As we stand on the brink of a looming crisis, it becomes increasingly clear that the great default is drawing near. Time is of the essence, and the prospect of intervention seems like an impossibility—much like a freight train barreling down the tracks.
To begin, the financial state of the U.S. government is dire. The only factor sustaining operations in Washington is a staggering $1 trillion annually from Federal Reserve debt monetization. Without this lifeline, the Treasury would be unable to meet its obligations.
Moreover, it’s beyond the capability of taxpayers to fill this fiscal void. Politicians have made countless promises to constituents, obligating themselves with expenditures that are unsustainable. The political realities make it impossible to significantly cut the budget or increase taxes without jeopardizing their chances for reelection. This cycle of spending leads to programs that the populace cannot afford.
Sadly, the situation is even more precarious than most Americans realize. Many have been misled into thinking they can enjoy unearned benefits, a misconception propagated by the agencies designed to provide accountability to the government.
Take, for example, the Congressional Budget Office (CBO). Its official budget forecasts serve more as PR for Congress than objective financial analysis. The CBO is falling short of its responsibilities and misguiding taxpayers.
Consider the following…
The Unofficial Debt
There is a distinction between official debt and unofficial debt, though many may not be aware of it. Official debt is recorded on the balance sheet, while unofficial debt remains hidden out of sight.
According to Boston University Professor Lawrence Kotlikoff, “The CBO’s [most recent] forecast was based on its Extended Baseline Forecast (EBF). This projection assumes current laws remain intact, including provisions such as cuts to Medicare and Medicaid payments, which no realistic observer, including the CBO, considers feasible.
“In prior years, the CBO would also release what it termed its Alternative Fiscal Scenario. This forecast is aimed at projecting future taxes and expenditures, accounting not just for existing laws but also for the frequent adjustments made by Congress and the Administration over time. Simply put, the Alternative Fiscal Scenario (AFS) outlines the CBO’s perspective on what lies ahead without a significant and sustained change in fiscal strategy.
“Those who monitor U.S. fiscal policy anticipate the release of the AFS each year. However, this year’s long-term forecast from the CBO included solely the EBF. The AFS was entirely absent. It wasn’t mentioned within the lengthy CBO report, nor was it present in the downloadable data available on the CBO’s site.
“Fortunately, growing questions about the AFS’s omission prompted the CBO to add a summary of its projections just two days later as tab 6 in the EBO spreadsheet, without a corresponding press release or any media attention.
“While the EBF and AFS figures reveal stark contrasts, the latter was hidden away in a single tab of a spreadsheet titled Supplementary Data, a minor link that will soon vanish from the CBO homepage, making it increasingly challenging for taxpayers to uncover.”
What you should recognize is this…
Playing with Fire
“According to the EBF, the fiscal gap stands at $47 trillion. However, under the AFS, the fiscal gap balloons to an astonishing $205 trillion! Presenting a fiscal narrative based solely on the EBF effectively understates the situation by 75%!”
“The $205 trillion fiscal gap is staggering. It represents 10 percent of the present value of all future GDP. To put it in perspective, raising 10 percent of GDP each year could require one of three drastic measures: (a) implementing a 57 percent increase in all federal taxes immediately and permanently, (b) cutting all federal spending—excluding interest on the debt—by 37 percent, or (c) a combination of (a) and (b). ”
Unquestionably, neither Congress nor policymakers will seriously entertain any of these options. They may make minor adjustments to budget allocations and taxes, but confronting the fiscal crisis head-on remains politically unfeasible.
As a result, the Federal Reserve will persist in printing money and funding the government until a catastrophic fallout occurs. Such debt monetization is profoundly disruptive to both the economy and financial markets. This situation exemplifies why we find ourselves in serious jeopardy.
Interestingly, just last Friday marked 90 years since decisive actions were taken to end the horrifying hyperinflation in the Weimar Republic. On November 15, 1923, the Reichsbank—Germany’s central bank—halted its debt monetization. This decision ultimately curbed the hyperinflation.
Just five days later, Reichsbank President Rudolph Havenstein succumbed to a massive heart attack. You can find an insightful analysis of that period by Thorsten Polleit here.
Perhaps the heart attack stemmed from Havenstein’s abrupt realization that he had profoundly miscalculated the events leading up to November 15, 1923, and how his actions had fueled inflation by printing more money to meet rising demand caused by the devaluation of the mark. While the reasons remain speculative, it’s worth noting that, in Germany, “in 1918 you could buy 500 billion eggs with the same money that would purchase just one egg five years later.”
By 1923, “hyperinflation had devastated the majority of the German populace, particularly the middle class. Food shortages and cold were rampant, fueling a rise in political extremism.”
This is the peril that the Federal Reserve faces as it engages in its ongoing debt monetization experiment. Furthermore, Janet Yellen, the incoming chair of the Federal Reserve, seems determined to continue this trajectory until the dollar is reduced to ashes.
In conclusion, the risks posed by unchecked debt monetization are profound, not only for our economy but for society as a whole. As we navigate through these treacherous waters, awareness and accountability must prevail.
MN Gordon
for Economic Prism
