Tea at Trianon: America’s Prolonged Economic Stagflation

John Wilson Croker on Marie-Antoinette

"We have followed the history of Marie Antoinette with the greatest diligence and scrupulosity. We have lived in those times. We have talked with some of her friends and some of her enemies; we have read, certainly not all, but hundreds of the libels written against her; and we have, in short, examined her life with– if we may be allowed to say so of ourselves– something of the accuracy of contemporaries, the diligence of inquirers, and the impartiality of historians, all combined; and we feel it our duty to declare, in as a solemn a manner as literature admits of, our well-matured opinion that every reproach against the morals of the queen was a gross calumny– that she was, as we have said, one of the purest of human beings."

~from History of the Guillotine by John Wilson Croker, 1844

Edmund Burke on Marie-Antoinette

"It is now sixteen or seventeen years since I saw the queen of France, then dauphiness, at Versailles; and surely there never lighted on this orb, which she hardly seemed to touch, a more delightful vision. I saw her just above the horizon, decorating and cheering the elevated sphere she had just begun to move in, glittering like a morning star full of life and splendor and joy. Oh, what a revolution....Little did I dream that I should have lived to see such disasters fall upon her, in a nation of gallant men, in a nation of men of honor and of cavaliers! I thought ten thousand swords must have leaped from their scabbards, to avenge even a look which threatened her with insult. But the age of chivalry is gone; that of sophisters, economists, and calculators has succeeded...."

~Edmund Burke, October 1790

Sunday, July 30, 2023

America’s Prolonged Economic Stagflation

From Brownstone Institute:

It doesn’t take a lot of cogitation to explain this dismal trend. The US economy is freighted down with debt and it is also short of labor, riddled with non-productive speculation and financial engineering and starved for productive investment. Taken together, those malign forces were more than enough to slow the underlying growth of the US economy to a crawl.

To be sure, the government reports slightly higher real GDP growth than the tepid 0.61 percent figure displayed above. During the equivalent 3.25 year period between Q4 2019 and Q1 2023, in fact, the per annum growth of real GDP posted at 1.61 percent. That’s still nothing to write home about, but it is considerably better than the pittance of gain private producers have produced and earned since the pre-Covid peak.

The difference, of course, is owing to the wonders of GDP accounting. That is, huge transfer payments from producers to non-producers and massive Federal spending and borrowing and its monetization at the Fed’s printing presses do give rise to additional GDP in an accounting sense and for the time being.

Alas, heavily taxing producers today and threatening even more future taxation to service the ballooning public debt isn’t a source of sustainable growth. It simply steals economic resources from the future.

For avoidance of doubt, consider the chart below. It shows that between Q4 2019 and Q1 2023 the public debt (blue line) increased by $8.26 trillion—a figure equal to 1.70X the $4.82 trillion gain in nominal GDP (brown line).

Needless to say, you don’t need a slide rule or even an abacus to project where that would lead. After just 12 years at these rates of growth the public debt would be $100 billion compared to just $52 billion of GDP—even as debt service exploded.

Indeed, we can’t see how the weighted average cost of debt could be held to even 6 percent under a scenario in which the Fed’s printing presses remain on idle because the inflationary cat is now out of the bag. That is to say, at the rate of public debt growth during the past 3.25 years, interest on the public debt would likely reach $6 trillion per annum over the next decade or so—a figure roughly equal to the total level of current Federal outlays.

In short, long before 12 years had elapsed, the system would go tilt. Even the tepid growth of real GDP recorded since the 4th quarter of 2019 cannot possibly support a Federal debt that is literally exploding higher at a compounding rate of gain. (Read more.)

From The European Conservative:

America’s fiscal crisis can begin either by Congressional action or by investors losing faith in the Treasury’s ability to honor its debt. The most likely starting point is an intertwining of these two causes, with Congress leading the way. When the cost of the debt becomes so burdensome that members of Congress are forced to make cuts in popular entitlement programs in order to pay interest to its creditors, then the United States has reached the point at which a fiscal crisis is most likely to begin.
Once there, Congress is likely to move forward along the path of least resistance: they will simply introduce a bill that says the United States Treasury can unilaterally write off some of the debt it owes its creditors. This will be the ‘least resistance’ alternative because Democrats will oppose spending cuts and Republicans will never agree to tax hikes.

We therefore start this fiscal-crisis scenario with the House of Representatives passing a bill that will write off part of the federal government’s own debt. The bill has bipartisan support from almost all members of the House.

The write-down bill will reduce the federal government’s debt by 25%—the same amount that the Greek government unilaterally wrote off in 2012. The American version begins with eliminating the debt that the federal government owes to the Federal Reserve, then it moves on to eliminate debt owned by financial corporations and very wealthy individuals. The process continues until 25% of the federal government’s debt is eliminated.

On the day that the bill is voted on in the House, the president announces his support for it. That same day, the U.S. Treasury holds three auctions to sell new debt. It needs to replace maturing debt and borrow a bit more on top of that toward the ongoing budget deficit.

Let us assume that the auctions are structured like some of the auctions held by the U.S. Treasury this week. They offer for sale $70 billion worth of three-month debt, $62.5 billion of six-month debt, and $42 billion of 2-year debt.

Let us also assume that these numbers are exactly the same as they sold a month earlier. At that point, the Treasury got $374 billion in tender offers from investors for its total $174.5 billion in sold debt. This means that investors offered $214 for every $100 of debt that the Treasury sold.

This ratio is important: it is a key indicator of a fiscal crisis in the making.

When the Treasury holds auctions right as Congress is trying to pass our hypothetical debt write-down bill, the response from investors is catastrophic. Initially, investors only tender $150 billion, which drops the ratio between investment offers and accepted debt purchases to 0.86, or $86 per $100 debt that the Treasury wants to sell.

This is a nightmarish scenario for the Treasury. When investors’ tender offers fall short of what debt a government is trying to sell, it is cause for panic in the Treasury. However, before they panic, they counter the poor investor interest by sharply raising the yield at the auctions.

Using the real numbers from the last real auctions for the three aforementioned maturities, we assume that the Treasury started its failed auctions by offering 5.25% for the 3-month bill, 5.24% for the 6-month bill, and 4.76% for the 2-year note. When the hypothetical auctions in our scenario fail to sell all the debt offered, the Treasury starts hiking the interest rate until it has sold all of the $174.5 billion it needed to sell.

Due to the mounting skepticism among investors in the wake of the debt write-down threat, the Treasury has to offer yields of around 7.5% in order to sell out the auctions. These very high yields are sure to put the nation on notice; just the day before, the yields were in the 4-5.5% range. Investors in the secondary market, i.e., the market where those who currently own U.S. debt can sell it, immediately start asking for significantly higher interest rates across the board.

Suddenly, the 7.5% from the three debt auctions begin spreading to other bills, notes, and bonds as well. Within two days of bond trading, rates on all maturities, from one month to 30 years, have reached 7.5-8.5%. (Read more.)