Tuesday , 20 February 2024

Kicking the Can Down the Road Will Eventually Lead to a Debt Jubilee

 

Quantitative easing is a technique used by the US Federal Reserve and other central banks to stimulate the economy in times of crisis. The Fed buys up securities from its member banks, thereby adding new money to the economy (this is where the expression, the Fed is “printing money” comes from). It’s a way of funding new expenditures, without actually dipping into the federal budget.

So says Richard (Rick) Mills (aheadoftheherd.com) in highlighted excerpts from his insightful, but lengthy, article entitled “Profligate spending and kicking the can down the road leads to Debt Jubilee”. Mills goes on to say in unaltered excerpts:

The idea is to free up more money for banks to make loans to individuals and businesses, thus growing the economy. The money is not cash, but credit that is added to banks’ deposits. When it wants to print money, the Fed lowers the benchmark federal funds rate, and banks in turn lower their interest rates, making capital more affordable so that businesses and investors are more likely to borrow.

US debt debacle

The United States has the world’s highest national debt in dollar terms, but Japan’s is higher in terms of GDP — 258% versus the US’s current 120%.

The US Treasury recently reported that, as of Dec. 29, 2023, total US debt surpassed $34 trillion for the first time. Compare this to January 2009, when the debt was just $10.6 trillion. For context, the debt rose by $1 trillion over the past three months, $2 trillion over the past six months, $4T over the past two years, and $11T over the past four years.

(Note that the national debt does not include debts carried by state and local governments, nor does it include debts carried by individuals, such as credit card debt or mortgages.)

According to the Bipartisan Policy Center’s deficit tracker, even before the pandemic, the federal government ran large and growing budget deficits at nearly $1 trillion per year. Emergency spending measures to deal with the economic fallout from covid-19 pushed budget deficits to levels not seen since World War II. Although the deficit has fallen to pre-pandemic levels, deficits are projected to grow significantly over the coming decades, states the BPC.

Presidents Trump and Biden have both been criticized as being especially loose with the public purse. Trump is actually eighth on Investopedia’s list of the most profligate presidents.

When history is written to include Biden, however, he is likely to be up there. Since taking office in 2021, the national debt has grown by over $6.24 trillion, largely driven by covid-19 relief measures. According to Congressional Budget Estimates, Biden’s American Rescue Plan would add $1.9T to the national debt by 2031. Among his other big spends are: the trillion-dollar bipartisan infrastructure bill signed into law in November, 2021; his amended student loan forgiveness program which could cost $230 billion over 10 years; and his Inflation Reduction Act, which focuses on green energy initiatives.

Inflating away the debt?

There is a school of economic thought that says it is possible to “inflate away the debt”. This is when the government deliberately generates inflation as a way of reducing its debt burden.

Without getting too technical, the way this works is through expansionist monetary policy. The Federal Reserve can, if it wants to, create more inflation by increasing the money supply, lowering interest rates, or engaging in quantitative easing (QE). As inflation rises the nominal value of the debt stays the same but the “real” value decreases, because of inflation’s effect of eroding the currency’s purchasing power.

We already know that inflating away the debt doesn’t work. The Fed’s recent rate-hiking cycle is a case in point. For a year and a half, the Fed kept raising interest rates, but it had to stop because higher rates were damaging the US economy. Inflating away the debt causes economic destruction not only domestically but in developing economies, whose currencies are worth less than the stronger US dollar reserve currency. Now that rates are dropping, the US dollar is weakening.

post on Seeking Alpha says inflationists make two mistakes when it comes to government: the first assumes that government debt is more important than consumer debt, and the second is that it’s not so easy to inflate away government debt.

Author Michael Shedlock also asks what would be the costs of a “successful” inflation campaign. These could include (and have included) rising mortgage rates, higher energy costs, and higher future costs of unfunded medical liabilities and social security payments, not to mention the higher interest on the national debt.

“Inflationists act as if unfunded liability costs and interest on the national debt stay constant,” Shedlock writes. “Also ignored is the loss of jobs and rising defaults that will occur while this “inflating away” takes place. Tax receipts will not rise enough to cover rising interest given a state of rampant overcapacity and global wage arbitrage.”

