Deposits and reserves

I think I have this right.

Reserves are very much like deposits, except deposits are between a bank and its customers, and reserves are between the central bank and its customers. The Fed creates money from nothing, to lend to banks. Banks create money from nothing, to lend to their customers. Deposits are not loaned out; neither are reserves. Deposits stay in the banking system unless withdrawn as cash. So do reserves.

It's a two-tiered structure of banking. The structure is generally the same, but on two different levels. Looking at it this way, reserves make sense to me.

Before solving a problem, one must know what the problem is

"We are not doing well in the world of education," Trump says, as he guts the Department of Education.

That is one example out of hundreds, or thousands, of Trump pointing out a result of our long economic decline, and treating that result as a problem to be solved by reduction -- by reducing the size and cost of the department or shutting it down altogether -- when what we need is to turn the economy around.

Democrats, however, don't see it correctly either, so there is little or no chance that the root problem will be solved. 

What Musk will say when the Trump depression comes

An exercise

I just want to see a number. I want to see where the federal debt would be, if we make allowance for federal responses to the Savings and Loan Crisis, the Great Recession, and the pandemic.

The Savings and Loan Crisis (2.2% of 1989 GDP)

Wikipedia says

The savings and loan crisis ... was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995... The total cost [to] taxpayers by the end of 1999 was $123.8 billion...

And the FDIC Banking Review Vol 13, No. 2 says

It has been more than a decade since enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which began the taxpayers’ involvement in the cleanup of the savings and loan industry.

The Great Recession (5.7% of 2009 GDP)

Forbes of 17 Feb 2020 says

Exactly 11 years ago today, February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 or the Recovery Act into law. The $831 billion in spending kicked off the longest period of economic growth and job creation in American history.

Heritage Foundation of 24 March 2020 says

In the wake of the housing meltdown and financial crisis, Congress passed the largest stimulus-spending package in American history... Vice President Joe Biden barnstormed around the country in 2010 promising a “Summer of Recovery” that never came.

He "barnstormed around"??

And of course Heritage, a nonpartisan, nonprofit charity, says

Keynesian stimulus almost always fails, and often makes the downturn worse and the eventual recovery weaker.

without any recognition of the financial roots of the 2009 recession or that "financial recessions are particularly problematic" -- as Google's AI Overview says:

Yes, financial recessions, stemming from issues in the financial markets, tend to be more severe and costly than those caused by other factors, often leading to significant economic downturns and lasting damage.

The Forbes article calls it the longest recovery. Heritage calls it the slowest. I love the irony.

The COVID-19 Pandemic (21.8% of 2020 GDP)

Investopedia says

According to official U.S. government tallies as of July 31, 2024, the U.S. had spent a total of $4.65 trillion on a variety of programs related to COVID-19 relief.

Adjusting the Federal Debt

I start with the FRED's FYGFD, an annual measure of the federal debt. To adjust for the Savings and Loan crisis I subtract $123.8 billion from the FYGFD number for 1989. This makes the federal debt falsely low for most of a decade. But it self-corrects by the end of 1999 because all that money was borrowed and spent by then. From 1999 to 2009, adjusted debt runs on the low side of the FRED data.

From the federal debt for 2009 I subtract the $831 Billion of the 2009 response to the Great Recession. Again, I let the passing years correct my lazy assumption that the whole 831 was spend in one year. After a decade, I figure, that money was all spent, and my number is a good estimate again.

And from the federal debt for 2020 I subtract the $4.65 Trillion COVID response. As that money was all spent by mid-2024, I figure my estimate is right by that date.

Without those three responses to economic crises, the federal debt would now be about
equal to GDP, some 20 percent of GDP less than it actually is. For what that's worth.

Yeah, I know: The graph ends in 2023. I know. But this is only an estimate, and now I have seen it.

I guess the government didn't "have to" rescue the economy those three times in the past 36 years. But if we did nothing, we might still today be in the middle of a Depression caused by the Savings and Loan mess.

That's okay. Trump is hard at work creating the next one.

He was right

"The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism."

Chapter 24

A Certain Uncertainty

FRED Source Graph: https://fred.stlouisfed.org/graph/?g=1ERg3

Uncertainty fell rapidly in the first four months of the Biden presidency. Uncertainty rose sharply in the month of Trump's election, then paused for two months, and rose sharply again in February of this year. Between the rapid Biden decline and the sharp Trump increase in policy uncertainty, we see Biden's four years. 

