How Government Budget Surpluses Cause Economic Depressions

In a sovereign floating fiat money system, in particular under balanced trade or a trade deficit, government deficits are the only way the private sector can accumulate net private saving. As I've argued before, historical evidence shows us that there is a link between recessions and insufficient net private saving.

In this blog post economics professor L Randall Wray also presents an interesting historical link between government budget surpluses and ensuing Depressions in the United States. In particular, 6 out of 7 federal government budget surpluses were followed by a depression:

Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years.

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The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.)

The 7th time the US government ran a budget surplus was of course in the lead up to the 2001 crash and ensuing recession, and you could argue that it all ultimately culminated in the so called Great Recession of 2008-2009.