Tag Archive for: FederalDeficit

Market Volatility Compresses As Debt Ceiling Looms

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Estimated Reading Time: 5 minutes

Volatility in stock, bond, currency, and gold markets continue to contract as they pause awaiting not only the next meeting of the Federal Reserve but also the resolution of the current political battle over the debt ceiling.

Depending on who is doing the talking, and what “extraordinary measures” are used by the US Treasury to shuffle money around, the US government will be close to running out of money in the next week or so.

Markets appear to act as if this threat is mostly political theatre, as none of the major markets are currently acting as if the US is really about to default on its sovereign debt.

For example, if the markets truly thought the US would not be paying interest on US treasury bonds, which is the reserve asset of the world as well as our own banking system,  Treasury bonds should be falling sharply in value, discounting that these bonds could become worthless.  Falling bond prices would translate into sharply higher interest rates, since the price of a bond and its yield, are mathematically connected at the hip. Such a collapse in price would harm everyone who owns them, which is most of the world.

Bonds, however, are only drifting gently lower right now.  However, their decline over the past year is largely responsible for our serious bank failures of late.

Likewise, the value of the dollar should be falling sharply, roiling international trade and banking as well.  That is currently not happening either.  The dollar has been drifting lower of late but recently has bounced back up a bit.  If we simply start to print money to pay all of our bills, that can hardly be expected to help the value of the dollar.

If the “reserve” of the international banking system were really about to default, then one would expect gold prices to be rising sharply.  They aren’t. Gold, of course, is the only recognized international reserve, not an obligation issued by a government, and hence, can’t default.  But of late, its price has been drifting lower, not rising in concern.   Having fallen just $4 short of an all-time high in early May, it has meandered down from about $2,060 per ounce to about $1,960 per ounce as we write.  This $100 dollar slide would seem an odd thing to do if the US were really about to default.

And stocks would hardly be comfortable with a default if that were really about to be the case but their action has been mostly sideways with contracting volatility.

Thus, it would seem the markets are sanguine about how the debt ceiling talks will end up.  The markets apparently feel that once again we will see some kind of resolution before it is too late or we will have selected shut down of some government agencies as we have seen before.  Closing the National Parks or Passport control is surely inconvenient and damaging to communities that need tourism, but such closures will not wreck the country.

The markets have had to go through this process several times before, and depending on the severity, and how “default” is handled, will dictate the extent of losses and the time necessary to come back from those losses. The last big debt ceiling crisis was in the summer of 2011.  It created several weeks of volatile action in the markets, including a decline in stocks of about 21%.  Afterwards, markets continued their advance which lasted for several more years.  However, the US government suffered its first bond rating downgrade and lost its AAA rating with Standard&Poors with a “negative outlook” going forward. 

There was another disturbance in 2013 that was milder.

There are both good and bad in the market’s reactions to these present events.  The good news seems to be that markets just don’t believe that our political leadership is that stupid and that most of this is political brinksmanship designed to extract concessions from the other side.  There are other things to worry about such as the FED interest rate policy, declining economic growth, and earnings reports softening.

The bad news comes on two fronts.  Firstly, the markets are quite unprepared if talks truly run off the rails and the US has to default in some form.  If you are unprepared,  when reality reveals itself it can lead to rapid panic. Secondly, the two arguing parties might feel greater urgency to solve the problems if the markets were putting them under pressure. The current sideways action just will not be sufficient to catch the attention of our camera-seeking political leaders.

History suggests that what damage is done will be temporary, assuming all other market factors are reasonable.

However, a true default could be much worse and more long-lasting.  Then again, getting spending constraints would be a positive for the markets and the economy.

The long-term problem is the current huge build-up of deficits is unsustainable. We cannot keep racking up deficits like this.  Spending is far outpacing both economic growth and revenues and the trend seems permanent.

Current Republican leadership knows this and also feels this time, as opposed to previous times, the debt ceiling crisis will be blamed on the Democrats. Current polling does show the public largely supports the Republican plans to trim spending. All that is being asked are quite modest cuts in spending and the return of unspent Covid relief money. They are quite willing to sign on to a debt ceiling increase if some modest common sense things are done.

The Democrats for their part are now a radical party and turmoil serves radical political ends.  Some of their most progressive members are now suggesting street violence. For most of the last few months, the Biden Administration flatly refused to even talk to the Republicans knowing full well the end date was coming soon.  Then they tried trotting out a strange 14th Amendment Theory.  The section of that amendment had to do with integrating the previous states of the Confederacy back into the Union and making it clear,  the Union would not be responsible for Confederate debts. The position that this applies to the current circumstance is absurd on its face and one only a constitutional ignoramus could make.