During those four years, uncertainty ran low from April to October 2021. Then it rose until October 2022. Then it dropped off until August 2023. Then it ran lower, until the election. 

The second graph shows the Biden years:

FRED Source Graph: https://fred.stlouisfed.org/graph/?g=1EW8a

The blue line shows policy uncertainty during the Biden years. The red line shows "the Biden inflation". The paths of the two lines show interesting similarity, don't you think?

"dismissing fears of a possible recession", and some headlines

To repeat something that should be obvious...

I watched John Oliver the other day, an old one, S11E15, June 16 2024, "Trump's Second Term". He ran a clip from a promotional video for Project 2025, a conservative manifesto I suppose you'd call it. The line in the video that caught my ear was this:

"... to end Washington's bureaucracy and restore American prosperity..."

As if ending the bureaucracy will restore prosperity. These people are totally out of ideas.

It was the word "prosperity" that got my attention. If you're talking prosperity, you're talking about economic performance. You're talking about the economy.

These Project 25 guys, they think they know how to fix the economy. But it sounds like they are still thinking what Reagan thought:

"Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

After 44 years, these people have learned nothing. Reagan was wrong about why economic growth is slow. Growth is slow because we have too much debt in the private sector.

Growth is slow because we have too much debt in the private sector.

 

Hey, we don't want to grow the government, right? We want the private sector to grow. That's where the money is, and the jobs and all. So the Project 25 guys want to "end Washington's bureaucracy" and "reduce the growth of government". Other people say government should spend more, to help the private sector grow. The two sides couldn't be more at odds.

As those other people often point out, Reagan grew the federal debt. But if you look at the debt of all US sectors, or of domestic non-financial sectors, or of the private non-financial sector, or of households alone, you'll notice that debt growth slowed in the mid-1980s (because of the Savings & Loan Crisis) and slowed again around 2008 (due to the financial crisis). 

And if you look closely at household debt,

Graph #1: US Household Debt, 1946-1980

• you will see it slowing from 1946 to 1955 (the line curves downward), 
• running at a constant rate from 1955 to 1965 (the line runs straight), and
• slowing down from 1965 to 1970 (the line curves down relative to 1955-65).

So there was also a slowdown of debt growth in the latter 1960s, at least for household debt.

It is all this slowing of debt growth that has slowed our economy. Slower growth of debt in the private sector means a slower increase in borrowing and spending -- and a slower increase in spending is closely tied to slower growth of the economy.

Also, the lines on the FRED graphs only go up, which means our debt is always increasing. Maybe increasing faster sometimes and slower at other times, but always increasing. So debt service is also always increasing, at least in the big picture. Increases in debt service take money away from current spending, and therefore contribute to making our economy grow more slowly.

I attribute the slow growth of our economy entirely to our accumulated debt. Most people ignore that line of thought. We can compromise, if you like, and say accumulated debt and your concerns have combined to slow our economy. I don't object to trying your solutions. I object to not reducing debt in the private sector.

In the latter 1960s debt growth slowed, and in the mid-80s, and again after 2008. Three warnings, the economy has given us. Three warning we have ignored. We're not too bright, are we.

Speaking of which, the Project 25 guys seem to think that cutting back on government bureaucracy (and on government spending and government debt, I presume) will lead us to "prosperity". Their word: prosperity.

It's funny, you know: There actually is a connection between government debt and prosperity. But that connection does not require us to reduce government debt. Nor does it require us to increase government debt. It only requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate we want.

It requires that private debt be low enough, relative to government debt, that private debt can grow fast enough to make us prosperous.

 

When I Google times of US prosperity, three periods come up: the "Roaring '20s", the 1947-1973 "golden age", and the "new economy" of the mid-to-latter 1990s. All three of those periods of prosperity were times when private debt was increasing relative to public debt. As you can see:

The Tides of Prosperity

The other times, when private debt gets too high, and when it falls relative to public debt, are not times of prosperity. This is something people will never see as long as they focus only on federal debt.

It's not that we have to increase the federal debt or reduce it. It's not that we have to increase or reduce private debt. What we have to do is coordinate the two measures of debt.

When private debt gets too high, relative to public debt, prosperity cannot continue. The problem is that excessive financial cost hinders growth. I don't know how economists missed that detail, but it seems that they have.

