But the structural fiscal problem was not solved; it was merely temporarily buried beneath three delusions.
THE THREE GREAT FISCAL DELUSIONS
The first was that the giant Reagan defense build-up—which was actually a vast armada of conventional land, sea and air forces ideally suited to wars of invasion and occupation—would go quietly in the night when the cold war ended and the Evil Empire was no more. It didn’t.
Instead, the military-industrial complex and its neocon propagandists panicked the nation into a pointless “war on terrorism” after the fluke tragedy of 9/11. Soon the defense budget had doubled, rising from under 3.0% of GDP during the early post–Cold War period to nearly 6.0% of GDP after Bush’s war campaigns reached full intensity by 2007.
Likewise, the front-loaded payroll-tax hike eventually exhausted its capacity to deceive. Accordingly, by fiscal 2013 the OASI fund (retirement) ran a $95 billion cash deficit and the DI fund (disability) generated an additional $45 billion cash deficit. This means that on a combined basis, the cash deficit was nearly $140 billion annually and growing rapidly into the future.
In effect, the so-called Social Security surplus, which had financed the general fund deficit for more than two decades, had not simply disappeared. As we detailed at length in Chapter 8, they had now entered the liquidation phase of Washington’s phony trust fund accounting scheme.
What this means is that the $19.4 trillion of public debt outstanding today is the real debt—not the convenient illusion peddled by Washington and Keynesian economists that the “publicly held” debt is only $13.5 trillion and therefore a “manageable” 75% of GDP.
Nope, the nation’s true public debt ratio today is 106% of GDP. Thirty-five years on from the first trillion dollar crossing, the public debt burden on national income has tripled. And when you add the $3 trillion of state and local debt, the total public sector debt ratio is nearly 120% of GDP.
And that gets to the final question. How did Washington get away with this vast fiscal debauch? How did we get to the point where an unschooled outlaw candidate for president would utter the impertinence of default?
The short answer is that Trump is here because Washington’s fiscal kick-the-can-game depended upon a central bank monetary parlor trick that left Flyover America behind, and that, in any event, is now over and done.
To wit, “crowding out” and high consumer price inflation never occurred because the Greenspan Fed launched the entire world economy down a path of massive credit expansion and financialization—an insidious process engineered by the concerted action of all the major central banks. That convoy of money printers generated large but dangerous central bank “vaults” where Uncle Sam’s debt has been temporarily sequestered.
THE GLOBAL MONETARY ROACH MOTEL
It was the equivalent of a monetary roach motel: the bonds went in, but they never came out. What happened in practical economic terms is that central bank fiat credit was substituted for real savings from privately earned incomes in the financing of public debt.
Indeed, owing to currency pegging by the mercantilist export economies of Asia and the oil exporters nearly $5 trillion of the U.S. public debt has been absorbed by foreign central banks and sovereign wealth funds. Another $3 trillion is owned by the Fed. And still another $5 trillion, as indicated above, had been temporarily funded by intragovernmental trust funds that are now about to plunge into an irreversible liquidation mode.
Two thing are therefore evident. The first is that massive monetization of the public debt cannot go on much longer, or else the monetary system will be destroyed. That’s what being stuck on the so-called zero-bound really means. And that’s why the lunatic money printing in Japan is a sign that the end of the monetization era is at hand.
In the case of Japan, the largest debtor government in the world has already destroyed its own bond market—the BOJ is the only bid left at negative 0.2% on the 10-year JGB.
Secondly, as we also documented in Chapter 8, the U.S. nominal GDP has been growing at barely 3% annually for the last decade, and, in a deflationary world, it has no chance of breaking away from that constraint.
Accordingly, the ridiculously optimistic rosy scenario currently projected by CBO does not have a snowball’s chance of materializing over the next decade.
In fact, the $10 trillion of cumulative baseline deficits over the next ten years projected by CBO is drastically underestimated. As we indicated above, Washington will generate at least $15 trillion of new public debt in the decade ahead under a realistic economic forecast that essentially assumes the next 10 years will perform as well as the past decade.
