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Sunday, July 21, 2019

Democrats' All-Out Socialist Agenda, Part 3

The Democrats have an unhinged spending plan for 2020. How will they pay for it? With truck loads of newly printed money. Yes: MMT, Mad Monetary Theory, is back again.

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In the previous installment of this article series I demonstrated what a disaster the Democrat Medicaid-for-All program would be. I explained that if they intend to do this program without having to raise taxes, then even if they could eliminate - yes eliminate - all administration and cut prescription-drug costs by 69 percent, they would still have to deny 182 million Americans access to health care. Either that, or they would have to
Reduce funding for our hospitals by $640 billion;Remove $2.2 billion from Indian Health Services;Take $2.9 billion away from school health programs;Cut Americans' dental care by $72.3 billion;Slash public-health programs by $49.8 billion;Take away $28.4 billion from health care research;Cut $54.3 billion from home health care;Eliminate more than $93 billion in funding for nursing care facilities;Reduce spending on medical technology by another $100 billion.
There is, of course, no chance that Democrats would let all of this happen. It would lose them the next election. Raising taxes on the "rich" is obviously not an option. Suppose we define the 25.3 million tax returns declaring a $100K+ income as representing the "rich". In 2015 they made a total of $5 trillion in taxable income, on which they paid $1.17 trillion in federal personal income taxes.

The problem for the health care socialists in the Democrat party is that under the scenario described above they would need to raise taxes by $1.87 trillion. Even if we doubled the federal taxes on all income above $100,000 per year, it would still leave $696 billion to be obtained somewhere else.

In fact, even if we doubled federal taxes on all income, down to those who make less than $10,000 per year, we would still be $412 billion short.

Again, this assumes that every American pays twice as much as he does now in federal taxes. We add $412 billion to the budget deficit and we haven't even begun paying for all the other entitlements the Democrats want.

Which brings us to the topic for this article. Since the Democrats will not be able to even cover the cost of socialized medicine without crippling taxes, they will have to go completely unhinged in terms of deficit spending.

The international sovereign-debt market cannot swallow trillions of dollars of U.S. debt in one single year (yes, that is what we are looking at), a fact that the economists behind the Democrat presidential contenders are duly aware of. This is why they have invented Mad Monetary Theory.

Essentially, MMT is nothing more than a Goliath-size version of Quantitative Easing. It means flooding the economy with newly printed money, so that government can hand it out in every cardinal direction. Uninhibited money supply will pay for slave reparations; single-payer health care; all kinds of paid leave; universal, mandatory, government-run daycare and preschool; free college; and of course universal basic income and a government job guarantee.

It is really not meaningful to try to debate the fiscal price tag for all these programs; beyond a certain point, fiscal insanity loses its meaning. Nevertheless, since the Democrats are committed to it we might as well:

-Universal basic income: $2 trillion;
-Total paid leave: $1 trillion;
-Medicaid for all: $900 billion per year (deducting current federal spending on Medicaid and Medicare from the bare-bones alternative previously discusses);
-Mandatory daycare and preschool: $160 billion;
-Free college: $120 billion.

The annual cost for these programs would run about $4.2 trillion per year - and we haven't even touched slave reparations or the job guarantee - which simply means that the Democrats will have to quadruple the current federal budget deficit. In one year.

And then keep it at that level.

Again, the global debt market will not take this kind of debt issuance with anything close to seriousness. Its reaction will be to run the other way; within two years of unhinged Democrat socialism, the dollar will lose its credibility as a safe-haven currency. This will add a second layer of risk to investments in Treasury bonds: not only do you know you won't get your money back from a U.S. government with a meth-level addiction to deficits, but you also know that the dollar will plunge and devalue whatever investments you have in U.S. debt.

This, however, does not worry Democrats. They will neutralize the market evaluation of their policies by seizing control over the Federal Reserve. Yes, that's right. They will end the independence of the central bank of the United States, by means of legislation or executive order.

How do we know this? Mad Monetary Theory. The MMT doctrine (to call it a theory is to do undue violence on the English language) says that you can print unlimited amounts of money, just like they did in the Weimar Republic, in Mugabe's Zimbabwe and in the Chavez-Maduro madland of Venezuela. Then, the MMT delusionists think, once inflation begins to increase you just raise taxes and drain the economy for money.

Because tax hikes have never caused inflation...

Yes, this is what Mad Monetary Theory prescribes. But that's not all. The MMT doctrine also says that when government has borrowed too much money and the sovereign-debt market is beginning to have serious doubts about the solvency of that mountain of debt, government can simply default on its debt.

