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BookmarkI have finished my book on the upheaval represented by the Trump candidacy and movement. It will be published soon, and is an exploration of how 30 years of Bubble Finance policies at the Fed, feckless interventions abroad and mushrooming Big government and debt at home have brought America to its current ruinous condition.
It also delves into the good and bad of the Trump campaign and platform and outlines a more consistent way forward based on free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule.
In order to complete the manuscript on a timely basis, I will not be doing daily posts for the next week or two. Instead, I will post excerpts from the book that crystalize its key themes and which also relate to the on-going gong show in the presidential campaigns and in the financial and economic arenas. Another of these is included below.
I am also working with my partners at Agora Financial on a new version of Contra Corner. More information on that will be coming soon.
Trumped Final
………One of the great virtues of the Trump candidacy is The Donald’s propensity to lob wild pitches—knowingly or not—at the sacred cows of Imperial Washington, thereby exposing the tissue of hypocrisy and can’t, which surrounds them.
But within the herd of revered ruminants none is slathered in more hypocrisy than the federal budget and official Washington’s unctuous professions of devotion to safeguarding the “full faith and credit of the United States.”
The truth of the matter, of course, is that our rulers have been marching the nation’s fiscal accounts straight toward national bankruptcy for the last 35 years, at least. And since the arrival of Ben Bernanke at the Fed, Washington’s actual policy with respect to the nation’s “credit” has been to debauch it.
So Donald Trump’s recent rumination about negotiating a “discount” on the federal debt was priceless. It caused a Beltway chorus of fiscal house wreckers to loudly harrumph and admonish the GOP candidate about the sanctity of Uncle Sam’s credit promises.
Default Is Actually Official Washington Policy
In fact, however, the unschooled Trump had merely mentioned out loud what is already the official policy of the U.S. government. He called them out, and they screamed like banshees.
Here’s why. For 90 months now the Federal Reserve has pegged interest rates to the zero bound. It believes that come hell or high water, the U.S. economy must have 2% inflation in order to grow and prosper, and that shoveling free money into the canyons of Wall Street is just the ticket to make this happen.
Other than a handful of rubes from the congressional hinterlands, there is nary a Washington operative from either party who has questioned the appropriateness or effectiveness, let alone the sanity, of the Bernanke-Yellen 2.00% inflation totem.
But what hitting this sacred inflation target really means, of course, is that exactly 30 years from today investors would get back 54.5 cents in inflation-adjusted money per dollar of principal on the U.S. Treasury long bond.
If that’s not default, it is surely a far deeper “discount” than even The Donald had in mind while jabbering to CNBC about his years as the King of Debt.
As we noted earlier, of course, the monetary geniuses who peddle the 2% inflation gospel claim we are all in it together. That is, prices, wages, profits, rents and even indexed social benefits allegedly all march upwards at 2% per year.
Save for minor leads and lags in timing, therefore, no one is financially worse for the wear; there is no inflationary default.
Actually, not on your life. That’s an official whopper that offends facts and logic on a scale that even Donald Trump rarely attains.
The truth is, savers get whacked and borrowers get windfalls. The wages of upper-end workers keep-up while the purchasing power of paychecks lower down the ladder shrinks continuously. Social Security recipients get recompense but private pensioners get shafted.
Likewise, under the Fed’s deliberate debt default policy traditional fixed income portfolios wither, even as the leveraged gamblers of Wall Street scalp monumental profits from zero-cost carry trades.
Indeed, the 2% inflation campaign in the real world is the very opposite of the Keynesian lockstep claim. Its incidence among economic agents and classes is actually capricious and inequitable in the extreme.
The debt-addicted politicians of Washington, of course, have no clue that the Fed is an engine of default and random redistribution. Nor do they have inkling that it is destroying the savings function, which is the ultimate key to capitalist prosperity.
Too be sure, they spend a goodly amount of time waxing about their endless affection for America’s working people. The often-sensible Governor Kasich, for example, never finished a single GOP primary debate without the sappy claim that he understood how to improve the U.S. economy because his father was a mailman!
Needless to say, mainstream politicians like Kasich, who also pound the table in behalf of the Fed’s vaunted “independence,” have never looked at the graph below. It shows real wages since the Fed went full tilt with printing press money in 2007. This is not a picture of 2% lockstep.
Less educated and lower wage workers have experienced shrinking real wages and for a self-evident reason. On the margin, they are more exposed to the lower nominal wages of foreign goods and services competitors than are workers on the upper end of the jobs and income ladder.
