A few months back one of the greatest anomalies of financial history quietly passed into the history books, but it shouldn’t have. We are referring to the fact that the yield on the 10-year US Treasury (UST) fell to an all time low of 0.52%, prompting Deutsche Bank’s chief credit strategist to marvel out loud:
……the current nadir in the 10-year yield went back 234 years…..The U.S. has been through depressions, deflations, wars, restrictive gold standard regimes, market crashes and many other major events and never before have we seen yields so low.
There you have the essence of Donald Trump’s malefic legacy. He brow-beat the Fed into abject submission on interest rates, even as he opened the spending and borrowing spigots like never before.
So on that inauspicious day (August 4, 2020), the lowest government bond yield since the founders were making their way to Philadelphia to draft the nation’s constitution was juxta-posed with the most recklessly profligate fiscal policy in its entire history.
Needless to say, that fraught combo is nothing less than a freak of financial nature. It is a temporary and incendiary condition spawned by the wilful stupidity of Washington policy-makers who should know better, but who, apparently, became enthralled to the crack-pot economics of Donald J. Trump—even as they turned his loathsome persona into a political pinata to be hammered with malice aforethought.
And, yes, we are now in the era of Orange Man Gone, but his baleful fiscal legacies lives on. What now passes for fiscal policy in the Imperial City today does indeed give the notion of “crackpot” an altogether new definition.
And it also tells you why the self-proclaimed “king of debt”, now relieved of his improbable sojourn in the Oval Office, will long be known as the father of America’s fiscal demise.
For want of doubt, consider the implications of the chart below. It is an eye-opener not merely because it shows the relentless rise of Federal spending since 1947, but that the massive deficit of $3.132 trillion recorded for the fiscal year just ended (FY 2020) was actually greater than total Federal spending—for everything from bombs and ships to food stamps and the Neon Light Museum—as recently as FY 2008.
That’s right. Owing to the mushrooming coast-to-coast soup lines hastily stood up by Washington in response to the collapse of jobs, incomes and business cash flows brought on by the Donald’s Lockdown Nation folly, as well as the evaporation of tax revenues, Washington’s fiscal accounts came to this: Uncle Sam borrowed more during FY2020 than his total spending just 12 years earlier!
Stated differently, back in the day we struggled to keep total Federal spending during 1981 under $700 billion. By contrast, the Donald borrowed more than that every 80 days during his final year in office.
Annual Federal Spending, 1947-2008
Needless to say, there is nothing remotely rational, plausible or sustainable about an FY 2020 budget that’s ended-up with revenue south of $3.5 trillion and spending north of $6.5 trillion.
That’s not even banana republic league profligacy. It’s just sheer stupidity and madness, bespeaking a bipartisan duopoly in Washington that had its collective brains turned into sawdust by the relentless, egregious money-pumping of the central banks and the reckless spending proclivities of the 45th President.
For want of doubt just consider what has happened between the end of the prior fiscal year on September 30, 2019 and the week the Donald shuffled out of the Oval Office in January 2021:
- The public float of Federal debt soared from $16.8 trillion to $21.6 trillion, gaining $4.8 trillion;
- The Fed’s balance sheet exploded from $3.86 trillion to $7.42 trillion, gaining $3.56 trillion;
- The Fed therefore effectively monetized an unprecedented and off-the-charts 74% of the staggering increase in the publicly-traded Treasury debt.
Of course, you can’t blame the Donald alone for this parting insanity; he had been enabled by two of the greatest court jesters to hold high economic policy positions in American history—Treasury Secretary Stevie Mnuchin and Fed Chairman Jay Powell (aka JayPo).
As it has happened, we have closely observed every combination of Fed Chairman and US Treasury Secretary since 1970, when we headed off for our first job in the Imperial City, eager to better the world and our own prospects, too.
So we can say without reservation that the above duo was the absolute worst combo of spineless, principle-free empty suits to plague the nation during the last half-century. And it’s not a close call, even against a ship of fools which includes John B. Connally, G. William Miller, Ben Bernanke, Hank Paulson Jr., Timothy Geithner and Janet Yellen, among considerable others.
After all, if even the Treasury Secretary and Fed Chairman are utterly clueless about the grave dangers of the fiscal and monetary bacchanalia now rampant in the Imperial City, how in the world will it stop except in some fiery collapse?
And how in the world can it possibly get any better when JayPo is still there and Sleepy Joe has seen fit to replace the clownish Mnuchin with the single worst former Fed chair person in all of American history?
Nor do we exaggerate. Consider the absolute rubbish that JayPo dispenses as a matter of weekly routine. Self evidently, the solution to the current state-imposed supply-side shutdown of the economy is not more counterfeit money, erroneous price signals, inducements to rampant speculation and moral hazard and further zombification of the main street economy.