When private debt gets low enough, prosperity is able to resume. After it resumes, prosperity appears to become self-supporting. But private debt always tends to grow faster than the economy. And federal debt tends to grow less in times of prosperity. So, in prosperous times, the private-to-public debt ratio rises, and rises until prosperity can no longer be sustained.

When private-sector financial cost becomes excessive, prosperity fades. Remember 2008?

One thing that does not show up on the Prosperity graph is the increase in debt: Debt only increases. The private-to-public debt ratio sometimes rises and sometimes falls, but debt only increases -- except in times of crisis, of course. But then, times of crisis are not times of prosperity.

Suppose that we want prosperity, but we also want the federal debt to be less than it is. Okay then, we will have to do something to reduce private-sector debt. Also, private-sector debt has to decrease faster than federal debt, to bring the ratio down until prosperity resumes. That is the trick. 

We have to bring private-sector debt down. And that is difficult to do. But it is easier to reduce private-sector debt than it is to reduce the federal debt. In the 44 years since Reagan -- and for 20 years before that -- we have been unable to bring the federal debt down. Yes, Clinton almost did it in the latter 1990s. But those were years of prosperity and, unfortunately, the prosperity didn't last.

To reduce the federal debt, we must be prosperous. And to be prosperous we must reduce debt in the private sector. That is difficult to do because economic policy promotes the use of credit. Because of policy, the private-sector use of credit grows fast, unnaturally fast. And the use of credit creates debt, so our debt also grows unnaturally fast. Thus, we have to come up with policies that encourage and accelerate the repayment of private-sector debt. 

We have policies that encourage credit use and the growth of debt. To offset the effect of those policies, we need policies that encourage repayment of debt. Such policies will lead to prosperity and, if we do it right, to long-term prosperity. 

As a bonus, accelerated repayment of debt would also help to fight inflation.

You heard it here first.

And now a few words from Milton Friedman

The Trump agenda, cut-cut-cutting the federal government, it's like we are married to it: for richer or for poorer, in sickness and in health, for better or for worse.

Milton Friedman wanted to say a few words:

Just as higher government spending can contribute to excessive monetary growth, so lower government spending can contribute to reduced monetary growth.

And also this:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

In recent posts we have seen the quantity of money running low, problematically low relative to GDP-at-actual-prices, and problematically low relative to accumulated non-federal debt. And not long ago we saw graphs showing

• the low quantity of "base" money as a recurring problem;
• federal debt running below-trend, contributing to the financial crisis and 2009 recession;
• and the effects of changes in the M1-to-GDP ratio.

Milton Friedman wants you to be cautious and careful, Donald. So do I.

 

Ah, and something I didn't notice until just now: 

• When non-federal debt went below-trend in the 1990s, the economy improved.
• When the federal debt went below-trend, 2004-2008, the economy tanked.

Coincidence? Sure, Donald. Keep thinking that, Mister I-don't-want-to-be-Herbert-Hoover.

Does Google's AI Overview have a creative mind?

Checking my work for a blog post, I googled was the US recession of 1982 severe

Yes, Gaio said, it was severe. 

 

Old responses from the AI Overview sometimes turn up in new Google search results, often in the "People also ask" section. Maybe Google archives the responses. I'm gonna test that theory by linking to Gaio's response to my question about the '82 recession.

It works. For now, at least.

 

Gaio said the 1982 recession "was the worst economic downturn since the Great Depression." You could probably find that said of most of the recessions since the Great Depression. But I got the confirmation I was looking for.

Gaio also gave some stats that I might want to consider when evaluating recession severity:

• The unemployment rate peaked at 10.8%...
• Gross Domestic Product (GDP) contracted by 2.7%...
• The prime interest rate reached a record high of 21.5%...

You'd think there would be a standard, accepted method (say, GDP contraction) for evaluating recession severity. But if there is, I never saw it.

Under "Other effects" Gaio lists more things I might want to use when evaluating the Volcker experiment:

• The recession led to homelessness.
• The recession contributed to the Latin American debt crisis.
• The recession contributed to long-lasting slowdowns in the Caribbean and Sub-Saharan African countries.
• The recession contributed to the US savings and loan crisis.
  

Yeah, I dunno.

