Hooray for America!! Our Debt Is No Longer A Concern... Spend Away!!

In an article in the New York Times, assorted fund managers, economists and just plain reporters opine as to the irrelevancy of the ballooning national debt. The focus of the article is that for many years, it has been assumed that there was a final tipping point — when the debt that America owed exceeded its annual GDP. By most measures, we passed that point in early June of this year, compounding the overage ever since. As the article points out, that occasion was not met with the end of the world often predicted, but with a shrug.

This is wonderful news indeed.

Now that we finally know that debt no longer matters, there’s a host of things that we should take care of. Let’s start with poverty… there is simply no excuse for it any more. We can provide a basic living wage to everyone in the country, and end poverty within days. Hunger? Done. You farmers and producers, just get to work. The government will cover you at fine prices. Health care… zero cause for that to be a problem. Free health care for all, whether it is single payer or not, should be mandated immediately. Military? Just give us a list of what you’d like, and it’s yours… nothing is too good for our men and women in uniform, costs be damned. Education? Free tuition for all, forever, and teachers are about to get a major raise, thanks to government subsidies.

Too much, you say? We can’t afford all of that? Of course we can. Deficits and debt are no longer relevant; we have printing presses, and we’re not afraid to use them. Send the bill to the Fed, and don’t concern yourselves with the final tally. Powell, Mnuchin and their friends have you covered.

If you want to argue that any of this is ridiculous, then you’ve got some work to do. First of all, you have to explain why.

If your argument is that we don’t have enough money, then what do you base that on? Is there a limit to what the Fed and Treasury, the arbiters of Monetary and Fiscal policies in our country, can provide if asked? If so, what is that limit? How high is up? According to Mnuchin, the trillions that we’ve added to the debt are basically irrelevant… according to Powell, there’s plenty more where that came from. Putting another two or five or ten trillion dollars into the mix doesn’t seem any more difficult than the last $10 trillion that we’ve done, so what’s your point? Where is the top?

Here is what passes for reality these days. The U.S. has an anticipated debt burden of about $28 to $29 trillion as of now, with projections for it to rise significantly over the coming months. The statements that it is “only” $21 trillion or so ignores the $7 trillion that is currently held by the Federal Reserve on its balance sheets, which are either good treasury obligations, or we have an entirely corrupt system and money truly doesn’t exist.

That amount is so new, that it hasn’t affected anything yet. A year ago, the debt was over $10 trillion lower, for about a 60% increase. No budget has been written by Congress that allows for the payment of interest on this new debt. No stock or trade market has been free of manipulation through the Fed and Treasury policies of extreme stimulus; every major company has access to unlimited credit, and the stock market has reflected that largess in its record setting prices despite the actual economy. No country has been in a position to exploit our own weaknesses, and we still represent a safe harbor for investment, even if only in relation to the rest of the world.

To pretend that we are in a normal economy is foolish beyond words. Nothing about today counts, nothing can be extrapolated into any sustainable future. The world is presently operating on a fully artificial form of life support, ignoring everything except the urgent need to exist.

Let’s talk about sustainability for a moment.

There is a conceit by too many “experts” that the present artificially suppressed interest rates will magically last for years, if not forever. The raising of interest rates by even a percentage point from current levels would have dramatic impacts on the cost of servicing our debt, but the Fed has assured that there are no upticks in our near future.

Let’s remember how the Federal Reserve maintains those zero interest rates. To simplify the process, the Fed goes into the market, buying Treasuries and in so doing, inflating their prices (it’s that old supply and demand thing; the more of something is bought, the more upward pressure on prices). In a fixed interest instrument like a treasury bill, note or bond, the higher the price the lower the interest yield… so by keeping the prices of those instruments elevated, the Federal Reserve maintains lower rates. That process requires the Fed having funds to buy those bills, notes and bonds with, and they have only one source: produce more money. Trillions of it. The Fed has always been concerned with doing this, but no longer; now, they brag about the infinite supply.

OK, so there’s a bunch of new money. Big deal… it’s an expensive world, we’ll use it all. That may be true (it’s not, but that’s another column), but look at the end result — the Federal Reserve now owns more treasuries. A bunch more, and all of them are obligations of the government. All of them add to the money that comes out of the budget each year in the form of payments. In cash. Sure, but it’s the Federal Reserve. They belong to us. They can just give that money back to the Treasury, so it washes out.

It’s not that simple.

First of all, the Fed doesn’t belong to us, not really. It is a strange sort of blended private entity, but to the extent that anyone owns it, it is the member banks. There are twelve regional banks, and the stock in them is held by an assortment of banks around the country. That stock isn’t particularly like the shares of Apple in your retirement account; they offer some voting rights, but no participation in profits. In point of fact, the Fed isn’t allowed to make a profit, but has to return excess funds (after expenses, dividends and a balance for future expenses) to the Treasury.

