Who’s Afraid Of Red Ink? COVID Crisis Spawns Bull Market In Deficit Fearmongering

Earlier this month, the “nonpartisan” Committee for a Responsible Federal Budget warned that measures enacted to provide relief to Americans amid the coronavirus epidemic will push the country’s debt and deficits to “never-before-seen levels”, both in absolute terms and as a percentage of GDP.

Now, I know what you’re thinking. Or, at least, I know what you should be thinking. You should be thinking something along the lines of “Who cares?”

That is, “Who cares about the deficit when 22 million Americans have filed for unemployment benefits in the space of just four weeks?” That figure, you’re reminded, effectively wipes out a decade of job creation.

To help illustrate the point, I’ve updated a visual which helps capture the scope of the malaise for America’s small businesses. As a reminder, the data I tap into for this comes from Homebase, a scheduling and time tracking tool used by more than 100,000 local businesses covering 1 million hourly employees.

According to the latest numbers, hourly employees working at local businesses are still down around 60% (and more, on weekends). Hours worked fell as much as 75% on April 12. The data compares a given day to the median for that day of the week for the period January 4 to January 31. That’s how Homebase captures the effect of COVID-19.

Homebase’s customers in the US consist mostly of restaurant, food & beverage, retail and services and are largely individual owned/operator managed. That makes this data particularly well-suited to this situation, given the pain is concentrated in the services sector, and particularly in food & beverage.

So, again, “Who cares about the deficit?”

Well, the above-mentioned Committee for a Responsible Federal Budget, for one.

“Last year, the budget deficit totaled $984 billion. Under current law, we project the deficit will be nearly four times as large this year, exceeding $3.8 trillion”, the organization says, adding that the deficit will total $2.1 trillion in 2021 while, as a share of the economy, the group sees the deficit hitting nearly 19% of GDP this fiscal year and nearly 10% next.

For those wondering, the following visual shows how those projections are derived, in terms of the individual contributions:

The CRFB then delves into the debt discussion. “During the Great Recession, debt grew by 21% of GDP between the end of 2008 and the end of 2010 [and] under current law, we estimate debt will grow a similar amount over just a seven month period”, the organization says, adding that on their estimates, debt “will grow from just under 80% of GDP prior to the crisis to over 100% of GDP by the end of Fiscal Year 2020, on October 1”. After that, debt “will continue to grow as a share of GDP… exceeding the prior record of 106% set just after World War II by 2023 and exceeding 107% of GDP by 2025”.

Fortunately, Donald Trump is the “king of debt”. By the president’s own account, nobody does debt better than him, although some of his previous creditors might disagree, depending on your definition of what it means to do “good” vis-à-vis debt.

Jokes aside, there are a couple of things worth noting here.

First, the fiscal help delivered thus far cannot properly be described as “stimulus” right now.  There’s nothing to stimulate — the economy is shuttered. All we’re doing is staving off the day when a liquidity pinch (for businesses both small and large) becomes a solvency crisis.

Second, there’s more spending in the cards. The CRFB projections are from last week. On Tuesday, the Senate cleared $484 billion in additional spending (it will be passed by the House) and that’s not counting the “phase four” virus recovery bill that is guaranteed to be enacted at some point later this year.

The CRFB disingenuously feigns sympathy for the plight of… well, let’s face it, for the plight of damn near everybody in the country. Because that’s the best way to describe the scope of the economic collapse that’s currently unfolding.

“Combating this public health crisis and preventing the economy from falling into a depression will require a tremendous amount of resources — and if ever there were a time to borrow those resources from the future, it is now”, CRFB president Maya MacGuineas said late last month. “Now is not the time to worry about near-term deficits”, she conceded.

But the commentary that accompanies the latest projections from the organization strikes a different tone, despite quoting MacGuineas’s message from March.

