Amidst all the good economic news this week, beware of this ‘time bomb’



Listening to President Donald Trump’s list of his economic accomplishments, both real and exaggerated, in this week’s State of the Union address reminded those of a certain age of Archie’s boasting Bunker that the United States has “the grossest national product”. Beyond the low unemployment rate and record stock prices, one data point was notable for its absence in the litany of numbers: the federal budget deficit.

It seems almost forgotten amid the triumphalism that red ink is flowing at an annual rate of $ 1,000 billion. More important than the overall figure is that the deficit reaches this level in the 11th year of a long-lasting economic expansion, as opposed to the $ 1 trillion deficit in 2012. It was up to the when the economy was in the early stages of recovery from the Great Recession that resulted from the 2008-09 financial crisis. And, let us remember, the tide of red ink at the start of the Obama administration won him the enmity of the loss-making hawks of the Tea Party, now a species almost extinct.

It also seems forgotten that when seeking the Republican presidential nomination in 2016, Trump told the Washington Post that he would be able to get rid of the $ 19 trillion national debt within eight years. Fast forward to today, and the Trump administration is projected to add $ 9 trillion to the national debt over eight years by current projections.

What is distressing, according to Albert Edwards, the eternally Saturnian strategist of Société Générale, is that the Congressional Budget Office sets the deficit for the current year at 4.6% of gross domestic product, with similar deficits expected. until 2030. Apart from six years during and immediately after World War II, the CBO pointed out, “the deficit over the last century has not exceeded 4.0% [of GDP] for more than five consecutive years, ”he wrote in a customer note.

“This time bomb requires aggressive and immediate measures to reduce public sector deficits and / or reverse promised future profits,” continues the austere Briton. But nothing could be further from what is happening on this side of the pond.

Indeed, the so-called Medicare for All proposed by Senator Bernie Sanders, the self-proclaimed Democratic socialist of Vermont and the self-proclaimed winner of the chaotic Iowa presidential caucus, would cost around $ 32 trillion, which is obviously not not included in current projections.

Although he approved a wealth tax that would increase the $ 4.35 trillion over 10 years, it doesn’t seem like a stretch to expect the deficit to grow even more under a single-payer health care plan. According to the Committee for a Responsible Federal Budget, Sanders’ plan would increase the deficit by about $ 13.4 trillion over that period.

His supporters do not whitewash at this prospect. Sanders’ economic adviser Stephanie Kelton of Stony Brook University suggested last week in an interview with Bloomberg that the $ 1 trillion budget deficit could be safely increased by an additional $ 500 billion a year.

Even without sweeping government expansions such as Medicare for All, our current trajectory will mean that the U.S. budget deficit will exceed Japan’s deficit (relative to GDP) for the first time since 1992, after the Japanese financial bubble burst in 1980. (This is based on Japan’s so-called primary deficits, which adjust to its business cycles and exclude interest charges, which is how economists prefer to measure the stance of fiscal policy.)

“This indeed marks a new level of fiscal debauchery for the United States,” exclaims Edwards. “I expect the United States to join Japan in renouncing any serious attempt to reduce its government debt-to-GDP ratios to historically ‘normal’ levels. It just won’t happen.

The only way out is what’s known as helicopter money – a term coined by Milton Friedman and popularized by Ben Bernanke long before he was Fed chairman, in a 2002 speech – the strategist said. This metaphor describes budget deficits financed by central bank money printing. MMT, or modern monetary theory, championed by Kelton and other left-wing economists, is a variation on the same theme.

“Call it what you want, but there’s only one realistic way out of this mess – and that’s to inflate their debt,” says Edwards. One of the problems is that many of the government’s obligations, such as retiree benefits and health care, would increase with inflation. Governments will therefore need to focus on reducing the real cost of other liabilities through rapid inflation.

And it would work. Pumping central bank liquidity by directly monetizing budget deficits would be more effective than so-called quantitative easing, which involves central bank bond purchases from investors, who redeploy the liquidity into riskier assets such as stocks, and thus indirectly stimulate the economy.

“The helicopter money will work a lot more efficiently for Joe Sixpack than it does for Mike Moneybags – and therefore it will be a lot more popular,” says Edwards.

“I have no doubt that the helicopter coin will be so successful that CPI inflation will come back like a long lost relative,” he continues. “But, like a distant uncle who we only see once in a while, we’ll have forgotten how out of control he can get after a few drinks, and woe to anyone who tries to stop him in his tracks.” It would be like a policymaker trying to keep inflation under control, as MMT presumes he would be affected by tax hikes or spending cuts.

Japan, however, has been plagued by too low inflation despite its budget lavishness, funded by the Bank of Japan’s purchases of so many Japanese government bonds that on some days few long-term bonds are available. to negotiation.

Indeed, the main challenge for the Fed, the European Central Bank and other central banks in advanced economies, they say, has been to drive up inflation despite resorting to other sweeping policies, such as interest rates. negative interest. Edwards sees the benchmark 10-year US Treasury yield falling to around minus 1% in a deflationary collapse that would ultimately lead to a drastic shift to helicopter currency.

For now, the US Treasury can borrow as much as it wants at historically low interest rates. But an economic sage from another era, Herb Stein, chairman of President Richard Nixon’s Council of Economic Advisers, observed that if something cannot last forever, it will stop. That would be when the unthinkable would happen: a Treasury auction that doesn’t attract enough bids. The next sound you will hear will be the helicopter rotors.

Write to Randall W. Forsyth at [email protected]


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