The best part of Gaio's response was the statement about the causes of the recession:

The recession was caused in part by Paul Volcker's tight money policy to fight inflation. The recession was also affected by the Reagan administration's fiscal policy.

The recession was caused by Volcker's tight money, and affected by fiscal policy.

I don't suppose I can get away with assuming Gaio was relying on the subtle differences in meaning of "caused by" and "affected by". But I do like seeing tight money get most of the blame. Gaio's evaluation is correct, I think. And the AI view lends credence to Milton Friedman's view that

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression. Fluctuations in monetary growth are also systematically related to minor ups and downs in the economy...

But I cannot say what I just said: that "the AI view lends credence to Milton Friedman's view". The AI view is not original, objective thinking. Far as I can tell, it is always a compilation of what it finds on the internet. It expresses things very well, far better than I can, sad to say. But if I lay out a problem -- the growth of financial cost -- and present it as a long-term cost-push problem, and point out that cost-push hinders economic growth (while demand-pull does not), will Gaio assemble the components on his own, make the argument that Excessive Reliance on Credit has increasingly made inflation a cost-push phenomenon, and conclude that our inability to achieve decent economic growth is a result of Financial cost-push?

Maybe. But I don't think he can assemble the components and arrive at a new theory.

The Bills to be Paid, and the Money to Pay Them

Here's another transaction-money graph. M1 money. This graph compares the bills we have to pay to the quantity of money we use to pay the bills. This time "the bills" is all the debt in FRED's TCMDO, except the federal government component. I know a lot of people blame the federal debt for all our economic problems, so I'm leaving it out.

I thought about leaving out "financial debt" again this time, too, but bills are bills. If you got bills you gotta pay, you gotta pay them. And that takes money, even for those in the financial sector.

Again, the graph uses transaction money. M1 money. This time the graph shows debt relative to the quantity of transaction money, the money we use to pay down our debt.

Debt of All US Sectors except the Federal Government, per Dollar of M1 Money

Excel's exponential trend line is based on the gentle upward sweep of the blue line from start-of-data (Q1 1959) to Q4 1990. The blue line -- non-federal debt relative to M1 money -- goes below-trend beginning in Q1 1991, reaches a low in Q4 1993 and returns to trend around Q1 2001, then remains on-trend until around mid-2005. After mid-2005 the blue line rises above the trend line and reaches an economically disastrous peak in Q1 2008.

The blue line goes below trend in the early 1990s in part because the growth of debt slowed from Q4 1985 to Q4 1991 and remained unusually slow until 1997. Much of this slow growth of debt can be attributed to the Savings and Loan Crisis of those years; on the graph, some is due to a period of rapid growth in M1 money (and the debt-to-M1 calculation).

This graph of M1 at FRED shows unusual increase in M1 from 1992 to mid-1997; that increase supported the return of debt growth to the 10% level and probably helped end the S&L Crisis. Also, in my view, the unusual increase in the quantity of money was largely responsible for the economic boom of the latter 1990s.

Those good years of the 1990s? On the graph, those are the years when the blue line starts out below-trend, and runs rapidly uphill while getting back to trend. The way our economy is, the way economic policy makes it, the economy is only good when debt can increase rapidly, as it did from 1994 to 2001.

The trouble is, the more debt we have, the more difficult it is for debt to increase rapidly. I think people just don't want that much debt.

That M1 graph shows a similar but smaller unusual increase from 1986 to 1989, which no doubt helped the economy through the S&L Crisis; and smaller yet, an increase from September 1982 to September 1984, which smoothed the transition from the harsh recession of 1982 to Ronald Reagan's good economy of 1984.

Look again at the graph above, the graph of non-federal debt per dollar of M1 money. Increases in transaction money helped the economy survive the S&L Crisis and the unusually slow debt growth that accompanied it. Then, in the high-productivity-growth years of the 1990s, increases in transaction money supported economic activity and helped sustain those good years. In good times and bad, when the quantity of transaction money is insufficient, increases can help.

Not that the trend is trustworthy, but: In the 1990s the debt was below trend, and the economy was very good for a while. After 2005, the debt was above trend and our "old normal" economy died. 

Tight money. Visibly tight

Based on my rough estimate, repayment of principal for household debt runs on average about 5 percent of outstanding household debt each year.

Let's say the number is 5 percent for domestic nonfinancial debt in general.

