Government Debt Is Starting to Look Almost as Sketchy as Payday Loans

[Muda69]

https://mises.org/wire/government-debt-starting-look-almost-sketchy-payday-loans

Quote

If there is one thing every honest money-saving advisor would agree on, it's that a payday loan is a bad idea. Taking a high interest loan backed by nothing but your word to pay off your current account to fuel consumption with no capital investment is just leading you on the road to ruin.

However this simple message of living within one’s means does not seem to have reached the gilded ears of central banks and governments around the world. As inflation rises (who could have guessed the borrowing binge of 2021 would have resulted in higher inflation?), both the EU and American governments are now caught between a rock and … well, a rock.

Trapped into a cycle of borrowing to cover current account expenditure, even debt-resistant economies like Germany and New Zealand need to keep on this self-destructive path. The collateral used is bonds, about as useful and as stable as ever; the international bond market has exploded in the last ten years.

Some of these modern bonds (In all their shapes and forms) are now also backed by CACs (collective action clauses), meaning that should the creditors agree, they can reduce the amount of payout on the bond if the country issuing the bond is falling behind. Unfortunately, this does pave the way for one of two (very bad) outcomes:

• The bonds are bought by friendly creditors like the European Central Bank (ECB), large blocks that will lean favorably on the side of the issuer due to a roundabout political method. As an example, Mario Draghi has more than a few friends in the ECB (being the former head of the organization) and is now prime minister of Italy, taking on oceans of debt. However, once the large political elements decide on the reduction in value, the smaller commercial holders will lose out and insurance companies that have large holdings of national bonds will take a commercial hit.

• The bonds are bought by unfriendly nations like China, and they refuse to allow the CAC to be activated, meaning that countries that have issued billions will not be able to burn any bondholders (as Iceland was able to) and will be thrown into further economic turmoil, with the controlling stake of what happens in the hands of rivals.

To return to the initial analogy, a bond is similar to a payday loan in that the only promise behind it is that the person taking the loan will have money to repay in the future at an agreed price. For the CAC, now imagine your payday loan is being funded by people in your neighborhood and that this debt can be freely sold to anyone. It’s fine if it ends up in your mates’ hands, but should it end up with that neighbor still annoyed about your house party last Hallowe’en, things could get messy.

And what of the money itself? The crux of the payday loan economist’s arguments is that all of this money will yield future dividends. It will be invested and reinvested and slosh through the pipes, creating jobs and money and whatever else they think sounds appeasing. But we know this doesn’t happen. Malinvestment, expensive vanity projects, and the discouragement of savings will mean this money would have been better burned than spent, at least we could have gotten utility from the heat.

In the midst of this, our old friend Mr. Krugman, the genius who thought that the internet would be a failure and one of the architects of the 2008 crash, has been shouting from his high horse about “leprechaun economics” again. Unashamedly offensive (under the placating guise of “Fortunately, the Irish have a sense of humor”; thank you, Mr. Krugman, but we didn’t find caricatures in Punch funny and we don’t find you funny) and consistently wrong, Krugman cannot see the value in Ireland maintaining a low capital gains tax.

However, his tax and spending binge plans (nothing has changed since Keynes) are the epitome of reckless consumerism. He and his payday cronies want to create a utopia where no one ever (really) has to pay anything back and there is unlimited credit and resources. But Mr. Krugman, I’m afraid the Irish do find a pot of gold at the end of their Rainbow in the form of Jobs, FDI (foreign direct investment), and a better balance of trade.

What we find with these payday loan economists is an unpaid bill, possibly in the hands of our enemies, that will have to be paid, as the party doesn't last forever and eventually someone needs to be paid.

As one of the comments states, "Not just a race to the bottom, but to oblivion."  

This is the fiscal future we are leaving for our children and grandchildren.

 

[Muda69]

U.S. Billionaire Wealth Would Fund Government For Just 6 Months: https://reason.com/video/2021/07/23/u-s-billionaire-wealth-would-fund-government-for-just-6-months/

Quote

Where do Jeff Bezos and Richard Branson get off spending their own money to go into space when we already have a scandal-ridden and incompetent public agency for that very purpose?

All Richard Branson ever did was give away half his fortune after foisting Tubular Bells and the Sex Pistols on the world.

