Fun with the Federal Reserve's Z1 Report

The Federal Reserve's Z1 report, known as the Flow of Funds Accounts of the United States, was released on June 10. There's lot of data in there and I made the above chart using the "Debt growth, borrowing and debt outstanding tables", specifically table d2. This is a seasonally adjusted annual rate and therefore much more volatile, but it shows the trends in debt growth extremely well. Above zero means increased debt, or leveraging, while below zero means debt reduction or deleveraging.

As the chart makes clear, the federal government is floating the economy. Without the borrowing being pumped into the economy, GDP would likely be flat or negative. Keynesian economists such as Krugman recognize this, but want to keep the stimulus going to help the economy. However, if debt is what got us into this mess, then increased federal debt will only damage the economy in the long-run.

GDP is a measure of economic activity and not wealth. Natural disasters increase GDP because money must be spent to rebuild and the economic activity generated by rebuilding is recorded. The lost wealth, however, does not show up in GDP. The government is currently spending down U.S. savings because it must borrow money to finance the deficits. If you believe that the government is not spending efficiently (I have seen several projects just in my area that are nothing more than digging holes in order to fill them, e.g. unnecessary road repairs), then they are probably destroying wealth. Eventually, the interest rate on the debt will exceed the return on these investments and the U.S. will be deeper in the hole.

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