The second chart focuses on the years 1960 through 2011 with hard data points, and estimated projections for 2012 and 2013. Again the various presidential administrations have been included and coded for the party in power. The same key policy decisions are again located in time as well as key events.
This chart displays a purple dotted line to again show the Currency in Circulation (CinC). It shows three key indicators about our Federal Budget. The Green Columns show the total receipts, or income, to the federal government from taxes, fees, interest and other sources. The Blue Columns show the federal spending and the Red Line shows the balance of the budget with a surplus when the line is above the $0.00 base line and a deficit when the line is below the $0.00 baseline. Finally, the Yellow Line represents the cumulative balance of the trade deficit.
The most remarkable thing that one can see in looking at the federal budget related to the increase in currency is that the combined effect of federal spending and the cumulative trade-deficit actually offset the increase in currency. Other charts I have previously published (see President Obama’s Speech: Critical Question Continued) show that the healthcare spend is a point for point match to the CinC curve, indicating that the place that a large part of the newly created currency went, was to pay for entitlements. The other curve that matches the CinC point for point, is housing prices. Since mortgage debt is the creative force for the new currency, and healthcare and entitlement spending is where the money went, you would expect to see indicators like median home pricing leading the increase in currency, and the rising cost of total healthcare spending as following the increase in CinC and, that is exactly what you see.
Looking at the Budget Deficit line during Carter years, you see the beginning of an increasing deficit that continued into the first half of the Reagan years, rising to balance in the end of the Reagan second term. Once again the budget deficit increases during President H.W. Bush’s term building a historically negative trend. Clinton did, in fact, inherit a negative deficit curve, but so did Presidents Kennedy, Johnson, Ford, Carter, Reagan, G.H.W. Bush, G.W. Bush, and Obama.
What was it that President Clinton did that turned this curve around? Was it the rising net value of the U.S. economy? No! Looking at these numbers it becomes clear that since 1972 the U.S. economy was not based on the tangible value of our underlying work and assets. How could one even think it was based on real values when you look at the other items? No one in America today, economist or not, thinks that America increased our national net worth thirty-five times since 1972! Additionally, if you even came close to believing there was a real underlying increase in the value of America, then you would have to explain how the cumulative deficit (more money going out of the collective piggy bank than was going in) could have continued to offset any potential tangible increase in value.
Again, we need to critically understand the effect of the elimination of the gold standard as the basis for our currency. When we eliminated this restriction, the banks, due to debt based fractional reserve lending, could simply print more money. The additional money drove more purchasing, higher wages, higher home prices, more home purchasing, bigger mortgages, higher debt, and ultimately this cycle of just increasing currency. In effect it was a printing press tied to no real basis. While wages went up, tangible goods creation fell. While wages and benefits rose, real output value based on the world’s appetite for American goods went down. The more we purchased from other countries the less we sold to ourselves and the less the world was willing to buy what we were making.
The main thing that allowed President Clinton to generate his budget surplus was the rapid increase in currency that was begun under his monitory policy in 1993; not a real increase in the output value of the American economy and our underlying asset base. The strong acceleration of the growth curve in currency in circulation was no accident. Printing more money tied to nothing, faster than we were initially spending it for a short term, pushed the curve into the surplus category. All now must realize however that it was really nothing more than a temporary gain. More spending in the economy, would require more currency, which required maintaining rapidly rising housing prices to underlie the basis for the mortgages that backed up the new money. In retrospect, this simply could not sustain itself—particularly when as a nation we were now not just borrowing from the American institutions but from our prime international suppliers as well. Rapidly the debt owed to foreign nations was outpacing the leverage-able debt we owed to ourselves.
In conclusion, the constant refrain of the Clinton Budget Surplus is a simple myth. It is an international game of Three Card Monte that we have been playing since 1972. When we were the ones controlling the cards and moving them on the table, rapidly and unobserved we were able to continue the charade. Like people that kite checks to defraud banks, as long as we deposited the supposed increase in currency just in advance of the need for the money, and we kept the underlying values off the table, we succeeded. Unfortunately, the game worked not just on the international economy, it worked on ourselves as well. But just like the check kiter, if anything delayed that deposit of new currency into our economy then the Three Card Monte House of Cards came crashing down. That is precisely what happened in 2006-2007. Now the rest is history!
