The evils which flow from Keynesian central banking are manifold, but surely high on the list is the euthanasia of the bond vigilantes. Those folks used to do god’s work in the bond pits by signalling to politicians to curb their enthusiasm for the malign art of “borrow and spend”.
No more. When the Fed and other central banks run the printing presses white hot, politicians are unleashed to spend at will.
That’s because there is no “crowding out” in the debt markets due to Uncle Sam’s sharp elbows. There are also no angry missives to U.S. Representatives and Senators from local car dealers, home-builders, tool & die shops and main street merchants about “punishing” interest rates. And Wall Street doesn’t give a damn about massive US Treasury issuance, either, because the Fed clears the market at existing absurdly low rates by scooping-up $120 billion per month of bonds that would otherwise find a home only at far higher yields.
For want of doubt, here is the annual rate of Federal spending growth since the Bernanke Fed jumped the shark during the financial crisis and made massive daily bond purchases the permanent modus operandi at the Fed. Between 2007 and 2020—
- Nominal GDP grew from $14.5 trillion to $20.9 trillion or by 2.9% per annum;
- Federal government spending grew from $3.0 trillion to $6.8 trillion or by 6.7% per annum.
That’s right. With the bond vigilantes dead as a doornail, the Washington pols have found one excuse after another to increase Federal spending 2.4X faster than the rate of GDP growth.
The downside, however, is not merely a fiscal matter, meaning the accumulating carry-cost of the consequent public debt and the manner in which that inherently squeezes out other government programs down the road.
Indeed, the current collateral ills of unhinged government spending may well be the more consequential. We are here referring to the fact that easily-financed spending sprees make giant illicit projects of the state seem far more feasible and attainable to the politicians and decision-makers involved than would be the case if they had to be financed honestly out of real money savings.