Let's also say we don't borrow money to pay down our debt. So then we must be using transaction money for those payments. M1 money. M1 is the money we receive as paychecks. Pocket money. Checking account money, if anyone still pays by check. The money we use to buy all the output in GDP, except when we buy on credit. 

 

Paying down debt destroys money. So let's look at the quantity of M1 money after we subtract the 5 percent of domestic nonfinancial debt we pay off each year, and look at what's left in M1 as a percent of GDP:

M1 (less 5% of Domestic Nonfinancial Debt) as Percent of GDP

As you can see, transaction money was so tight between 2000 and 2010 that the repayment of 5 percent of the principal would have drawn M1 down to a number below zero. If you want an explanation for the cause of the financial crisis and Great Recession, this is all that you need.

Transaction money is the money we spend. Too much of it causes inflation. But not enough of it is a problem, too. And it is probably safe to say that every recession shown on the graph was caused by a decline in the quantity of M1 money. For the 2001 recession and the "great recession" of 2009, it is undeniable.

I stopped the graph in 2019 because the Federal Reserve redefined savings to be part of transaction money in 2020, adding some $12 trillion to M1 overnight. The FRED graph of M1 shows it. I see this change, and all of the increase since 2010, as an admission by the Fed that they let M1 get much too low, apparently without realizing it. Yeah, they watch interest rates like hawks watch mice, but the quantity of money is another matter.

You remember what Friedman said, right? No, not the "always and everywhere" thing. This:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

The quote is from Chapter 2, on page 48 in my copy of Money Mischief. Look it up in yours.

 

The moral of the story: In a tight-money world, excessive reliance on credit is ultimately self-defeating.

And, no: Counting savings as part of M1 money does not solve the problem.

"Dodd-Frank under fire" (2017)

At the start of Trump's second, an old (February 2017) blog post at Twenty-Cent Paradigms is an interesting read: Dodd-Frank Under Fire

 

The Donald Trump Uncertainty Index

Economic policy uncertainty: Since 2005 there have been three times of high uncertainty in regard to economic policy:

1. A long period of abnormally high uncertainty during the financial crisis of 2007-08 and the so-called "Great Recession" of 2008-09, and until 2013 when uncertainty finally began to decline;
   
   
2. A shorter but extremely high period of policy uncertainty arising from the pandemic of 2020; and
   
   
3. A sudden rapid increase, from a low of 97.3 in October 2024 to near the 160 level (in November & December 2024 and January 2025) and then to the most recent (February 2025) level of almost 240 -- in all a sharp, rapid reaction to the November election.
   
   

The Economic Policy Uncertainty (EPU) Index since 2005

 

The Economic Policy Uncertainty Index since 1985:

https://fred.stlouisfed.org/series/USEPUINDXM

The jagged blue line indicates economic policy uncertainty. The Uncertainty Index appears to go high at times of recession. In addition there are a couple highs in the 1980s during the Savings and Loan Crisis, and the long-running high following the Great Recession, noted above.

 I added vertical dash-dot lines indicating November 1 of Presidential Election years:

• 1988: George H. W. Bush
• 1992: Bill Clinton
• 2000: George W. Bush
• 2008: Barack Obama 
• 2016: Donald Trump
• 2020: Joe Biden
• 2024: Donald Trump

None of these election-date indicators occur at  moments of sudden increase in the Uncertainty Index unless there is also a recession around the same time. None of them, that is, until the 2024 election of Donald Trump.

In the months since the Trump victory, the Economic Policy Uncertainty Index suddenly spiked upward, nearly reaching the 240 level in February, the third highest point on the graph after the pandemic-related cluster and the August 2011 high. The reaction was immediate, beginning in the month of the election.

An interesting statistic, given the current political environment.

 

For a bigger graph, click the graph image above. For an even better view, click the link below the graph to see it at FRED.

The Fred page links to an info page identifying three types of data used to create the index: news coverage, disagreement among economic forecasts, and, interestingly, "tax code expiration data".

FRED also links to the EPU home page, which displays a large selection of policy uncertainty graphs, including a global measure.

In addition, FRED links to Measuring Economic Policy Uncertainty, a 75-page PDF by Scott R. Baker, Nicholas Bloom, and Steven J. Davis.

Trump's Address to Congress

Tuesday, 4 March 2025

I wanted to watch Trump's address to Congress because I cannot tell from the fragments I see on CNN if Trump has a plan for the economy.

