By David Stockman as originally published on Contra Corner and reprinted here with permission
The watchword for 2018 is: UNHINGED!
That refers to Wall Street, Washington, the Dems and the GOP, and all the far and near corners of the planet which are implicated in their collective follies.
The latter begins with the fact that Imperial Washington has become so dysfunctional that the most powerful government on earth can’t seem to keep its doors open for more than a few weeks at a time.
The next continuing resolution (CR) deadline is January 19 and the route thereto resembles nothing less than kick-the-can-alley. It’s strewn with $100 billion of unfunded disaster aid, defense and nondefense sequester caps fixing to be busted by another $100 billion, 700,000 dreamers waiting to be deported, 9 million poor children (CHAPS) facing termination of medical care and millions more ObamaCare recipients who have been promised that cost abatement subsidies to insurance companies will be funded forthwith.
And along with those major bouncing cans are countless more articles of graft and booty cued-up on Capitol Hill looking for a legislative gravy train (i.e. CR) to hop aboard.
Likewise, the casino gamblers on Wall Street complacently attempt to tag another record at 2700 on the S&P 500. Yet that would represent a nosebleed 25X LTM earnings heading into a bond market rout that is certain to result from soaring treasury issuance and the Fed’s impending bond dump-a-thon.
Worse still, the Donald insouciantly unleashes tweet storms about the alleged Trumpian boom when the next recession is statistically just around the corner. After all, the current so-called recovery will pass the existing 118 month record, which occurred under the far more propitious circumstances of the 1990s, in April 2019.
But when it comes to Unhinged, nothing tops the GOP’s disgraceful plunge into fiscal turpitude. The once and former party of fiscal rectitude and a constitutionally required balanced budget has unleashed a torrent of red ink, which under the circumstances, makes Barack Obama’s profligacy pale by comparison.
What we mean is that circumstances matter, and that piling $800 billion of “shovel unready” stimulus on the recession-bloated Federal deficit in 2009 was bad enough. But 108 months on from the Obama Stimulus with the official unemployment rate at 4.1%, a huge discretionary leap into more red ink borders on madness.
Even the most incorrigible Keynesian stimulators have never argued that you inject massive amounts of borrowed money into the economy during the 8th inning of a business expansion. Instead, you are supposed to be shrinking any residual deficit from the last downturn, and, ideally, running a surplus in order to chip-away at the existing debt.
Yet the Trumpian-GOP has thrown every shred of fiscal rectitude to the winds at the absolute worse time in modern history. As we explained last week, the front-loaded tax bill will shrink the revenue base by $280 billion during FY 2019 to just $3.4 trillion.
At the same time, upwards of $200 billion in add-ons for defense, disaster relief, ObamaCare insurance bailouts, border control, veterans and law enforcement will drive spending to nearly $4.6 trillion or 20% above Obama’s outgoing budget of $3.85 trillion (FY 2016).
That’s right. These GOP clowns have left Big Spending Barry in the dust, and that’s before they get around to auctioning off votes for what the Donald is now flogging as a “bipartisan” infrastructure bill.
The latter will add hundreds of billions more to the borrowing tab. That’s because the White House can’t pass an infrastructure bill without a lot of Dem votes, and the latter will demand real pork in the appropriations barrel, not some kind of slight of hand tax-induced mobilization of so-called “private” capital (it’s not “private” when it get mobilized by a tax incentive bribe).
In short, what was already a structural deficit of $700 billion will erupt into new debt issuance of $1.2 trillion—-and perhaps well beyond that figure—-commencing in October. At that very time, of course, the Fed will be dumping old bonds into the market at a $600 billion annual rate.
Yet to our knowledge, there was not a single mention of this pending epic bond market collision during the perfunctory Congressional debt on a bill that had no hearings and had not been read by the overwhelming majority of legislators when it was jammed through on Christmas Eve.
And that’s why we describe the GOP’s fiscal policy—among others—as unhinged rather than merely reckless or hypocritical. That is, Imperial Washington has been house-trained for so long by central bank money printing that it has no clue that it has actually participated in a giant financial fraud.
To wit, the Fed balance sheet at the turn of the century was only $500 billion, meaning that in round terms upwards of $4 trillion of public debt has been monetized during the course of this century. And so doing, the Fed forced the other central banks of the world into aping its policy (or suffer soaring exchange rates), thereby causing even more of Uncle Sam’s massive debt emissions to be sequestered in central bank vaults around the world.
But now even Keynesian central bankers have realized that they must pivot toward interest rate normalization and balance sheet shrinkage (quantitative tightening or QT). Otherwise, they will be caught sucking their thumbs near the zero bound with no balance sheet dry powder when the next recession makes its inevitable appearance.
Moreover, from the Keynesian-statist point of view that would be an absolute political calamity and central bank franchise killer. That’s because the whole monstrosity of contemporary central banking rests on the false proposition that—save for the skillful (and “courageous”) ministrations of central bankers—-capitalism would never recover from recessionary slumps, and that it has some kind of depressionary death wish, to boot.
Needless to say, the GOP doesn’t even recognize the evil of present-day central banking and is so confused on the topic that its “low interest man” in the Oval Office chose an outright Keynesian statist and crony capitalist larcenist, Jerome Powell, as the next Fed Chairman.
Worse still, the Congressional GOP leaders persuaded the clueless Trump to also nominate Professor Marvin Goodfriend, whom House Financial Services Committee Chairman, Jeb Hensarling, described as an “impeccable conservative”.
But for crying out loud, Goodfriend wants to abolish cash (i.e. the ultimate protection from state seizure of wealth through control of bank deposits) so that the Fed can impose negative interest rates during an “emergency” declared by 12 central bankers.