Yet during a recent Congressional hearings, Powell delivered this marvel of double-speak:
The United States federal budget has been on an unsustainable path for years now…..(while) every generation is entitled to spend what it wants to spend on the things it thinks it needs, it really ought to pay for them rather than passing the bills onto the kids (ya think?)
“The time to work on that hard is when the economy is strong, unemployment is low, there’s growth (where was he in 2012-2019?)….. but I wouldn’t prioritize them at a time like this, when the spending is giving us a better economy moving forward, which will really help service the debt.”
The Donald’s legacy of coast-to-coast soup lines is already absolutely destroying what remains of the Federal government’s finances and inducing rampant financial indiscipline throughout the government, household and business sectors of the economy, alike. Yet by JayPo’s lights Congress should please to pile on even more bailouts and free stuff because if it “were to pull back from the support that it’s providing too quickly,” the US might head into the drink for the second time in less than a year.
Well, there is already $4 trillion heading out the door from enactments to date, oozing through the endless spending filaments and spigots contained in more than 2,000 pages of pork-ridden statute that no voting member of Congress actually read.
If that’s not enough to keep America’s debt entombed economy from cap-sizing, then pray tell why does our central banking chief think another $1.9 trillion, per Sleepy Joe’s day one proffer, will make any difference?
Once upon of time, of course, even Washington politicians feared large, chronic public debts, and not merely because they were especially intelligent or virtuous. We learned that in real time during 1981 when the deficit hawks among the GOP Senate college of cardinals nearly shut down the Gipper’s supply-side tax cuts out of a (justified) fear of mushrooming deficits.
To be sure, these pols didn’t know Maynard Keynes from Emanuel Kant, but they did know that Uncle Sam has exceedingly sharp elbows and that when he becomes too dominant in the contest for funds in the bond pits, it is private households and business borrowers which get bloodied and crowded out via rising interest rates.
That is to say, in the days before massive central bank monetization of the debt, there was a natural counter-balancing constituency in the equations of fiscal politics. We heard from them, too, in our Congressional days when the car dealers, feed mill operators, tool and die shops, building contractors, restaurateurs and countless more main street businessmen of the Fourth Congressional District of Michigan let it be known loud and clear that Jimmy Carter’s big deficits were doing them unwelcome harm on the bottom line.
Nor was there any mystery as to why. Aside from the short-term expedient of foreign capital inflows which come at a heavy long-term price (chronic trade deficits and off-shoring of production and jobs), the only honest source of funding for government deficits is private savings. And when the latter—defined as household savings and retained corporate profits in the GDP accounts—are meager to begin with, an eruption of government borrowing squeezes out private investment good and hard, while raising the carry cost of all floating rate existing debt.
As it happened, by 1981 the US was already slouching toward the Big Squeeze of too little national savings and too much government borrowing. At an annualized run rate in Q2 1981, for instance, net private savings totaled $378 billion (purple line) compared to net Federal “dis-savings” (viz deficits) of $87 billion (brown line).
So already Uncle Sam was absorbing 24% of savings which would otherwise be available for investment in private sector growth.
The rest is history with a few twists along the way. As it happened, during the 1990s the last generation of fiscal hawks in Washington got their revenge against the foolish abstractions of the Laffer Curve and the bogus claim that you can grow your way out of large structural deficits.
On two occasions, therefore, first when George Bush the Elder moved his lips and signed a bipartisan deficit reduction bill which included both spending cuts and tax increases, and then when Bill Clinton did the same two years latter, the Reagan structural deficits was substantially closed.
And on top of that came two more fiscal windfalls. First, was a temporary fall in defense spending owing the Soviet Union disappearing into the dustbin of history. That was before John Bolton and the rest of the neocon war mongers found new enemies in Saddam Hussein and the Iranian mullahs and a pretext for the massive defense build-up needed to conduct wars of invasion and occupation.
At the same time, there also occurred the tech-based stock market boom touched off by Greenspan’s first round of madcap money printing, which generated a huge windfall of capital gains revenues in the late 1990s. Consequently, there were three consecutive budget surpluses at the turn of the century, and that did mightily, albeit temporarily, relieve the “crowding out” effective of large government deficits.
During Q4 2000, for instance, private savings posted at a $458 billion annual rate, and that was accompanied by an actual $150 billion Federal surplus.
At the time, so-called advanced thinkers in Washington like Alan Greenspan even began gumming about the possibility that the Federal debt would be fully paid off in about 10 years’ time. And then the Fed would have allegedly found itself unable to conduct monetary policy because, heaven forfend, there would have been no government paper available to monetize via purchases from Wall Street dealers paid for with digital credits plucked from thin air.
A high class problem, that, but not one which remotely materialized. The next round of Greenspanian money pumping blew up the housing and credit markets, even as two unfinanced GOP tax cuts and two unfinanced wars brought back the Reagan structural deficits with a vengeance.
Thus, by the eve of the financial collapse in Q4 2007, private savings stood at $618 billion (annualized rate) while the structural deficit (it was not cyclical because the economy was then at practical full-employment) had ballooned to $324 billion. Uncle Sam, therefore, was now absorbing 52% of net private savings.
