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George Washington vs. Washington DC’s Debt
Our nation’s founders were keenly aware of the habits of mind necessary to self-governance. Public thrift was considered essential to prosperity and stability. They knew from reading history that financial insolvency was a primary destroyer of great civilizations.
George Washington among others warned against “ungenerously throwing upon posterity the burden which we ourselves are to bear.”
They would see everything they feared most unfolding now in 21st-century America, capped by the financial disaster we have created out of a viral pandemic. We have so far added over $4 trillion in Covid spending, all of it paid for by our fantasy credit card.
Our $27.5 trillion total debt exceeds our GDP, a traditional red flag. Yet Americans remain curiously unconcerned about this menace to our future.
When Covid hit, many pronounced it unprecedented, the worst crisis in our history, justifying the expenditure of gigantic sums. But our hysterical reaction is not based in reality.
1919 was the year after World War I killed 20 million and the Spanish flu (political correctness alert) took 50 million victims worldwide. In 1968, RFK and MLK were assassinated, cities burned and the Hong Kong flu killed 1 million. The Civil War, WWII, and the Great Depression were financial as well as humanitarian disasters.
Yet in the face of conditions at least as dire as ours, Americans accepted the sacrifices, did their jobs, and got through it, without aggrandizing themselves as heroes. It probably didn’t occur to them to start writing checks to each other, even those who have not suffered financially, with the intention of passing the bill to future taxpayers.
The original CARES Act was a $3.2 trillion attempt to mitigate the fallout from the disastrous, ineffective lockdown strategy, possibly the worst policy failure of all time. Before the money was even spent, politicians and interest groups were clamoring for more. The House authorized another $3.4 trillion in May and Nancy Pelosi ever since has been pressuring Republicans to go along.
Meanwhile, economic growth is resuming in spite of continuing lockdowns. Employment is rising, financial markets are healthy, and household spending has actually increased in seven of the last eight months.
Yet rather than pursue targeted relief and re-opening the economy, spineless Republicans agreed that more “rescuing” was necessary, just not as much as Queen Nancy had demanded. With the purported crisis as an excuse, another congressional feeding frenzy ensued with $2.3 trillion spent total in the name of coronavirus aid and “keeping the government open“. Broadway, teachers unions, racehorses, brewers, and many others found champions to help them over the line.
The reaction of Democrats and President Trump was: not enough. “This action in the lame-duck session is just beginning” Joe Biden proclaimed. “I’m going to ask for more.” Democrats made no bones about their intention to spend more trillions on Medicare for all, the Green New Deal, student loan forgiveness, and other goodies.
The truth is that Americans love their myth that we can spend more than we have indefinitely without consequences. Our elected leaders speak and behave exactly as they would if we were flush with cash and are politically rewarded for doing so.
If they bother to provide any justification, they conveniently ascribe to the New Monetary Theory, which is that money-printing governments can never run out of money. That’s economic sophistication on the level with believing that you’re always OK if there are checks in the checkbook.
So far, we’ve survived our recklessness because interest rates have been artificially depressed by the Fed and investors are still willing to lend money to the US at extremely low rates. But at some point another crisis will require supplemental funding – war, another pandemic, political collapse, whatever.
Bond investors will then see a nation that is already financing debt payments with more debt, that most likely will be running $2 trillion to $3 trillion deficits and still facing unreformed Social Security and healthcare mandates. Sharply higher interest rates will increase the deficit, which will cause interest rates to rise further, creating a classic Doom Loop, all because our political culture couldn’t resist overspending.
Our 2020 spending was unjustified and immoral intergenerational theft. George would not be amused.
Published in Economics
This is my favorite video on this topic.
Almost this whole podcast/show is about this topic particularly focusing on MMT. Very fresh view.
https://omny.fm/shows/the-dan-proft-show/december-22-2020
http://financialrepressionauthority.com/2017/07/26/the-roundtable-insight-george-bragues-on-how-the-financial-markets-are-influenced-by-politics/
Tom,
We the people, or we our government?
https://www.amazon.com/End-Near-Its-Going-Awesome-ebook/dp/B009NF6CGY
This is a very good book.
Eh. Williamson’s book struck me as a libertarian fantasy. When the system implodes, everyone will magically see the rightness of small government and free markets. There is no reason to think this will happen. Our future is more likely to be Argentina than Hong Kong. California is leading the way.
