The Black Hole Shrinks
Typically, even when there is good news – seriously good news, not just a minor item or fleeting event – you wouldn’t know about it unless you made an effort to find out. The simplest explanation for this phenomenon is to see it as part of the information overload problem and the inability of the media to sort and filter the flow of information and data, so that what is important is extricated from what is secondary, or completely irrelevant.
There is, as usual, tons of bad news around, most of it from Europe – such as the latest jump in Spanish unemployment to 27%, a number that really does boggle the mind. There is also good news here and there: the UK reported that its economy grew in the first quarter of the year, and by more than most analysts had dared to predict, after two successive quarters of contraction.
But these are just regular monthly or quarterly economic data, part of the accepted picture. In Spain the woe gets worse and in Britain it has eased slightly, at least temporarily. What about a development that imposes a change in the overall picture? That would have to relate to a country bigger than Spain or Britain – say, the US. And it would have to relate to something really important in the American economy – say, the budget deficit.
Well, we all know that the Americans are running huge budget deficits. We have heard, ad nauseam, about the wretched, squabbling American politicians and their inability to get to grips with the country’s fiscal crisis. We have learnt new concepts, such as the debt ceiling, and new terms, such as sequestration. But nobody told us that the deficit is actually shrinking. Not just in a specific month because of some chance occurrence, but a steady downtrend that is now in its third year. And not by the odd billion or two, but by hundreds of billions of dollars.
Too bad for all those people who keep complaining that this column is full of doom and gloom. And too bad for all those people who are convinced, as a matter of supreme dogma, that Obama and Co are bent on destroying the United States. I suspect there is a large overlap between those two groups, but anyway, here are some boring facts. The federal budget deficit keeps getting smaller. This has nothing to do with the stupid sequestration, the effects of which will only be felt going forward. Spending has been lower than expected throughout the first half of this US fiscal year, which began on October 1 — as it was in FY 2012, which ended on September 30 last year.
Similarly, revenues have risen, both in the current and previous fiscal years. The outlook is for more of the same, this year and next. Goldman Sachs just reduced their estimate of the deficit for FY 2012 – for the second time in three months. Last time, they cut their deficit forecast from $900 billion to $850bn and now they have cut that to $775bn. Expressed as a ratio to GDP, which is the way deficits among different nations can be compared most easily, this means that the US deficit for FY2013 is now expected to be 4.8%, down from the previous estimate of 5.3% and the 5.6% expected last October. A more dramatic comparison is with the monstrous deficits of 8-10% per annum that were recorded in 2009-2011.
In other words, there has been a major improvement in one of the most important economic indicators in the world’s largest economy. It has been underway for some three years and looks set to run much further. Goldman estimates that by FY2015, the deficit will be sub-3%. That, unfortunately, is as good as it gets, even seen through Goldman’s rosy spectacles – after that the deficit begins to rise again. Nor is this continued improvement baked in the cake. There are numerous things that could go wrong, in the US or globally, and send the improvement into reverse.
Even if nothing goes wrong, Goldman’s analysts are quick to point to the potential threat hiding behind this good news. If Congress finds out that things are rapidly getting better, there will be no incentive at all for it to address the long-term issues underlying the budget deficit, such as entitlement reform. This is not nit-picking: the improvement that has taken place is almost entirely cyclical – meaning it is the result of the swing out of the Great Recession into recovery, weak as that has been. The underlying problems have not been touched, nor is there any political desire to get to grips with them.
So it’s really all part of the Orwellian world we now live in: good news – the budget deficit is shrinking – is bad news, because it will deter the political system from making essential reforms. Bad news, on the other hand, is good news – because it will make the central bankers maintain the flood of liquidity, thereby keeping the financial system on a ‘high’ and avoiding any unpleasant encounters with reality.