April 30, 2021
Should we be worried about deficit spending? Catch our newest TrendsTalk episode with ITR Economics CEO Brian Beaulieu to learn about its impacts on inflation, the value of the dollar, and more.
Transcript by Rev
Hello. I'm Brian Beaulieu, CEO and Chief Economist of ITR Economics and thank you for joining us this edition of TrendsTalk. I just want to chat just briefly about deficit spending. There's a lot of it going on and there's more coming. The president's going to be rolling out a $1.8 trillion program this evening when he talks to Congress, and that's what put deficit spending back into my head. The numbers are truly awesome, and that in terms of awe inspiring massive numbers.
10 year plans for spending. Taking 15 years to pay for, as if the world was just going to sit still. And all the while we're told by various and sundry people, not necessarily the president, that don't worry about it. Deficit spending, there's nothing the matter with deficits. They get the economy going, they stimulate the economy. We've run all these deficits and we're still here to talk about it, right?
So what's the worry? Well, you're right. We are still here to talk about it and we're going to be here to talk about it for as long as the world wants to continue to lend us money, or until we have a fiscal crisis of some other sort. Economists debate right now how much of a fiscal gap we have. That essentially means how much run room do we have before the rest of the world turns their back on us. We're working on figuring that out also at ITR Economics.
But I want to hone in on this concept that deficits don't matter. ITR, the T stands for trend, we're Institute for Trend Research. We were looking at periods of deficit spending and what are the ramifications of that? Then one of the clearest ramifications of it is that when you engaged in prolonged deficit spending, you see that the value of the US dollar goes down. Now, when the dollar goes down, some people win, some people lose. And if you hedge, then nobody sings the blues, right? Wrong.
Because when the dollar goes down on more than just a cyclical basis, but more on an extended basis, which is what we're anticipating for this decade, the historical record is pretty clear. It breeds inflation, it breeds higher interest rates, and actually not in that sequence. First comes slightly higher interest rates, then comes the more important systemic inflation. I'm not talking about the near term inflation that we're seeing. The Federal Reserve is going to welcome that with open arms.
That is part of their inflation averaging formula. They're happy with a three to three and a half percent core rate of inflation. They won't budge interest rates in the short term because of that, but the long-term yield is going up. I think it's because of those deficit spending numbers. I think that you're looking at bond holders who are saying, "You know, I need to be compensated for the basis of my investment here, the dollar going down in value."
That's just one mechanism of how it feeds into higher and higher interest rates. It eventually feeds into inflation. That's pretty much Econ 101. That also gets you into more inflation. Higher interest rates, higher inflation, the more deficit spending we engage in, the higher both of those are going to go. It's not immediate pain. So yeah, we can engage in deficit spending today and it would have no consequence.
None. If when things were going well, as they are today and will be through 2024, instead of engaging in additional deficit spending, we ran some surpluses. That was the ideal the Keynes put forth is that during tough times, the downside of the business cycle, you engage in deficit spending, and you prepare yourself for that by during the good times, the upper portion of the business cycle, you engage in surplus activity.
We haven't run a surplus since the late 1990s and it was not long lasting. The weakness of our system is, well, there are a lot of weaknesses. The prescription for the fix has probably a whole another TrendsTalk. Suffice it to say that it's easy for the politicians to engage in deficit spending because they have this tendency to say, "We need to do it today to save the economy."
That really means get ourselves probably reelected. And we're going to count on some future group of politicians or some future generation to figure this out. They'll engage in the surplus activity and it's all going to be good in the end. Except since the early 1980s, we have failed miserably at doing that so deficit spending. It matters. This is Brian Beaulieu from ITR Economics. Thanks for listening to this TrendsTalk.