Sunday Morning Economics - Debt Ceiling Simplified

It is factual to say the our burgeoning federal debt is a consequence of budget choices made by both Democrats and Republicans.  It has been a bipartisan endeavor to borrow money to finance expanded federal spending, underwrite the indirect costs of tax cuts, maintain social safety nets and expand assistance during recessions.  It is an oversimplification to suggest that growth in spending is the sole domain of Democrats or cutting taxes is the sole domain of Republicans.  

Democrats and Republicans mutually engage in both pursuits.  

Recent history suggests that the largest drivers of our accumulation of debt has been the federal response to the economic downturns of the 2008 financial crisis and the 2020 pandemic crisis.

You may recall that when Obama took office in 2009 he inherited a recession from Bush.  In response, he persuaded Congress to authorize $787 billion in stimulus spending and tax cuts.  Safety-net spending continued at higher levels over the ext few years as the economy slowly rebounded.

After COVID spread across the globe in 2020 leaving floundering economies everywhere in its wake Trump persuaded Congress to authorize a much larger aid package exceeding $3 trillion.

Biden ascended to office in 2021 and signed into law an additional $1.9 trillion in stimulus.

It would be fair to question the efficacy of individual components of all of the foregoing.  Both parties continue their finger-pointing.  And economists disagree amongst themselves.  Nevertheless, there is general agreement that in the face of a serious economic decline federal spending (and its resultant borrowing) to protect citizens, businesses and stimulate the economy is a good thing.

There is also general agreement - amongst economists anyway - that recent inflationary pressures can be laid at the feet of flooding the economy with all of that liquidity.  But I digress.

So, is it a small matter to assign blame to individual parties or administrations for the debt?  Of course not.  Like I said at the outset this is bipartisan.  The deficit increased by roughly $12.7 trillion under the administrations of Bush and Trump.  And an additional $13 trillion under the administrations of Obama and Biden (so-far).

Of course, these are simply the raw numbers and do not account for the deficit impacts of policy decisions that persist for many years after presidents depart.  Nor does it address the fundamental principle of matching spending with revenue.  In years of extraordinary spending demands my own household may exceed its revenue resources.  But subsidizing a lifestyle solely with borrowing is reckless and fraught financial planning. 

The important thing to remember is that we got here largely as a consequence of the actions of the four most recent administrations.  As you witness the current drama remain mindful that any newfound spine for deficit spending is coming from many of the same members of Congress who sat idly by and with nary a whimper raised the debt limit three times while the former guy was in office. 

Sure, they want to blame everything on the current guy.  That is theatrics and politics.  I get it.

I'll conclude this post with an observation and admonition.  Failing to raise the debt limit does nothing to control spending for the simple reason that the money has already been spent.  Getting your undies in a knot for all the stuff they've already bought doesn't do anything to stop Congress from spending the money from the get-go.  It may keep your base in a near-state of constant agitation and near-erotic arousal but when you pick it apart it's conflated virtue-signaling.  Sure, I admit to being raised in a simpler time; but I learned this:

Paying your bills is virtuous.

Playing with dynamite is dangerous.

You're welcome.

And stay-tuned.....

Energy Independent?

A funny thing happened on the way to the FB page in the last couple of days. There has been a marked increase in chatter about how Donald Trump made us energy independent and how Joe Biden erased it. Once again I am reminded that FB is a fertile petri dish for lazy partisan economic thought. And Zuckerberg doesn’t much care about which side of partisan divide you dwell. It’s all click bait. *Disclaimer: I own FB stock. Please, PUHLEASE, click to your heart’s content.

 

I spent almost four decades making arcane economic concepts easy for lay-people to grasp and understand. I was good at it, built a successful investment advisory business, made a lot of friends and retired. I am told I even saved a marriage. My business partners continue the line of succession today along with the fourth generation of many of the very first clients. But I digress. The point of this post is that if I had clouded my professional judgment and advice with partisan rancor I would have been out of business in fairly short order. So I am going to put my advisor hat back on for a spell as this is the stuff retired financial silverbacks love to expound-upon. It’s free too as I’m no longer licensed to bill you for it. You can stop here or choose to keep reading. You pick. I recommend you share this with your own trusted financial advisor for a second opinion. Indulge me the access to your valuable bandwidth.

