Tag: GDP

Where Does This Magical Stimulus Money Come From?

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Americans have received over $2 trillion from “the government” with more to come. Since the government doesn’t earn money, but rather just redistributes the people’s earnings, this windfall is taken from somewhere that involves us. How are they doing it, how is it paid back, and what does in mean for you…and your children?

Following what is happening with the federal government’s unprecedented infusion of vast and unimaginable amounts of money into businesses and individuals is like the proverbial herding of cats. It is essentially impossible to understand every aspect of how this works, but the bottom line is we are borrowing from our future selves.

On March 27, 2020, Congress approved the expenditure of $2 trillion for businesses and individuals. Then on April 23, 2020, they passed an additional $484 billion for business and disaster relief. With more on the horizon, we will soon be approaching $3 trillion in government assistance to victims of the pandemic. In fact, Pelosi’s Democrats have just floated a proposal for yet another $3 trillion for states and local governments and another wave of individual payments. Of course, that amount is ludicrous, but a big chunk of it will probably fly. The entire 2020 federal budget is $4.7 trillion, so the stimulus already equates to over half of the annual budget. By the way, the $4.7 trillion budget is supported by only $3.6 trillion in tax revenues resulting in a $1.1 trillion planned budget deficit to be added to our national debt.

Let’s pause here for perspective. Just what does $3 trillion dollars look like? Well, if you stacked $3 trillion in $1.00 bills, it would be over 203,000 miles high or almost to the moon. Laid flat, the stack would circle around the equator 7 1/2 times. If you spent $1.00 per second, it would take you 96,000 years to spend $3 trillion.

So, where is this $3 trillion, and very likely much more, coming from? It’s complicated, but let’s look at it in general terms. The federal government sells government bonds, or IOU’s, to banks which in turn sell them to individual and corporate investors. Since these bonds have the government backing them, along with a reasonable interest rate, there is a decent market for them, especially in these uncertain times. The government will just sell more bonds that they will later have to pay for plus interest.

Now, the question is how does the government pay back the investor in principal and interest that they haven’t budgeted for. Some pundits say the US Treasury will simply print more money. That is not exactly true, although there is some sleight-of-hand here. The Federal Reserve–the government bank–creates digital dollar credits that are as good as cash. These digital dollars will of course ultimately be called for by the bond holders, but, by that time, the government will hope to have enough revenues from taxes and future bond sales to pay the debt. Eventually, any shortfall in revenues to pay off the bonds will be paid by increasing the money supply, or literally printing more money. Unfortunately, printing more money lowers the value of the dollar and hurts the economy.

If you follow this cycle, it becomes obvious that all this stimulus spending will someday come back to haunt us and our future generations. Some of the stimulus money is in the form of loan guarantees that will not have to be spent. But the Congressional Budget Office estimates the bond obligations alone has added over $2 trillion to our national debt which bumped it up to over $25 trillion. Most economists agree that, when any nation’s debt exceeds its GDP–the sum of all annual production or spending in the economy–it should raise all kinds of red flags. Last year’s GDP was $21.7 trillion. Some financial analysts calculate the national debt as $19 trillion, since $6 trillion of it is what the government owes itself. Either way, we must ensure that our long-term position of debt is well below GDP.

I don’t disagree that the stimulus was absolutely necessary to rescue and resuscitate our economy. Perhaps some more is needed. The idiom, drastic times call for  drastic measures, applies here. However, we must be very cautious about future stimulus packages and very conscious of the inevitable payback. I would like to see your thoughts on this.

 

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GDP Growth: Why Should We Care?

The most important current news item is not Cohen’s tape, Putin’s visit, or what the president knew when. The news media is focused on those Trump bashing stories that hardly affect you and me in order to foster their liberal narrative. America’s Gross Domestic Product, or GDP, just increased significantly, and that’s a personal win for us. Of course, the media is playing it down. So what does GDP mean to us exactly?

GDP is the globally recognized measure of a nation’s economy. It is is the market value of all currently produced final goods and services within a country in a year by domestic and foreign-supplied resources. In other words, America’s GDP is every dollar spent on everything purchased by this country’s consumers no matter where it was produced. This includes personal spending by American households, investment spending by businesses, government spending, and net export spending (Americans’ spending on foreign products and services minus foreigners’ spending on our products and services). Last year the U.S. GDP was $19.4 trillion. That is one-fourth of the world’s total economy.

A figure that big is almost meaningless until it is compared to that of other nations. The next highest GDP is China’s at just under $12 trillion. Japan is next at $4.9 trillion followed by Germany at $3.7 trillion. The U.S. GDP is higher than all nations of the European Union combined. By the way, Russia’s GDP is $1.5 trillion.

The more important factor is how we are trending in GDP. Generally, a healthy economy is considered to have an annual growth rate of 4%.  For the last three years, the U.S. has posted percentage increases of 2.9, 1.6, and 2.2 respectively. The last time America enjoyed a 4% annual increase was in 2000, 18 years ago. Annual increases during the entire Obama administration averaged 1.6%. Although GDP is an annual statistic, it is measured quarterly. The quarterly measurement is “annualized” to estimate what the annual result of the quarterly numbers would be. The increase just announced for the second quarter (April through June) was 4.1% annualized. In other words, if the U.S. economy continues to perform at the present pace, we would have a 4.1% increase in GDP for 2018. The last quarterly increase north of 4% was in 2014. Almost all economists, regardless of their political leanings attribute the good news to President Trump’s policies of tax cuts, job creation, regulation reforms, and trade negotiations.

