‘Lower the Debt Ceiling’
That is the headline on the 30th anniversary issue of Grant’s Interest Rate Observer, which this morning is, as it has been every other week for the past generation, being savored among the savvy. The latest headline sits atop one of the newsletter’s classic editorials. “Since 1917,” it quotes its analyst, Charley Grant, as reporting, “the ceiling has been raised 107 times. Expressed as a compound annual rate of growth, the debt ceiling has risen by 8.4%, the nominal GDP by 6% Twenty-nine more years on this track and the debt ceiling would be the size of the GDP.” Grant’s also quotes President Van Buren as saying that the “creation in time of peace of a debt likely to become permanent is an evil for which there is no equivalent.” It is Grant’s view that it would “do the quality of debate a world of good if someone would move to reduce the ceiling, not to raise it.” We’re all for it. We comprehend it runs against what is being received by the Republicans in the way of political advice, which holds that confronting the debt ceiling would be a kind of suicide of the party. We’re not so sure. Deficits, Debt and the Fate of the Dollar
The year-end "fiscal cliff" tax deal sent shivers through the bond market, driving the price of 10-year Treasurys to the lowest level since April. There was a good reason. The stubborn resistance by President Barack Obama and Senate Majority Leader Harry Reid to spending cuts left no further doubts about their lack of interest in the nation's No. 1 economic problem, massive federal deficits. The bond-market decline came despite the Federal Reserve's renewed program to gobble up yet more government debt. Presidents of some regional Federal Reserve Banks are growing nervous about this program, judging from the December minutes of the Federal Open Market Committee, which guides Fed policy. Jeffrey Lacker of the Richmond Fed, Richard Fisher of Dallas and Esther George of Kansas City have been among the most outspoken in voicing fears that continuation of the Fed's manic buying—now running at $85 billion a month in Treasury and agency paper—will ultimately destroy the dollar. The concerns expressed in the FOMC minutes didn't cheer the bond market either. These are signals of dangerous times. Forget about the next Washington dog-and-pony show on the debt ceiling. The bond market will ultimately dictate the future of U.S. monetary and budgetary policy. Bond markets only obey the law of supply and demand. When the flooding of markets with American debt causes the world to lose confidence in dollar-denominated securities, the nation will be in deep trouble. The only force standing in the way of that now is the Fed's support of bond prices. But regional Fed presidents are prudently asking how long that can be sustained. Gold Can Save Us From Disaster
A new gold standard is crucial. The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated. An unstable dollar is wreaking havoc on our capital markets, depriving us of money for productive enterprises and future enterprises while subsidizing government debt on a scale never before seen in U.S. history. The zero-interest-rate policy destroys capital by punishing savers and enabling the central bank to allocate where capital goes. By definition such central planning means subpar or negative returns. No one believes, given the finances of the U.S. government, that a ten-year Treasury bond should yield only 1.8%. The promiscuous printing of money in the U.S., Europe and elsewhere is enabling governments to put off pro-growth structural reforms and giving them incentive to increase the burdens on the private sector. The poster child here, of course, is France, raising its maximum income tax rate to 75%. Not since the early 1930s have governments of major countries collectively acted so destructively. The only difference between then and today—and it is a gargantuan one—is that we haven't destroyed the global trading and capital systems. But even they are facing increasing strains and will continue to do so unless policies are changed. What the Fed is doing through its binge buying of bonds is enabling Washington to consume our national wealth. Instead of creating new wealth we are beginning to destroy that which exists. No wonder tens of millions of people feel—rightly—that their real incomes are declining and their financial situations are coming under more pressure. In real terms the stock market is lower today than it was in the late 1990s, and even in absolute terms it still isn't where it was in 2007. Can we move forward on a gold standard before a real catastrophe à la the 1930s results? Debt Drags Down Growth in U.S., Advanced Economies
Recent research is shedding new light on just how destructive excessive debt — both public and private — can be to economic growth. The study comes not from a right-of-center think-tank like Americans for Limited Government or the Cato Institute, but from the Bank for International Settlements (BIS) — the central banks for all central banks. The bank of who? Housed in Basel, Switzerland, the BIS has played a significant role in the direction of monetary policy worldwide since 1930. At first it was set up to manage the post-war reparations regime against Germany, but once World War II broke out, significantly the bank declared neutrality, and continued doing business with the Third Reich, handling their deposits of gold — which were looted from other central banks. Nowadays, the BIS is responsible for setting standards for lending worldwide. The Basel Capital Accords, now in their third manifestation, fix how much limited capital banks must hold in order to carry on lending. In practice, however, these agreements, to which the U.S. is a primary signatory, allow institutions to lend far more money than they ever hold in capital. The standards that have been set in Basel are one of the major reasons why the U.S. — and other advanced economies — have such a high debt load. They are also the principal reason why today when there are large defaults, the entire financial system is imperiled with what policy wonks like to call systemic risk. If banks were not allowed to lend money into existence, we wouldn’t have these types of problems. The Endless Spending Spree
From George Washington to Dwight D. Eisenhower, the national debt tended to grow in wartime and shrink in peacetime. Because the dollar was generally convertible into gold or silver at a fixed and statutory rate, the central bank, when there was a central bank, couldn't just materialize money as the Federal Reserve does today. You had to dig the metal out of the Earth, or entice it into American vaults with money-friendly financial policies. The Treasury could borrow, all right, but not without limit. Wars aside, the government paid its way like a man with a debit card. Washington, D.C., got its credit card on Sunday, Aug. 15, 1971. Pre-empting the horse opera "Bonanza," President Richard Nixon told a national television audience that the gold standard, or what little of it remained, was kaput. No more would the dollar be defined in law as 1/35th of an ounce of gold. It would rather be anchored by the good intentions of the people who printed it. There has never been a credit card quite like the nonmetallic dollar. We Americans, consuming much more than we produce, finance our deficits with the dollars that we alone may lawfully print. Our Asian creditors not only accept this money in payment for goods and services but also turn right around and invest it in U.S. Treasury bonds and federally insured mortgages. It's as if the greenbacks never left the 50 states. The Nixon gambit marks a great divide. In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion. |
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