Pro Perspectives 5/12/23

Please add to your safe senders list or address book to ensure delivery.  

May 12, 2023
Let’s talk a bit more about the building debt ceiling drama, and the comparisons to 2011.
Obama entered office with an aligned Congress, and a war-chest of fiscal stimulus.  But beyond the $800 billion stimulus package (within the $1.4 trillion deficit of 2009), he ran a $1.2 trillion deficit in 2010, and proposed a $1.6 trillion deficit in 2011 (over three times the pre-financial crisis budget deficit of 2008).
Keep in mind, the economic contraction of the Great Recession, the maximum drawdown in economic output, based on the Fed’s quarterly readings, was “only” $500 billion.  To put it simply, the emergency fiscal stimulus, and subsequent deficit spending deluge was FAR in excess of the damage.
If we include the 2011 deficit proposal, that’s $2.8 trillion in spending (in excess of the pre-crisis, 2008, budget deficit), — to resolve a $500 billion loss in economic output. 
Sadly, it wasn’t growth producing (it was agenda fulfilling).  The economy grew at below trend rate, with the weakest recovery since World War 2.  
This is, in part, why Congress divided by late 2010.  In 2011, the House Republican’s pushed back on the madness and ultimately got a reduction in spending, in exchange for a last minute debt ceiling increase.  
In that case, then Secretary of Treasury, Tim Geithner put a hard stop date on a debt ceiling raise of July 8th.  The stalemate continued on July 7th — and Geithner moved it to August 2nd.  They did a deal on August 2nd. 
Fast forward to today:  Biden walked into office with an economy that had already fully recovered the pandemic-induced loss of economic output.  It was a $2.1 trillion loss of GDP.  And it was plugged by the $2.2 trillion Cares Act.  GDP was nearly back to peak levels by the end of Q4, 2020.    
However, if we include the 2023 budget proposal, we’re getting $5.7 trillion in deficit spending over three years.  That’s $2.7 trillion in excess of the pre-crisis deficit spending level of 2019 (as a reference point/benchmark). 
So, we have $2.7 trillion in excess spending, to resolve a economic output hole was already plugged
It’s driving inflation.  But it’s producing, relatively, weak growth AFTER the effects of inflation.  No bang for the buck, just debt, with a rising debt service cost. 
Why?  Because it’s not intended to be growth targeted.  It’s spending on the Biden administration’s social and economic transformation agenda.
This is precisely why I said earlier this week, this debt ceiling standoff (between parties) is as much about policy-path (maybe moreso), as it is about debt levels. 
PS:  If you know someone that might like to receive my daily notes, they can sign up by clicking below …