Other novel theories suggest money once appropriated by one Congress is binding on the debt management of another Congress.  But if acts of one Congress of one party are an unquestionable obligation of another Congress run by another party, nothing would ever change.  That is not the way the system of checks and balances works. Democrats remain convinced they can blame the “crisis” on the Republicans but their desperation indicates that Speaker McCarthy has them and the President cornered.  They seem to feel there are no problems always spending more than you take in. The bogus nostrums of Modern Monetary Theory seem to have taken up permanent residence in the Democrats’ brains.

Both the market complacency and the view that this is just another period of political brinksmanship do seem to miss the serious nature of what we are dealing with.

We really can’t go on like this as a nation.  The debt burden is now way beyond political posturing. Not that far in the future, the laws of economics will apply to the US just as it has to other countries.  We are already in the worst inflation we have suffered in 40 years, an indication we are closer to the breaking point than many think.  We are having a rolling banking panic and we are not even in recession.  If we nose into recession later this year, revenue will fall (it already is) and expenditures will rise, making the deficit widen once again.

Other great empires have been brought to their knees by financial calamity and both citizens and markets, become collateral damage to government financial mismanagement.  Who is to say we are so special as to avoid the consequences of spending forever more than we receive in revenue?

No, we need some sober leadership that gets expenditure and revenues back into balance.  However, financing this great country with such chaotic procedures is a burden on all of us and very difficult for the markets to figure out.

The great leader that unified Germany Otto von Bismark is credited with this pithy observation: “There is a Providence that protects idiots, drunkards, children, and the United States of America.”

We worry about how much longer that may be true.

 

 

 

 

Crowding Out: The Fed May Be Killing the Private Sector to Save the Government

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Estimated Reading Time: 2 minutes

The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.

Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.

The current situation is the worst possible. The Fed’s balance sheet is not falling as fast as it should; government spending has not even been scratched, but the money supply is falling at the fastest pace since the 1930s, and rate hikes are hurting the productive economy while the government seems unaware of the need to reduce its bloated budget.

The first-quarter GDP figure is extremely concerning. Government spending showed yet another big rise at +4.7 percent, much higher than expected. However, consumption, at +3.7 percent annualized, was well below estimates and driven by a worrying new record in credit card debt. Even more concerning, gross private domestic investment fell by a massive 12.5 percent.

There is robust evidence of a negative trend in the real economy. Rising federal expenditure, more bureaucracy, higher taxes, and weaker activity in the part of the economy that drives growth and jobs.

Rate hikes have two direct negative effects on the economy if the government does not reduce its deficit spending spree. They mean higher taxes and a massive crowding out of available credit. The government deficit is always going to be financed, even if it is at higher rates, but this also means less credit for businesses and families. The crowding-out effect of the public sector over the productive economy means lower productivity growth, weaker investment, and declining real wages as the government keeps inflation above target by spending additional units of newly created currency, but the productive sectors find it harder and more expensive to find credit. Additionally, the government borrows at a much lower cost than even the most efficient and profitable businesses.

It is impossible to achieve a soft landing for the economy when the Federal Reserve ignores the signals of the banking system and the real economy. The first pillar of a true soft landing must be to preserve the real disposable income of workers and the job creation and investment capabilities of businesses.

When the government continues to increase spending, there is no signal of the mildest budgetary control, and the entire “landing” comes from the private sector, what we get is upside-down economics.

The Federal Reserve has stopped paying attention to monetary aggregates just as the money supply is contracting at an almost historic pace. Even worse, the money supply is contracting but federal deficit spending is untouched, and the debt ceiling was raised again.

The money supply is collapsing due to the inevitable credit crunch and the difficulties faced by consumers and businesses. It is impossible to grow with rising taxes, persistent inflation—a tax in itself—and carrying the entire burden of the normalization of monetary policy.

Fighting inflation without cutting government spending is like dieting without eliminating fattening foods.

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This article was published by the Ludwig von Mises Institute and is reproduced with permission.

6 Charts Show Crucial Facts About Spending, Taxes, Deficits Missing From Biden’s Budget

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Estimated Reading Time: 3 minutes

The Biden administration on Thursday released an outline for its fiscal year 2024 budget. As expected, it promotes the same swampy, big-government agenda as last year, which the country desperately needs to avoid.

Beneath the administration’s spin, the ultimate message is that it thinks the federal government doesn’t have enough power and control over our families and businesses.