For example, it uses bombastic, bolded titles for the subsections like “Debt Could Exceed the Size of the Economy This Year” and “Deficits Might Quadruple This Year”. To the general public (which, of course, knows little to nothing about any of this), those are scary-sounding declarations, and the CRFB surely knows it. Here’s some additional shrill-sounding rhetoric from the group:

If policymakers end up spending another $1 trillion per year over the next three years on additional stimulus measures, debt as a percentage of GDP would be about 12 percentage points higher by 2025. If policymakers use the current crisis as an excuse to enact a number of permanent and unrelated policies, debt could grow even higher and larger deficits would persist in perpetuity. At some point, such high and rising deficits and debt levels will prove unsustainable, and corrective action will be needed.

I certainly hope it’s not lost on readers that these kinds of declarations and implicit warnings almost never define what “unsustainable” actually means.

I implore you to take note of that latter point. It’s likely one of the more important things I’ve ever said to readers in these pages.

“Unsustainable” is a totally amorphous concept in the vast majority of deficit and public debt fearmongering. I can attest to this from personal experience, having been previously employed in the service of doing precisely this kind of hawkish deficit analysis.

I, myself, frequently resorted to the cheap tactic of punctuating hawkish diatribes with some derivation (and there are many) of the same sentence the CRFB uses in the last excerpted passage above. It’s in the unwritten fiscal hawk playbook: Use a series of nebulous terms to describe an always undefined future state, during which there is some manner of fiscal reckoning.

Must-use phrases and words include (but are not limited to): “At some point”, “eventually”, “in the long-run”, “everyone knows”, “borrowing from the future”, “unsustainable”, “come home to roost”, “one day”, “years from now” and, everyone’s favorite, “shifting the burden to our grandchildren”.

I have some bad news for those of you who have, for years, bought into that kind of cheap rhetoric: It’s false. And in some cases, deliberately so.

The reality (as hard as this is for many folks to wrap their heads around) is that, as Stephanie Kelton puts it, “a monetary sovereign does not need to tax or borrow in order to spend and any interest paid on bonds it chooses to offer is a policy variable”. Note the emphasis on “chooses”.

It’s a shame that so many people continue to deny that reality, even as it plays out before their very eyes in 2020. The crisis is providing Americans with a rare opportunity to see the myriad aspects of the deficit myth exposed in real time. There’s more here.

As for what happens when the policy response is inadequate, Kelton has an answer for you in the form of a chart, which she posted to Twitter on Wednesday. “If we get it wrong again, we’ll get a similar (but uglier) series of downward revisions”, she warned.

Ultimately, it’s up to you. You can listen to the good folks at places like The Committee for a Responsible Federal Budget which is, to quote the organization’s mission statement, “committed to educating the public”.

Or, you can see fiscal propaganda for exactly what it is – propaganda.

Finally, I would note that if you want to chat with anybody over at the CRFB about this, you’ll need to do it via e-mail or, perhaps, a teleconference.

Because, as MacGuineas explained on March 24, “the Committee for a Responsible Federal Budget has closed its physical offices… throughout this crisis”.


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19 thoughts on “Who’s Afraid Of Red Ink? COVID Crisis Spawns Bull Market In Deficit Fearmongering

  1. White collar job loss is happening (I believe this is underreported), so let’s see what everyone thinks about deficits/money printing as this segment of the workforce is furloughed/terminated.

  2. Even Kelton admits there is a level of spend that would be inflationary to a monetary sovereign. To say “who cares about the deficit” is just as amorphous as saying the sky is falling; since neither you, nor Kelton, nor CRFB know where the inflationary switch is as you point out.

    It doesn’t matter until it does.

    1. Part of the “need” to suppress inflation can be explained by the age old debate over whether to protect lenders (the wealthy in many cases) or the “common man.” The Cross of Gold speech for instance.

      The post-2009 dicrediting of “austerity” as a cure was the first signal that things are changing. add in the rise of populism (Bojo, Trump, Bolsonaro, Abe, Modi etc)., perhaps the balance or power has shifted to “the common man.”

    2. And there you have it, another line from the playbook: “It doesn’t matter until it does”. I wish you knew how many times I wrote those six words while wittingly penning hawkish deficit commentary for public consumption.

          1. If your position is not it doesn’t matter period or it doesn’t matter till it does, what is your position?

            It matters right now?