So the nation’s current mountain of public debt will inexorably rise to $35 trillion by 2026 or so. Likewise, the giant financial bubble and vast malinvestments generated by the world’s central banks over the last two decades now guarantee a long spell of global deflation.
That’s why we believe that the U.S. nominal GDP will be lucky to reach $24 trillion by that same year (3% annual growth). The math computes out to a public debt equal to nearly 150% of GDP.
THE GLOBAL SOVEREIGN-DEBT MARKET—THE MOTHER OF ALL FINANCIAL BUBBLES
For all practical purposes, these budgetary realities mean an endless fiscal crisis lurks in the nation’s future.
That’s the real end game of a lamentable path of unprecedented fiscal profligacy embarked upon 35 years ago.
Needless to say, it was not Donald Trump who trashed the “full faith and credit of the United States” along the way.
Nor is it Donald Trump who offers the prospect of a solution. As we demonstrated in Chapter 1, his stated plans would make the nation’s fiscal accounts even worse.
You don’t need a lot of wonky budgetary detail to know that if you increase defense spending, massively cut taxes and exempt Social Security, you end up with even more red ink. That’s what Ronald Reagan proved for all time.
No, the only thing which will arrest Washington’s headlong toward fiscal ruin is the upcoming crash of the global bond market. It is the mother of all financial bubbles thanks to the $20 trillion of bond buying by the world’s central banks over the past two decades.
This lunacy and financial fraud inserted the central banks’ big fat thumb on the supply and demand scales in the world fixed-income markets, thereby causing the price of bonds to soar and their yields to virtually shrink to the vanishing point.
Indeed, within the proximate $40 trillion worldwide sovereign debt market, upward of $13 trillion of government debt trades at sub-zero yields and the weighted average yield of the total outstanding is less than 1%.
When QE finally ends in Europe and Japan, and it will end soon in order to avert monetary catastrophe, there will be a massive rush for the exists when the punters who now own trillions of sovereign debt on 95% repo realize the jig is up.
That is, without the massive artificial bid of central banks, the price of government debt is going to fall hard. That will threaten, in turn, to wipeout the accumulated capital gains of these bond market front-runners and crush the carry-trade spreads on which their speculative positioning is based.
Needless to say, when the fast money starts selling in order to lock-in what remains of their unspeakable windfall profits, there will be no bid for a falling knife.
Trillions will be lost. Government’s that can’t roll their massive but suddenly far more expensive debts will default. The Donald’s expertise in that department, at least, should be given its due.
CHAPTER 10
How the GOP Got Trumped—the Fiscal Follies of Johnny Lawn Chair and Faker Ryan
IN THE IMPROBABLE CANDIDACY OF DONALD TRUMP, THE REPUBLICAN PARTY got what it deserved. After all, its job in the context of American political democracy is to function as the nation’s fiscal guardian. Yet that role hardly fits the GOP’s new presidential nominee and erstwhile constructor of hotels and casinos, who now promises to build the greatest ever walls, roads, bridges, military and other accouterments of na
tional greatness.
But then again, the GOP has been derelict on the fiscal front for most of the last for 35 years . Instead, it has become a gang of neocons, social cons, tax cons and just cons. Perhaps Trump is merely the ultimate expression of the latter.
The first two of these contemporary GOP factions—the neocons and the “social cons” aggrandize the size and role of the state. This extends from the uninvited policing of the world’s neighborhoods and nations to the unjust intrusion into domestic family, religious and social life.
The “tax cons” correctly recognize that private enterprise, not the state, generates prosperity and wealth and that tax barriers and disincentives to production, investment and work should be lowered whenever possible. But they fail to heed the great Dwight D. Eisenhower’s fundamental rule for fiscal governance now that the cat of Big Government is out of the bag.