In fact, the chart’s three categories of workers with less than college degrees have experienced a 4% to 6% decline in real hourly wages since 2007, even based on the BLS’ understated inflation. Why in the world, then, does the Fed incessantly strive for more inflation and even more random punishment to the less privileged?
At the end of the day, Fed policy amounts to a grand scheme of random monetary default. But after Trump had the temerity to broach the topic—whether by inadvertence or by purpose—the spendthrifts of the Imperial City scrambled to smother us in a verbal blanket of phony fiscal rectitude.
Fiscal Hypocrisy of the Beltway Bloviators
In that regard, there are few more noxious precincts of statist fiscal hypocrisy than that occupied by the ranks of scribblers at “Politico.” And among these scolds and bloviators, there are few Washington apparatchiks more culpable than Gene Sperling, who headed Obama’s economic policy council.
According to Sperling’s snarky rebuke of Trump’s purely hypothetical suggestion, everything that has been done in the Imperial City these last several decades should have been done. Certainly, there is no fiscal crisis that might warrant radical ideas like those proffered by Donald Trump.
Let’s see. Between December 2008 and the present, the public debt exploded from $10.7 trillion to $19.4 trillion.
That means that on Obama’s watch, and with Sperling’s presumptive advice, new public debt was issued equal to 80% of the total debt created during the entire prior 220 years of the republic and the tenure of 43 presidents.
Well now. Has Sperling and his ilk ever considered how high interest rates might actually be, save for the massive bond market fraud carried out by the Fed and the rest of the world’s central banks?
Even the economically benighted types among us, apparently Donald Trump included, know that neither Washington, the IMF or the G-20 has repealed the law of supply and demand. Nor has the CIA yet classified as a state secret the amount of sovereign debt and other financial assets that the central banks of the world have vacuumed-up in the name of monetary “stimulus” over the past two decades.
Phony Defense of Uncle Sam’s Full Faith and Credit
As we have demonstrated, in fact, about $19 trillion—including more than half of the publicly traded U.S. Treasury securities—has been sequestered in central bank vaults since the mid-1990s.
All of that debt would have otherwise massively burdened the world’s limited supply of real savings—from income—thereby causing interest rates to soar. Instead, it was made to disappear from market circulation by monetary authorities hitting the “buy” key on their digital printing presses.
And the Bushbama enablement of this giant backdoor form of default on honest debt via the appointment of avowed Keynesian money printers to the Fed isn’t the half of it.
Whenever a corporal’s guard of Capitol Hill fiscal antediluvians has tried to stop the government-spending machine by refusing to raise the federal debt ceiling, their Beltway betters have cried “full faith and credit.”
So time and again the so-called debt ceiling has been raised to validate deficits already incurred. So doing, our Washington rulers did not even bother to reform entitlements, raise revenue or sharply curtail discretionary spending because they knew that the Fed and its front-running Wall Street punters would buy-up the continuing flood of new Treasury paper.
In fact, after so many years of being house trained by the Fed, Washington’s ruling class has turned wild fiscal irresponsibility into a self-conferred virtue. For example, Sperling sniffed that Trump should get himself educated by attending “Hamilton” next time he visits Broadway.“generations of Americans have benefited from a historical commitment started by Alexander Hamilton to ensure the full faith and credit of the U.S. is rock solid.”
Obama’s former chief fiscal strategists then pedantically averred that Trump is utterly bereft of the wisdom and courage displayed by the Obama White House when it starred down the 2011 debt ceiling challenge of GOP backbenchers: “does anyone doubt that such Trumpisms could lead to a global panic with unknown economic harm to the global economy and the long-term economic reputation of the United States?”
Well, here’s a newsflash for Gene Sperling and the rest of his “full faith and credit” choir of fiscal saboteurs. Roughly 80% of federal spending consists of transfer payments, debt service and other essentially locked-in commitments under law.
Accordingly, the debt ceiling is the only frail reed by which the inexorable expansion of this fiscal doomsday machine can be arrested. That’s because the tiny band of fiscal patriots left in Washington has no power whatsoever to directly stop the entitlement and automatic spending machine.
Indeed, under the extant Democrat White House you would have needed a two-thirds vote to override the veto of any entitlement reform that could not possibly have slipped through Capitol Hill in the first place. So stopping the borrowing authority is the only way to get leverage to stop the spending.
Thus, when the “full faith and credit” chest-thumpers on both ends of Pennsylvania Avenue quashed the backbench uprising in August 2011, they insured that Washington’s actual march toward default would continue unabated.
So doing they carried out the Big Lie. Namely, loudly and publicly denying that the U.S. Treasury secretary has the constitutional power to allocate and prioritize spending in the absence of new borrowing authority.