What does this growing economy mean to you personally? It means production increases that bring lower prices, more jobs creating upward mobility in the work force and less government subsistence, more government revenue keeping taxes down, more entrepreneurial opportunity, better infrastructure creation and maintenance, hopefully lower national debt, and a strong dollar keeping import prices down. A healthy, growing economy adds quality to the life of every American.

Of course, many factors are involved in the movement of a national economy. We should celebrate the 4.1%, but watch closely what happens in the next quarter. The Trump tariffs and potential trade wars could bring downward pressure on the GDP as could the status of our sanctions on Russia, Iran, North Korea, etc. External realities can offset a lot of good internal policies in shaping our economy. But, don’t get too caught up in all the liberal hype about losing our allies and putting our economic supremacy at risk. No other country or international trade organization is going to do much to provoke a country that holds a quarter of the world’s financial resources.

In my opinion, though, America desperately needs to turn off the soap opera of news stories that distract our attention away from much more important things like the economy. Let’s take a deep breath and focus on what’s good about America.

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Hey World, It’s Not Business As Usual for America Anymore!

 

After decades of other nations taking unfair advantage of America’s generosity, President Trump is reducing the outflow of our tax dollars to other countries and holding them accountable for more of their own security and prosperity. It isn’t setting well with nations which have been enriching themselves on our resources for generations. This will be a painful process for America and the rest of the world, but the adjustment is crucial for the future of all nations. Here is what it will require.

Most of the current inequity began with America’s compassion and goodwill demonstrated in the post-WWII reconstruction of Europe and Japan. Our subsequent prosperity during the 50’s and 60’s placed us head and shoulders above the rest of the world in economic and military power. Our Judeo-Christian values led us to share our blessings through foreign aid, the World Bank, imports, defense alliances, liberal immigration, response to disasters, etc. By and large, the rest of the world’s governments became dependent on us to supplement their subsistence. Allies depend on our military to supplement theirs. The oppressed depend on us to take them in. Foreign businesses expect to export to us without barriers, but don’t reciprocate. Even our enemies assume we will feed their economy while they threaten us. A world game-changing adjustment is well overdue.

Of course, America must always be America, the nation that shares its incredible blessings with those less fortunate both domestically and throughout the world. We have a moral responsibility to heed the words of Jesus, “Everyone to whom much was given, of him much will be required.” But, when the giving gets way out of balance and enables others to neglect their own responsibility, such enabling is wrong and the giver is to blame.

The controversial NATO Summit just concluded exemplified the new order of international relationships with America. Since 1949, western European nations have trusted in the U.S. to protect them from the former Soviet Union and now Russia. Although all the nations have military forces, the U.S. contributes well over half of the investment of those forces. The chart above shows that, of the 29 NATO nations, ours funds over 70% of the total military capability. Defense spending as a percentage of GDP is probably a fair comparison of skin in the game. Even at that, we spend 3.6% of our GDP on defense–much more than any other member country. All NATO countries agreed at the 2014 NATO Summit to spend at least 2% of their GDP on their military annually. Only four other countries are doing that. Yet the Russian threat is in their back yard and an ocean away from America.

Some European governments argue that all of their defense spending is in support of the NATO region while much of U.S. spending funds forces obligated to the Pacific and other areas of the world. That argument doesn’t consider the fact that, if Europe were attacked, almost all of our forces would be immediately deployed to the European theater.

And, there are other ways America is moving from business as usual to fairness and equity in international relations. For years, foreign governments have placed excessive tariff charges on imported U.S. products to keep their domestic businesses competitive. Then, their businesses enjoy exporting products to the U.S. with little or no tariff charges by us. That is a big reason we have such a trade deficit with other countries. We import much more than we export due to unfair trade barriers of our trading partners. President Trump’s tariff increases may cause some discomfort to our own citizens in the form of higher prices. Trade wars may make certain items scarce. But, it is a necessary temporary pain in order to ultimately create a level playing field for international trade. Free trade must be fair trade.

We are also seeing adjustments to the long-running open borders that have allowed almost anyone and everyone to enter our country, often illegally. We have long-established legal processes for reasonable immigration and asylum. But, millions of illegal immigrants have entered our land and are siphoning our resources. Business as usual trespassing on America is starting to be denied although not without major opposition from the liberal faction among us.

The U.S. GDP is greater than that of all European countries combined and almost twice that of the second highest nation, China. The U.S. military comprises over a third of the entire world’s fighting forces. There is almost no possibility of losing our world leader status anytime soon. Other nations will continue to look to America for help and direction for the foreseeable future, and we are morally obligated to maintain that role. However, the time has come for a global reshuffling of commitments and an environment of fairness among the nations. Mainstream media will decry it as betraying our friends, and protests will abound both here and abroad. But, just sit back and watch an essential and healthy cultural shift take shape. “Make America Great Again” is not a motto of arrogance; it is a reset toward fairness. It’s not Trump’s isolationist doctrine; it’s Trump’s fairness doctrine.

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