Great, that solves everything! The money goes from the treasury to the fed, then back to the treasury… no harm, no foul. Settled, you say.

And I respond, agreed. The buying of securities by the Federal Reserve is irrelevant, and therefore unlimited. It can, and should, buy another $30 trillion of securities back from the market, and retire that silly national debt once and for all. Every year, the treasury can cut a check for the interest on the $40 trillion the Fed is holding, and the Fed will send that check right back. Next year, we’ll get around to the whole poverty, health care, military, etc. thing, and add another $10 trillion to the pot. Amazing that we never thought of that before, but now that we have, done deal.

Hmm… wait a second. That sounds too easy, too obvious. Why haven’t we done that before?

Well, since you asked.

In order to make those purchases — both the ones that we have already recently completed, and those that we’ve just suggested — the money to pay for them has to come from somewhere. That somewhere is, as we’ve discussed previously, the thin air, since the Federal Reserve cannot have any retained profits. Thin air in this case is basically new money, money that didn’t exist before. The money required to purchase those many trillions of bills, notes and bonds would be added to the economy, vastly increasing the amount of dollars in circulation.

This leads us back to the question of capacity. Conventional wisdom says that when you create more money, the existing money becomes worth less, potentially much less. When dollars are worth less, it takes more of them to buys stuff. That is called inflation, and if the inflation is severe enough, it’s referred to as hyper inflation, a condition where money becomes so worthless that it destroys the economy and the government that allowed it to happen. In other words, a very bad thing.

There is an argument that is often made that the escalation in money supply (the amount of money in circulation) has already been extreme, and despite that, inflation has remained at historically low levels. This is somewhat true — the money supply has grown excessively, though at levels far lower than it is growing now, and inflation has not jumped up. Again, we have to look at the artificially manipulated nature of the economy, and the question of sustainability.

During the last economic crisis — just a dozen years ago — the Fed began the process of acquiring massive amounts of assets in order to stabilize the economy. Starting in 2008, the Fed accrued over $2 trillion in treasuries, an unprecedented supply. Then Federal Reserve chairman Paul Volcker testified that the purchases were temporary, and that he would look to divest them over the coming years. Congress nodded, and everyone went back to work on the recovery.

A funny thing happened. Volcker found that he couldn’t divest without triggering the market, so instead, the Fed bought more in order to maintain stability and control. By the middle of the next decade, they were up to over $4 trillion, and the pressure was being felt. An aggressive program of selling allowed the total to fall to about $3.5 trillion before it could do no more. As the current crisis began, that total was pushed upwards daily, to where it now stands at $7 trillion with expectations of considerably more to come. So far, current chairman Jerome Powell hasn’t bothered to pretend that he’ll be able to sell what he’s bought; the upward pressure that such actions would create for interest rates would be obviously ruinous to the economy, and besides, if Volcker couldn’t sell a couple of trillion, what would make anyone think that Powell could sell multiples of that?

So, let’s put that all together. The massive and growing debt of America hasn’t caused damage yet because it hasn’t had to be paid for yet. The interest rates that define how large those payments will be are being artificially suppressed by creating ever increasing amounts of new money, which in turn is being funneled into the system without restraint. The Federal Reserve balance sheet is swelling far beyond what was ever imagined, and there appears to be no means of relieving the pressure without jacking up interest rates, which in turn would magnify the cost of the existing debt. There appears to be a day of reckoning coming, but we’ve held that at bay for now by throwing ever more money at it, making the eventual payment that much worse.

The solution apparently embraced by many in the administration and the market is to simply not worry about it. We can’t repay what we owe already, so why not owe a bunch more? Ok, I get it… but there’s a corollary concept coming at you right behind it. If money really doesn’t matter, and it can’t unless we’re lying to each other, then we have no reason to withhold spending on American deficiencies, to solve all of the American problems that plague the least in our nation. We should live finally in paradise, a just and fair expression of our great national wealth.

Let’s listen to the response when we demand it.

But if we are lying to each other; if the motivation for the extreme positions being expressed by the powers behind trillions of dollars of stocks and bonds is the maintenance of their vast and rapidly expanding personal wealth, then let’s all take good notes. If they are lying now, then when that day of reckoning comes we will know exactly where to look for compensation and recapture. We will know the truth, and that the wealth that was given under such false and cynical circumstances needs to be returned.

It can only be one way or the other — money either matters or it doesn’t — and I contend that the answer is knowable today, even if the New York Times doesn’t care enough to know it, or to report it.