These charts, based on updated information from the nonpartisan Congressional Budget Office, show just how off-base Biden’s narrative is and why America needs exactly the opposite from its leaders.

For more than 50 years prior to the COVID-19 pandemic, federal spending averaged a whisker over 20% of the economy. That temporarily spiked above 30% in 2020 and 2021 due to the immense (and extremely wasteful) spending spree by Congress.

The country is on course to return to that excessive level of spending without war, recession, or a pandemic as the underlying cause. Merely maintaining the status quo of allowing benefit and cronyistic programs to grow faster than the economy will make “emergency” levels of spending the new normal.

A relatively short exposure to firehose-style spending helped drive inflation through the roof. We can only imagine what would happen if that’s allowed to become permanent reality.

Incredibly, the Biden budget would increase spending above the baseline by $1.85 trillion over the next decade, making the problem even worse. It envisions a mindboggling $10 trillion in spending by 2033.

The raw numbers involved with federal budgeting are impossible to fully comprehend, which makes charts such as these so important.

In fiscal year 2022, the federal deficit was the equivalent of nearly $20,000 for a middle-class family. To carry the analogy further, this family would already be more than $447,000 in debt, but with no new assets to show for it.

Any family with such an unbalanced budget would be bankrupt in no time flat. We shouldn’t assume that the nation can avoid a similar fate for much longer.

It has been incredibly reckless for Washington insiders to assume low interest rates would be around forever. With interest rates rising, the country is faced with the prospect of dedicating more than $1 trillion dollars per year to interest payments by the end of the decade, and trillions more per year not too long after that.

Servicing the federal debt will soon be an anchor dragging on the economy, steadily eroding the growth and prosperity that we take for granted. Any attempt to artificially push interest rates down would threaten to make inflation worse, squeezing families from both sides.

Federal spending is projected to grow much faster than the economy. Of that incredible growth, a full 79% would arise from net interest payments, Social Security, and Medicare.

Too many politicians want to either ignore this reality, or—like Biden—pretend that the solution is to raise taxes while refusing to take any meaningful action to reform key benefit programs with long-term stability in mind.

Incredibly, Biden is proposing a whopping $4.7 trillion tax increase in the budget plan, or more than $35,000 per household.

Biden and his staffers love to brag about the 2022 deficit being lower than it was in 2020. This talking point is, frankly, misinformation. Biden’s decisions have consistently made things worse.

Further, the 2022 deficit was still well above the historical average. Unless something changes, deficits will be twice the historical average by 2029 and keep climbing from there.

Biden and the Left have spent decades claiming that high-income households don’t pay their “fair share” of taxes. The Biden budget’s signature policy is a tax hike based on that assertion.

Once again, reality says otherwise. The top 1% of households pay more income tax than the bottom 90% combined and pay roughly twice as much in taxes relative to their share of income.

The Left never defines what “fair share” means, other than “more,” and they typically want to use that “more” to cover spending increases.

It’s crucial for Americans to understand that raising taxes on businesses and entrepreneurs would not only damage economic growth and private investment, but it would also utterly fail to generate enough revenue to satisfy the Left’s agenda.

The harsh reality is that a European-style government with cradle-to-grave benefits would require European-style taxes, and that would mean hammering the middle class with tax hikes.

A proper solution to federal finances, such as that of The Heritage Foundation’s Budget Blueprint, would focus on shrinking bloated bureaucracies and reforming programs such as Medicare in a way that treats both older and younger Americans fairly.

In contrast, Biden’s budget would leave future generations with crushing burdens of debt and taxation. More than merely rejecting this bleak vision for the country, Congress must go in the opposite direction if we are to have any hope.

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This article was published by The Daily Signal and is reproduced with permission.

Budget; What Budget?

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Estimated Reading Time: 3 minutes

Our leaders have failed at a national balanced budget. They do not even begin to address whether we are anywhere near the possibility of a balanced budget.  Charges are flying back and forth about whether anyone wants to cut Social Security and/or Medicare as some demagogue the issue.  It is time to take a simple “helicopter” view of what is actually happening.

In 2022, our federal government spent $6.48 trillion.  The breakdown:

  1. Social Security — $1.22 trillion, comprised of three parts: Payments to seniors $1.03 trillion, $144.7 billion for disability; $48.4 billion – other.
  2. Defense – $1.03 trillion, composed of $759.8 billion for defense and $271 billion for veterans.
  3. Medicare $756.1 billion.
  4. Transfers to states – $1.21 trillion.
  5. Transfers payments – $619.3 billion. Only $36.3 billion of that is paid for by the recipients as those are payments related to unemployment insurance.
  6. Interest payments – $483.5 billion.

