|Possible solutions: grow, cut, tax, inflate, repress, restructure, repudiate, seize, MMT|
Spending Crisis – Part III
Possible Solutions to Spending Crisis
By: George Noga – May 12, 2019
This is the third of four posts in our Spending Crisis series, which is available in its entirety at www.mllg.us. There are many theoretical ways a spending crisis could be averted; we could grow, cut, tax, inflate, repress, restructure, repudiate, seize, or MMT our way out. More likely, we will employ a combination of these measures.
Grow: There once was a time, as recently as 5-10 years ago, where growth was a possibility: no longer. There is no way the economy can grow at a faster rate than the debt, which currently is growing by 5.25% and increasing to 8.00% by 2025.
Cut (Spending): FY 2019-2020 spending will be about $4.7 trillion with a deficit of $1.1 trillion. To balance the budget requires spending cuts of 23.4% but, by the time an impending crisis gets Congress’s attention, cuts of 30% will be necessary. Social Security, Medicare, Medicaid, pensions and defense would have to be savaged to such an extent as to sow the seeds of civil unrest. Moreover, the cuts would have to remain in effect for 15 straight years just to get back to today’s 78% debt ratio.
Tax: Balancing the budget will require a 36% tax increase. Even if possible, it would be self defeating, as sky-high taxes would lead to economic stagnation. Note: tax hikes are a higher percentage than spending cuts due to starting from a lower base.
Inflate: Inflation is the cruelest tax of all and devastates everyone’s plans, hopes and dreams. Just to cut the debt in half requires 10 years of 7.5% inflation provided the deficit is not increasing during that same time. Realistically, it would require 20% inflation for ten or more consecutive years just to maintain the status quo.
Repress: Repression is government action that insidiously transfers wealth from the private to the public sector to facilitate financing massive public debt. It includes: (1) low or negative interest rates; (2) war on cash; (3) currency/capital controls; and (4) bail-ins. We already have repression; it will get much worse as the crisis approaches. See our post of November 11, 2018, devoted entirely to financial repression.
Restructure: Debt restructure likely will be part of the government crisis response. It takes many forms including: (1) lengthening maturities; (2) requiring roll-over; (3) imposing haircuts; (4) lowering interest rates; and (5) conversion to other securities.
Repudiate: Nations that have repudiated are unable to borrow again for decades. Any repudiation would be perpetually tied up in courts and would decimate the savings of ordinary Americans who own government debt, directly or indirectly, in money market accounts, pensions and annuities. A direct repudiation is unlikely.
Seize: When crisis hits, there will be $25 trillion of IRA, 401(k) and pension assets; government could seize some or all such assets in exchange for government pensions. In recent years, Poland, Hungary, Bulgaria, Ireland and France have, through one artifice or another, seized money from pension assets. Government, like Willie Sutton, will go where the money is and that place is pensions.
Modern Monetary Theory: MMT has been around for a while but recently has been embraced by the democratic socialist crowd as a justification for unlimited spending. MMT asserts that a sovereign government that issues debt in its own currency, has flexible exchange rates and controls its central bank can spend without limit or constraint. With MMT, the state simply creates unlimited amounts of money.
Combination of Most of the Above
Just to stabilize (not to fix) the ratio requires $1.25 to $1.50 trillion per year from the above sources for up to 15 years. In the early stages of the crisis, a panicky government will: (1) enact VAT and/or carbon taxes; (2) make modest spending cuts; (3) increase repression; and (4) tweak Social Security and entitlements. It will be too little, too late; at most, it could slow the progression of the crisis for a few years.
In the advanced stages of the crisis anything is possible including: (1) massive tax increases; (2) hyperinflation; (3) severe financial repression including negative interest and currency/capital controls; (4) debt restructure; and (5) reliance on MMT to create unlimited amounts of money. When the crisis reaches the desperation stage, I would not rule out government seizure of most or all IRA, 401(k) and pension assets.
Our final post in this series (next week) addresses the ultimate question of whether or not a spending crisis catastrophe can be averted. Don’t miss it.