Deficits Should Rise During Recessions, Not Booms
Rarely have deficits risen when the economy is booming. And never in modern U.S. history have deficits been so high outside of a war or recession (or their aftermath).
The federal budget deficit has only exceeded 4.6 percent eight times since 1950. Four of those years were during and immediately following the Great Recession of 2009, and the other four followed the 1981-82 recession (which was followed by large tax cuts and a defense buildup near the end of the Cold War). Most smaller spikes in the deficit also took place during or immediately after a war or recession.
Going forward, deficits are projected to rise even assuming the economy remains stable. Under current law, CBO projects deficits in 2028 will exceed 5 percent of GDP, and under a (perhaps more realistic) Alternative Fiscal Scenario that assumes Congress continues recently enacted policies, deficits will reach 7.1 percent of GDP in ten years.
The same pattern holds with employment rates – the deficit has typically moved in the same direction as the unemployment rate. Yet the current unemployment rate of 3.7 percent is the lowest since 1969, and the deficit is high and rising. All other recent periods of high deficits have been accompanied by high unemployment.
What's the Problem?
Apparently, there is none.
Trump brags about the stock market every chance he gets.
To support Trump's mind-blowing deficits, he needs lower interest rates.
Moreover, the Fed is willing to accommodate Trump.
Bubbles Be Goode
In case you missed my musical Fed tribute, please enjoy Bubbles B. Goode: Musical Tribute to the Fed.
Mike "Mish" Shedlock