In recent years, a troubling consensus has emerged within Congress: the ability to pay is no longer seen as a constraint on the promises made to the public. While there are no explicit polls confirming this shift, the actions of lawmakers clearly indicate this new norm.
According to the Constitution, Congress—especially the House of Representatives—holds the “power of the purse,” granting it the authority to tax and allocate funds for federal spending. However, over the past half-century, lawmakers have shown a glaring disregard for the government’s fiscal responsibilities.
When it comes to taxation, Congress often excels. Yet, their real talent lies in spending. The Treasury Department revealed that for the calendar year 2019, the annual budget deficit exceeded $1.02 trillion. Alarmingly, that figure is just the tip of the iceberg.
In the first quarter of the 2020 fiscal year, which began in October, deficits surged by 12 percent compared to the previous year. Specifically, this figure reached $357 billion. If the trend continues, the total deficit for 2020 could exceed $1.4 trillion.
This deficit is primarily financed through Treasury debt. Since mid-October, nearly half of this debt has been acquired by the Federal Reserve. During this time, the Fed began creating money at a rate of $60 billion per month, solely for the purpose of purchasing Treasuries.
As we look ahead to the next decade, the trajectory of debt and deficits appears increasingly alarming, as a greater portion of Treasury borrowing will be financed by money printing. Here’s why:
Inverted Pyramid
Recent data from the U.S. Census Bureau indicates that the U.S. population is growing at a mere 0.48 percent annually. Without immigration—currently at a lower rate—the population may actually be in decline. Business Insider highlighted several concerning observations:
“The census data capped a decade marked by sluggish U.S. population growth—the 2010s may be recorded as the slowest decade since the first Census in 1790. Low fertility rates and increasing mortality are predicted to persist into the 2020s.”
“The looming reality of demographic stagnation significantly affects projections of U.S. economic growth over the next decade, given smaller increments in the working-age population and the ongoing retirement of baby boomers. An increasing number of retirees will depend on a dwindling workforce to fuel economic activity.”
This anticipated structure is fundamentally unsustainable.
An economy backed by a growing, youthful demographic can more easily manage public debt. Local governments can issue long-term municipal bonds, relying on an expanding and prosperous tax base for repayment. Public pension funds also perform better when supported by a larger workforce.
However, as demographics age and economic growth stagnates, legacy costs become excruciatingly burdensome. The workforce pyramid, once thriving, transforms into a top-heavy inverted structure, where fewer workers support an increasing number of retirees.
With this evolving scenario, those profiting from the system begin to leech off it, rather than making necessary corrections. This ultimately leads to serious societal consequences.
Local governments may default, pensioners could be left in the lurch, public services may erode, infrastructures may fall into disrepair, and once-proud buildings might devolve into squalor—akin to the Hotel Alexandria in Los Angeles during the 1990s.
Living On Borrowed Time
On the national stage, circumstances differ. With the Federal Reserve and Treasury cooperating and a fiat currency system in place, along with Congress readily raising the debt ceiling, the U.S. government cannot technically default. However, to continue expanding its debt, the Fed and Treasury resort to widespread currency debasement.
As mentioned, the Fed is currently funding $60 billion per month to the Treasury, which covers approximately 50 percent of the deficit for the first quarter of fiscal year 2020. This monthly figure is in addition to nightly liquidity infusions exceeding $80 billion aimed at controlling repo rates below 2 percent—an aspect of the Fed’s controversial repo operations.
Without the Fed’s monetary interventions, Washington would be compelled to hike taxes, curtail spending, face prohibitively high-interest rates, and potentially default. Such a shift would occur swiftly, leading to a disastrous collapse of the financial system.
Unfortunately, there is no turning back from this path. Neither quantitative easing nor the current repo operations can be easily withdrawn.
Ultimately, the challenges posed by population and demographic shifts make it increasingly improbable to manage the overwhelming debt accrued from past expenditures. The likelihood of a sustainable economic recovery appears dim.
What remains is a precarious reliance on debt supported by fabricated money from the Fed.
We are, undeniably, living on borrowed time. A day will arrive when the costs of debt monetization outweigh the benefits, resulting in ferocious price inflation—a scenario that will come at a steep price.
For now, however, the markets seem untouched. Tesla shares are soaring, priced above $500. Can anyone say amen?
Sincerely,
MN Gordon
for Economic Prism