Namely, that tax cuts must be earned with off-setting retrenchment of the spending and entitlement accounts. That’s how Ike balanced the budget several times during his eight year tenure, even as he struggled to reduce the military budget by 33% in real terms and chisel away at the economically stifling edifice of the Roosevelt/Truman war taxes.
The GOP’s latter-day supply siders, unfortunately, did the opposite—especially during the era of Republican rule under George “Dubya” Bush. The “tax cons” joined hands with the neocons to protect and enlarge the Reagan warfare-state budget, expanding its present-day purchasing power to more than twice what General Eisenhower thought was adequate at the very peak of the Cold War. At the same time, they slashed the revenue base by nearly 4% of GDP with two giant unearned tax cuts.
So doing, they replicated the fiscal betrayal of the Reagan years with even less justification. Indeed, rather than pretending as did the Gipper that deficits would eventually go away owing to “growth,” the tax cons of the Dick Cheney schism militantly proclaimed they didn’t even matter.
In this context, the balance of rank-and-file congressional Republicans morphed into “just cons.”
That is, they settled into the business of harvesting campaign loot from the K Street lobbies and the endless racketeering enterprises of the Imperial City. And especially after Citizens United opened the floodgates, the congressional GOP became a pure fund-raising machine that happened to dispense talking points favored by the neocons, social cons and tax cons—when, as and if convenient.
GOOD RIDDANCE TO JOHNNY LAWNCHAIR
And that gets us to the startling midterm upheaval in the House GOP leadership last fall. Except that leadership is hardly the word for the speakership of the feckless John Boehner or his replacement, by the equally spineless Congressman Paul Ryan.
As I will document below, under the faithless leadership of Boehner and Ryan the large GOP House majority has been turned into a dysfunctional, squabbling gang. Notwithstanding the 2010 election’s Tea Party sweep, the House GOP has accomplished nothing on behalf of free enterprise, sound money and small government.
But worse still, it has utterly betrayed its core historical responsibility to defend the nation’s fiscal solvency. On that score, its record is so abysmal that it might as well embrace the budgetary follies that Trump has so far managed to enumerate—for all the difference it would make.
As we showed in Chapter 9, the hoary excuse that a divided Senate and hostile Obama White House prevented the GOP House of Representatives from taking meaningful action on the fiscal front doesn’t wash. The House GOP had a huge lever called the “debt ceiling” that time and again it surrendered with hardly a fight.
The fact is, had the House GOP leadership held fast and refused to raise the debt ceiling at $14.3 trillion way back in August 2011, and especially on the heels of its Tea Party election sweep, it would have forced the unthinkable on the Imperial City. And that would have made all the difference.
To wit, the Obama White House would have been required to prioritize and allocate spending down to the level of incoming revenue. Such an unheard of exercise of Uncle Sam temporarily living within his means would have broken the deadly shibboleth that every dime of Uncle Sam’s bills must be paid once they are incurred.
Instead, payments to military vendors, local governments, student loan recipients, highway contractors and checks to federal employees and beneficiaries would have been deferred or cutback. The resulting wailing and gnashing of teeth among the legions at the federal trough would have been a wonder of political history.
In that fraught context, a determined speaker postured in behalf of the taxpayers and producers of Flyover America could have written his own ticket in terms of the entitlement reforms and spending cutbacks that would be necessary for him to lift the fiscal siege. The back of the federal doomsday machine—a budget in which upwards of 80% of outlays stem from entitlements, debt service and other automatic or contractual spending—would have been broken.
Needless to say, Boehner and then Paul Ryan after him took the route of accommodation and surrender in the name of “bipartisan governance.” But the latter is no virtue of high-minded statesmanship; it’s a pernicious invention of the Beltway’s permanent ruling class designed to keep the pork and entitlements flowing, the national debt growing and the Fed’s printing presses glowing red hot.
So here’s the truth. The existing GOP leadership is far worse than even the false caricatures that the elite commentariat and ruling class has thrown up against Donald Trump.