The government received $5.03 trillion in revenue:

  1. Payroll Taxes – $1.50 trillion comprised principally of $1.09 trillion Social Security and $344 billion for Medicare.
  2. Income taxes and other taxes — $3.50 trillion.

Clearly, there are many items to discuss.  First, you can see that Social Security already has expenditures exceeding collections.  There is no fund saved somewhere to make up the difference. If there were no massive payments for disability and “other,” the fund would be solvent. No question that there are many deserving recipients of disability benefits but there are many who are not.  The disability recipient pool expands dramatically any time there is an economic downturn, and no one polices that.

Notice the expenditures for Medicare are more than twice the revenues.  This is after significant increases in the tax base occurring in the ACA passed during the Obama Administration.  Not clear how this can possibly get close to being balanced.

Why so much money is paid out to the states instead of the states making their own tax collections remains a mystery. Over $600 billion of this is for medical care programs. That means the federal government is funding over $1 trillion for unfunded medical care.

The taxpayers of the states are unwilling to vote themselves to be taxed, but the feds are willing to simply print more money.  The feds enjoy supplying the funds because it gives them control over the state and municipal governments.  Without all these transfers the budget would have been close to balanced. 

The interest payments are already skyrocketing with the return to more normal interest rates.  Our irresponsible elected officials were willing to incur greater debt when the interest rates were much lower.  They had to know that would change and we would have a serious problem.  The massive amount of interest has already increased from over $300 billion to $783 billion annualized and it is a good bet that will go higher.

Some people keep harping on the fact that we should increase tax collections on wealthy individuals and corporations.  We have already increased tax collections as the reduced rates spurred higher collections.  The top 1% of earners pay 40% of income taxes while earning a far smaller share of that income. Does anyone really believe we can close this $1.45 trillion budget imbalance simply by collecting more from large corporations and the very financially successful ones? If we collected 100% of high-earners’ income we would still be nearly a trillion dollars short of a balanced budget.  Seems implausible to me. 

If we combine the four factors of defense, social security, medical care, and interest payments, the current amount being paid out is $4.4 trillion. That is almost the entire revenue of the federal government.  Since two of those expenses are programs people have paid into to receive benefits and defending the country is the primary aspect of what the federal government should be doing, there is little flexibility.  The problem is everything else the federal government does and for the most part badly.

Our President is spending much time criticizing Republicans about phantom proposals to cut Social Security and Medicare. On the other side, Republicans are swearing fealty to an unsustainable system.  Biden appears unwilling to negotiate on reducing any element of the budget to create a positive atmosphere to raise the debt ceiling. He is proposing even greater levels of expenditures. All of these talking points may change but currently makes little sense.

The CBO (Congressional Budget Office) has stated unless there is a change, the increase in the national debt will be $19 trillion over the next decade. The CBO likewise stated federal spending on Social Security and Medicare will explode over the next decade.

You can evaluate for yourself whether our current national finances are sustainable year after year with trillion-dollar deficits. It seems to me something has to change and change quickly.

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This article was published in Flash Report and is reproduced with permission by the author.

 

 

Poll: Americans Say Economy is in Trouble

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Estimated Reading Time: < 1 minute

Americans think the U.S. economy is in trouble, according to a new poll.

Released by CBS News and YouGov, the poll found that 64% of those surveyed said the national economy is doing “fairly bad” or “very bad.”

The survey found 56% disapprove of the job Joe Biden is doing as president. Those two figures are likely intertwined. Inflation has soared since Biden took office. Gas prices hit record highs last summer and are expected to rise again this year. Food prices have soared as well and show little sign of returning to their previous level.

Notably, 49% of those surveyed say they feel “scared” about the fate of the U.S. in the next year.

The poll also found 65% of Americans said things in the U.S. are going “very badly” or “somewhat badly.” That pessimism is similar to the sentiment found in a recent Gallup poll that found that that about 80% of those surveyed expect a higher deficit, higher taxes, and a worse economy in 2023.

“More than six in 10 think prices will rise at a high rate and the stock market will fall in the year ahead, both of which happened in 2022,” Gallup reports. “In addition, just over half of Americans predict that unemployment will increase in 2023, an economic problem the U.S. was spared in 2022.”

But it’s not just the economy. Americans are also worried about crime with Gallup reporting that 72% of surveyed Americans predict crime rates will increase, not decrease, this year.

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This article was published by The Center Square and is reproduced with permission.

