September 25, 2013

Obamunism = Drowning In Debt

Hatched by Dafydd

Peter J. Tanous presents a grim and grisly future of staggering debt due to the Federal Reserve's "quantitative easing" (QE) -- which itself appears to stem from a bad misreading of John Maynard Keynes. (Is there a good reading of Keynes?)

(I'm certainly no expert on Keynesianism; I never even made it to the 50-page mark in any of its creator's books. But I've read Keynesian analyses -- written by true-believer Keynesians -- that say JMK himself only advocated flooding the market with money when the country being flooded had a very, very small debt-to-GDP ratio... and definitely not when it was already deeply underwater. If any Keynesian expert wants to correct me, please feel free to do so in the comments!)

Under QE, as the Wikipedia article indicates,

The central bank may enact quantitative easing by purchasing a predetermined quantity of bonds or other assets from financial institutions without reference to the interest rate. The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further.

The last sentence of this paragraph offers a dire warning:

This is often considered a last resort to stimulate the economy.

I wonder whether this mindset, that the government must "stimulate" the economy, is actually the root cause of the fiscal and economic problem in the first place. Perhaps we should consider being more hands-off, helping the "deserving poor" hit by unmanageable financial collapse, and letting Capitalism right the ship in its own time. But be that as it may, that's not the system we have nor likely to have in the near future. So let's return to what is actually happening and the dire consequences quantitiative easing may produce.

The article identifies several risks of QE that can severely damage the American economy:

  • The intended result of QE is to flood the economy with cheap money; but another word for "cheap money" is "inflation."
  • Because interest rates have dropped precipitously, interest on pensions and savings may not stay ahead of said inflation, leading to a continuing loss of retirement income for ordinary people.
  • "The new money could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans." We see this today, with stock prices soaring even as wages are stagnant or dropping, employers are cutting hours to push more of their employees into "part time" status, and startups that could have filled the job gaps are depressed because of the lack of lending to new businesses.
  • The recipients of the extra cash under QE tend to be banks, companies that already have ready access to large lines of credit, and homeowners who already have mortgages; consider how many of us have taken advantage of the low interest rates to reduce payments on our existing home mortgages. The article notes, "Economist Anthony Randazzo of the Reason Foundation wrote that QE 'is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality'."

    Massive income inequality typically leads to social dislocation, a two-tiered economy, the loss of belief in opportunity for upward mobility, and ultimately, to more reliance on government handouts -- thus leading to a more big-government paternalism and a citizenry leaning more towards socialism and welfare.

But Tanous notes an even nastier consequenece of QE... one which, rather than being unintentional, might actually be the "hidden agenda" of the Fed's policy of flooding the economy with cheap dollars. From the CNBC piece:

Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.

But that is where we may be heading.

That eventuality may be shocking, but it would not be difficult to achieve. QE has driven down interest rates on federal debt to 2.4%; as we have about $12 trillion of such debt, we're paying about $288 billion every year just to service that debt... that is, to pay the interest; we are not, of course, reducing that debt. In fact, it's still increasing and is expected to rise by 2020 to the princely sum of $16.6 trillion.

But the chief danger of QE is that it cannot continue indefinitely, because, as Friend Lee has said, government can set the price but not the cost of goods and services. An excess of money (which is what is meant by quantitative easing, e.g. cheap money, e.g. electronic counterfeiting) cannot be forever suspended overhead. Sooner or later, it must come crashing down.

And when it does, among other dread problems, interest rates will rise again. Obamunists hope that the crash will hold off until a Republican sits in la Casa Blanca, so they can blame the resulting financial carnage (from their own stupid policies) on that luckless bag-holder... just as Democrats tried to blame the 9/11 attacks on George W. Bush.

So how high might interest rates rise? Tanous says that the average interest rate for U.S. debt over the last two decades is actually 5.7%. If interest rates were only to return to the average, then instead of $288 billion per year in interest, we would be paying $684 billion.

But in the meantime, more debt will accumulate up to that $16.6 trillion level by 2020. Thus not only the interest but the principal would rise... and we would actually be paying $946 billion in debt service alone. (Tanous says $930 billion; I'm not sure why the discrepency, perhaps a rounding error.)

In 2012, the entire amount of personal income tax collected by the IRS was $1.1 trillion. Assuming QE doesn't lead to a great economic leap forward -- not even the Feds predict that! -- Americans would soon realize that 85% of their income taxes (or 86%, if you use the $946 billion number) went to nothing but paying interest on the bloated national debt.

Tanous drolly suggests that --

[I]f Americans find out that the lion's share of their income tax payments are going to service the debt, prepare for a new American revolution.

I think that's an understatement. But the scariest uncertainty is whether that revolution will target the real culprits -- the Obamunists, going all the way back to the Progressivist cadres who captured the 2006 election, the ones who broke the economy in the first place... or whether voters will simply (and simplistically) blame whoever is president at the moment -- likely a fiscally conservative Republican trying his best to clean up the awful mess the Left left behind.

If I wasn't utterly convinced of the essential incompetence of the administration and its lickspittels in Congress, of their inability to think beyond a two-year window, I might believe this was a deliberate conspiracy to destroy the American economy, ushering in a new New Deal era of socialism, tyranny, and totalitarianism. The only thing missing would be another "world war" to warp patriotism into slavish devotion to a cult of personality, an American Hugo Chavez.

Fortunately, there is nobody on the Progressivist horizon with enough charisma to fill that role; at worst, we might end up with a Teddy Roosevelt-like, big-government Republican... a Chris Christie, for example. And as bad as Christie might be, he would still be more interested in preserving the Union than "transforming" it.

Hatched by Dafydd on this day, September 25, 2013, at the time of 3:20 PM


The following hissed in response by: wtanksleyjr

That NBC article is economically illiterate in an inexcusable way. The cause of high debt servicing costs is high short-term debt, not changing interest rates. Blaming the government debt load on FR policy is therefore _stupid_.

I also happen to think the article (and yours as well) is economically wrong, but that I can handle -- that is, I think the QE is more likely to help us pay debt (by reducing unemployment) than it is to only raise the price of paying for debt. There's room to disagree there, so I respect that you disagree with me.

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at September 25, 2013 4:03 PM

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