He does—even by the lights of liberal constitutional scholars like Professor Laurence Tribe of Harvard Law School. In fact, not paying military suppliers, highway contractors, Pell Grant recipients, cotton farmers and local public transit authorities their scheduled reimbursements and grants would concentrate the mind of Washington like nothing else.
Alas, that’s why they never make choices and rarely say no. The preposterous lie that their hands are tied absent a debt-ceiling increase is far more politically convenient.
Yet these people have the audacity to chastise Donald Trump for toying out loud with the possibility of default? In fact, it is the Beltway ruling class that has been marching resolutely in that direction year in and year out for the better part of three decades.
As we documented in Chapter 8, for example, government transfer benefits have soared from $1 trillion per year at the turn of the century to $2.7 trillion at present.
Even then, the baby boom bulge driving this budget breakout is just getting up its demographic head of steam. During the next 15 years the entitlement tsunami will truly become a fiscal doomsday machine.
Thus, while Beltway hacks like Sperling have been harrumphing about full faith and credit and the sanctity of the humongous debts that they are piling on to generations born and unborn, the nation’s fiscal doomsday equation has been permitted to run its course unmolested by Washington’s supposed fiscal watchmen.
Even by the lights of the CBOs Keynesian scorekeepers, the budget deficit will hit $1.4 trillion and 5% of GDP by 2026 under current policy, meaning that another $10 trillion would be added to the public debt during the next decade as a whole.
And that assumes, as we have seen, no recession for 17 years and a rate of nominal GDP and wage growth that is 65% higher than that over the last decade.
Imagine what will happen in the real world when the Red Ponzi finally crumbles in China and the global economy plunges into a prolonged deflationary recession
What will occur, in fact, is that the public debt will rise by at least $15 trillion in the decade ahead under even a halfway-decent economic scenario. Add that to the $20 trillion which the next president will inherit and you have, as we documented earlier, a $24 trillion GDP lugging around a $35 trillion national debt.
Needless to say, Sperling has left the White House and is now out humping for Hillary, who promises to lower the Medicare age to 50 years and distribute a goodly amount of other free stuff from Bernie’s playbook. And that would be on top of the 150% of GDP public debt that is already baked into the cake.
Only Yesterday, the Public Debt Was Less Than $1 Trillion
Alas, the fiscal menace at loose in the land long predated Donald Trump.
In fact, it has been gathering momentum for the last 35 years. Astonishingly, a public debt which is practically $20 trillion today and heading for $35 trillion soon was less than $1 trillion in 1981.
Indeed, in the great fiscal scheme of things, Oct. 22, 1981 seems like only yesterday. That’s the day the U.S. public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years).
Your author remembers October 1981 perhaps better than most because as the nation’s budget director at the time, I had some splainin’ to do. Ronald Reagan had waged the most stridently antideficit campaign since 1932, when, ironically, FDR promised a balanced budget while denouncing Herbert Hoover as a “spendthrift.
Likewise, Governor Reagan had denounced Jimmy Carter’s red ink and promised a balanced budget by 1983.
But as 1981 unfolded and the U.S. Treasury borrowed large sums each day to fund what we were pleased to call Jimmy Carter’s “inherited deficits,” the trillion dollar national debt threshold rushed upon us. And, in truth, it came far more rapidly than had been anticipated because by the fall of 1981, the Reagan White House had enacted the largest tax reduction in American history.
On top of that, it had also green-lighted a huge defense buildup, yet, as we liked to rationalize at the time, had made little more than a “down payment” on sweeping reforms of domestic spending and entitlements.
The latter were supposed to happen in subsequent years and had been designated by a placeholder in the out-year budgets infamously labeled the “magic asterisk.” In fact, there was nothing magic or devious about it.
Washington well recognized that it represented large and painful reforms of Social Security and other middle class entitlements that were to happen in 1982 and beyond.
Needless to say, we never got there. What happened, instead, is that the GOP embraced a revisionist fiscal policy, which at first was called “grow your way out”; and, eventually, was articulated by the nefarious Dick Cheney as simply “deficits don’t matter.”
Additionally, a new regime came to the Fed in August 1987 when lapsed gold bug, Alan Greenspan, discovered that he could run the Fed’s printing press with gusto, yet falsely claim credit for the disinflation of the 1990s.
As we showed in Chapter 5, however, it was the tens of millions of Chinese peasants streaming from the rice paddies into Mr. Deng’s export factories that was actually responsible for Greenspan’s tepid “disinflation.” That history-changing development, in fact, inaugurated two decades of goods and labor deflation on a worldwide basis, allowing the Fed to monetize a growing portion of the ballooning national debt with seeming impunity.
