Living On Borrowed Time

Practicality the entirety of Congress now believes that the ability to pay should not limit the ability to promise people whatever they want.  There’s no poll of members of Congress to support this assertion.  We base it on what they’ve communicated by real, material actions.

Remember, per the Constitution, Congress – and in particular, the House of Representatives – is vested with the “power of the purse.”  They retain the authority to tax and spend public money for the federal government.  Over the last 50 years Congress has demonstrated they give less than half a rip about the government’s ability to pay.

Congress may be good at taxing.  But they’re even better at spending.  According to the Treasury Department, the annual budget deficit, the shortfall between tax receipts and spending, for the 2019 calendar year topped $1.02 trillion.  But that’s nothing…

The budget deficit for the first three months of the 2020 fiscal year, which started in October, is up 12 percent over this time last year.  Specifically, the deficit for the first three months of the 2020 fiscal year is $357 billion.  At this rate, the annual 2020 fiscal year deficit will eclipse $1.4 trillion.

The deficit, of course, is funded with Treasury debt.  And since mid-October, nearly half the Treasury debt has been purchased by the Federal Reserve.  If you recall, starting in mid-October, the Fed began conjuring money out of thin air at a rate of $60 billion a month for the sole purpose of buying Treasuries.

Over the next decade, as debt and deficits go vertical, more and more of the Treasury’s borrowing will be financed via the printing press.  Here’s why…

Inverted Pyramid

New U.S. Census Bureau figures show that the U.S. population is growing at an annual rate of 0.48 percent.  If it wasn’t for immigrants, which are entering the USA at a reduced rate, the U.S. population would be in decline.  Business Insider offered several anecdotes:

“The census data capped 10 years of sluggish US population growth.  The 2010s may enter the record books as the slowest decade in population growth since the first Census in 1790….  And low fertility and an increase in deaths are projected to continue into the 2020s.

“The prospect of demographic stagnation is playing a critical role in projections of slower U.S. economic growth over the next decade, given smaller increases in the numbers of working-age Americans and as baby boomers continue retiring.  Going forward, a ballooning number of retirees would rely on a shrinking number of workers to power the economy.”

Quite frankly, this ‘going forward’ scenario is unworkable.

You see, when an economy’s supported by a young and growing demographic, the burden of public debt quickly dissipate.  At the local level, long term municipal bonds are issued, and then repaid by a larger and more prosperous tax base.  Public pension funds also work reasonably well when supported by a growing work force.

But as the economy ages, and growth stalls, the legacy costs become insurmountable.  In effect, the age demographic transitions from a well-functioning pyramid, with a large base of workers supporting a small tip of retirees, to a top heavy inverted pyramid.

By then the public grifters, like intestinal tapeworms, have taken control from the inside.  Rather than making a course correction, they devour their host.  That’s when the gig is finally up.

Local governments default.  Pensioners get the shaft.  Public services diminish.  Infrastructure falls to derelict, decay and disrepair.  And formerly grand properties degenerate to single room occupancy housing for the wicked…much like Los Angeles’s Hotel Alexandria in the 1990s.

Living On Borrowed Time

At the national level, the rules are a bit different.  With the Fed and Treasury working in concert with a fiat dollar, and Congress raising the debt ceiling with little reservation, it is impossible for the U.S. government to technically default.  However, to keep perpetuating more and more debt, the Fed and Treasury resort to mass currency debasement.

As noted above, the Fed is currently printing $60 billion a month and loaning it to the Treasury.  This is financing about 50 percent of the deficit through the first quarter of fiscal year 2020.  Moreover, this $60 billion a month is in addition to the nightly liquidity blasts of upwards of $80 billion the Fed applies to the overnight funding market to price fix the repo rate below 2 percent as part of its program of repo madness.

Without the Fed’s fake money intervention, Washington would be forced to raise taxes, reduce spending, accept a much higher interest rate, and default.  The progression would happen in short order.  Plus, the financial system would blowout to the extreme.

Yet there’s no turning back.  There’s no graceful way out.  There’s no backing away from QE or repo madness.

When it comes down to it, population and age demographics make it impossible to support the accumulated debt of yesterday’s spending.  The likelihood of growing our way out of this mess is next to none.

So what are we left with?  We’re left with debt financing by way of fake money from the Fed.

Make no mistake, we’re living on borrowed time.  The day will come when the costs of debt monetization exceeds any benefits.  That’s when those costs will be paid with ruinous price inflation.  And, as it happens, ruinous price inflation is very costly.

In the meantime, everything’s awesome.  Shares of Tesla are trading at over $500.  Somebody say amen.

Sincerely,

MN Gordon
for Economic Prism

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