The problem is, once the 10 year treasury hits 4% every single western government goes broke. It’s going to be a very stark situation.
Oh I agree with you. I know from our mutual comments on other posts that we think a lot alike on these matters.
I just don’t think that the people will somehow embrace free markets and limited government in the wake of the catastrophe. That’s not the historical precedent. Even though government will have caused the crisis, people will still turn to government to solve it. The government will oblige by finding convenient scapegoats to demonize and feed them to the mob. Socialism fails over and over in Central and South America and this is what happens.
Fair enough. That makes sense.
The government needs to stick to public goods only. If I recall correctly Kevin’s book states that some economists think 80% of government is non-public goods.
The other thing is, don’t start a government actuarial system unless you keep it totally over funded the whole time. Be totally explicit about the redistribution built in.
For those that are interested, here are some ***really technical*** explanations of the government running out of money and so forth.
https://ttmygh.podbean.com/e/teg_0006/
https://ttmygh.podbean.com/e/teg_0010/
Listen to them in that order.
It happened once in Western civilization, and it can happen again–there or elsewhere. The first time, and the next time and every time, it will necessarily be preceded by a change in the theories of the intellectual class, not the masses nor the political class.
The first liberal revolution did NOT begin with the economic implosion of the illiberal regime on the ground. Just the opposite. It began with the greatest explosion in the generation of human welfare in the history of mankind.
Perhaps that transformation has already begun, this New Year’s Eve. You and I (we are part of the masses) would have no way of knowing. Most of the ruling party in academia and the media are just intellectuals in sense defined by Hayek. They are repeating half-memorized phrases from Marx, Playboy, and Easy Rider out of context. They are not original thinkers, merely second-hand dealers in ideas. That is why we won’t detect the change in direction till long after it happened.
John Adams, Thomas Jefferson and all the intellectual elite of America in that day had read Adam Smith, but Samuel Adams and the Committees of Correspondence hadn’t, I’m sure. With only the Trumpists of the time on its side, the Revolution would never have happened. They didn’t hold any Truths to be Self-Evident.
This is really short.
https://mises.org/wire/were-living-age-capital-consumption
Rufus,
If you find these answers on the ‘net, bookmark them. As they say on the spam ads: you will be shocked at how Wall Street, the Fed, Fannie/Freddie, and Treasury actually work.
If Britain and France had not had such debt troubles, we could not have won independence or made the Louisiana Purchase. Debt is a vulnerability.
Well, this gets into the weeds but the government can force pensions and banks to buy treasuries.
The problem comes in when the whole public stops believing in central banking.
The Lacy Hunt podcast is technically about the political independence of the Federal Reserve.
Great comment, Rufus.
An interesting but unnoticed additional force generated by the current “stimulus” might be directed toward capital consumption. That is because it involves an intentional forced transfer of purchasing power from wealthier to less-wealthy households.
You know Austrian theory of capital. In a self-sustaining, stable economy, there is a steady flow of real investment (capital generation for growth plus capital maintenance).
The richer the household, the higher its financial savings/investment rate, which means in general the higher the real savings/investment rate.
So if it works as designed, these interventions should artificially depress the portion of annual real production that flows toward capital maintenance. All else equal, coercive (wealth-destroying) destruction of capital.
Yes, debt is a vulnerability to an individual, and gold debt was a vulnerability even to a country, under the gold standard.
Why?
Because if a country owes gold, it is in the exact same boat as an individual: it has to get hold of some actual gold before it can make its debt payments. (Britain: “No problemo, Dutch bank. Will you take my marker? I’ll have it sent over before noon.” Dutch banker: “No. Just gold, please, as you promised.”)
Under the new post-WWII standard, Bretton Woods, the French Government says, “No problemo, Dutch bank. Will you take French Francs? I’ll print you some off this afternoon”. Dutch bank: No. Just US Dollars, please, as you promised.”
What a racket the gold exchange standard was for the Yanks, while it lasted!. Countries pretended to believe it was a gold standard. The Yanks ran that racket till 1973, when France and the others finally said, Okay Yank, change these USD for gold, just like you promised” and Nixon said, “No problemo. You will take my marker. If you want gold, come and get it. Bring your expeditionary force with you.”
I think you mean Modern Monetary Theory not New Monetary Theory.