He does appear to have a plan. And he did say that fixing the economy is "among my very highest priorities" (to fix it, to improve it, something like that. I missed the word). But after that, the next thing I have in my notes is Trump calling the post-pandemic inflation "the worst inflation, perhaps ever, in the history of our country" which is a crock of shit. Trump does not have enough respect for our economy to tell the truth about it. As you know, I think the Employment Level data for the first month of Trump's second term was fake news. And as you can imagine, I am not happy that Trump wants to change the way GDP is measured.

Hey, the data for GDP excluding the government component is already available. If you want to take government spending out of GDP you can do it in seconds. At FRED, grab the GDP series and subtract from it the GCE series. Done. 

Oh, and at Vox, a good read: Economic growth is slowing — so Trump wants to redefine “economic growth”. The NY Times has Commerce Secretary's Comments Raise Fears of Interference in Federal Data.

Next, Trump blamed Biden for the price of eggs. Then he described his plan to fight inflation: "Reducing the cost of energy and ending the flagrant waste of taxpayer dollars."  How, sir, how are you gonna do that? Fire everyone you can fire, and drill-baby-drill? That's it, I guess. Nothing esoteric in that. But how does it fix the bird flu problem?

My note-taking was rushed, and my handwriting is illegible at best. My notes have Trump saying "by getting rid of fraud in social security we will cut grocery prices." I gagged on that line when he said it. Prices and costs are related. If not, then prices and profits are related. It shouldn't be hard to figure out the problem even if it is something other than bird flu.

And then, Trump promised to balance the federal budget. Note that he did not promise to avoid creating a Greater Depression in the process. That's my concern, the worst-case bad ending. And Trump is already messing with the GDP data, so you know he is worried also about the worst case. Trump doesn't want to be Herbert Hoover, and all that.

At one point Trump said he wants to make interest payments on car loans tax-deductible, "but only if the cars are made in America." That was interesting. However, by making loans less costly, deductible interest encourages people to go deeper into debt. And the problem with our economy, the biggest of all the problems with our economy, is that the private sector is already so deep in debt that we can no longer borrow enough to offset the cost of debt service and have enough left to boost the economy by spending it. This is the problem that needs to be solved. Making interest on car loans tax-deductible will not solve the problem. It will make the problem worse.

To be clear, federal debt is not the problem. It is a problem, yes; but the federal debt is not the cause of the private-sector problem. Federal debt, really, is a measure of the size of the economic problem of the private sector. Excessive private-sector debt is the cause of the private-sector problem. If we rely less on borrowed money and more on income -- if policy creates this change -- then a reduction of business interest cost can offset an increase in labor cost, with something left over to boost business profits.

I may regret saying this, but I think Trump is modeling himself to be our Caesar, ending the Republic and creating an Empire. He would be far better off, as would we all, if he modeled himself after Solon, the forgiver of debt.

In the Tuesday night speech, Trump mentioned a lot of new investment. In my notes I have him saying "$1.7 trillion of new investment in just the last few weeks." A sentence or two later, that new investment spending turned into announcements of plans for investment "in the US instead of in China". Not sure I got that last quote right, but I got the gist of it. 

If Trump wasn't lying about that investment, good. I could probably set aside my concern about a Greater Depression, and I would be happy to do that. But he lies all the time, so I can't trust him on the big new dollars of investment. I will look into it, after I finish these remarks. I wish I could do better. But he's the one that lies all the time, so it's on him.

In my notes, just before my note about the new investment, Trump called his first term the "most successful economy in the history of our country." Bullshit.

 

The next thing in my notes, after the grandiosity of taking credit for the most successful economy in the history of our country, is Trump saying

reciprocal tariffs begin April second.

Whatever tariffs other nations set on our products, we'll set matching tariffs on their products. That's kinda cute, in a way. More complicated than it sounds, I think, because we don't buy the same products from them that they buy from us. But it is cute. And it might be a way for Trump to negotiate the tariff rates to lower and lower levels over time. I think that might be what he has in mind.

Well, the speech went on for a while longer. He started introducing people from the audience and I started losing interest. But I waited it out to the end. And while I did, I wrote this in my notes:

Trump's plan for the economy seems to be tariffs, tariffs, and tariffs.

