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“Towards the Cliff…”
by Brian Maher
“The nation’s finances careen downhill toward a cliff. And the brakes are gone… The United States government dispensed more money in May than any other month in all its 243 years. And like a hopeless wastrel who uses one credit card to pay down another… much of it was borrowed.
Tax receipts increased 2.3% through the first eight months of fiscal year 2019 (which began last October). But federal outlays? They increased 9.3%. In consequence… The budget deficit through May expanded to a gobsmacking $738.6 billion. That $738.6 billion deficit represents a nearly 40% year-over-year increase.
The Congressional Budget Office (CBO) projects it the deficit to scale $900 billion by year’s end. Meantime, trillion-dollar annual budget deficits are in prospect through the next decade — at least. By some metrics, the United States now takes on more debt in one year than it did in the first 200 years of its grand and gorgeous existence. Now lift your jaw from the floor…
Interest Payments on Debt Exceed Entire Deficit from 2015: Federal debt is rising perhaps three times the rate of revenue coming in. And interest payments on the nation’s debt tallied $354 billion through May — $46 billion greater than through May 2018. The Treasury further expects interest payments to end the year at $591 billion. That is greater than the entire 2015 budget deficit.
The mathematics is simple. And the mathematics is dreadful.
Truth from the Sage of Baltimore: Every normal man must occasionally be tempted, said H.L. Mencken, “to spit upon his hands, hoist the black flag and begin slitting throats.” Times as these tempt us to raise our piratical ensign, seize an edged weapon… and proceed in the violent fashion indicated.
The national debt pre-financial crisis was roughly $9.5 trillion. The United States government has since borrowed some $11.6 trillion. And to show for it?
The American economy expanded only $5.1 trillion these past 10 years. That is, GDP has increased 35%. But the national debt has risen 122%. Meantime, the CBO estimates debt is expanding at a 6% annual rate. And so the point of rapidly diminishing returns has already arrived… More and more debt. Less and less growth.
But Negative Growth Without Debt? “Bond King” Jeffrey Gundlach estimates nominal growth these past five years would have been negative — in the absence of these heaping debts. Mr. Gundlach is not alone. Research by financial advisory firm Baker & Co. indicates “actual” GDP — GDP minus debt’s phony fireworks — has declined an average 7.45% a year since 2007.
Remove the stimulus, concludes Baker — and GDP collapses up to 7%. It is true, the data do not cover 2018 or 2019. Would you expect much difference if they had?
The Price of Lost Growth: But in the spirit of generosity, let us include debt’s GDP “contributions.” Average “real” annual economic growth since 2009 runs to 2.23%. In contrast, the larger trend since 1980 is 3.22%. One percentage point may seem a relative trifle. And one year to the next it is.
But according to Jim Rickards, the United States would be $4 trillion richer had the 3.22% trend held this decade. Run the numbers 30, 50, 60 years. You arrive at a dismal conclusion. As Jim notes: “A society that grows at 3.22% will be twice as rich as one that grows at 2.23% over the course of an average lifetime.” We can only conclude that $1 of debt no longer carries the load it once did…
Less Wine, More Water: Assume, if you can somehow, an economy unburdened by crushing debt. In this economy the miracle multiplier of debt could argue a plausible case for itself. One dollar of debt might transform the cup of water into the proverbial quart of wine. But the debt begins to mount… and each new drop of water yields less and less wine. Ultimately comes the point when water not only yields no wine… it actually starts turning the liquid to vinegar.
Fifty years ago, $1 of debt yielded perhaps $4 of economic growth — real or false. And today? Every borrowed dollar since 2008 has generated perhaps 40 cents of output. That is, today’s borrowed buck wields some 1,000% less bang than 50 years ago.
And so the Keynesian “multiplier” is reduced to a sad, sad caricature. It seduces men locked in what Chesterton termed “the clean and well-lit prison of one idea.” And prison is prison — clean and well-lit or dank and dark. The lesson, plain to liberated men outside the prison walls: Debt is a false enchantment, a snare, a trap. It steals from the future to gratify the present. That is, it brings tomorrow’s consumption forward to today. And it leaves the future empty.
How has the nation arrived at such a sad estate?
Loads of Blame to Go Around: Lest we be accused of partisanship… we haul both Democratic and Republican parties into the dock. The one party only locates its fiscal conscience when the other is in power. On their own, each spends like a drunken and maniacal sailor turned loose ashore. But the glad-handing, vote-seeking politician is not solely to blame.
So… Were We the American People humbugged into so much debt? Or have we freely and knowingly put our names to the contract? As we have argued before, two possibilities immediately suggest themselves:
1. The elected officials of the United States are colossal rogues who amassed a $22.3 trillion debt in barefaced defiance of the thrifty American voter.
Or…
2. The $22.3 trillion debt reflects faithfully the expressed desires of the American voter. He has gotten what he wants. At the very least, he accepts it in exchange for the perceived benefits it showers upon him.
We once again conclude: Option 1 makes mockery of our cherished democratic theories. Option 2 stands in full indictment of them. Hand it over, we bark out one corner of our mouth. But don’t dare raise our taxes, we belch out the other.
Your humble editor here gazes at himself in the mirror. Not once in our existence have we declined a free lunch… or a tax cut. “Every nation gets the government it deserves,” said 18th-century French philosopher Joseph de Maistre. That is precisely our fear…”