$21 Trillion And Counting: Why Deficits Didn’t Matter During The Age Of Monetization, 1987-2017 (Part 2), by David Stockman

The age of deficits not mattering to either politicians or financial markets is passing. From David Stockman at davidstockmanscontracorner.com:

For the past 30 years fiscal deficits have been a big financial nothingburger because the Fed and other central banks gutted their sting. So doing, they drastically and dangerously falsified the market for government finance by weaning politicians of the one element that kept modern Big Government fiscally contained.

We are referring to the historical fear among politicians that fiscal deficits cause “crowding out” of private investment and rising interest rates. Indeed, that  proposition was universally understood during your editor’s sojourn in the Imperial City between 1970 and 1985 as a staffer, Congressman and budget director.

As it has turned out, however, there was implicitly a crucial qualifier. To wit, it was naturally assumed that fiscal deficits would be financed in honest capital markets, and that yields in the bond pits were free market prices which cleared the balance between the supply of private long-term savings and the demand for term debt.

The very notion that it could be otherwise—-that the central banking branch of governments could swoop into capital markets to scoop up and sequester in their trillions the debt emissions of the fiscal branches— was scarcely imaginable among anyone reasonably educated and minimally informed.

After all, had Lyndon Johnson, Tricky Dick, Jimmy Carter or even Ronald Reagan suggested that the Federal Reserve buy government debt at rates which exceeded annual issuance by the US Treasury, as was the case during the peak years of QE, they would have been severely attacked—if not subjected to impeachment—-for advocating rank financial fraud.

Nor is that mere conjecture. For instance, after his “guns and butter” deficits had breached an unheard of 3% of GDP (outside of world war), LBJ essentially concluded he had no choice except to commit political hara-kiri by forcing a 10% surtax through the Congress in the 1968 election year.

Likewise, upon inheriting the Oval Office in August 1974, Jerry Ford  famously attempted to curtail excessive fiscal stimulus with a “WIN” tax, and Jimmy Carter never let his deficits get above 2.5% of  GDP—-even though he had a big spending domestic agenda.

But the most dispositive case of all was that of Ronald Reagan. Notwithstanding his reputation as the scourge of taxes, the Gipper signed three consecutive tax increase bills in 1982, 1983 and 1984 after the deficit exploded to 6% of GDP owing to the original Reagan tax cut and huge defense build-up.

To continue reading: $21 Trillion And Counting: Why Deficits Didn’t Matter During The Age Of Monetization, 1987-2017 (Part 2)

2 responses to “$21 Trillion And Counting: Why Deficits Didn’t Matter During The Age Of Monetization, 1987-2017 (Part 2), by David Stockman

  1. Gee who’d have believed a tax, spend and borrow policy would end badly? Contrary to those with advanced degrees telling us the problem is too complex to understand, the value of money is determined not by the full faith and confidence of the government, but by the people.

    All those lovely pieces of paper issued by the Fed and most of the central banks of the world will soon enjoy the same honor and respect, not to mention value, of a ten trillion dollar bank note from Zimbabwe.

    Forget get a 21 trillion debt. Look at the current balance of payments in trade. Look at the USG obligations. Examine the debt level of credit cards, school loans, and foreign loans.

    Hyper inflation will bring massive social change, probably violent, like the French Revolution or Weimar Germany. It produces such wonders as Hitler, Napoleon, and Robespierre. Something our leaders are charging headlong toward.

    Lots of luck to future generations. Your parents and grandparents betrayed your heritage. The current generation is just poliching the casket.


  2. As a long-forgotten point, the original legislation creating the Federal Reserve did so with one of the provisions of the new central bank being that it was specifically prohibited from buying government bonds and counting them on its balance sheet as “assets.” This was quickly “remedied” in 1916, together with other subsequent remedies necessary to enable it to better fulfill its purpose. Its purpose being to provide unlimited money and credit to the politicians who, in exchange, grant and maintain its franchise.

    When the inevitable destruction of the money and credit comes, and inflation/deflation/chaos is seen as “uncontrollable,” said franchise will be revoked and direct creation of money and credit by the Treasury itself will begin. Gideon Gono will then come to be seen as a rank amateur.


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