All Jeff Bezos ever did was make a year-long pandemic bearable by creating the company that delivered everything we wanted to our doors within hours.

Maybe Elon Musk is a welfare queen. But as long as he's spending his own doge coin and living in a $50,000 prefab house, who are we to judge?

If Rep. Alexandria Ocasio-Cortez's (D–N.Y.) former policy guy is right that every billionaire is a policy failure, then the remedy is taking the wealth they accumulated and appropriating it for the government, which is really just another name for the things we do together.

Like manning 800 military bases in over 70 countries and spending more on defense than the next 11 nations combined. 

Or wasting half a century punishing people for recreational drug use and putting more Americans per capita in prison than Cuba, Russia, and China does.

Or passing massive Covid relief bills that only spend 5 percent of their totals on actual Covid relief.

There are 724 American billionaires worth a total of $4.4 trillion, according to Forbes. It's a list that includes far-out space nuts like Bezos and Musk, entertainment moguls like Steven Speilberg and Tyler Perry, and lawyer-in-training Kim Kardashian. If it were somehow possible to liquidate all of that wealth without causing a market crash that would obliterate much of it in the process, we could cover roughly half a year of combined local, state, and federal spending.  

Instead of targeting billionaires and their admittedly penis-shaped rockets, millionaires like Jon Stewart and Jason Alexander, who joined forces for this short video mocking Branson, Bezos, and Musk, should take aim at the federal government, which is the biggest dick in the room by a few orders of magnitude.

Our national debt is around $22 trillion and will continue to climb in the years to come so that by 2050, just paying interest on the debt will account for about a quarter of every dollar the federal government spends. That kind of debt correlates strongly with sharply reduced economic growth, which is the only proven way of improving living standards over time. In the years to come, the U.S. will have no choice but to raise taxes on everyone and slash Medicare and Social Security, which are the biggest budget-busters. But by then it will be too late for a generation of elderly people to plan accordingly. And a U.S. debt crisis could destroy the dollar and undermine our entire economy. 

There's no way to confiscate enough wealth to stave off our looming fiscal catastrophe. Instead of harping on rich people and their rockets, let's start talking about the looming debt crisis fueled by insane government spending and come up with actual ways to avert catastrophe.

Truth, yet socialists like Dante insists taxing ourselves out of debt is the answer.

 

[Muda69]

Elizabeth Warren Says People Are Struggling and Jeff Bezos Hasn't Pitched In Enough

https://reason.com/2021/07/26/elizabeth-warren-says-people-are-struggling-and-jeff-bezos-hasnt-pitched-in-enough/

Quote

Over the weekend, the space billionaires appear to have taken up rent-free space in Sen. Elizabeth Warren's head. "The richest guy on Earth can launch himself into space while over half the country lives paycheck to paycheck, nearly 43 million are saddled with student debt, and child care costs force millions out of work," the Massachusetts Democrat tweeted Sunday. "He can afford to pitch in so everyone else gets a chance."

This is strange criticism to level at a person who has created a million jobs, has supplied cheap consumer goods to 150 million paying Prime customers (and more goods to the other 150 million who opt for slightly longer shipping times), and is attempting to put satellites in space that will enable high-speed internet access for people who live in far-flung parts of the globe. Even more confusing is the idea that Bezos' tax bill is why Americans are feeling the squeeze.

Billionaires who can afford to take a 10-minute joyride to outer space can afford to pay a #WealthTax here on Earth.

— Elizabeth Warren (@SenWarren) July 25, 2021

 

From the Warren vantage point, it's easy to capitalize on this moment to make the case for a wealth tax, an idea she's been fixated on for years. But taxing billionaires' fortunes will almost certainly fail. A tax on households with high net worths (over $50 million in assets, in Warren's template plan, with more for households of $1 billion or higher) would present a huge incentive for people to engage in capital flight, fleeing for greener pastures on far-away shores; taxing the same pot of money over and over will result in less money to tax over time; some assets that rich people store their wealth in are very difficult to assess; and, all these other matters aside, much of this wealth isn't actually liquid.

I suppose Warren could look to France to see how they pulled it off—except they didn't. When France implemented a wealth tax, more than 40,000 millionaires fled the country over a 12-year period. The country ultimately dropped its wealth tax; Germany and Sweden did the same to theirs.