What is the chief cause of a government running out of money? Is it general political will and collective morals like most people talk? Or is it individual immoral structural changes like going off of the gold standard that make it all but impossible to do the right thing? I think it’s far more the latter.
The big problem is militarism requires an inflationist system. The regressive inflation tax keeps militarism safe. If you are going to be a global superpower you have to have a system based on inflation. The only way you can avoid all of this is if every single country drops militarism and switches to a more natural deflationary system.
The natural way to live is a slight deflationary system. That is the actual state of nature. Better living through purchasing power. That is progress. If you didn’t have central banks that’s the way everything would be. The side effects of an inflationist system are impossible to manage in the long run.
Technology and global trade is retarding actual CPI inflation so we have asset bubbles all over the place instead. If civilization is going to hold together they have to create actual CPI inflation. I watch all kinds of videos about this and that is what has to happen.
It’s both. Many, many Americans live beyond their means and have little to nothing in savings. Not surprisingly, many Americans vote for government that is equally irresponsible. It’s not the case that the people are all level-headed but those gol-darned politicians keep spending money to the great objections of the public. People may say they would prefer budgets to be balanced but most people are unwilling to endorse serious spending cuts. Even trying to reform Social Security to make it solvent is impossible, because “we the people” reject every proposed change that could save the system.
Ten whole minutes. Check it out.
Nobody is going to do this, but I really recommend listening to this three-part series. It’s about 2 1/2 hours.
For those that are interested, this is a discussion about MMT.
This is my opinion of how this would have to happen. The second the Soviet Union fell we should have switched to a deflationary government and financial system. All of the entitlements should’ve been fixed in the whole western world. The way it is now you have to make it by stealing from other citizens through the government or more or less levering up financial assets. Speculating.
This is why I think central banking is worthless. Those guys should’ve made it clear to the politicians that computers, automation, and globalized trade was going to kill off the inflationist system one way or another.
Trading with China was a huge mistake as well. It kills jobs and creates deflation we can’t handle. We get nothing positive out of it on net.
This is why idealism about Ronald Reagan is ridiculous. If he were here he would have gotten all over why Socialism and populism are taking off.
It’s all fine and dandy until the interest portion of the debt service crowds out the shrinking discretionary portion of the budget. When that wasn’t happening, and it was 2/3/4% of the budget, yeah, it could be handled without much concern. The capital portion wouldn’t be getting paid down, but the interest could be serviced easily.
We’ve almost tripled the national debt in the space of 12 years. Obama doubled the 10 trillion or so in 8 years, getting to almost 20. Under Trump, it’s now 27 trillion.
It took 240 years or so to get to 10 trillion. It took a fraction of that time to almost triple that debt. There’s not enough income in the wealthier percentiles to start addressing this from a purely tax point of view, we’d have to raise taxes on the middle class significantly to start chopping the tree down.
All the incentives are upside down for politicians. They are penalized in elections for not spending money. It’s how they stay in office.
We’re left holding the bill from a 435 drunken *ssclowns, and a massive, lumbering, annual spend behemoth that can’t seemingly be slowed down. Study after study shows the lunacy spending items that make it into the budget, but they are never repealed, stopped, or reduced. They’re simply reincarnated annually in a fresh round of stupid, to keep a bunch of aging loads in their 2nd and 3rd taxpayer-funded homes while servants make meals for them in DC.
And people think the gov’t exists to help them. It exists to help itself.
I think Williamson is right for part one. Pollyanna on partbtwo
This is really good. If you listen around the one hour mark, Peter Schiff explicitly explains how the Federal Reserve was set up originally. I forgot this.
The way it was set up, the only thing that was supposed to be on the Fed balance sheet was gold and commercial paper. Commercial paper is 100% backed up by real goods or work in progress or something like that. Highly discounted accounts receivable, maybe. They literally couldn’t buy treasuries. They weren’t buying crap that went into the government vortex. All they did was back up the financial system at a penalty rate if you had good collateral. I think it facilitated the swings of such an agricultural he dominated economy or something like that.
He then goes into talking about what Janet Yellen actually did and what they are actually doing now. People have no idea. At some point they are going to break everything on purpose and then we are going to get inflation. I think they literally have permission to buy corporate bonds and ETFs right now.
https://quoththeraven.podbean.com/e/quoth-the-raven-233-peter-schiff/