Janet Yellen, former chair of the Federal Reserve, will be confirmed as our new Secretary of the Treasury. This is an important post. For example, Scrooge McDuck would have done almost anything to get that job.
The Wall Street Journal had a large photo of Ms Yellen on
the front page with the question – The Debt Question Facing Janet Yellen is how
much is too much? https://www.wsj.com/articles/the-debt-question-facing-janet-yellen-how-much-is-too-much-11610993908?mod=hp_lead_pos7
I assumed they were not talking about meatballs in pasta or salt on potatoes –
we all know you can never get enough of that.
It seems that the article was not addressing meatballs or
salt but was addressing the issue of government debt. When Ms Yellen was head
of our Fed she went on record numerous times saying that there was no limit to
how much the government could or should borrow.
That seemed screwy to me. Most of us know that our friendly
banker will cut us off at some point. No Larry, we at the National MisTrust Company of Green Lake
don’t think we should lend you another half billion dollars.
But sir, look at how low interest rates are. Surely, I could
pay you back since the interest rate is near zero. I am not sure how many times
I saw those words in the WSJ article yesterday. Important men and women were quoted
over and over saying that interest rates on government debt are very low. Who can
argue with that? I guess I can. That is like saying
that I should eat 12 chili dogs in Rockford Michigan because the price of chili
dogs was low.
But never mind all that. The other argument advanced by these sophisticated leaders of America – read the article I am not kidding – is that the world as we know it is just about over. The economy is so terrible that we must do something – alarm bells ringing in the background – we must do everything to save our people and our country and our artichoke hearts.
Rather than use anecdotal and irritating personal examples, I decided
to put my Mr. Macro Hat on and look at some data. Is it true that 2021’s
economy is so alarming that we should add trillions and trillions to our national
debt?
In December of 2020, the unemployment rate was 6.7%. Not a great
number. But the end of the world? It reached 10% right after the 2009 recession,
6.3% after the 2003 recession, and 7.7% after the 1992 recession. At 6.7% it is
already coming down from its recent high. Alarming? I don't think so.
I cherry-picked a few more items for the Table below. I stayed within the last
20 years and took numbers from recessions in 2001, 2009, and 2020. All numbers
are one-year percentage changes ending in the quarters indicated.
As you can see, Real GDP fell in 2020 but that decline was
small compared to the comparable time period during the 2009 recession. Spending on consumer durables was very
strong in 2020. And while business spending on plant and equipment fell in 2020, the decline was relatively small compared to the past two recessions. It fell
by 17.1% in 2009.
Yes, I cherry picked a bit. But notice that I am not trying
to say that the economy is wonderful. What I am saying is that for some strange
reason, our incoming Secretary of the Treasury and a lot of her powerful buddies want
you to think that the end of time is near.
Trust them? They say let’s go into historically high
national debt. We have to engorge ourselves because the end of the earth in near.
And luckily, they argue, interest rates are low.
I am not buying it. Okay they want to save the day and be famous. But that doesn’t mean we have to risk our kids' inheritance. The economy is showing resilience. Maybe it needs a wee bit of caretaking. But there is a difference between having a couple of Dicks famous burgers and eating the whole tray.
So dear friends. What am I missing here by wearing my macro hat? Should we add trillions to national debt now -- after having adding trillions recently?
2020 Q3 -2.8 7.2 -4.5 7.2
2009 Q2 -3.9
-5.7 -17.1 -27.4
2001 Q4 +.02 4.9 -6.8 2.0
* C-G Consumer Goods
* NRI Nonresidential fixed investment (Plant &
Equipment)
* RI Residential Investmenbt
Dear LSD. Some time ago while watch’n terra firma talk’n headz someone said, “They’re pick’n my pocket and gotta stop it.” Some thingz never change, eh? I Ain’t Jell’n fer Yellen’s hand is deep into my gillz and me don’t see anywayz to git it out. Kinda makes it hard to breathe sea water, if’n ya git my drift. But thatz my pro-ble-ma. Youse terra firma guyz are gunna have a hell-a-va time putt’n the free money honey genie fresh from the 24/7/360 govomit print’n press back in its boddle. And, further, youse guyz up there are also gunna have a hell-a-va time pay’n down the govomit debt with diminish’n value dollarz especially with soon-to-sky-rocket interest rates = a weal weal double whammy. But datz de bad newz. De good newz is that with our new Lost-In-Word-Salad-Dolt-In-Chief’s big fat wet kiss to de Chi-Comz they’ll continue to buy our bondz with our own moola to keep de 24/7/360 govomit print’n press a-roll’n.
ReplyDeleteAdd trillions now? Tiz a moot point.
Thanks Tuna. Seems like you are saying that the ball game is over. I tend to agree. Put on your seatbelt and enjoy the ride. Kinda like a tuna on the end of a fishing line -- if you can't get loose then enjoy the ride.
DeleteThe insidious idea that we should borrow so much because interest rates are low also ignores that fact we don't pay off the debt -- never have (much), never will. I don't have too much of a problem with that but that means that the debt just rolls over when it comes due and it rolls over at the new current market interest rates. Unless one thinks interest rates will stay low forever, the interest costs on the debt will eventually rise. Interest on the debt is paid out of tax revenue as it should be (though some may just want to borrow to service the debt, that idea may not be far away.) With a large debt/GDP ratio and interest rates at something resembling normal long term levels, servicing the debt will take a large portion of tax revenue. Then our option is either to reduce spending so we can both pay our bills and service our debt or we could go into the Argentinian debt death spiral and borrow to service the debt. This is not unlike all of the people who borrowed more than was prudent during the housing appreciation of the early 2000s because interest rates were low and they could afford the mortgage but, when rising market rates pushed up their their variable rate mortgages, they were left in the lurch. Saying it's ok to borrow a lot because interest rates are low assumes that like a fixed rate mortgage, we will pay the same interest all the time and eventually retire the debt. Neither of those events apply here and there is not a justification to borrow excessively when interest rates are low.
ReplyDeleteRoll over Beethoven! Nice to hear from you Jerry. Yes, rates will not be fixed and if and when they rise they will need to be dealt with. I still think that debt/income ratios matter regardless of interest rates. Maybe debts are never paid off -- but there have been times when the ratio fell and it was taken as a sign of good things to come. And times when the ratio rose and things got worse.
DeleteAs long aa the receivers of the funds spend on things that go up in value or earn a good return then no problem. But that is California Dreaming
ReplyDeleteOk Hoot. So let me get this right. You borrow $10 million at a low interest rate and so long as you spend it all, everything will be ok. Is that right?
DeleteNo, you borrow $10M at 2% and buy a or startup a small business which has products or services wanted or needed. You hire 4 people and buy inventory from the local manufacturer. You sell $5M in product after buying $2M from the manufacturer. The combined staff cost $$250K per year and are able to buy goods and services from local vendors. This happens at an increasing rate each year. The $10M generates those salaries, purchased goods, food, housing, tax to pay for public infrastructure and service which generate more income payments from all parties. Now the Chinese own the bonds the support the loan ....so in essence they are shareholders in this little town.
ReplyDeleteHowever, if the funds are invested in the wrong things like highways to nowhere that support local politicians or other corruptive enterprises then the initial use of the government only is limited in return....if any. Those are the two extremes.
Well said Hoot. So how much of the new extreme government borrowings are at which extreme?
DeleteNo idea. Most have no idea of return In business money has to ear more that it cost on assets that also value. In governments no realistic returns if any are not normal.
DeleteYep. So maybe we should not want those folks spending so much of our money?
Delete