During this debacle, in 2006, one assumes by pure coincidence, the Federal Reserve decided it was no longer a good idea to calculate one of the key economic measures of the total amount of currency in circulation, called the M3. Today there are numerous organizations that have been continuing to calculate the M3 for years. Even the St. Louis Federal Reserve Bank, continued to produce a similar statistic called the MZ. The numbers for the CinC used in this article are those that are produced by the outside organizations. The St. Louis Fed number in 2008 was about $10 trillion as opposed to the $16 trillion of the other institutions. Regardless, while the sizes of the numbers are different the actual curves are identical. It is in these curves that the truth is told. Clearly, President Clinton’s actions increased the amount of currency in circulation in the U.S. economy during his presidency. This increase in the amount of money, allowed for more federal revenue which temporarily created a budget surplus. But what is also clear, is that it was not a real surplus.
If the underlying value of the U.S. economy remained the same, and the amount of currency increased, then at a minimum each new dollar diluted the value of the other dollars in the national piggy bank. The real problem is that the national real value did not remain the same. Our national net value has been in decline for almost 60 years as we have voluntarily decided to stop doing many of the things that created our cumulative value in the first place. At this same time, because we started printing more money in 1972, we have lulled ourselves into the belief that we can afford to spend a lot more. The effect on our national economy is devastating. And the people that have felt the most effect are the middle-class.
The middle-class is not eligible for the subsidies that the poor get. The way the system works is that as the poor get poorer we print more money and we give more to the poor in services. Since the new money goes into the economy, often through loans, investments and interest, those with excess assets, take some of their money and invest it into areas that benefit from the spending of the new printed money. In other words they can offset the loss in purchasing power because they can hedge part of their assets against the devaluation. The middle-class get neither subsidy nor do they have the excess assets necessary to hedge. This is why the middle-class has seen their lifestyles collapse over the past 30 years despite the rhetoric from either side.
Additionally, it was mostly the middle-class that the government targeted for the new spending for homes, bigger mortgages, and higher credit card balances to fund this engine of growth in new ‘out of thin air” currency. Recently, President Obama stated straight-out that it was the role of the middle-class to purchase more to drive our economy. In reality, not only did their increases in earnings buy less, the government convinced them to purchase a lot of things they could not afford based on their continually rising standard of living. A cynic may say they were screwed, blued and tattooed. Prior to the 1970s, those of us alive were taught to save, save, save! About 1973, we started to see a lot of promotion for credit, credit cards, and home ownership.
Now we know that in the end, it is us, or our children and our children’s children that will pay. Along with the myth of the Clinton Budget Surplus, comes the myth of the evil empire that is out to destroy the other side. There is no grand conspiracy to take money from the poor and give to the rich. There is no conspiracy to take all that the rich have and give it to the poor. There are just a lot of short sighted, temporary actions, sometimes done with the best intentions that have had horrible and cumulative unintended consequences. One of the key drivers is the need for our professional political class to continue in their job by trading our vote for perceived valuable free stuff. We now know unequivocally it was not free nor very valuable.
So the next time you hear about the Clinton Budget Surplus, you will have some additional data points to put it, and all of our monetary policy in perspective. Remember, it was old Ben Franklin who said, “a penny saved is a penny earned.” Perhaps he was more correct than we have recently realized!
Regardless of whether you agree with this article or not, please respond by tweeting or forwarding the link to others. While we may disagree on conclusions we can no longer afford to disagree on the need for this dialogue. If we do not begin to deal with the underlying issues soon, our fate will be sealed by circumstances beyond our control.
(Thomas W. Loker served as the Chief Operating Officer of Ramsell Holding Corporation. Prior to joining Ramsell, Mr. Loker was the founder and senior partner of Wild Tiger Holding Company and Thomas Loker Consulting. Visit his website at www.loker.com and his blog at tloker.wordpress.com.)