Needless to say, it only got worse from there, with Federal dis-savings reaching a $1.37 trillion annual rate at the bottom of the Great Recession in Q1 2010, which amounted to fully 95% of private savings of $1.44 trillion.
Thereafter, of course, the macro-economy experienced a simulacrum of recovery. By Q4 2013 the cyclical elements of the deficit had been reduced, causing annualized borrowing to fall to $531 billion or 38% of net private savings of $1.39 trillion.
And under even the primitive Keynesian theories of the 1960s, the deficit was supposed to keep shrinking from there through the top of the business cycle, if for no other reason than to reload for the next downturn.
That didn’t happen, of course, because the Congressional GOP commenced a new fiscal game with the Obama White House and the Capitol Hill Dems. To wit, the Dems were relieved of any demands for serious entitlement cuts, and both sides got goodly increases in annual discretionary appropriations for defense and domestic pork and welfare, alike.
Accordingly, the deficit widened to $707 billion by Q4 2016, representing nearly 50% of net private savings of $1.48 trillion. And then came along the King of Debt, who made a mockery of the traditional notion that late in the business cycle is the time for fiscal consolidation.
Indeed, the aforementioned “fix it in the good times” mantra that JayPo so hypocritically importuned his Congressional interlocutors with was literally shit-canned by the Donald’s born-again Lafferite advisors. Mnuchin, Kudlow and the rest told him, incongruously, that the economy would grow its way out of the gratuitous $1.7 trillion late cycle tax cut of 2017 and the giant defense increases which have been added since.
So as the business expansion approached its record 128th month during 2019 and early 2020, did Powell and his merry band of money printers pound the table in behalf of the above advice to fix the deficit during the good times?
They did not.
In fact, long before a hint of the Covid was on the radar screen, when the surging Federal deficit hit an annualized rate of $1.225 trillion in Q3 2019, it was then absorbing 68% of private savings. And this was at the very time that the Fed was completing its half-hearted attempt to normalize its balance sheet, having reduced it from a $4.5 trillion peak in 2015 to $3.75 trillion by August 2019.
But that’s all she wrote. After relentless attacks by the Low-Interest Man in the Oval Office and an interest rate uprising in the repo pits in September 2019 when the old crowding out equation came back into play, the Fed returned to bond buying with a vengeance, thereby preventing honest price discovery from rearing its head one final time.
Of course, even the practical Keynesians of the 1960s and 1970s had a reason for the idea that the fiscal equation should be put in a some semblance of order at the top of the business cycle. Namely, the possibility that an unexpected economic or fiscal dislocation from war or pestilence could erupt, thereby leaving policy makers in an especially unpleasant bind.
Alas, then came the Covid, the horrible malpractice plot of the Donald’s doctors and the folly of Lockdown Nation, as eagerly implemented by the Donald’s Dem opponents in the mayors and governors offices of Blue State America.
So on the eve of a plunge that was recorded as a thunderous 31% shrinkage of GDP in the second quarter, the Donald and his GOP henchman had maneuvered the Federal fiscal equation into a very not “good place”, to use the specious expression of JayPo himself.
During Q1 2020 and 128 months into the longest expansion cycle in US history, the Federal deficit posted at a $1.344 trillion annualized rate or 72% of net private savings of $1.875 trillion. And that was the baleful state of play before the Covid-Lockdown disaster sent the nation’s economy and fiscal accounts reeling.
Viewed through the lens of subtraction that meant that there was only $500 billion of net private savings left, and to accommodate a Federal deficit—one has now mushroomed by an additional $2.0 trillion from its Q1 2020 run rate.
So it is no wonder that the panicked money printers in the Eccles Building threw caution to the wind, indeed sanity itself, and printed upwards of $3.4 trillion of new credit during the last twelve months.
Having fostered $82 trillion of public and private debt over the last three decades owing to relentless interest rate repression and falsification of financial asset prices, the fools in the Eccles Building dare not let interest rates normalize or reflect the true state of supply and demand for private savings.
So they have essentially green-lighted a final burst of fiscal mayhem in the months just ahead via the expedient of monetizing virtually any and all US Treasury borrowings. Accordingly, the Fed’s message to Capitol Hill boils down to this: Hit Uncle Sam’s depleted checking account with reckless abandon, raise the funding in the bond pits and demand that the central bank buy up the resulting flood of new debt paper with credits conjured from a digit printing press.
That’s Trump-o-Nomics. That’s the most insidious assault on financial sanity and sustainability in all of recorded history. And that’s why the Donald’s departure came none too soon.
Needless to say, now that the Government Party (Dems) is back in power, it isn’t about to throttle the spending sluices or order the Fed to throttle its red hot printing presses. Only a conservative Opposition Party can do that, but there no longer is one—just a Trumpified caricature of the once and former party of the old time fiscal religion.