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Trillions and Trillions..

June 25, 2021

Or an alternate title could be a “a trillion here and a trillion there and pretty soon you’re talking real money”. (Original quote with “billions” was by Sen. Everett Dirksen).

With the passage of the $1.9 Trillion “American Rescue Plan” in March, we officially entered into the era of US debt (and money printing) on steroids. We now have $28.4 Trillion in US debtalmost triple the $10 trillion in debt we owed in 2008 just before we started to ramp up federal spending with the first trillion $ stimulus package of 2009. Even measured as a % of GDP our debt load is enormous some 128% of annual GDP higher than it’s ever been in the US since WWII.

Incredibly we currently have about federal spending (at a $6.7 trillion annual rate) that is approximately double our annual tax revenues of $3.4 trillion. (Never in my 67 year history on earth has federal spending been that % above tax revenues).

Total debt will continue grow rapidly in the next few years as Social Security, Medicare, and Medicaid outlays continue to soar easily hitting $37 trillion by 2025 (OMB estimate), but if interest rates go up significantly (which is a virtual certainty) probably closer to $40 billion. Even today, we owe a mind-boggling $226 thousand per taxpayer. And this number doesn’t even count the unfunded liabilities in the US –social security, medicare/medicaid, other federal and state government and private pensions– which currently adds another $150 trillion to the total. The term “fiscal responsibility” has officially been stricken from the lexicon, while “free money” is the new watchword. Or as Robert Preston once famously sang “Oh folks we got trouble right here in River City…”

The Solution: Monetizing the Debt?

The Fed, Treasury, The White House, Congress all see “monetizing” the debt or at least a large portion of new debt as the only viable strategy going forward. (Interestingly, this seems to be one of the very few things that Dems and Reps generally agree on). Monetizing the debt simply means that the Fed buys Treasury Bonds and Treasury Bills typically from member banks to soak up some of the excessive amount of debt being created. Banks and others that own Treasuries sell the Treasuries to the Fed and receive $$$ credit from the Fed. Voila! the debt held by the market falls (the debt goes onto the Fed balance sheet) and money supply increases by the same amount.

This strategy had never been used in a major way until the 2008-09 Financial Crisis when QE (Quantitative Easing) was started. (a fancy seemingly intellectual way of saying massive money printing). During the period 2009-2015 the monetary base more than tripled from $1.2 to $3.9 trillion which helped cover the stimulus packages and increase in govt. programs during this period of roughly $1 trillion more per year. (i.e. Fed budget which had been about $3 Trillion a year during 2005-2008 grew to about $4 trillion during the Obama years).

With the 2020 economic market shutdown in late March, the Fed instantly reduced the Fed Funds rate to 0% AND immediately printed ~$1.5 trillion in just two months (Buying Treasury Bonds). By April 2021, the Fed had increased its supply of Treasury Bonds by $2.1 Trillion. The Fed remains committed to purchase approximately $120 billion per month or a $1.4 trillion a year pace for the foreseeable future.

The effect of all this money printing is well-documented and agreed upon (at least in the short run). Massive money printing lowers the cost of borrowing by reducing interest rates of Treasury bonds. (i.e. Massive buying of bonds increases bond prices which in turn lowers interest rates). This strong support for the Treasury bond market also drives down the borrowing costs for the economy as a whole. Mortgage interest rates, state and municipal bond rates, corporate bond rates etc. all are benchmarked relative to treasury rates and all fall as a consequence. This encourages borrowing, increases corporate debt and increases asset values (particularly housing/real estate values which are heavily driven by borrowing costs). In fact, lower interest rates generally increase the value of investment securities and hence stock and bond prices and other real assets such as gold, silver and even bitcoin.

These virtuous effects of money printing increase wealth, economic growth, increases employment and wages. It also allows the government to fund more giveaway programs (e.g. the Cares Act $1800 checks, higher unemployment benefits, etc.) and generally expand the total debt. So Why not print even more? Why not give everyone $50,000 a year for free!!!

The answer of course is that a much greater money supply reduces the value of a dollar so eventually there is inflation. (i.e. many more dollars chasing the same number of goods). In the past, money supply and inflation often were heavily linked. However, the last round of massive money printing(2008-2015) did not create the inflation that many feared would result. This in part was because on a relative basis the rest of the world economy was also printing lots of euros, yen, and yuan. So the dollar value relative to other currencies wasn’t a major cause of US inflation. Further, the US economy and the world economy remained very weak with generally high levels of unemployment and unused productive capacity throughout much of this period. This meant there was little ability to increase prices or demand higher wages because there was lots of competition between goods being sold around the World as well as among laborers for scarce jobs.

Modern Monetary Theory (MMT) and its advocates believe in increasing money supply in order to reduce interest rates and in turn enhance economic growth and employment. This according to MMT should be done UNTIL we get inflation. At that point, MMT advocates that taxes should be increased to quell inflation. Not much is stated about the political difficulties/very low likelihood of actually accomplishing this however, particularly given that a very large increase would be required on all Americans not just the wealthy in order to accomplish this. Nor is much said about the knotty problem of “inflation expectations” which can rather quickly set in after prices have started to increase significantly. This problem was evident in the 1970s.

Is Current Inflation Temporary?

