A crowded trade is a market position in which the players are all of one mind. As a trader with hopes of survival, I tend towards taking the other side of consensus bets. I’ve come around to thinking that the idea that we have too much government debt is now a crowded trade. I am going to argue that the Federal Government’s budget deficit is not excessive, it is not due to wasteful government spending, and, above all, it will not bankrupt the nation. I will do this with the understanding that I will convince no one because no one that I’ve spoken to in the recent past has been able to address the subject without becoming extremely angry. The last person I had this discussion with turned red in the face and the veins in his neck bulged out one minute into the discussion.
How much of a deficit is too much? We don’t know, because we’ve never gone bust over a budget deficit. What we do know is that we’ve had deficits that were a lot bigger as a percentage of GDP in the past and it has not killed us:
The Federal budget deficit at year end 2012 was 7 pct. of GDP. Horrific, fall-off-the-cliff deficit? Hardly. It’s down from 10 pct. three years ago. It’s barely one fourth of what it was in 1943. The nation ran deficits most years from 1960 to the late nineties, finally getting into a surplus in 1999. On the whole, the economy did pretty well during that time.
For all the talk about waste in government, most of the deficits recently have been due to force majeure–two unexpected wars which ballooned expenditures and a recession which brought on a big shortfall in revenues and a corresponding jump in food stamps, unemployment benefits and other safety net spending. For a complete discussion, Google “Where did the Mammoth US budget deficits come from?” and go the Christian Science Monitor story.
Recent polls indicate that a majority of voters want the deficit reduced through spending cuts. In a poll conducted by The Hill, two options were given without naming the source. The proposal made by Paul Ryan was the most favored option. Oddly, when told it was the Republican plan, the same voters backed off, saying they did not trust Republicans to get it done.
Nevertheless, the public wants government to cut spending. Spending cuts will surely reduce outlays, but they will also reduce revenues. I argue that we should also borrow more money to do some spending. There are two kinds of debt, self-liquidating and non-self-liquidating. Our war induced debt is non-self-liquidating because war does not generate revenues. But if we borrow money to refurbish roads, bridges, airports and port facilities, we can issue self-liquidating bonds funded with use taxes which would provide a specific source for the necessary revenues. We would generate jobs for the private sector immediately, and help to make the country more competitive in world trade. Both would generate increased revenues, helping to speed up the process of bringing the budget back into balance.
This a wonderful time to rebuild our national capital stock. Labor is in plentiful supply and Government’s cost to borrow is extremely low, probably the lowest it will be in our lifetimes. Tell me where I’m wrong.