How the United States Conquered Inflation Following the Civil War

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Estimated Reading Time: 4 minutes

Americans today are once again the victims of price inflation brought on by runaway government spending and printing of unbacked paper money.

 

According to the most recent polling data, the American public’s approval of Congress stands at a dismal 21 percent. Almost four times as many people disapprove of the job it’s doing.

That’s par for the course in recent decades. It’s the major reason the Washington sausage grinder earns so little praise. To be fair, though, let’s review an occasion when lawmakers got something right. I’m prompted to share this story now because its lessons are especially relevant considering today’s concerns about rising price inflation. The year was 1875.

The Civil War (1861-65) produced disastrous hyperinflation in the Confederacy and considerable currency depreciation of paper greenbacks in the North as well. A decade after Appomattox, Congress still had not made good on its promise to make its paper money redeemable in gold. But in January 1875, alarmed by the rise of pro-inflation agitators (the “Greenbackers,” later to become “silverites”), Congress passed the Specie Payment Resumption Act, which President Ulysses S. Grant later signed into law.

Politicians often break their promises, and this was yet another opportunity to do so. Congress could have declared, “We don’t have the gold necessary to honor our pledge, so we’ll pay gold for greenbacks at 50 cents on the dollar.” But lawmakers chose to be honest for once, and to meet their obligations fully. The Act provided that all paper greenbacks would be redeemable on demand “at par” (100 percent of the earlier promise), beginning on January 1, 1879.

When Rutherford B. Hayes succeeded Grant as President in March 1877, he knew his administration had less than two years to prepare the Treasury and the nation’s banks for redemption. He and his Treasury officials believed the best way to avoid a run on the banks in January 1879 was to shore up the country’s gold reserves. They did so largely by selling bonds to Europeans in exchange for gold.

Redemption Day came amid rumors that people would flood the banks with their paper greenbacks and demand the promised gold, but just the opposite happened. Hardly anybody showed up at bank teller windows asking for the yellow metal. Why? Because the Treasury had accumulated more than enough gold to take care of convertibility, and the public knew it. The lesson? When people have good reason to believe their paper money is “as good as gold,” they prefer the convenience of paper.

Former United States Circuit Judge Randall R. Rader writes,

The year 1879 brought the resumption of the redeemable currency. The consumer price index stabilized at 28 in that year. For more than three decades thereafter (World War I interrupted the price tranquility), the index never rose above 29 or dipped below 25. The index remained at 27 for a decade. Never did it rise or fall more than a single point in a year. The gold standard worked throughout that entire period to keep prices remarkably stable.

Americans today are once again the victims of price inflation brought on by runaway government spending and the printing of unbacked paper money. Does the Specie Payment Resumption Act of 1875 offer a model that could solve the problem? Yes and No.

Certainly, tying the dollar to a precious metal would exert a discipline desperately needed in monetary policy. Putting the Federal Reserve out of business would be a meaningful and positive reform as well; since its inception in 1913, it has given us one Great Depression, a bunch of recessions and a currency worth maybe 1/20th of its 1913 value. The Fed is an inflation factory, stumbling and fumbling from one self-inflicted crisis after another. Gold convertibility, as the 1875 act provided, would signify a restoration of integrity and monetary sanity that we haven’t seen in a hundred years.

But two big, fat elephants ensure that an 1875-like reform would immediately collapse unless they are summarily escorted out of the room. One is dishonest politicians. Washington is overrun with them—people who are interested first and foremost in short-term power and re-election and least of all in the long-term economic health of the country. Many are (pardon my bluntness) economic morons, oblivious to the red ink even as they drown in it.

The other elephant—the presence of which is a confirmation and consequence of the first—is a massive, annual budget deficit.

For half a century from 1865 until World War I, the federal government ran an almost unbroken string of budget surpluses. Today, it produces trillion-dollar deficits without batting an eye, and the President demands trillions more in spending and debt. If he announced today that the dollar would henceforth be backed by gold, the world would laugh, and you and I would rush to the banks with our paper before the gold ran out.

In other words, monetary discipline goes hand in hand with fiscal discipline. A return to sound money is impossible without a simultaneous return to sound budget management. In the face of a monstrous budget deficit and an even more frightening $30 trillion national debt, Congress just voted to ship $40 billion to Ukraine without cutting so much as a penny from anything else.

We have neither a Congress nor a President, and perhaps no public consensus either, that would permit anything remotely resembling the 1875 Specie Payment Resumption Act.

And until we do, the dollar is destined for further depreciation. Just as elections have consequences, so do destructive monetary and fiscal policies.

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This article was published by FEE, Foundation for Economic Education and is reproduced with permission.