US Investing Championship's Norman Zadeh: Why Tight Budgets Lead to Market Crashes

LOS ANGELES--(BUSINESS WIRE)--The following is a statement from Norman Zadeh, founder of the United States Investing Championship:

There has recently been talk of reducing discretionary spending to get closer to a balanced budget. The US ran a balanced budget from 1920 to 1929, which led to the crash of 1929. More generally, whenever the US has run a tight budget over a multi-year period, by which I mean the budget deficit has been insufficient to fund the trade deficit, a crash has followed. For example, horrible crashes followed the tight budget periods from 1998-2001¹ and 2005-2007. ²

To understand why this is true, it suffices to track the IOUs issued by the government to fund its deficits.

For the period from January 2009 through December 2022, the cumulative budget deficit was $16.986 trillion,³ while the cumulative trade deficit was $8.250 trillion.⁴ In other words, the US government lost $16.986 trillion and issued $16.986 trillion in IOUs to cover that loss. Foreigners as a group made $8.250 trillion, which they held in additional US government IOUs. The public (mostly corporations and the wealthy) received the other $8.736 trillion in IOUs — they made $8.736 trillion, which showed up as an increase of roughly $8.736 trillion in their bank accounts. Equivalently, they increased their financial wealth by $620 billion annually from 2009 to 2022. That enabled them to pay their debts and led to a surge in stock prices.

During periods of tight budgets, money leaves the public’s bank accounts to pay for their excessive purchases of foreign goods. Corporate profits are pressured as well. The net result is that debts are harder to pay, resulting in more defaults. The process feeds on itself, with more and more defaults until the government is forced to run large deficits to make it easier for everyone to pay their bills.

The current trade deficit is $948 billion. The budget deficit was $3.142 trillion in 2020, $2.775 trillion in 2021, and $1.376 trillion in 2022.⁵ The tightening deficits have clearly affected the market. Recent interest rate increases will require a larger deficit. Cutting spending on people earning below average incomes will trigger a spike in their defaults, leading others to be unable to pay their debts. If the deficit is to be reduced, the best way to do that without causing a debt collapse is to increase taxes on the very rich.

A more detailed analysis is available at https://www.financial-competitions.com.

Norman Zadeh (aka Zada) runs the United States Investing Championship. From 1975 to 1983, he taught as a professor at Stanford, UCLA, Columbia, and U.C. Irvine. His father, Lotfi Zadeh, created Fuzzy Logic.

¹ https://www.whitehouse.gov/omb/budget/historical-tables/ Table 1.1
² https://www.macrotrends.net/countries/USA/united-states/trade-balance-deficit
³ https://www.whitehouse.gov/omb/budget/historical-tables/ Table 1.1
⁴ https://www.macrotrends.net/countries/USA/united-states/trade-balance-deficit
⁵ https://www.whitehouse.gov/omb/budget/historical-tables/ Table 1.1