Sunday, March 24, 2013

New Metric using TCMDO

Here is a new way of looking at the debt.

First of all, forget about GDP.  It can be manipulated. How exactly is it measured, and don't tell me it doesn't include estimates.  It is unfair.  To do a measurement of debt to GDP implies that the government is entitled to some portion of my income.  And it has a bias towards government spending.  Since reducing spending reduces GDP, everyone freaks out.

Instead use TCMDO.  This is all the debt in the economy, or, looking at it from the opposite perspective, it is all of the assets in the economy that pay interest.  We want this number to grow about 3% per year.  This would allow interest to be paid on existing debt and also include a little bit of growth and inflation.  If this number is less than say, 3%, then there is a valid reason for Keynesian deficit spending of up to this amount.

So, looking backwards, how does this compare?

Date         TCMDO   Growth  Targ.(3%)   Deficit  Sugg. Defic. 
---------    -----   ------  ---------   -------  ----------
9/30/2007    49482
9/30/2008    52985   3503    1500        459         0
9/30/2009    53352   367     1600        1413     2646
9/30/2010    53058   -294    1600        1293     3187
9/30/2011    54212   1154    1600        1300     1746
9/30/2012    55668   1456    1600        1090     1234
9/30/2013    58100   2432    1700        1100      368
9/30/2014    61000   2900    1700        1150        0


So, I don't know if this makes any sense or has any validity at all, but the Keynesian philosophy was that during a recession you run up deficits to make up for the lag in demand and during normal years you balance the budget or run a surplus.  Without deficit spending, the economy would have been shrinking for the last 3 years.  But now that things are returning to almost-normal, there is no valid reason to continue to run huge deficits.

Anyways, this theory explains why the huge deficits of the last 4 years haven't been inflationary, because they are counteracting the deflating private debt.  But relatively soon, maybe as early as next year, inflation will start to reappear, along with rising interest rates.

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