One person who has clearly come around the reality that there is no putting the genie back in the bottle when it comes to government spending to cushion the blow from acute crises, is Gary Cohn.
Cohn showed up on CNN Sunday for a chat with Fareed Zakaria, and he was not shy about discussing the deficit and the necessity of rethinking how Congress approaches the debate around borrowing, spending and taxation.
“There are people who are worried now, as you know, on Capitol Hill, about the debt”, Zakaria said.
“Initially, right now, we should not be worried about the debt”, Cohn responded, echoing Steve Mnuchin and everyone else who is any semblance of rational (indeed, even some folks in Washington who aren’t rational understand this). “We need to do whatever we can to recover our economy”.
Cohn then shifted tone, noting that “a year from now, hopefully when we get through this and this is behind us, we absolutely have to worry about the debt”.
That’s not as unequivocal as he makes it sound. The Fed is absorbing the entirety of the relief packages passed thus far and is expected to absorb the next one too.
But, the crucial bit from Cohn’s remarks is his exhortation for Congress to be realistic about the fact that COVID-19 will not be the last time lawmakers are called upon to spend trillions in a crisis. Here’s the key quote:
We now have the knowledge that at any given moment in time, our Congress is going to need to spend – you tell me – $3 trillion to $ 5 trillion to stimulate the economy because of a crisis. And we don’t know what that next crisis is. So our next Congress, they almost have to sit down and look at our spending, and our revenue side. They really need to look at our budget – how we spend money – and in addition to that, I think they need to look at our tax system and they have to think of ways we raise revenue. You know, if you think back to 1935 and the Depression, some major tax reform came out of that.
Cohn’s bottom line for Washington: “Congress has to think differently” going forward, and they have to acknowledge that we are going to have another crisis.
As Zakaria notes, there are some budget hawks beginning to circle inside the Beltway. The deficit was $737.9 billion in April alone. Spending was nearly a trillion.
Earlier this month, Treasury said it will borrow $2.99 trillion in the April-June quarter. The previous plan was to pay down $56 billion of net marketable debt during the period. In other words, the plan represents a net $3.06 trillion swing versus what was tipped in February.
But let’s be clear about something. If you forget about the primary dealer middleman (who is totally superfluous in this equation on some interpretations), the fact is, the Fed is buying the bonds the US is issuing to fund the stimulus. We are issuing debt and effectively buying it from ourselves.
That is indirect monetary financing. If you strip out the primary dealers (who benefit from their role as middlemen and arguably do not fulfill their implicit obligation in the arrangement vis-à-vis Main Street) you’d be left with direct financing.
If Americans have any sense about them at all, they will start to question the mechanics of this arrangement. Specifically, they will ask why, if this charade is as laughably transparent as it clearly is, we need the primary dealers in the middle of things. What is the purpose of that if it’s not facilitating robust economic outcomes for Main Street? Why not just have the Fed directly finance the deficit? Taking it one step further, if all we’re doing in that scenario is issuing debt and buying it from ourselves, why issue the debt in the first place?
As Cohn says, there will be another crisis. And when it comes, we will have to spend several trillion to combat it, just like we’re doing now.
If you want to persist in the notion that deficits matter and have to be “financed”, then you need to rethink the tax system. You can’t just keep cutting taxes for the rich and corporations and claim that “growth” will eventually pay for those tax cuts. That supply-side canard has (literally) never worked. Let me reiterate, because this is a highly pernicious myth: The idea that tax cuts for corporations and the wealthy will finance themselves over time via higher growth has never been borne out in reality. It is largely a fairy tale pushed by supply-side charlatans like Stephen Moore and Larry Kudlow, neither of whom are economists.
Of course, some of this thorny debate could be relegated to the dustbin of history (where it probably belongs) if people would free themselves from the imaginary constraints of deficits and make-believe “limits” on spending the dollars America itself issues.
If you think a system that is defined by deficit monetization is destined for hyperinflation, then there is a very good chance you are essentially oblivious to the fact that the Fed has been monetizing debt for the better part of the last decade.
Read more: If There’s An Economic Silver Lining In This Crisis, It’s The Exorcism Of The Deficit Demon
“Congress has to think differently” going forward, and they have to acknowledge that we are going to have another crisis.”