That’s right. This whack job devotee of Milton Friedman wants to confiscate the liquid assets of savers if they fail to borrow and spend at the rate decreed by the monetary politburo in the Eccles Building.
So yes, when it comes to the state’s destructive propensity to borrow and print money, the GOP has simply become: Unhinged!
Worse, they have also become essentially innumerate. For instance, even as they are loading the public debt with another $1.2 trillion or more in the fiscal year just ahead, they have spent the Christmas break bloviating about the growth and jobs which will ostensibly issue from their asinine tax bill, thereby mitigating the added red ink—-if not eliminating it entirely.
Not on your life!
Even if the wallop of borrowed cash injected into the economy during FY 2019 adds a full 1% of extra growth, it would amount to just $190 billion of nominal GDP and therefore a mere $35 billion of incremental revenue. That is, the “reflow” would amount to a rounding error in the context of a $4.6 trillion spending orgy.
To be sure, tax bill apologists would argue just give it time. For instance, an extra point of growth (above CBO’s baseline of 1.7% per annum) for the next four years would result in a nominal GDP gain of $905 billion by FY 2022 and therefore an extra $160 billion of revenue.
Alas, the baseline deficit for that year with the enacted tax bill and the GOP spending spree would otherwise amount to $1.44 trillion. So getting the outyear deficit down to $1.2 trillion with “more time” does not exactly compute to a growth based rescue of the nation’s rapidly unraveling fiscal accounts.
Moreover, it is utterly unreasonable to assume that Washington has that much time in the wake of the jarring bond market collision that it now baked into the cake for the year just ahead. In fact, FY 2022 would constitute months #147-159 of the expansion which incepted in June 2009.
Needless to say, that’s terra incognito from a macroeconomic perspective: A place where the US economy has never been—even during LBJ’s “guns and butter” frolic of the 1960s and Greenspan’s irrationally exuberant technology and dotcom boom of the 1990s.
In this context, we have frequently referenced then Senate Majority Leader Howard Baker’s characterization of the giant Reagan tax cut as a “riverboat gamble”. Yet today’s fiscal and demographic circumstances are so infinitely worse than those of 1981 that the GOP’s current fiscal posture surely constitutes a Riverboat Gamble On Steroids.
Back then, the public debt was just $930 billion or 30% of GDP, the 78-million strong baby boom had not even fully entered the work force yet and Paul Volcker was at the Fed, where he was slamming the breaks on the printing presses—-thereby pegging the 10-year treasury note at 15%.
That is to say, there was running room on Uncle Sam’s relatively pristine balance sheet, an army of strong backs was headed for the job and taxpayer rolls and interest rates had nowhere to got except down—-and big time in that direction after the back of commodity and consumer inflation had been broken.
By contrast, the GOP tax bill and spending spree—when piled on top of the inherited baseline deficits—will result in nearly a $27 trillion public debt by the end of FY 2022 or more than 120% of GDP. And that assumes that the current business cycle does not roll-over from record old age and the crunch of soaring debt yields on an economy saddled with $67 trillion of public and private debt at this very moment.
More importantly, it ignores the demographic-fiscal time bomb of the retiring baby-boom. That is already evident in the projections through FY 2022 when combined spending for baby boomers (including much of Medicaid which goes to the poor elderly and nursing home care) will exceed $2.5 trillion or 63% of total Federal revenues after the GOP tax cut is factored in.
But that’s not the half of it. By early in the 2030s, the number of OASDI beneficiaries will reach 95 million compared to 60 million at present, and then climb steadily higher into the triple digit millions from there.
In a word, the longer-term fiscal condition of the nation’s baby-boom driven entitlement monster is so forbidding that not a single dime can be responsibly added to the Federal debt—not for tax cuts, defense, Mexican walls, the rescue of people who choose to live in hurricane ally without setting aside their own stormy day funds—or anything else.
So in the face of bond market collision that is imminently pending, a recession that is not far down the road, and a baby-boom/entitlement eruption that is baked into the demographic and statutory cake, the GOP’s current feckless fiscal game plan is truly unhinged.
Moreover, the recent announcement by the Great Fiscal Fake who presides over the US House of Representatives, Paul Ryan, that the GOP will now turn to spending control and welfare reform is truly laughable. The $70 billion extra they are pumping down the Pentagon rat-hole this year is equal to the entire cost of the Food Stamp program and exceeds spending on family assistance by more than 2X.
Indeed, the heart of the $700 billion means-tested “welfare budget” is Medicaid ($430 billion) and the earned income, child care and similar tax credits. But the GOP has already punted entirely on the former during its failed attempt to repeal and replace ObamaCare and it has added tens of billions to the latter in the now enacted tax bill.
The recklessness of it is only surpassed by the bubble-blind casino gamblers and robo-machines, which, oblivious to the fundamentals and inexorable future realities, chase prices higher and higher only because they are going up.
In Part 2, we will consider: The RussiaGate Hysteria of the Dems. It has now become the great skunk in the woodpile that is separating Imperial Washington from even a tenuous connection to the facts, history and common sense realities of the non-existent security threats that result from Russia’s pipsqueak sized economy and midget military budget.
Moreover, the resulting rampant Russophobia means that the War Party is more ensconced in power than ever before. That is to say, the ultimate threat to domestic peace and prosperity is a $1 trillion annual Warfare State budget that is both utterly unnecessary based on the real facts of the world, and which was utterly unaffordable—even before the outbreak of the GOP’s latest bout of fiscal madness.