Chart of the Day: US deflation held back

Today’s chart comes from Econompic and tracks how in the United States, public sector spending has offset private sector deleveraging in Q3 of 2011:

There are two takeaways here.

First, whilst the US private sector is outright deleveraging, this has only just begun and it still at hugely elevated levels (except college students who are caught in a Ponzi scheme).

Second, US GDP is only being held up at ca. 2% p.a because of massive (10% of GDP) government deficit spending. That spending will be cut in FY2012 automatically, and may even be slashed further on the outside chance a Republican candidate wins the election against incumbent Barack Obama.

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  1. I am also interested in this viz-a-viz our own HECS situatuion re student loans.
    Do we have a Ponzi scheme here also?

    • No. Our HECS is administered directly by the RBA in concert with the ATO.

      Repayments are indexed to inflation and only payable once a borrower meets an income level that suggests they can afford to repay it.

      Some never earn enough to repay it.
      But that works here, because the RBA’s job is to moderate inflation. Non-performing loans are directly deflationary. Performing loans also have a deflationary effect because the borrowers are repaying it directly to the RBA, who can restrict its re-spending.

      It’s an interesting concept.

      In the USA, the loans are made privately with some government fingers via Sallie May in the pie too. This means the low, (but not effectively zero) interest accumulate whether you can afford it or not. Repayments start as soon as the student finishes their studies. Leaving very little breathing room if you need to start at the bottom rung.

      The loans also cannot be forgiven in bankruptcy. Our’s cant either, but they never accumulate ‘real interest’, meaning they should be just as affordable after 20 years as they were at year 0.

      Our HECS/HELP system is actually very similar to what Milton Friedman advocated in Capitalism and Freedom. He, (surprisingly) advocated, rather than free education, a direct government loan at fair terms. Because education is an investment that may not always pay off, the successful loans would be very carefully granted and potentially discriminatory private loans at high rates. He argued that even though the investment may not be economic in all cases (and thus a commercial return would require high rates), it is always desirable to invest in. The government is the only entity he saw with the capability to extend this sort of credit at a non-commercial rate of return.

      Our HECS seems to be very faithful to this logic, and because of the way interest and repayments are structured, it is impossible for it to become a millstone around the neck of Australians.

      I was quite surprised when I read that book. Several of our policies seem to have been modelled on his ideas. Superannuation is one such policy, where he said that if the government MUST force people to save, that it would be best to allow the people to direct their own funds.

  2. Other ways to read that chart are that:

    i) government expenditure is crowding out private investment


    ii) Government expenditure is artificially keeping wages too high, and suppressing the private sector.


    Neoclassical/Austrian Moron

    • Another way to read that is the size of the government debt increase almost too-neatly matches the size of the Financial decrease. A bailout by any other name?

      • Define “bailout”. I don’t see who was bailed out here by any any usual definition of the term.

  3. Crowding out requires interest rates to rise and as real and nominal interest rates in the US are very low it is clear that crowding out is not behind the phenomenon illustrated in the chart. The government spending to private sector wage nexus is lost on me but given an unemployment rate of around 9% it is difficult to believe that there is any upward pressure on wages in the US right now. The truth, of course, is the lack of aggregate demand as households rebuild their balance sheets, state and local governments cut spending, and businesses stay on the sidelines waiting for signs of life. Household deleveraging will take a while so, given the unwillingness of the Federal government to offer any further (and substantial) fiscal stimulus, don’t expect much good economic news from the US for sometime.

  4. I’d also like to see an elaboration on the student Ponzi scheme comment given that college-educated US workers earn much, much more than their non-college-educated counterparts.

  5. Keeping asset deflation at bay is a win in property and shares for the foreseeable future.

    But the outlook in Europe and the US is not promising for this struggle.

    Any optimists in the investment markets out there?