I didn't hear him say anything about finishing his first-term project, the wall between the US and Mexico to keep foreigners out. His second-term focus is evidently on another wall, a different wall, a wall of tariffs intended to keep foreign output out. 

I oppose globalization, but I don't think tariffs are a good idea. I think the good idea would be to figure out why US economic growth is in long term decline, and solve that problem, the problem of excessive private-sector debt.

GAIO and Units, again

 

The January jump in employment looks suspicious

The Employment Level increased far more in January 2025 than in any month since January 2021 -- far more than in any month of the Biden administration, we might say:

https://fred.stlouisfed.org/graph/?g=1E8kq

Despite all the sudden change in the first weeks of the Trump administration, despite all of the unknowns arising from the threat of 25 percent tariffs, despite the decline of employment due to the federal workforce reductions of Musk and DOGE, despite the warning from the CEO of Alcoa that

the tariffs could cost about 20,000 US aluminum industry jobs and a further 80,000 jobs in sectors that support it.
"This is bad for the aluminum industry in the US, it's bad for American workers," he said.

In addition, according to Google's AI Overview,

Ford CEO Jim Farley has warned that tariffs on Mexico and Canada would be devastating for the U.S. auto industry.

Reuters adds

"What we're seeing is a lot of cost, a lot of chaos," Farley said on Tuesday at a Wolfe Research conference. 

None of this news, none of these views, are good for the economy. Furthermore, I don't see it in the data, but CBS News reports that "Consumer confidence plunged in February amid rising economic concerns". Expectations, when they are falling, can undermine even a good economy.

And even Trump supporters see a rough spot in the road ahead. According to VOX (November 1, 2024):

If elected, Trump has vowed to put Musk in charge of a “government efficiency commission,” which would identify supposedly wasteful programs that should be eliminated or slashed. During a telephone town hall last Friday, Musk said his commission’s work would “necessarily involve some temporary hardship.”

"Temporary hardship."

Days later, Musk suggested that this budget cutting — combined with Trump’s mass deportation plan — would cause a market-crashing economic “storm.”

"A market-crashing economic storm."

On his social media platform, X (a.k.a. Twitter), an anonymous user posted Tuesday that, “If Trump succeeds in forcing through mass deportations, combined with Elon hacking away at the government, firing people and reducing the deficit - there will be an initial severe overreaction in the economy…Market will tumble. But when the storm passes and everyone realizes we are on sounder footing, there will be a rapid recovery to a healthier, sustainable economy.”

A severe overreaction downward -- but one that I say will not be an over-reaction. The anonymous user's references to sounder footing, rapid recovery, and a healthier, sustainable economy are conclusions that I, for one, am unable to reach. Optimism these days is a dangerous thing.

Musk replied, “Sounds about right.”

Musk is excessively optimistic.

Many people seem to think that you can do whatever you want, set whatever economic policy you want to set, and run with it, no problem. I don't think like that. I think persistent bad policy will always lead to a crisis and severe recession like we had in 2008-09 and for some time after. And I think a severe recession can become a depression, and a severe depression can become a Dark Age.

I think this is serious business, and our policymakers need to think long and hard and clearly and carefully about what they are doing. I understand, that if and when a Dark Age comes, it will be the wealthy few who are left owning everything. I understand that these owners of "provinces" will become the leaders of the new governments that arise in those provinces. I even understand that the wealthy few may look forward to such developments, though I do not. Most people seem not to think about such things. 

Most people seem not to realize that it is possible to prevent such developments by correctly understanding the problems of our economy -- that is to say, not the surface problems that people have with the economy, but the deeper imbalances that disturb our economy and are never addressed -- and by correctly addressing those imbalances.

It should be clear that the policymakers who allowed the troubles of 2008-09 to develop and come to fruition were not able to understand the imbalances that disturbed our economy, nor properly address them. Far as I can tell, the Trump team is even further than that from the economic thinking they need. The Trump team seems to have a "set whatever economic policy you want" mindset, and is nowhere near correctly understanding the imbalances that disturb our economy.

 

Musk said we should expect some "temporary" hardship. Yeah, and the last guy to use the word "temporary" in a context like that was Federal Reserve Chairman Jerome Powell in March 2021, when he said we should expect some "temporary" inflation.

The pandemic recovery aside, the employment level increased more in January 2025 than at any time since January 2000. I don't believe the January 2025 number. I think Trump went with the fake news.