One thing is for certain is that we do have reported inflation now on the order of 5-6% per annum. The truth is actual inflation is much higher –near 10%– when you take out the government’s phony adjustments. (See the Shadow Stats website for more info on this Note that the Fed uses the PCE for its inflation number to guide policy. But PCE excludes energy and food because apparently none of us need to eat, drive or heat our homes in the winter.

The Fed and many others believe inflation is temporary and should abate by year’s end. However, there are a significant number of us who are concerned that inflation increases are not temporary and may become more permanent, if not now , over the next few years. If so, it will almost certainly will mean that interest rates for federal debt, corporate debt and mortgage debt will increase significantly in the next few years. This will kill the stock market, the housing boom (Goodbye 3% Mortgages …Hello 8%+ Mortgages) and consumer demand in general as prices rise. All this points to an even larger deficit (hard to imagine I know) than we currently have, because tax revenues will decline and interest on new federal debt will soar. Only even more federal money printing will keep Treasury bond rates in check. But of course this is just more fuel for inflation.

To be sure many of the experts may be right and govt. reported inflation may return back to 2%. I would be very glad if this is the outcome!!!!, but I do think it is worth protecting yourself at this point. The current politics is for massive deficit spending and money printing to support it to continue for many years in the future. Don’t be fooled by proposals for “tax increases on the the wealthy” which have been promoted by Biden or the increasingly rare calls for reforming Social Security or health care in order to control costs. There is no appetite for either at this point. And even these calls would do very little to fix are long term budgetary problems.

Could we fix a lot of these problems? Sure, but in a world where many sees all government programs as essentially free as the MMT crowd rules the day, it’s hard to imagine how or when. If we refuse to tackle the easiest problems (e.g.the Social Security trust fund), how on earth are we ever close the gap on a $3 trillion per year annual deficit.

In the meantime, for many of my retired or partially retired peers as well as any others who are saving money for an uncertain future, my advice is simple. Protect your retirement funds vs. future inflation. That means owning gold, silver and precious metals (commodities and funds); no long term or intermediate term bond funds except for TIPs funds; some stocks but only companies with strong balance sheets and cash flow. And hold lots of cash just in case it all goes to hell in a hurry.

Let’s hope I am wrong. But unfortunately the numbers usually don’t lie.

Promise to blog about something more cheery next time!

From → Uncategorized

  1. Robert Carey permalink

    “approximately double our annual tax revenues of $3.4 trillion. (Never in my 67 year history on earth has federal spending been that % above tax revenues).”

    One interpretation of that could be that in the US tax rates, particularly on the rich and on businesses, are way too low.

  2. Yes. But making up a several $ trillion deficit or even a significant part of it with just tax increases particularly if it is just on the wealthy and corporations will be very hard. I think across the board tax increases would be better in particular we should consider a VAT/consumption style tax. This has the advantage of being unavoidable so tend to be much better for actually raising more revenues.

    However, we also must reduce our spending and at least get our budget back down to $4-5 trillion and soon.

    I wish I were optimistic but the loss of any moderates in Congress means that we dont have anyone who really cares if we make it work. Meanwhile, we will all face the consequences.

  3. Robert Carey permalink

    I don’t have a problem with some tax increases on the middle class, and in particular the upper middle class. And I think that taxes on things other than income on the wealthy are important as well. Jeff Bezos makes millions of dollars every hour while he sleeps. I’d be perfectly happy to see that taxed at 100% (although if he were willing to give it to the lower end employees of his business, that’d be good as well).

    The real question is how are we going to approach the infrastructure problems, which as far as I can see are far more pressing than anything related to inflation. The roads around here look like the roads in the Soviet Union in the 1970s. (OK I didn’t see the roads in the USSR in the 70s, but you know what I mean.) The Internet is becoming essential to every day life, and its support across the country is spotty. If Medicare or Social Security are cut, most of the people I know are going to be screwed. I don’t know where the Republican obsession with tax cuts came from. It wasn’t always like this, at least not to this extent. And I don’t understand why the military gets whatever it asks for when it clearly doesn’t know how to use it.

    I think a lot of Democrats (and I do think there are moderates in that party) would like to work on solving these problems in reasonable ways, but the Republican party has openly declared (per Mitch McConnell) that all they are interested in is blocking all progress by the Democrats. They act like the Democrats have moved leftwards, but the current Democrats are not far to the left of Nixon, while the Republicans have moved very far to the right of Goldwater, and have accrued a fair number of nutjobs in the process. (AOC is fairly far left, but compare her to Gaetz, Greene, Jordan and company and she at least comes across as civic-minded and sane.)

    I don’t know how to get where we need to get, but I wish there was more work in good faith to address very real problems via analysis and hard work rather than political posturing. I think you and I may be in agreement there.

    • Yes. Particularly agree with your last point. And I agree the infrastructure investment is important— though a much higher gasoline/diesel tax, raising the gasoline tax for the first time in more than 30 years, would be a good idea. I like the idea of having big users of roads (and transportation) funding the needed repair and investments. And in reality it is trucks and freight that exact by far and away the biggest toll on roads. And because their MPG is low, they will pay the a large proportion of the higher taxes which makes it a VERY good idea. But good luck getting that passed thru Congress. (sigh)

  4. Rob Carey permalink

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