        1. The statement “a monetary sovereign does not need to tax or borrow in order to spend” is not clear to me.

          A monetary sovereign does need to tax or borrow in order to spend. It either taxes or issues bonds or prints money. And printing money is issuing debt (borrowing), since the monetary base is part of the Liabilities side of the Central Bank balance sheet and the Central Bank is part of the Consolidated Public sector.

          I am not sure I am interpreting Mrs. Kelton correctly. If I am she is plainly wrong. Being a Latin American that lived many years under 300% per year inflation and has seen inflation at 3% per day for brief periods I have some practical knowledge of this subject.

          Somehow there is still trust on the U.S. dollar and people hold it just like some people collect baseball cards. It helps that other major currencies are in even worse shape. But this bubble will stop sooner or later.

        2. I have a thought and please correct me if I’m wrong, Mr. H. It seems the majority of goods that go into the US inflation calculus are not produced in the US but elsewhere, mostly imported from developing countries. What we have here, thanks to plunging oil prices and global monetary stimulus, commodity prices have tanked, thereby affecting income flows to these countries, which are siting on a record amount of USD-denominated debts. They need USD and Fed is the only agent with surplus to provide. That said, the more serious the situation is for EM, the more deflation comes to the US, and the more USD needed to avert that scenario. So I think the appropriate position to have here is it doesn’t matter as long as the developing countries need it. And as long as the USD remains as the most powerful world’s reserve currency, EM always need it.

  3. This is purely an Economic/Political based set of scenarios….I appreciate the fact that it is unusually oversimplified leaving little room for alternative interpretations…(very uncharacteristic)..
    There are ,however a lot more ingredients in this kettle of soup that has been cooked……that make oversimplification questionable.. The ‘ glacial pace ‘ of change in the trajectory of the status as the Worlds Reserve Currency (stole that glacial pace part ) is paramount in my thinking here because unexpected events are like Corona Virus ( an unexpected as well as untraceable phenomenon ) that can occur for unknown reasons… I try to never take any conclusion for granted that seems too obvious as there are lots of moving parts out there that lead to an element called SURPRISE…..

  4. This does not even begin to consider the impact upon the Social Security and Medicare Trust funds, which money printing alone cannot shore up. ISTEA (“Ice-T”) is funded almost exclusively by gasoline taxes. I don’t suspect it will be flush with cash anytime soon for an infrastructure spending spree. State and municipal trusts are generally even more stressed. Cutting benefits would be economically disastrous and politically suicidal. Whither the money for the trusts with the federal annual operating budget which was primary negative BEFORE the pandemic? And let’s not forget state budgets whose shortfalls were papered over by creative accounting and wishful thinking BEFORE the pandemic. The money printing and inefficient allocation of it has just begun as has the pain for large swaths of the populace.

    The inability for monetary policy to produce significant inflationary pressure suggests that monetary transmission is not a particularly efficient tool for sparking demand –a point the Fed itself has made repeatedly over the years. Fiscal policy would be more helpful, but the 2017 tax cut, tariffs (and pulling out of TPP) all constrain the possibilities for a fiscal multiplier due to a debt burden assumed during a period of sustained growth.

  5. This system is descending toward some level that could qualify as monetary chaos… Unexpected events can take place when the logical trajectory of theories like the one Kelton postulates are finally tested by unexpected events….Status of the US as sole Reserve Currency is not a given even as it seems likely for the near future. Lots of unaccounted for moving parts in the World situation today…

    1. It is being said wryly that we are all MMTers now. This is their prescription for a deflationary event. The test would be a sudden inflationary event. Fiscal side of that might be unsavory. Spending is easier than raising taxes.

  6. The fact is that despite all this spending and monetary ease (money printing) we are most likely facing deflation. That is how powerful the forces of deflation are in our situation. If you pinned most policymakers to the wall, right now they would get on their knees and pray for some inflation. In this particular case it would mean economic policy had won. Sadly, that is not the case, and it is plain to see the market reflect a sub 1% 10 year and oil and other industrial commodity prices in the basement. If we were facing inflation and the economy was soaking up the spare capacity including the reserve army of the unemployed, Jerome Powell could raise short rates, shrink the balance sheet etc. after a short period. The federal government could raise taxes etc. Right now that is far from the case.

NEWSROOM crewneck & prints