The budget surplus myth

On Thursday the White House published the chart below that explains how the nation got from the Clinton-era budget surplus and the projection that it would eventually pay off the U.S. national debt to the $14 trillion debacle we’re facing only a decade later.

U.S. National Debt

(Click on the image for a slightly more legible version.)

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3 thoughts on “The budget surplus myth

  1. It was easy to declare budget surpluses when all you did was inflate the currency. Clinton appears to be the one that took the most advantage, begun by Nixon when he took the US off the gold standard, to new heights. In 1972, we had about $500 Billion in total currency (according to the St. Louis Fed) Today, we have about $10 Trillion according to the same source. Others paint a much larger number some to over $16 trillion.

    While Nixon took us off the gold standard, the real increases started with Carter, the Fed continued back funding the banks (printing money and borrowing) under Reagan, but it was Clinton that really drove it up. They had to do something as the entitlements were draining the federal coffers and everyone who was in the loop new that this was unsustainable. Social Security was soon destitute, and the extension to social security, Medicaid and Medicare, had accelerated the drain even further. This was not a new idea. Wilber Mills, who in 1964 some considered the foremost expert on social security’s impact warned President Johnson that the great society program was going to break the economy. When the democrats swept the house and senate, Mills, a democrat, got the religion and supported Johnson’s initiative (listen to the Johnson tapes available on line for some fascinating “inside baseball”)

    The method to cover the inflation of the currency, that the Fed and Clinton chose was the elimination of the savings and loans (never let a good crisis go to waste – and if you don’t have one make one), long a thorn in the side of the Fed and the banks, using a change in asset valuation to the Mark to Market Rule, and then the elimination of Glass Steagle Act to facilitate more leverage over the base assets of the banks in the U.S. Then, the piece de resistance was the creation of Fanny and Freddie to stimulate (read as back end fund) low income home ownership, really bringing the science of currency inflation to a new level.

    In the world of unintended consequences, this was the ultimate doozy! Over time, the inflated currency bubbles all burst (stocks – dot com crash, other smaller scales, then the big critical one Housing) The chickens came home to roost. Everyone forgot about the “Mark to Market Rule”! While it had a crippling effect on the S&Ls, it didn’t affect the banks in the 70s because they could practice fractional reserve lending at a ten to one ratio. As the leverage, on the derivatives (over 1,000 to 1 in some cases) exploded, and as the calls on the hedges against the default of the derivatives came due, the insurers, like AIG, began to collapse. With the hedge collateral gone the banks were soon to follow. The US and some others had to start to flow more money to back the insurance protecting the banks hedges or it all collapsed. And right alongside they needed to shore up the banks’ balance sheets as all the phony collateral eroded. Now you understand why the government purchased AIG and still is back end funding the underwriting of the defaulted collateral.

    If the numbers are correct we should really have a $4 to 5 trillion economy today not a $10 to 16 trillion one. If we are that overvalued, along with most of the other western nations, then the problems are catastrophic. The increase of the debt limit is not the issue, the underlying valuation of our entire economic system is the problem.

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