Inequality arguments aside, Bezos should not be scapegoated for high costs of living that compel people to take on student debt and saddle them with high child care costs. Though politicians often address poverty via income-based approaches, they could take a cost-based approach instead. For example, they could try to eliminate the government-created muddled incentives that have encouraged so many colleges to jack up tuition while letting unqualified Americans take out tons of cheap loans to earn degrees that do not make them very much money. This is something that's within Warren's power to attempt to solve, not Bezos'.

Warren seems to view wealth in America as a fixed pie. But companies like Amazon that deliver cheap goods to people who want them aren't responsible for people's malaise. In fact, Bezos' creation may be easing that malaise by delivering inexpensive products to people who are otherwise struggling to get by.

Agreed. 

 

[swordfish]

On 7/27/2021 at 11:07 AM, Muda69 said:

Elizabeth Warren Says People Are Struggling and Jeff Bezos Hasn't Pitched In Enough

https://reason.com/2021/07/26/elizabeth-warren-says-people-are-struggling-and-jeff-bezos-hasnt-pitched-in-enough/

Agreed. 

 

You may want to clarify Muda.  A weak minded individual or mental midget may think you are agreeing with Ms. Warren, not the actual story you linked that is quite the opposite.

[Muda69]

16 hours ago, swordfish said:

You may want to clarify Muda.  A weak minded individual or mental midget may think you are agreeing with Ms. Warren, not the actual story you linked that is quite the opposite.

I agree with primarily these statements in the article:

Quote

Inequality arguments aside, Bezos should not be scapegoated for high costs of living that compel people to take on student debt and saddle them with high child care costs. Though politicians often address poverty via income-based approaches, they could take a cost-based approach instead. For example, they could try to eliminate the government-created muddled incentives that have encouraged so many colleges to jack up tuition while letting unqualified Americans take out tons of cheap loans to earn degrees that do not make them very much money. This is something that's within Warren's power to attempt to solve, not Bezos'.

Warren seems to view wealth in America as a fixed pie. But companies like Amazon that deliver cheap goods to people who want them aren't responsible for people's malaise. In fact, Bezos' creation may be easing that malaise by delivering inexpensive products to people who are otherwise struggling to get by.

 

[Muda69]

The Fed Is Bailing Out the Wealthy as Everyone Else Pays the Price

https://mises.org/wire/fed-bailing-out-wealthy-everyone-else-pays-price

Quote

The Federal reserve says that inequality is a problem. At the same, the Fed also pretends to have nothing to do with it. 

Last September, for instance, Jerome Powell bemoaned the "relative stagnation of income" for people with lower incomes in the United States, but then claimed the Fed "doesn't have the tools" to address this issue. Instead, Powell, being the chairman of this ostensibly "independent" and "nonpolitical" central bank, called for the federal government to engage in fiscal policy efforts at income redistribution.

Powell, of course, is wrong, and he probably knows he's wrong. In any case, if the Fed were actually concerned about wealth and income inequality, the Fed would stop doing what it has done over the past decade. It would end its ultralow interest rate policy and quantitative easing.

These policies have been at the center of the post–Great Recession economy, in which wealthy owners of stocks and real estate become ever more fabulously wealthy, even as ordinary people face stagnating employment, low economic growth, and a rising cost of living. This only accelerated during the economic crises of 2020, when endless Fed efforts to prop up the stock market meant that financial markets soared—and with them the portfolios of the wealthy—even as unemployment rose to record levels. Even Jim Cramer could see what was happening and declared Fed policy to be a part of "one of the greatest wealth transfers in history."

The ways that the Fed effects wealth transfers to the financial sector and the state—at the expense of everyone else—have long been the domain of Austrian school critics of central banks. That is, we've long noted in these pages how financial repression and so-called easy money have fueled vast riches for Wall Street, while leaving the middle classes and lower-income Americans behind.

But one need not rely on Austrian critics to get insight into the damage done by modern monetary policy.

In her new book, Engine of Inequality: The Fed and the Future of Wealth in America, Karen Petrou looks in detail at how Fed policy over the past decade—especially quantitative easing (QE) and ultralow interest rates—have benefited the wealthy while leaving most ordinary people behind.

