Wikinvest Wire

Budget deficits and financial bubbles

Monday, August 31, 2009

Doug Noland of Prudent Bear comments on the history of U.S. government budget deficit projections as they relate to the many financial bubbles experienced in recent decades.

The Congressional Budget Office (CBO) saw deficits as far as the eye could see back in the early nineties. Actual deficits turned to nice surpluses by the end of the decade. And looking back at year 2000 projections, the CBO penciled in a $400bn surplus for 2009 and better than $3.0 TN of cumulative surplus for this decade.
I have my own explanation for why the CBO projections were so off in both the early nineties and earlier this decade: the historic expansion of “Wall Street finance.” The Securities Broker/Dealers began the nineties with assets of $237 billion, ended 1999 at $1.0 TN, and peaked at $3.1 TN in 2007. The GSE started 1990 with assets of $454bn, ended the decade at $1.732 TN and concluded 2008 at $3.458 TN. The ABS market began the nineties at $210bn, ended 1999 at $1.313 TN and peaked in 2007 at $4.5 TN. I don’t have data for hedge fund positions, “repos,” or the collateralized debt obligation (CDO) market - but all would have the same Bubble trajectory.

While the U.S. banking system was severely impaired to begin the nineties, this fact did not prove bearish for the economy, the markets or federal government finances. A historic “Wall Street” Credit Bubble was cultivated and then championed by the Greenspan Fed. This massive expansion of Credit created abundant liquidity for spectacular asset Bubbles, a dramatic inflation in government receipts and spending, and a consumption boom like the world had never experienced. And, importantly, the reflationary boom in Wall Street finance worked to repair and rejuvenate the bank Credit-creating mechanism – until last year's collapse left everyone (but the federal government) starved for Credit and liquidity.
It should come as no surprise that Doug doesn't think we're about to see a repeat of the early 1990s when an expanding credit system drove the economy. Moreover, the most recent estimate of $9 trillion for the ten-year budget deficit is deemed to be about right.



Blissex said...

As always, in their parochialism, USA commentators forget about the Japanese ZIRP and the gigantic Yen carry trade.

As to purely USA matters, regulatory changes that greatly reduced capital requirements at banks in 1995 and subsequently are equally responsible in creating the giant debt bubble.

In effect around 1995 the Republican party and the centrists of the Democratic party decided to recreated wildcat banking, only on a much bigger scale.


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