“They do not know how to do right,” declares the Lord, “who store up in their fortresses what they have plundered and looted.”Therefore this is what the Sovereign Lord says: “An enemy will overrun your land, pull down your strongholds and plunder your fortresses.” – Amos 3:10-11
Just Friday the federal government tripped over into “sequestration” – automatic (and paltry) spending cuts. The cuts amount to a 2.2% reduction in spending this year (about the same reduction the working man faces with the lapse of the payroll tax holiday). Yet in the face of this paltry cutback there has been much hand-wringing about the sure-fire calamity that will hit us. (Please check out Charles Krauthammer’s thoughts on the subject, here.) Now, for those who work with or for the federal government, the cuts will seem like more than 2.2% – but I suspect private industry might respond with “it’s about time the government felt some of what the rest of us have been facing for years now” … that’s just a conjecture though.
The talk before sequester was always about how it was the end of the world. It became clear that we were going to actually go through with it when the doom-and-gloomers (mostly the left) started changing their tune. The president softened his tone and said that maybe the effects wouldn’t be felt right away (ahem). Then there was mayor Bloomberg of New York City attempting to calm fears over how the sequester would impact the city. Now, I will actually say “well done” to both men – best not to get people into a panic when the situation is imminently manageable. However, somewhere in the interview Bloomberg went into silly land. Here’s what he had to say:
“We are spending money we don’t have … It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. … Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.”
Wow. Now, some of these notions have merit, but not the way Bloomberg applies them. It is true that nobody will owe me limitless money, because they know that I have a limited capability for production (if nothing other than the finite time span of my life), and thus can only pay back a limited amount. The same is true of the federal government in general though, whose “productive capacity” is capped by the aggregation of all of the citizens. Yes, people “seem” willing to lend us more and more money, but people can change their mind. Someday they might (though, I would suggest that America is still a better bet than Greece, or Japan, or China, or Spain, or many, many other countries).
Then he trips over into the “whose problem” metaphor. Now, this too has merit. If I owe you $50 it is my problem, if I owe you $50,000,000 it’s your problem. The rationale here is simple. I can pay you $50, so any refusal to do so is hard to defend and I will ultimately have to come up with the cash. I cannot pay you $50,000,000 – so if you were silly enough to loan it to me, then you have a real problem. You won’t be getting your money back, and someday you might have to explain why you made such bad loans. But Bloomberg blows this relationship apart when he discusses how “so many people” own our debt. If anything this hurts the argument. One person might have a reason to maneuver and adjust to cover up his mistake of loaning $50,000,000 to a welch, but the masses can unwind their small portions of bad loans with relative impunity.
He then says that he masses “can’t stop lending” the US money. This has a grain of truth too, but certainly not the way Bloomberg means it. They absolutely can stop, anytime they want. The masses absolutely can refuse to buy government bonds and treasury notes, or any other asset class for that matter (more on that in a second). The reason an individual or a single institution “can’t stop” lending, even when it’s a lost cause, is that there are consequences to admitting failure. The reason the IMF and the ECB keep throwing money at Greece or Spain is that to quit now would mean a default, and they’d lose the lot of it. Further, the “wrong people” would lose their shirts (read, the wealthy bond-holders of the international banking cabal). But individuals, the “masses” who own a mound of questionable debt, can unwind it reasonably well and at a modest discount (rather than full default).
Of course, there is another reason that we the people, or the international community (for a time), can’t stop lending money to the federal government. The Federal Reserve can print up as much money as they want and buy all the debt the government can issue. In this sense, the government can borrow an “infinite” number of dollars (not truly infinite, of course, but as many zeros as you care to pile on). This doesn’t mean they can borrow an infinite value, simply that they can turn on the printing presses if they so desired. They can “borrow” the money from anybody who currently holds federal debt (including dollar bills, which are simply a “promise to pay” some future value) – but I use the term “borrow” loosely here, because it is not by a mutually agreed contract from both parties.
We’re getting close to just that reality, by the way. The Fed is buying $85 billion a month in government debt and mortgage-backed securities, which comes in around $1.02 trillion per year – close to the $1.327 trillion budget deficit we ran in FY 2012. (Sure, not all of the Fed’s purchases are government debt … some of those purchases are meant to go directly to backstopping any losses the wealthy banking class my suffer in their property/mortgage crisis. The point is we’re printing money at nearly the same rate as the deficit spending; regardless of how the fed chooses to inject that money into the credit markets.)
And what happens when we print at a rate greater than our borrowing? Who knows. I’m not a hyper-inflationist in general (persuaded by some of Mish’s arguments). Still, printing money is generally a tax on anybody who has stored excess production as dollars. Further, due to the transient nature of money supply and prices, printing benefits those with “first access” to the money (the wealthy and politically connected) at the expense of those with “last access” (the poor and working classes).
Speaking of printing money to aid the wealthy, the conspiracy theories are starting to gain some traction regarding Fed interventionism in the stock market. We know full well that Bernanke wants the stock market to go up because of the supposed “wealth effect” – if people “feel better” about their financial situation, they’ll spend more money. (We “know” this, by the way, because Bernanke says it himself.) To date though the general theme amongst investors has been that Bernanke’s pursuit of higher stock prices has occurred through “Quantitative Easing” – he buys bonds (and mortgage-backed securities, lately) and some of the money eventually rolls its way into the stock market. But now folks are talking about indirect buying of equities by Fed proxies. Consider “The High Cost of Backstopping the Walmart Mini Crash” for example. There’s no evidence here, by the way, but there is some analysis that says “these price actions aren’t consistent with how people would usually react to bad news from a company – but they are consistent with how a Federal Reserve that is worried about a potential flash-crash bringing the house of cards down.” Is this proof? Not at all, but it’s interesting.
Since I’ve done a fair bit of ranting lately about the rich oppressing the poor, let me leave you with a few thoughts on principles of taxation and rich versus poor. I do not support things like progressive taxation as a means of “leveling the playing field” – I actually prefer a flat tax. (And, while we’re at it, I’d prefer a flat tax with no deductions.) But I also prefer a system that isn’t rigged (whether by central banking or government kickbacks and interventionism) in favor of the wealthy over the poor. We should deal with both, of course, and I’d prefer to do so wholesale at the same time. But if we can’t do such a thing wholesale, then I certainly prefer removing the “false weights and balances” of the central bank first, or hold open means for people to avoid the printing tax (e.g., remove capital gains taxes and let us trade into any assets we choose).
I simply point this out so I don’t give people the wrong impression. When I say things like “the rich plundering the poor” please don’t infer that I mean “the rich need to pay higher taxes”. No, I simply mean the system needs to be free and fair, and not rigged to benefit the wealthy at the expense of the poor. The poor cannot escape the pro-rich policies of the Fed. Especially not if they print to infinity … what we’ll now call the “Bloomberg Model”.