Petrou is one of the more interesting and informative analysts examining the financial services sector. As the head of Federal Financial Analytics Inc., she has provided research on the banking sector for more than thirty years, but in recent years she's become more focused on exposing and examining the unhealthy and destructive effects of Fed policy.

Petrou takes a different approach from the Austrians. She appears to have arrived at her conclusions from observing the trends and outcomes produced by Fed policy and then working backward into a theoretical framework. The data seems to have prompted her to ask why things have gone so badly after more than a decade of "unconventional" Fed policy. When it comes to identifying the problem, she's come to the right conclusions.

In any case, Petrou's book is important because it is the work of a Wall Street insider who no longer swallows the Fed's propaganda line that the Fed's interest rate manipulation—as Powell puts it—"supports the economy across a broad range of people."

The reality is something different. As Petrou notes, the "perverse effect" of Fed policy has been to create "acute inequality and resulting risks to both growth and financial stability."

The Mythical "Wealth Effect"

How did this happen?

Since the 2008 financial crisis and the Great Recession, the Federal Reserve has increasingly ratcheted up its efforts to increase liquidity and drive down interest rates. This is done as part of an effort to prop up the financial sector. It is assumed that a robust financial sector will grease the wheels of the economy overall and that the wealth in the financial sector will somehow trickle down to the rest of the economy via a theoretical "wealth effect."

Specifically, to do this, the Fed engages in quantitative easing, in which it purchases government bonds and financial assets. These assets are placed in the Fed's portfolio in exchange for dollars, which then flow into the financial sector. This raises the prices of financial assets while lowering yields and interest rates. It also increases the money supply.

Since the Great Recession began, the Fed has added more than $8 trillion in assets to its portfolio—which means trillions of dollars have poured into banks and nonbank financial institutions.

As Petrou notes, the effect of this policy has been extremely beneficial for the wealthy. Because so much money has been injected into the financial sector, stock prices have skyrocketed, and the prices of other assets—especially real estate—have soared.

Petrou shows that if we look at the data, however, we find that this economic boon hasn't done much for those who don't already have robust stock market portfolios and real estate assets. That is, the lower half of the US in terms of wealth and income. In fact, from 2001 to 2016, the median wealth of Americans in the bottom 80 percent of income earners has fallen.

According to Petrou's analysis, as stock prices and real estate prices have climbed, the economic prospects of many ordinary people have remained flat, or worse. She notes that from 2010 to 2020, employment growth was unimpressive and that during this period "Fed intervention led only to the slowest economic recovery in modern memory." She writes:

US economic growth was at best lackluster before COVID and the "full" employment about which the Fed was wont to brag was in fact less impressive when labor-participation rates and other factors are carefully considered.

On the eve of the 2020 financial collapse, the US's economic recovery could only be described as "fragile" and disappointing for anyone who wasn't in the top quintiles of earnings and wealth.

Soaring prices in stocks cannot be shown to have benefited those who don't own many stocks. Moreover, since the Great Recession, housing prices were largely flat among lower-priced homes in middle American markets. The benefits of asset price inflation in housing is felt far more in expensive coastal cities, where the wealthy own higher-priced real estate.

How Ultralow Rates Punish Ordinary Savers

In addition to asset price inflation is the problem of yield chasing, fueled by ultralow interest rates. This doesn't just leave low- and moderate-income families behind as asset price inflation does. Ultralow interest rates actually punish ordinary, conservative savers who lack the wealth or sophistication necessary to gain the benefits of high-risk yield chasing in the markets.

Banks and hedge fund managers have access to many tools to take on higher risk and seek out the corners of the market where higher interest offers a better yield. So, ultralow interest rates still leave Wall Street a variety of options. Most ordinary families don't have those options. 

Petrou explains:

Ultra-low rates fundamentally eviscerated the ability of all but the wealthy to gain an economic toehold; instead they lead investors to drive up equity and other asset prices to achieve their return … but average Americans hold little, if any, stock or investment instruments. Instead, they save what they can in bank accounts. The rates on these have been so low for so long that these thrifty, prudent households have in fact set themselves back with each dollar they save. Pension funds are just as hard-hit meaning not only that average Americans can't save for the future, but also that the instruments on which they count for additional security are unlikely to meet their needs."