Last Days of the Old-Time Fiscal Religion
Yet none of that was anticipated in October 1981. Most of Washington was still in thrall to the old-time religion, fearing the untoward effects of chronic budget deficits and unbridled rise of the national debt. That is, that massive Treasury borrowing would “crowd” out private investment and eventually grind economic growth to a halt.
Even the Gipper, ever the optimist, did not want to trifle with this core precept of fiscal rectitude. With no inconsiderable reluctance, therefore, he embraced legislation to vault the national debt over the $1 trillion mark, while at the same time chiseling back his cherished tax cuts and defense build-up.
Back then, there was really no choice. You couldn’t have found a single dyed-in-the-wool Keynesian or even Marxist economist who would have embraced the path of massive, permanent government borrowing and debt monetization by the central bank which actually ensued over the next three decades.
So Washington stumbled forward at the $1 trillion mark. By October 1981, with the U.S. economy sliding back into a double-dip recession, the fiscal math of Reaganomics was already beginning to burst at all the budgetary seams.
The Reagan tax cut had triggered a monumental bidding war on Capitol Hill among special interest lobbies, and had ended up reducing the permanent out-year revenue base by about 6.2% of GDP—compared to the original pure supply-side rate cut of less than 3.5% of GDP.
Likewise, the defense budget was supposed to have grown at about 5% in real terms for a few years, but the Pentagon had spooked the new president into authorizing a decade-long spending spree that would have tripled defense outlays by the mid-1980s (the neocons told him the Evil Empire was flexing for military victory when it was actually tumbling into economic collapse).
Needless to say, the modest domestic-spending cuts enacted during the Reagan administration’s initial honeymoon did not even make a dent in these monumental excesses on the tax and defense fronts.
So in the fall of 1981, it was not merely the symbolic ignominy of crossing the trillion-dollar national-debt threshold for the first time that weighed on the White House. It was actually driven by fear that acquiescence in giant, permanent deficits would lead to economic ruin.
And by the standards of the past, where even Lyndon Johnson’s infamous “guns and butter” deficit of 1968 had only amounted to 2.5% of GDP, the outlook was indeed dire. As I put it at the time, the nation faced 6% of GDP deficits “as far as the eye can see.”
And there’s one more salient point. The nation’s central bank was then being run by the great Paul Volcker, who was determined to break the back of the double digit inflation that his predecessors, William Miller and Arthur Burns, had foisted on the nation during the 1970s.
It goes without saying, therefore, that no one thought Volcker was about to monetize the federal debt in order to let spendthrift politicians at either end of Pennsylvania Avenue off the hook.
So for nearly the last time in history, Washington reluctantly repaired to the “takeaway” mode. During the next three years by hook and crook about 40% of the giant Reagan tax cut was recouped.
Likewise, the bountiful flow of the defense pork barrel was stretched out and tamped down. And, crucially for all that was to follow, they payroll tax was jacked-up by about 20% in the guise of rescuing the Social Security trust fund from insolvency in 1983.
Taken together, these measures of fiscal restraint did a not-inconsiderable amount of good. They put a cap on the runaway deficits that would have otherwise occurred owing to the frenzy of tax cutting and defense spending in 1981 and the drastic recessionary shock to the economy that had resulted from Volcker’s unavoidable monetary medicine.
Still, for the period 1982–86, the federal deficit averaged 5% of GDP. Nothing like that had every been imagined before outside of world war—not even by Professors Samuelson, Heller, Tobin and the other leading Keynesian lights of the day.
During the peacetime period from 1954 to 1964, for example, the federal deficit had averaged less than 1% of GDP and Eisenhower had actually achieved several modest surpluses during the period.
Indeed, the deficit breakout that ensued notwithstanding the fiscal retrenchment efforts of 1982–84 was even embraced by assistant professor Paul Krugman.
Back then he was on economics staff of the Reagan White House. Never once did he aver that the national debt at only 33% of GDP was way too small, and that open-ended “stimulus” was in order.
But then came Volcker’s victory over inflation, a strong economic rebound and the “morning in America” campaign of 1984. For all practical purposes, the job of fully restoring fiscal rectitude was left unfinished—and permanently so, as it turned out.
What happened was that the structural deficit begin to shrink modestly. This was in part owing to the strong economic recovery of 1983–85 when GDP growth averaged 5% per year, and also due to the delayed revenues gains from three tax increase bills signed by Reagan during 1982–84 and the massive payroll tax increase that was buried In the so-called bipartisan Social Security rescue (1983).
by David Stockman • September 2, 2016