Federal employment as percent of US population

I googled federal employment as percent of US population.

The AI Overview says "The federal workforce makes up about 0.6% of the U.S. population. This percentage has remained stable over the past decade..."

Pew Research says "In November 2024, the federal government employed just over 3 million people, or 1.87% of the entire civilian workforce, according to BLS data."

Then I went to FRED to see the big picture:

"All Employees, Federal" as a percent of US "Total Population"
https://fred.stlouisfed.org/graph/?g=1E6Gp

 I do not understand the urgent need to cut the federal workforce. I think we'd be better off getting rid of the policies that promote Excessive Reliance On Credit (EROC) in the private sector, and letting our economy grow. We could then watch as federal deficits turn into surpluses as they did in the 1990s.

By the way, the thing that killed off the good economy of the 1990s was our rapid return to EROC. But getting rid of those EROC-promoting policies would allow the good growth & the budget surpluses to continue.

9-to-1 Against

Wrote myself a note this morning, 3:34 in the morning:

I have to look at the chances of Depression, the chances of Trump creating a depression with his cut-cut-cut.

So I googled Trump and the risk of depression.  I looked at the first page of results, and I was seriously disappointed. Of the 10 results on the first page, nine were about mental health -- either Trump's own, or ours being put at risk by his decisions.

Only one of the 10 results on the first page was about the kind of depression that could put our economy in the toilet for a lifetime. Only one of the 10 could look past the insanity of the moment and see a bigger problem. One out of ten, plus two related links for the Quora result. 

At East Asia Forum we have "Trump’s trade madness risks global depression if retaliation’s not measured". The article is focused on Trump's tariff policy. I've been studying the economy since 1977, but I never studied tariffs because the topic never came up. I couldn't even spell "tariff" until Trump made the topic relevant again. Google's AI Overview, Gaio, says

The Smoot-Hawley Tariff Act of 1930 was a law that raised tariffs on imported goods in the United States during the Great Depression. The law was intended to protect American businesses and farmers from foreign competition.

How it impacted the economy:

• The law raised tariffs on agricultural imports and more than 20,000 imported goods 
• It led to global trade declining by 65% 
• It is widely blamed for worsening the severity of the Great Depression

The bullet points agree with what I think I know -- tariffs aggravated the decline of trade and made the Great Depression worse.

Hey, I think our massive trade deficits are a big problem, but I wouldn't go with tariffs. Other things are wrong, that need to be fixed. Applying the wrong solution is always, always, always  a bad thing to do.

The East Asia Forum article ties economic depression to tariffs. (Funny thing is, the word "depression" occurs only in the article's title.) My concern links economic depression to the Trump/Musk cuts in federal spending. I think both concerns are important, the tariffs and the spending cuts. And I think our concern, yours and mine, about the possibility of depression, economic depression, is strengthened by having two or more reasons to be concerned.

At Quora, "What is the likelihood of another Great Depression occurring due to President Trump's trade wars with China and other countries?" The question is about "trade war", about tariffs. Dan Cougherty expresses concern about a wide range of troubles pointing to recession or worse, including: deficit spending; income inequality; "systemic risk in the lending markets" around the time of the Great Recession; and the "lack of oversight" that created it. Comparable problems in finance are still with us. It was finance that made our 2009 recession "great". And excessive, unjustified confidence could easily do it to us again.

Again, at Quora: "Is there a chance of another Great Depression because of Trump?" Here, the answer focuses on tariffs and trade even though the question does not. Baba Vickram Aditya Bedi offers some good insights:

"Any manufacturing returning to the U.S. would take years well beyond the scope of the Trump presidency to even begin to matter to the macro American economy. However, the tariffs and loss of relationships with U.S. Allies and trading partners will have a relatively faster impact. The forced expulsion of migrant workers will have an even greater immediate impact."

The policies that boost US growth will take a long time to develop. The policies that undermine growth will will have their effects sooner. This combination of outcomes tends away from growth, and toward recession or depression.

As for the rest of these Google Search results, you and your mental health are on your own.

 

I would probably find better links if I kept looking. And I will. But it troubles me that almost no one seems to see the real disaster that threatens us: the Greater Depression. I know Trump said he "doesn't want to be another Hoover". And I even believe that he meant it. But his economics is not even close to understanding what must be understood, nor to doing what must be done.