Moreover, as banks and other lending institutions searched for higher yields, they lost their interest in lending to regular people:

As a result [of QE], the Fed's ultra-low rates led to the yield-chasing that propelled financial markets ever higher even as regulated financial institutions changed their business model from taking deposits and making loans to average households to one betting on stocks and offering loans and other services to wealthy households, financial markets, and giant corporations. Ultra-low rates failed to trickle down to low-, moderate-, and even middle-income households.

This is not due only to interest rate policy, however. Petrou also explains how banking regulations after the Great Recession have further driven banks away from lending to small businesses and ordinary borrowers. Federal regulation has further fueled a strengthening of megabanks, which are better able to meet regulatory benchmarks. Community banks, meanwhile—which serve smaller markets and small-time borrowers—are increasingly disappearing. Consequently, wealth continues to be centralized in Wall Street.

Petrou presents all of this information using evidence from countless quantitative studies from a variety of sources, including the Bank of International Settlements and even some member banks of the Federal Reserve System. Hundreds of footnotes enable the reader to follow these reports back to their sources and see for themselves what has happened: Fed policy has done wonders for billionaires and hedge fund managers. The data suggests others have clearly done less well.

Petrou's book certainly has its shortcomings. The book's monetary policy discussion doesn't begin until chapter 5, nearly sixty pages in. Before that, the reader must slog through an overly long discussion about the evils of inequality. Petrou's discussion on digital currency appears to be out of place, and her conclusions are not terribly convincing. And the final quarter of the book is a laundry list of recommended regulations and changes that amount to little more than tinkering with monetary policy. That is, this book is far too timid in calling for any real restraint on Fed power.

But as a resource for quantifying the results of the Fed's unconventional monetary policy, this book is valuable indeed. There is a well-researched and well-detailed hundred-page core in this book that shows in a dozen different ways what should be regarded as undeniable at this point: the Fed is a force for impoverishment, economic stagnation, and inequality.

Agreed.  The Federal Reserve system needs to be abolished.  

[Muda69]

Yellen Is Wrong. The US Government Doesn't Always Pay its Debts.

https://mises.org/wire/yellen-wrong-us-government-doesnt-always-pay-its-debts

Quote

The regime is trying to whip up maximum hysteria or the chances that the US government could default on its debts if the debt ceiling is not raised.

So far, the financial markets don’t seem to care that much, as ten-year Treasurys over the past week have barely risen above 1.5 percent, and not even matched last March’s recent high. Investors seem pretty confident that the world will still exist even after default.

But the media and Democratic politicians assure us that any default will bring about a second Great Depression and financial collapse.

One key component of this strategy is convincing people that the United States has never defaulted before, and has always made good on its financial obligations. This is key because it helps create the impression that were the United States to default, the result would a step into the great unknown, and a “financial crisis and a calamity.”

This is likely (in part) why, in her September 19 column for the Wall Street Journal, Treasury secretary Janet Yellen repeatedly claims the US has never defaulted. “The US has always paid its bills on time,” she insists, and then repeats the claim in the next paragraph: “The US has never defaulted. Not once.”

Yet the United States government absolutely has defaulted on debts before—more than once. Moreover, if we expand the idea of default slightly, to encompass the idea of inflating away a government's debt in real terms, default is even more common.

First, let’s look at the most notorious case of US default on its debt obligation.

The 1934 Default on Liberty Bonds

In 1934, the United States defaulted on the fourth Liberty Bond. The contracts between debtor and creditor on these bonds was clear. The bonds were to be payable in gold. This presented a big problem for the US, which was facing big debts into the 1930s after the First World War. As described by John Chamberlain:

By the time Franklin Roosevelt entered office in 1933, the interest payments alone were draining the treasury of gold; and because the treasury had only $4.2 billion in gold it was obvious there would be no way to pay the principal when it became due in 1938, not to mention meet expenses and other debt obligations. These other debt obligations were substantial. Ever since the 1890s the Treasury had been gold short and had financed this deficit by making new bond issues to attract gold for paying the interest of previous issues. The result was that by 1933 the total debt was $22 billion and the amount of gold needed to pay even the interest on it was soon going to be insufficient.

So how did the US government deal with this? Chamberlain notes “Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Americans.”

