Dwight D. Eisenhower served during the Great War, lived through the Great Depression, and led the Allies to Victory in WW II. But perhaps Ike’s greatest contribution was his leadership as President of the United States, ensuring the peace and building America’s infrastructure while imposing additional sacrifices on his generation to eliminate the WWII debt burden, the failure to do so after the Great War being the primary cause of the next. His hard won legacy of freedom and democracy has been completely squandered over the last half century by fiscally irresponsible Baby Boom politicians.
The Clinton Administration cut the deficit every year, averaging only .8% of GDP, the lowest since the Eisenhower Administration, leaving the budget in what was predicted by many at the time to be a permanent surplus. But the deficit during the Obama/Biden Administration averaged 5.9% of GDP, the largest since WW II, increasing the outstanding debt accumulated over the centuries by 70% and now exceeds 100%, the level at the end of WW II. The CBO projects that under existing law, including repeal of the 2017 tax cuts in 2025, that will double again to 200% of GDP over the next generation as the $200 trillion in unfunded liabilities continue coming due. State and local governments face similar unfunded liabilities that they are prevented from borrowing to fulfill, so subsequent federal bailouts as currently demanded will add to these federal totals. This CBO forecast implies declining middle class/middle age after-tax incomes even as debt and deficits balloon.
The Biden Plan
A Biden/Harris Administration inherits this debt legacy while promising much bigger deficits to come. The Biden Tax Plan would raise $3 trillion dollars from corporations, high income individuals and middle income individuals through the payroll tax as well as advancing the repeal of the 2017 tax cut to 2021.The Biden spending plan, a record setting peacetime increase of more than three times the projected tax savings, adds an additional $2 trillion annually to a budget deficit that was over $3 trillion in fiscal 2020, and Harris and the rest of the Democratic leadership have proposed spending ten times what the Biden plan admits to. Not surprisingly, economic models predict a short term rise in GDP from such “stimulus,” a measure of total national spending without regard to the value to the public. But the consequence of such spending is reduced private investment, bringing back Obama era “secular stagnation” – the notion that private business has few good uses for savings – with permanently lower productivity and real income, undercutting the possibility of growing out of the debt burden.
Who would lend this money?
Democratically elected politicians would never impose the taxes necessary to pay for current planned expenditures, never mind fund the Green New Deal or pay down the outstanding debt. Borrowing defers political accountability while increasing the aggregate economic pain: is an additional $60 trillion or more in net federal borrowing feasible?
During WW II with a dearth of consumer goods available patriotic Americans purchased war bonds. Today’s American savers, screwed for a decade by Chairman Bernanke’s zero interest rate policy and convinced the federal government will not honor their social security obligations, are unlikely to respond to patriotic appeals. They may respond to a significant rise in real interest rates, but this would further amplify the debt spiral. Domestic saving isn’t a realistic option.
Foreign savers were made whole on their investments in government sponsored enterprises in 2008, but foreign investors like Russia and China have been pairing back their holdings of U.S. debt for years. Japan has held back, but with an average age of 48 years old will need to liquidate their holdings soon.
Central Banks to the rescue
The United States earned the “Exorbitant Privilege,” (Barry Eichengreen, 2012) of being the global reserve currency as it amassed most of the global gold stock while being on the winning side of WWII, with debt but not devastation. It squandered that privilege after Ike’s Presidential term as spending on the War in Vietnam and the Great Society caused a massive gold drain. In response, President Nixon (Ike’s VP) defaulted on central bank gold convertibility in 1971. Anticipating the inevitable, the CIA began preparing for Currency Wars more than a decade ago, but Eichengreen was still bullish on retaining the privilege in 2012 if the U.S. took immediate action to shore up domestic finances. In 2020 the Fed created a liquidity facility to discourage central banks from further selling dollar reserves. China and Russia now control most of the global gold stock, but for now their political systems still appear less credible in support of a gold-backed currency than the U.S.
The role of central bankers is to inflate away debt gradually and opaquely with as little political accountability as possible, the reason for the Fed’s faux independence, but Bernie Sanders supporters openly advocated Modern Monetary Theory – money printing. The Federal Reserve has been ballooning its balance sheet for a decade and is now at $10 trillion, promising to do whatever it takes. Based on the 1990 definitions, the Fed has already engineered 10% inflation over the last few decades, enough to trigger German hyperinflation. Paying interest on bank reserves has limited money growth, but the Fed has been treading water for decades, floating the economy first on a sub-prime mortgage bubble, then on a global debt bubble. McMaken concludes: “The only thing that can prevent a wave of insolvency, bankruptcies, and foreclosures will be more monetization of debt and immense amounts of asset purchases, possibly for years.”
This sea of debt is the baby boom’s legacy. For the younger progressive Democratic leaders to have any chance of funding their proposed massive government expansion, they would need a new COVID virus lethal to baby boomers. Given China’s own demographic time bomb, that might already be in the works.
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.