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Tuesday, May 2, 2017
The Democrats and Dystopian Debt
Jon N. Hall
Enjoy the next five months while you can, because America will soon be entering a "brave new world" in which our fiscal chickens will be coming home to roost. On Oct. 1, 2017 we begin fiscal 2018, and it'll mark the 10-year anniversary of former Speaker Nancy Pelosi's first budget, which saw a deficit of -$458B, the record at the time. A year later, on Oct. 1, 2018, we hit the 10-year anniversary of Madam Pelosi's first trillion-dollar deficit: -$1.4T. Not one to rest on her laurels, Pelosi went on to produce additional trillion-dollar deficits.
Why are these 10-year anniversaries significant? It's because most of the federal debt is in the form of Treasury Notes, i.e. T-notes, whose longest terms are ten years. Which means the insane debt of the last decade will soon be coming due. Look at the nearby screengrab of the chart on page 25 (pdf-28) of the latest "Schedules of Federal Debt" put out by the GAO in Nov. 2016, it shows that fully $8.6T of the $13.6T in marketable publicly-held debt was in Treasury Notes. Also notice that Treasury Bonds, which have twenty and thirty year terms, comprise less than 13.4 percent of marketable public debt.
Over the next decade, the feds will need to roll over, i.e. resell, U.S. debt on a scale that we've never seen. The proverbial pig will start making its way through the proverbial python. But the pig is rather elephantine, so open wide, because you're the python.
Adding to this we have the periodic spectacle of the "debt ceiling." Some ceiling that is, as Congress always busts right through it to ascend to ever-higher debt. (They should rename it the "debt speedbump.") Democrats have made not raising the debt ceiling into some unthinkable betrayal, a shirking of one's duty as a public servant. It's as though not going further into debt is treasonous. Our looming debt repayment dilemma would be bad enough if the budget were balanced, but Congress is still running a huge deficit. In the debt ceiling brouhaha of 2011 there was even talk of minting a "trillion-dollar coin." (Heck, why not just mint a quadrillion-dollar coin and be done with the debt ceiling for a while?)
Some say "deficits don't matter." We own the world's reserve currency, after all, which allows us more latitude than EU nations, like Greece. And we can create money "out of thin air"; the Fed did that for years with Quantitative Easing. But we've had a stagnant economy despite throwing trillions of dollars at it in deficit spending and QE. We may have done little but postpone the unpleasant.
First, the Federal Reserve is expected to continue phasing out its policy of keeping interest rates extraordinarily low, meaning rates should normalize over the next few years.
Second, interest rates have been constrained by the weak recovery that followed the Great Recession. If the economy eventually returns to its more typical 3.0 to 3.5 percent growth rate, demand for business, auto, and home loans should go up, thus raising interest rates.
Finally, and most importantly, the soaring national debt will eventually push interest rates significantly higher, because added demand raises prices. With the national debt in the process of rising $20 trillion over 20 years, all of Washington's new borrowing represents a historic increase in the demand for savings, resulting in higher interest rates for the government (as well as for families and businesses).
Up until now, the Federal Reserve and the weak economy have counteracted the interest effects of this new debt, saving taxpayers $1.3 trillion in lower national-debt-interest payments since 2009. But as the Federal Reserve tightens its policies, economic growth (hopefully) picks up, and the national debt continues surging, all signs suggest interest rates will be significantly higher down the road.
Nancy Pelosi was never able to get the deficit back below a trillion dollars before she lost the speakership. The four budgets that Speaker Pelosi oversaw produced the largest deficits ever, and the bulk of that debt starts coming due on Oct. 1 this year. That Democrats still have that ridiculous woman as their leader is testimony to the dystopian decadence of their party. Pelosi may not be the most destructive speaker ever, but she is surely the most expensive. So it's a bit rich when she says of the border wall that it is "immoral, expensive, and unwise."
If the federal government does not begin to have a "fiscal reckoning" within the next five years, then it may never happen. In which case, we'll need to consider if we live in some "monetary Matrix" where nothing's real, (call it "Krugmania"). But however tenuous its existence might be, I'm betting that money does have some kind of reality, and that its reality is going to bite us soon.
On March 4, NRO ran George Will's "Slouching into Dystopia," a review of The Mandibles, a new novel by Lionel Shriver that puts our fiscal reckoning in 2029. That's the year of an "economic crash and the Great Renunciation, whereby the nation, like a dissolute Atlas, shrugged off its national debt."
If you're one of those who believe "deficits don't matter," then read Will's short review. Also, in a wide-ranging Reasonmagazine interview, Shriver summed up her new book: "The focus of the novel is the implosion of the economy as a consequence of overloading of U.S. sovereign debt." Interviewer Katherine Mangu-Ward asked Shriver, "I was struck by the idea that complex systems collapse catastrophically. Is our economy such a system?"
I think so. It almost collapsed in 2008. We think that we went through a catastrophe at that time and we didn't. We propped everything up. But I think that there are all kinds of signs that we have simply -- the British use this expression incessantly -- kicked the can down the road. I think that the bullet we dodged in 2008 is still whizzing around the planet and is going to hit us in the head. When the currencies aren't worth anything and the stock market is crashed, what's left?
The nifty thing about balanced budgets is that they force decisions about what's important, they force prioritizing. But Congress hasn't had to prioritize, because with debt and the Fed's money creation, they don't need to make tough decisions, they can have it all. Despite our coming debt difficulties what do we hear coming from D.C.? We hear that economic growth will balance the budget; growth first, budget later. What we're not hearing much about is cutting spending, for that would entail decisions. But there isn't much road left for can kicking.
Our D.C. politicians need to think bigger. They need to think about doing two things that some think exclude each other. Our D.C. politicians need to think about a "fiscal Moon Shot": We choose to simultaneously balance the budget and revive the economy, not because it is easy, but because it is right.