 

The truth of the matter is that in the natural order of the oil business we import oil from other countries each and every day. Unlike rare art works or collectibles oil is a fungible global commodity. It is universally interchangeable and trades freely between willing buyers and willing sellers. If we import a million barrels of oil and export a million barrels of oil our net dependence or independence remains unchanged. Nobody will give a tinker’s damn.

 

It is a fact that in 2019 the net imports for crude oil flipped from positive to negative. By that measure alone (excluding natural gas, coal and renewables), we became “energy independent” insofar as oil consumption is measured. Donald Trump was president when this happened for the first time in October 2019.

 

This trend towards independence began under George Bush II, continued under Barack Obama, Donald Trump and now Joe Biden. The policies of the former and current presidents bear no direct responsibility for this trend.

 

Hydraulic fracking is responsible for this. Yup, fracking.

 

It is instructive to know that it was under Obama that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline or diesel and kerosene could be exported. Opening-up the markets for domestic producers of crude oil was a pretty big deal as it allowed access to global consumers for front line drillers and not just refiners. This both extended and expanded the fracking boom.

 

It is no great secret that Biden has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we were witness-to last year was largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before Trump left office. The 2020 drop in production was initially five percent. In the eyes of most people 5% might not seem like much but it happens to be more than three million barrels per day (BPD). Consumption (demand) during the pandemic recession declined by 3% and as a consequence our energy independence began to shrink.

 

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. Demand fully recovered last year while production continued to lag with the following result: Smaller Supply + Increased Demand = Higher Prices.

 

By the close of 2021 production reached 11.7 million BPD. While this was still a million BPD below 2019 levels it was a million BPD higher than levels at the close of 2020. This was evidence of a recovery.

 

As further evidence of a turnabout the number of rotary oil rigs began to recover. At the close of 2019 there were approximately 700 operational domestic rigs. In 2020, that number had fallen somewhere below 200. Oil field services giant Baker Hughes recently reported that the rig count has rebounded to close to 500. As a leading indicator of the strength of the domestic oil business a recovering rig count is exceedingly encouraging.

 

So where does that leave us?

 

At the beginning of the year I blogged about this and my expectation was that as the supply/demand gap closed between production and consumption our independence would recover and consumer prices would moderate.

 

The good news is that according to the US Energy Information Administration  and data just in within the past week; we continue to remain net negative (independent) with regard to imported oil. 

 

 

Does this mean we do not import oil? 

 

Nope. As I pointed out in the third paragraph (above) the nature of the oil business is that you always import oil. The important end-result is net negative. And for the record most of our imported crude comes from our friendly neighbors to the north. Our neighbors also export refreshing Canadian lager to US markets but that is an altogether different discussion.

 

The net negative situation is a good thing as this “independence” most importantly protects us from supply shocks. Furthermore, we retain profits here and they do not go to vain and unholy middle eastern despot kingdoms. Instead they contribute to our own GDP and US prosperity. When energy prices go up it is domestic producers of crude oil, their workers and oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska that are winners. This is a good thing.

 

Yet let’s be clear; energy independence as described here does not magically translate to low prices. Anybody that tells you otherwise is peddling economic pornography or hocus-pocus. Go back to paragraph three (above) and be reminded that oil is a globally-traded commodity and is freely-priced. Like all global commodities it is subject to price shocks as a consequence of geopolitical events.

 

No president of any party has the ability to dial-up or dial-down commodity prices any more than they have the power to fix the price of a share of Apple stock. Don’t take my word for it though; Hugo Chavez tried that years ago and look where it got Venezuela. A vast failed socialist state.

 

If energy prices spike as a result of war and the disruption of European energy supplies it will likely not have outsize influence on our longer term overall growth. Nevertheless, you and I will not be happy with the price at the pump. And Old Joe Biden will be blamed for this.

 

Because that’s the way politics works, not the way market economics works.

 

PS – If anyone wants to blame any of this on shutting down Keystone XL – fight me.