The country’s debt-to-GDP ratio is at a historic high, and countries with higher debt-to-GDP ratios during recessions struggle to respond effectively to recessions, due largely to politicians’ concerns over debt, and suffer more painful recoveries than nations with less debt.
This is the most problematic part of the business cycle because very few politicians are economists or even grasp our monetary system. Even those who actually understand macroeconomics at the federal level are reluctant to buck the accepted narrative and distrust voters have for anyone who steps outside established boxes. This is even more true when downturns and recessions coincide with campaign seasons.
That common narrative in the US is the result of the average voter relating federal economics and budgeting to their own kitchen table budget process that requires them to “obtain” money prior to spending. The value of thrift is too well ingrained in them to be easily discarded, evidence be damned. However, this almost always leads to doing exactly the wrong thing at the wrong time, as the federal government, as the monopoly issuer of our nation’s currency, should almost always do exactly the opposite of what constitutes good personal/household economics.
Every recession in history (except the great depression) showed signs of slow down prior to dropping off the cliff. This creates anxiety among the population and politicians are always willing to pander to their ignorance to show they too can be frugal when needed. When voters are claiming that the federal government should tighten its belt as much as the people are forced to tighten theirs they don’t understand that they are asking for a deeper and longer recession as well.
Times like these are when the government should have strong safety nets and infrastructure projects ready to go to inject the currency that the private sector is withholding. Deficit spending, the red ink of government, is the only net source of black ink the private sector has that doesn’t have to be repaid at some future date. The government should be the economic leveler when the people need it, but should “always” spend in deficit as long as we have trade deficits and allow wealth accumulation, both of which are currency drains.
When pressured, the people will take on too much private debt to maintain their lifestyles and without public money to retire that debt defaults increase dramatically as GDP growth slows and private debt is harder to “roll over” into new debt.The goal of Congress should always be 100% employment in the private sector, even if it must become the employer of last resort with public projects. Recessions can easily become depressions if vital supply chains aren’t maintained. Domino-like job losses in those supply chains are economy killers and are very hard to recover from.
Unfortunately, such reforms don’t seem to be of interest to the White House, which has until this point worked to make it harder for people to get food stamps and other federal benefits.
America has shown a propensity to elect business leaders and Governors to the White House. Even if they have stellar records in their previous jobs they are not suited to the mental reversal necessary to allow them to be effective leaders when they control the money supply. They will default to what worked in the past for them and will obsess on “cutting costs”, not realizing that they have a no-cost commodity in the currency to use to shape the economy.
Instead, they use the economy to service the mostly meaningless numbers of deficits and debt, thinking that the need for taxation will be less and the people will keep more of their own money. Their economic experience tells them that they must “get” money, taxed or borrowed, before they can spend on programs that mitigate the suffering of recessions. That has never been true on the federal level, especially since we left the gold standard. As long as the government doesn’t accept debt in a currency it can’t create it can never fail to pay any obligation, or “go broke”.
As the currency issuer it will always be the “price setter” for whatever resources and labor it utilizes, meaning it can “afford” anything that is for sale priced in dollars without causing inflation, regardless of prior spending or debt positions and regardless of “revenue”. We can pay down the debt by simply stopping the sales of Treasury bonds and allowing existing bonds to mature on schedule. They are not a “funding” process and are mostly just welfare for rich people and banks.
If we fall into a recession it will be the first time that we do so with a large deficit, as all previous recessions/depressions were preceded by the government getting close to a balanced budget for any length of time and starving the economy of the currency needed to store value from commerce and retire private debt. The uniqueness of this recession would be evidence of the extreme inequity of distribution of the currency, with most of it being sequestered by wealth away from the Main St economy.