“Net interest costs soared to $659 billion in fiscal year 2023, which ended September 30, according to the Treasury Department. That’s up $184 billion, or 39%, from the previous year and is nearly double what it was in fiscal year 2020.” CNN

Fun facts:

  • Interest costs nearly doubled over the past three years, from $345 billion in 2020 to $659 billion in 2023.
  • Interest is now the fourth-largest government program, behind only Social Security, Medicare, and defense.
  • The federal government in 2023 spent more on net interest than it did all spending on children, and it also spent more on interest than most major programs or program areas including Medicaid, veterans’ programs, food and nutrition programs, and education
  • Interest payments over fiscal year 2024 will be just over $1 trillion according to Blomberg.
  • US Federal government net tax revenue for fiscal year 2024 is budgeted $5.04 trillion.

How long before interest payments on the debt exceeds revenues?

Debt Jubilee

The global debt overhang has severely curtailed governments’ ability to deal with a major financial crisis such as a recession, war or pandemic.

A cross-the-board ‘Debt Jubilee’ might sound radical, but a reading of history shows that retiring debt can actually make a country’s economy, and its indebted citizenry, all the better for it.

The term ‘Jubilee’ comes from the Old Testament. The book of Deuteronomy refers to a sabbath year during which any slaves would be freed, and everyone would be allowed to return to their family farms and live off the land. During the Jubilee, all debt obligations would be forgiven — such as land or crops that debtors had pledged to creditors.

The main economic justification for a modern Debt Jubilee is simple. With debts forgiven, governments could spend the money currently devoted to interest and principal repayments on worthwhile programs; businesses would suddenly be freed from debt bondage and could expand/ hire more staff; and households would have more disposable income, all of which would, in turn, increase aggregate demand and encourage economic growth.

An outright cancelation of sovereign debt shouldn’t be ruled out. During the Depression, France and Greece had about half of their national debts written off completely. In 1953, the London Debt Agreement between Germany and 20 creditors wrote off 46% of its pre-war debt and 52% of its post-war debt. The country only had to repay debt if it ran a trade surplus, thus encouraging Germany’s creditors to invest in its exports, which fueled its post-war boom. In 2000, $100 billion worth of debts owed by developing countries were wiped off the books.

Again, this is not as far-fetched as it sounds. Because we live in a fiat monetary system, currencies are not backed by anything physical; the reserve currency, the US dollar, was de-coupled from the gold standard in the early 1970s. It’s not like a raid on vaults full of gold, which have an inherent, physical store of value.

In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero.

The benefits of a Debt Jubilee would accrue to governments no longer bound to austerity programs; businesses that could invest in their operations instead of paying interest and principal to corporate bondholders; and taxpayers, who would benefit from increased social spending and higher household disposable income.

Of course, not everyone wins from a Debt Jubilee. The losers would include credit card companies, auto manufacturers and banks, all of which would lose the value of the debt which for them is an asset.

Conclusion

The Fed can telegraph its intentions of cutting interest rates all it wants, the fact remains that at such unsustainably high debt levels, the interest payments will eventually cripple the federal government. Politicians are addicted to spending and the current monetary system allows it to continue without consequences, through rampant money-printing. Interest payments have surpassed $1 trillion, while the national debt has ballooned from $23.2 trillion in pre-pandemic 2019 to $34 trillion, post-corona. Some see the national debt going much higher, given that the way it is calculated now, doesn’t include unfunded Social Security and Medicare promises. When that $151 trillion worth of bills is added, “the truth” is closer to $164 trillion.

There is a way to avoid this slow-moving car crash — a global debt reset — a Debt Jubilee, if you will. Imagine what could be achieved if all the central banks acted together in retiring all the world’s debt — all $307 trillion of government, corporate and consumer loans. Of course the financial institutions would balk; their hands would need forcing, but…a global wide reboots effect on the economy would be immediate and profound.

Richard (Rick) Mills
aheadoftheherd.com
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