Moreover, with the Gold Reserve Act of 1934, Congress devalued the dollar from $20.67 per ounce to $35 per ounce—a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

The US offered to pay its creditors in paper dollars, but only in new, devalued dollars.1 This constituted default on these Liberty Bonds, since, as the Supreme Court noted in Perry v. United States, Congress had “regulated the value of money so as to invalidate the obligations which the Government had theretofore issued in the exercise of the power to borrow money on the credit of the United States.”

This was clearly not a case of the US making good on its debt obligations, and to claim this is not default requires the sort of hairsplitting that only the most credulous Beltway insider could embrace.

Indeed, Carmen Reinhart and Kenneth Rogoff in their book This Time Is Different list this episode as a “default (by abrogation of the gold clause in 1933)” and as “de facto default.”2

The Short Default of 1979

A second, less egregious case of default occurred in 1979. As Jason Zweig noted in 2011:

In April and May 1979, amid computer malfunctions, heavy demand from small investors and in the wake of Congressional debate over raising the debt ceiling, the U.S. failed to make timely payments on some $122 million in Treasury bills. The Treasury characterized the problem as a delay rather than as a default. While the error affected only a fraction of 1% of the U.S. debt, short-term interest rates—then around 9%—jumped 0.6 percentage point and the U.S. was promptly sued by bondholders for breach of contract.

Apparently, the United States sometimes does not pay its debts. While the 1979 default was relatively small, the 1934 default affected millions of Americans who had bought Liberty Bonds mistakenly thinking the government would make good on its promises. They were very wrong.

So, it is simply untrue that the US “has never defaulted. Not once,” as Yellen claims. But this claim remains a useful tactic in sowing fear about “unprecedented” acts that would bring the entire US economy crashing down.

Default through Devaluation

But outright repudiation of contracts is only one way of defaulting on one’s obligations. Another is to deliberately devalue a nation’s currency—i.e., inflate it—so as to devalue the amount of debt a government owns in real terms.

And Zweig writes investors view this as a real form of avoiding one’s debt obligations:

Perhaps the biggest worry [among investors] isn't default but … "financial repression." In dozens of cases, governments have dug out from under burdensome debts not by refusing to pay interest but rather through other harsh means. For example, by keeping short-term interest rates below the level of inflation, a government can pay off its bondholders with cheapening money. Through regulations, it can compel banks and other financial firms to buy its own debt, much like geese being force-fed for foie gras. As a result, current yields and future inflation-adjusted returns on government bonds fall.

This strategy, Zweig concludes, “stiffs bond investors with negative returns after inflation.”

Zweig categorizes this as something separate from default, but Reinhart and Rogoff clearly consider it a form of de facto default. They write: “The combination of heightened financial repression with rises in inflation was an especially popular form of default from the 1960s to the early 1980s” (emphasis added).3

(In the United States, a key event in this respect occurred in 1971 when Nixon closed the gold window. This was an explicit repudiation of the US’s obligation to repay dollars in gold to foreign states, and it also greatly enabled the US government in terms of financial repression and monetary inflation.)

Since the Great Recession, financial repression is popular again. This method of de facto default has enabled the federal government to take on massive amounts of new debt at rock-bottom interest rates. In real terms, the US government—or any government using this tactic—pays back its debts in devalued currency, essentially enabling the government to make good on the full extent of its debts. The cost to the public manifests in asset price inflation, goods price inflation, and a “hunt for yield” driven by a famine of income on safe assets. Americans of more modest means are those who suffer the most, and the result has been a widening gap of inequality in wealth.

It may very well be that a default could lead to significant economic and financial disruptions. But let's stop pretending that a default is unprecedented or that the United States always pays its bills. It's true that the US's current debt machine, enabled through financial repression, is a form of slow-motion default. But that doesn't make the US government any less of a deadbeat.

Yep, the U.S. government has been effectively bankrupt for decades.

 

[Muda69]

Joe Manchin Is Forcing Congress To Think About the Deficit. Good.

https://reason.com/2021/09/30/joe-manchin-is-forcing-congress-to-think-about-the-deficit-good/

Quote

Sen. Joe Manchin (D–W.Va.) didn't play in Wednesday's annual congressional baseball game, but he managed to throw the best curveball of the evening anyway.

