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Everything You Heard About the Deficit Falling Is Wrong

Most of the media bought the notion that somehow the deficit had magically halved. Let's look at the math.

Photo Credit: Cotney


If it’s too good to be true, it probably isn’t. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines that came of age decades ago. 

So went the telling of the deficit story last week. Most of the media bought the notion that somehow the deficit had magically halved to $682 billion from around $1.1 trillion last year, based on not even examining the Treasury Department's own reports before promoting that gleeful and surreal conclusion.

When the Congressional Budget Office (CBO) announced that the deficit underwent some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The magic number proved that government fiscal stimulus will ultimately boost the economy. (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) Thus, budgetary cuts are not necessary.

Where there is truth to this (austerity never helped anyone but those not affected by it), ignoring the fact that certain federal fiscal stimulus plans were used as reasons to increase overall debt in the form of treasury securities that banks use as reserve to buoy the banking system—and thus the stock market—and not the general economy, does economics and more importantly, the country, a disservice.

On the other hand, the free-market types also considered this a triumph of their philosophy. By not overly regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal.

Again, this does their notion a disservice because a true free-marketer would be against the Federal Reserve propping up the treasury (and thus debt) market by buying lots of treasuries, and allowing banks to park more treasuries on their books to the tune of $1.5 trillion worth) and toxic assets (in the form of buying $85 billion of  them from banks who had them rotting on their books allowing banks to free up space to speculate in other ways).

Those debates, in all their generalities, will continue on. Meanwhile, there’s the matter of what sparked the latest phase of debates over big vs. small (rather than Wall Street-coddling vs. population-stimulating). -the deficit figure, that number that measures what the government takes in vs. what it spends, and what it shows, is that neither bank stimulus nor populace stimulus has changed very much in the past three years.

First, a hat tip to Karl Denninger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go. According to Denninger, since September 28, 2012, “there has been a net $762.6 billion of new debt added to the federal balance sheet, not the $488 billion the Treasury Department claims.” In addition, Social Security and Medicare are almost $90 billion in the hole this year already.  

He writes that Treasury’s own cash statement indicates that, “At the current run rate  over the four calendar months … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, which is about the same. If you include figures through the end of April, that same run rate produced a deficit of about $1.307 trillion.

I was truly puzzled by the new figure and more so by how much of the media and various Krugmanites tend to lump all fiscal stimulus into a population helping category, without noting that certain forms help the banking system more than the population. To be sure, stimuli like extended unemployment programs help families make ends meet while seeking better opportunities, but programs like HAMP barely make a dent in peoples’ foreclosure-related problems, while enabling banks to benefit from more aggregate support.