levels start to rise then we will know that our economy is on the right track.
Until then, we wait and we watch.
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