In a lengthy statement, Manchin spelled out the reasons he is unwilling to support the $3.5 trillion reconciliation package his fellow Democrats are hoping to push through Congress within the next few days or weeks. "Spending trillions more on new and expanded government programs," he said, "when we can't even pay for the essential social programs, like Social Security and Medicare, is the definition of fiscal insanity." Manchin went on to say that he worries about how more government spending might drive inflation even higher, how higher taxes necessary to pay for that spending will make it harder for small businesses to compete with big retailers like Amazon, and how an expanded welfare state might slow the ongoing economic recovery.

Manchin's opinion about these things carries a lot of weight right now. Democrats have the slimmest possible majority in the U.S. Senate, and need all 50 of their members (plus Vice President Kamala Harris) to vote in support of the reconciliation bill or it will not pass. The senator from West Virginia has all the leverage, and he's using it to force the rest of Congress to take a good, hard look the fiscal mess its made over the past few years (and, more specifically, since the COVID-19 pandemic began.

"I can't support $3.5 trillion more in spending when we have already spent $5.4 trillion since last March," Manchin said. "I cannot—and will not—support trillions in spending or an all or nothing approach that ignores the brutal fiscal reality our nation faces."

While he did not specifically invoke the $28 trillion national debt or the federal government's current budget deficit, Manchin obviously wants to draw Congress' attention to the massive disconnect between how much the government spends and how much it collects in taxes. According to the Congressional Budget Office (CBO), the national debt will exceed the size of the U.S. economy by the end of this year and will continue growing as annual budget deficits pile up over the next few decades. "A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets," the CBO has warned.

Higher levels of debt mean higher interest costs and larger sums of money that must be dedicated to debt service. Every dollar spent paying for the cost of carrying so much debt is a dollar that can't be used on something else. If interest rates rise even just a few percentage points, the cost of servicing $28 trillion (and counting) of debt will skyrocket.

As Manchin also pointed out, the government is already going to need a lot of dollars to fix the trajectories of the major entitlement programs—Social Security will be insolvent in the early 2030s and part of Medicare will be unable to fully pay benefits in just five years.

But while the senator at the center of the reconciliation bill drama has made clear he won't support $3.5 trillion in new spending, he's been more than a bit vague about what sort of package would earn his vote. There are a few nuggets to be mined from Manchin's statement on that front: He signals support for undoing some of the Trump tax cuts and for means-testing expanded social programs to ensure they are aimed at the truly needy. Those seem like places where Democrats might find a compromise that satisfies both Manchin and the party's progressive wing.

Relatedly, Politico reported Thursday that Manchin offered in July to support a $1.5 trillion reconciliation bill. That plan would reportedly raise corporate income taxes, personal income taxes on high earners, and the capital gains tax. Excess revenue beyond the $1.5 trillion necessary to pay for the bill would reportedly be directed to deficit reduction.

Manchin is hardly the only person worried about these things, though you wouldn't know it by paying attention to Congress or the national media. An April poll conducted by the Pew Research Center found that 72 percent of Americans rated the federal budget deficit as a "very big" or "moderately big" problem for the country. It ranked ahead of violent crime, racism, the pandemic, illegal immigration, and lots of other issues that get far more attention.

Manchin's Wednesday statement drew condemnation from some public figures on the political left who have decided that there's nothing wrong with massive deficits and nothing to fear in piling up more debt.

THERE IS NO BRUTAL FISCAL REALITY THE NATION FACES; IT IS ENTIRELY MADE UP!

— Chris Hayes (@chrislhayes) September 29, 2021

 

I'd go further and argue not only is debt not bad, it's actually in current circumstances *affirmatively good.* As the world's reserve currency, have a moral obligation to do what we can to help power a global economic recovery from Covid and lead the way on climate investment.

— Chris Hayes (@chrislhayes) September 29, 2021

 

In truth, no one is sure how much money the federal government will be able to borrow before a crisis hits—piling up debt is like walking down an infinite hallway with an invisible pit, as Noah Smith has described it. But higher levels of debt are associated with lower economic growth even in places that haven't suffered major meltdowns. The surely catastrophic consequences of America going through a major debt crisis demands that even a small risk of one must be taken seriously. And there is no arguing with the fact that we are now in uncharted territory.

"America is a great nation but great nations throughout history have been weakened by careless spending and bad policies," Manchin said Wednesday. "Now, more than ever, we must work together to avoid these fatal mistakes."

