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The Deficit Is Already Shrinking

Tuesday, 13 Sep 2011 | 3:07 PM ET
John Foxx | Stockbyte | Getty Images

It seems nearly everyone in Washington agrees that we need to reduce our budget deficit.

Well, here's the good news: the deficit is already shrinking dramatically in the only way that matters.

We normally hear about the budget deficit in absolute numbers or in comparison to the entire economy. But these aren't really useful ways of thinking about the deficit.

Instead, we should focus on the funds available to fund the deficit.

There are many sources of those funds, including foreign investors holding dollars. But lets pretend for a moment that global credit markets shut down and the government must fund itself solely with domestic funding.

As you can see from the FRED chart below, government borrowing (the green line) shot up during the recession. After the recession, however, the budget deficit leveled off—albeit at a high level. But something else happened also, our gross domestic savings (the blue line) started shooting up again. This means the domestic borrowing capacity of the US government is expanding once again.

Taking this chart back to 1980 is useful because you can see that the gap between gross savings and the budget deficit is right around where it was during most of the Reagan administration.

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