The Federal Fiscal Condition: Kick the Can ’til You No Longer Can

Donald Trump wants to cut the tax/confiscation rate.  Ok, but maybe it would be a good idea to look at the monetary and fiscal facts on the ground first, just to scope out how much wiggle room he has to play with.

On August 15, 1971 the Nixon administration closed the gold window, removing the last restraint on government inflation of the paper money stock.  Currency plus checking-type accounts in the hands of the public (M1) increased from $226.5 billion to $3.5 trillion since 1971, an annual inflation rate of 6.1%.  Yippee, we are all rich now, right?  Since the financial crisis of 2008-9, M1 ballooned from $1.4 trillion to $3.5 trillion, an annual 12% inflation.  Even mo better!

What about federal debt?  At $408 billion in 1971, it grew to $10,000 billion (= $10 trillion) by early 2009 and then doubled to $19.8 trillion by this year.  Blame Obama?  Be my guest, yet the average national debt increase has been 8.8% per year since 1971 and 9% per year since Obama took office in early ’09.  Kind of average in other words.

Current Prices on popular forms of Gold Bullion

What about the share of the national debt held by the public?  That increased from $305 billion in 1971 to $6.4 trillion in early ’09 and then to $14.4 trillion this year.  That’s an annual growth of 8.7% per year since 1971 and 10.7% since ’09.

Down the road what happens as the monster thrives?  The nonpartisan Congressional Budget Office worries about that, so what does it forecast?  CBO predicts that the debt of $15 trillion held by the public at the end of 2017 will rise to $25 trillion by 2027.  Sounds too optimistic to me.  Back in 2007 CBO forecast that public debt held by the public would be $4.2 trillion in 2017 but it turns out to be $15 trillion by the end of this year, about 3.5X the CBO forecast of 10 years ago!  Holy mackerel.

Here is a better way to forecast: assume the historic growth rate of public debt since 1971 continues.  That seems like a promising baseline or any least lower bound on the national debt.  If debt held by the public grows at 9% per year, then $15 trillion doubles to $30 trillion in eight years (rule of 72), and would add another $5.6 trillion by 2027 for a ten-year debt total of $35.6 trillion.  That is $10.6 trillion more debt than the CBO estimates over the next decade.  Similarly, total national debt growing at 9% per year will double to $40 trillion in eight years and blimp to $47.5 trillion in only 10 years.  The math of compound interest is astounding and relentless.

These calculations do not include the massive liabilities of the federal government outside of the national debt but it’s bad enough as is.  So what happens?  Default.  That is what happens when the government cannot meet its financial obligations.  Two forms of default/bankruptcy are available: hard and soft.  Hard means the government “stiffs” debt holders totally or partially—“sorry, we cannot repay any of your principal or interest” on your bonds and T-bills or “we can make only part payment.”  The “soft” default method is for the Federal Reserve to run its printing and digital presses red hot, paying off debt with zillions in money with new zeroes, ultimately making the money worthless.  Economic chaos and disaster ensue.  Irresponsible?  Hyperinflation?  Yes.  Would the Fed do it?  Don’t ask me, ask the bailed-out masters of the universe on Wall Street what they want the Fed to do.