In my previous post "Capital Flow Bonanzas and Their Aftermath", I discussed the strong correlation found in recent research between abnormal net capital inflows (large current account deficits) and the incidence of financial crises, with budget deficits not being strongly correlated with financial crises. In this post, I look at some relevant data for the US in this context.
As I remarked in my previous post, the US had both budget and current account deficits in the years preceding the crisis and the Oregon Office of Economic Analysis has recently shown that the aftermath of the financial crisis in the US is broadly comparable in many ways to what one would expect from the research of Reinhart and Rogoff - with the silver lining that, perhaps due to some of the policies followed since late 2008, the depth of the grave unemployment problem we face is not as bad as what was observed in the previous 5 worst cases studied. That's not saying much given the unemployment problem we have is substantially worse than what we've seen in the aftermath of past recessions in the U.S., but it is a data point to keep in mind. What I'd like to explore a bit more is some of the data on US trade balances and debt.
US Debt to GDP
The problem of rising debt to GDP in the US in the post WWII-era has, as it turns out, been largely a phenomenon accompanying Republican Presidential administrations, starting in the early 1980s. As this chart from Wikimedia Commons shows, the rising trend in public and private debt began in the Ronald Reagan era and was in reversal or tempered during the latter part of the Bill Clinton era, but returned to an unfavorable rising trajectory during the George W Bush era, culminating in an 'explosion' upwards due to the financial meltdown that started at the end of the Bush II era and extended into the Obama era. Thus, the only period of time in the last 30 years when US debt to GDP was in decline was during the second half of the Clinton administration, when there was a focus on driving to a fiscal budget surplus.
US Trade Balance