Republicans and Democrats have mostly abandoned any interest in fiscal responsibility. But Manchin has decided, for whatever reason, that deficits actually do matter. And, right now, he's got the power to make the rest of Congress listen.

 

[Muda69]

Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion

https://mises.org/wire/2008-monetary-policy-has-cost-american-savers-about-4-trillion

Quote

With inflation running at over 6 percent and interest rates on savings near zero, the Federal Reserve is delivering a negative 6 percent real (inflation-adjusted) return on trillions of dollars in savings. This is effectively expropriating American savers’ nest eggs at the rate of 6 percent a year. It is not only a problem in 2021, however, but an ongoing monetary policy problem of long standing. The Fed has been delivering negative real returns on savings for more than a decade. It should be discussing with the legislature what it thinks about this outcome and its impacts on savers.

The effects of central bank monetary actions pervade society and transfer wealth among various groups of people—a political action. Monetary policies can cause consumer price inflations, like we now have, and asset price inflations, like those we have in equities, bonds, houses, and cryptocurrencies. They can feed bubbles, which turn into busts. They can by negative real yields push savers into equities, junk bonds, houses, and cryptocurrencies, temporarily inflating prices further while substantially increasing risk. They can take money away from conservative savers to subsidize leveraged speculators, thus encouraging speculation. They can transfer wealth from the people to the government by the inflation tax. They can punish thrift, prudence, and self-reliance.

Savings are essential to long-term economic progress and to personal and family financial well-being and responsibility. However, the Federal Reserve’s policies, and those of the government in general, have subsidized and emphasized the expansion of debt, and unfortunately appear to have forgotten savings. The original theorists of the savings and loan movement, to their credit, were clear that first you had “savings,” to make possible the “loans.” Our current unbalanced policy could be described, instead of “savings and loans,” as “loans and loans.”

As one immediate step, Congress should require the Federal Reserve to provide a formal savers impact analysis as a regular part of its Humphrey-Hawkins reports on monetary policy and targets. This savers impact analysis should quantify, discuss, and project for the future the effects of the Fed’s policies on savings and savers, so that these effects can be explicitly and fairly considered along with the other relevant factors. The critical questions include: What impact is Fed monetary policy having on savers? Who is affected? How will the Fed’s plans for monetary policy affect savings and savers going forward?

Consumer price inflation year over year as of October 2021 is running, as we are painfully aware, at 6.2 percent. For the ten months of 2021 year-to-date, the pace is even worse than that—an annualized inflation rate of 7.5 percent.

Facing that inflation, what yields are savers of all kinds, but notably including retired people and savers of modest means, getting on their savings? Basically nothing. According to the Federal Deposit Insurance Corporation’s October 18, 2021, national interest rate report, the national average interest rate on savings account was a trivial 0.06 percent. On money market deposit accounts, it was 0.08 percent; on three-month certificates of deposit, 0.06 percent; on six-month CDs, 0.09 percent; on six-month Treasury bills, 0.05 percent; and if you committed your money out to five years, a majestic CD rate of 0.27 percent. 

I estimate, as shown in the table below, that monetary policy since 2008 has cost American savers about $4 trillion. The table assumes savers can invest in six-month Treasury bills, then subtracts from their average interest rate the matching inflation rate, giving the real interest rate to the savers. This is on average quite negative for these years. I calculate the amount of savings effectively expropriated by negative real rates. Then I compare the actual real interest rates to an estimate of the normal real interest rate for each year, based on the fifty-year average of real rates from 1958 to 2007. This gives us the gap the Federal Reserve has created between the actual real rates over the years since 2008 and what would have been historically normal rates. This gap is multiplied by household savings, which shows us by arithmetic the total gap in dollars.

To repeat the answer: a $4 trillion hit to savers.

The Federal Reserve through a regular savers impact analysis should be having substantive discussions with Congress about how its monetary policy is affecting savings, what the resulting real returns to savers are, who the resulting winners and losers are, what the alternatives are, and how its plans will impact savers going forward.

After thirteen years with on average negative real returns to conservative savings, it is time to require the Federal Reserve to address its impact on savers.

Forget about saving U.S. dollars.  Buy Gold.  And Seeds.