In fact, there are few political hacks in Washington more deserving of everlasting ignominy than the retiring House speaker because he represented in one package all four gangs that have hijacked the Republican Party.
So we now offer a vehement good riddance to the man who has single-handedly destroyed whatever pathetic semblance of fiscal responsibility that remained in Washington prior to his baleful tenure.
The so-called bipartisan budget deal of 2015 that he confected as a parting gesture doesn’t even deserve to be called a farce. It’s actually just an extension of Washington’s pathological lying to the American public about the monumental fiscal calamity now brewing.
More importantly, it’s a case in point of why a confused and desperate Flyover America is turning to a strong man like Donald Trump to fix a system that it can plainly see is completely broken.
The chart below shows Washington’s patented “kick-the-can” formula—employed for the second time since the phony sequester mechanism was put in place during the debt-ceiling crisis of 2011.
The Boehner/Obama deal will increase spending by $85 billion in the here and now by busting the FY 2016 and 2017 caps. This new red ink will then, purportedly, be off-set way down the road with gimmicks, imaginary IRS audit revenues and hazy disability benefit reforms which will never materialize. Never.
Indeed, these people are beyond shame. The big bulge of $33 billion of savings shown for the Neverland of 2025 is due to a sharp increase in assumed discretionary spending cuts and Medicare benefit reductions. That is, the very same programs that are being pumped up during the next three years!
And that’s the same thing the Ryan-Murray bipartisan comprise did two years ago with respect to FY2014–15. In combination these 11th hour bipartisan shams have thus added $143 billion of real money to the national debt for the years through 2021, “paying” for them with imaginary savings to be realized after 2021. That is, until we get there—at which time anything which bites into the gravy train will be predictably deferred.
Nor is that the extent of Johnny Lawnchair’s odious record of fiscal betrayal since 2011. In the first instance, he broke the will of fiscal conservatives just when they had Washington over the debt ceiling barrel in August 2011 with the promise of $1.5 trillion of entitlement savings via the super committee.
What an unrelieved farce that was. After yielding on the debt-ceiling increase and then being subjected to endless establishment media hounding about what a political mistake it had been, the rubes from Tea Party and soon discovered that “bipartisan compromis
e” is no such thing at all—it’s a cover for political surrender.
The so-called super committee didn’t even try to reform entitlements and hardly even meet. Instead, the Capitol Hill establishment simply faded into another Big Lie.
Not to be troubled, they said, when the super committee turned in an empty exam sheet at its due date in late 2011. Why, the very same $1.5 trillion of “savings” will now be achieved from discretionary defense and domestic appropriations accounts via the automatic sequester mechanism.
At length, those sequester caps started to bite in 2013. So Boehner sent out his budget lapdog—pedigreed fiscal faker and now his successor, Paul Ryan—to negotiate relief for the military-industrial complex and to ensure plentiful pork for GOP candidates in the 2014 election.
That particular task the fiscal faker from Wisconsin accomplished with alacrity—just as he did back in 2008–9 when the GM plant located in his district needed a bailout from the taxpayers.
THE 2015 BIPARTISAN DEAL—BOEHNER’S FASTEST FOLD EVER
Soon still-another election season was pending and yet-another debt-ceiling increase had been all used up. So, predictably, as the debt ceiling expiration approached in October 2015, Boehner folded so fast that the mainstream media barely knew he had gone to the White House.
On a lickety-split basis Johnny Lawnchair not only jettisoned two more years of the discretionary spending sequester, but also blew any other inconvenient fiscal restraint lurking between then and 2017. That included a perfectly reasonable and long scheduled increase in Medicare Part B premiums for the better off elderly and the impending action-forcing exhaustion of the Social Security disability trust fund.
In the best kick-the-can style, as we mentioned earlier, the latter will be funded by raiding $150 billion from the retirement trust fund, while pretending that Washington bureaucrats at the Social Security Administration will write new rules to prevent abuse of a program that is totally out of control.
Trumped! A Nation on the Brink of Ruin... And How to Bring It Back Page 18