Why do all other commentators ignore the reality of another eventual crisis in their prognostication? Most people talk as though COVID-19 and its carnage on lives and livelihoods is all we have to worry about, as they debate the shape of a recovery. There are multiple worries to consider:
As H points out repeatedly, the trade war is heating up. Hong Kong’s demise and capital controls lurk. A domestic terrorist attack is not impossible. An asteroid plopped on Silicon Valley would take care of FAANGM’s. And Tom Cruise might have a tantrum once he reaches the ISS.
I think they need to look at our tax system and they have to think of ways we raise revenue…,this from the individual who orchestrated Trump’s tax cut, what chutzpah!
No sh*t.
“Why issue the debt in the first place?” Just print the money and hand it out… then everybody is happy? Except for maybe those that are holding our previously issued debt as they watch their investment being diluted? Not sure I have this right, H. Instruct me?
Hi MC, I’ll take a stab at this.
If there is no resulting inflation (for goods and services), and the US Dollar holds its value, then the existing holders of previously issued debt are not negatively impacted.
They only get hurt if goods and services inflation gets out of control, devaluing the US Dollar. Because then they’re getting paid back in a currency that isn’t worth what it was when the initial loan/investment was made.
thanks to you Prestwick AK… I guess I am not so worried about the inflation aspect as H has mentioned the Fed has been monetizing debt for so long, I am worried that we lose the confidence of our bond holders as to our long term solvency
I read and read and read. I think and think and think. Things happen and happen and happen. I personally perceive no correlation between these factors. That leads me to the following theory of human life:
The World was created when a colossal amount of shit encountered a gigantic fan.
That explains everything.
Survival requires skillful artful dodging and even then things do not always go well.
100 percent.
The big dump theory.
I like your theory of world creation way better than God taking 6 days to craft his “master piece…”
What is the primary dealers “take” in this arrangement? While they are there for nominal appearances’ sake only, my guess is this “illusion” we have created probably costs us many millions. So we are paying to fool ourselves, but not really. If nothing else, that is certainly MAGA.
This set of issues seems to have no proponents to the fact that all this is unprecedented… Actually this is the game called ‘the cat that ate the Canary ‘ None is going to get the canary back and that goes double for the money that was extorted by a few pretty smart operators while America was texting on their Facebook page… Could be Ray Dalio has a better handle on this than he is credited with ….(lately)
I’d like to hear our moderator talk more about the implications for societal inequality. There’s been no “real-world” inflation because this money stays with the financial firms, which drives asset inflation, and nearly all financial assets are held by the top 10% of the wealthy. So our economy gets hollowed out with less productive capacity because of the lack of valid economic signaling, while the wealthy party on. Sure, the state pensions also need the stock market to go up, but I’d still like to hear more about implications for inequality and long-term dysfunction in the economy when zombie corporations are allowed to survive.
Oh my God, so the “Laffer’s Curve” didnt ever work? I’m really shocked!
US can print, borrow, behave poorly, pretty much do whatever it wants until China can form an alliance with a credible nation/currency.
Then watch out.
A book of interest, “Disunited Nations,” one man’s opinion of course, but worth a read. A dissertation on the end of the Order which is basically the system put in place by the US to counter the Soviet Union after WW2. Basically, if you are a “friend,” we have your back and will guarantee the free movement of goods protected by the most powerful navy on earth. In his analysis China is toast. I have a difficult time envisioning the US taking this route but food for thought nonetheless.
“Of course, some of this thorny debate could be relegated to the dustbin of history (where it probably belongs) if people would free themselves from the imaginary constraints of deficits and make-believe “limits” on spending the dollars America itself issues.”
H many would argue that your view of history is too short-sighted. Ten years of stimulus without inflation means little when to go back a few more decades. Or centuries. We’ve had a dozen 500 year floods in the last 15 years in various parts of the country, we can’t have a 200 year financial event? I would highly encourage you to listen to Danielle DiMartino Booth’s (Author of Fed Up) podcast from yesterday for some great insight on this. Hyperinflation and/or loss of Dollar sovereignty are not only possible, they are becoming more and more probable. Yes, it’s more probably that neither one happens, but your adamant dismissiveness when it comes to either one is alarming, considering that you present a balanced view on nearly everything else. Do us readers a favor and at least publish an imaginary scenario in which one or both happen.
Money can be replaced lives can’t come on people help the American people that’s a good way to get the economy going