Instead of honoring its obligations on Treasuries, government simply allows its creditors to use their bonds, at face value, for tax payments. In other words, if you own $100 worth of Treasury bonds, you can hand in that bond to the IRS and deduct $100 from your personal federal income taxes for that year.

There are, of course, a couple of minor problems associated with this idea that MMT delusionists ignore. For one: what taxes does the Chinese government owe the U.S. government?

It will take an entire separate piece to chop our way through MMT per se. I have discussed it in a few previous articles, but there is still more to say about it. Briefly, though: its purpose is, plain and simple, to remove whatever institutional hindrances there are in the way of unlimited government. There is really nothing innovative about MMT - they used it in the Soviet Union - but it looks bright, shiny and intelligent thanks to some clever repackaging.

Once a Democrat president and Democrat Congress has used Mad Monetary Theory as a pretext to seize control over the Federal Reserve, they will start cranking out money in order to feed that $4 trillion budget deficit. According to the prevailing unwisdom among MMT delusionists, the money that government churns out will cause a massive boom in the U.S. economy. This boom will then somehow delay the catastrophic plunge in the credit worthiness of the federal government, possibly because it will generate more tax revenue.

There is, of course, not a chance on God's Green Earth that such tax revenue can be generated by an American economy that is being perforated by gigantic, new entitlement programs. The distortion of the free-market price mechanism will be endemic, as will be the disincentives toward work.

Not to mention inflation again.

However, there is one more aspect on this reckless doctrine of socialism by monetary fiat. The MMT delusionists believe that once they go to work on the monetary printing presses, there will be a significant time lag before the debt and currency markets react negatively to their deeds. They think that they can wait in peace and quiet for the multiplier effects in the U.S. economy to produce positive effects of their money printing - effects that will then, allegedly, quell investor fears.

Unfortunately for the proponents of Mad Monetary Theory and unhinged government spending, we are already precipitously close to the point where debt markets may lose their influence over government fiscal policy. Reports Bloomberg:
Bill Clinton’s political adviser, James Carville, once said he’d like to be reincarnated as the bond market, since “you can intimidate everybody.” Those days of cowing even presidents may be over. The term ‘bond vigilante’ was coined in the 1980s for investors who punished governments by selling off sovereign debt and sending yields surging, forcing changes in policies or personnel. They had their heyday during the European debt crisis that kicked off in 2009, when investors had the power to make or break governments. From Greece to Italy and Ireland, leaders fell as yields soared and governments were forced into international bailouts.
Bill Clinton should not have had much to worry about when it came to the bond market. His fiscal conservatism remains unsurpassed in recent U.S. history.

That said, the point about government fearing the bond market is important, but we should note right from the start that there is another name "bond vigilante". It is "market investor". 

If I buy stock in Volvo (which I would never do) and then see them cranking out bad cars (which they do) making me lose confidence in the stock, then what fool would I be if I did not sell that stock?

The market for government debt works the exact same way. If I buy Swedish treasuries (which I would never do) and then see the Swedish government conduct policies that destroy the country's economy (which they do) making me lose confidence in getting my money back, then what fool would I be if I did not sell that bond?

Ever since the crisis in 2008-2009 governments around the industrialized world have had wet dreams of uncoupling their deficit spending from the bond market. As Bloomberg reports, they may have reached that point:
Now, with interest rates at rock bottom, bond yields are at historic lows and investors’ ability to bully governments is waning. Italy remains politically volatile, but yields on its two-year debt went into negative territory this month. Spain doesn’t yet have a government after April elections, but it too can borrow at negative rates. ... [The] removal of a layer of market pressure on governments to stay within certain guardrails may mean even more wayward behavior.
That is exactly the point. And, of course, the purpose behind central banks pushing interest rates into negative territory.

The idea of destroying yields on government bonds did not originate in Europe - it was invented by the Federal Reserve in the wake of the 9/11 attacks - but that continent has now become Ground Zero for zero-rate monetary policy. The countries mentioned in the Bloomberg article are all under the euro zone, whose central bank has pushed interest rates deep into the ground:

Figure 1
SourceEuropean Central Bank

In other words, there is no room in the European economy for any more interest rate depression.

The same is not quite true for the U.S. economy, though the margin to zero in the 10-year bond yield appears to be only a temporary phenomenon:

Figure 2: Annual yield, 10-yr Treasury Bond; reported monthly
Source: United States Treasury

In fact, if we look a bit more closely at how the Federal Reserve has interacted with the real sector of the economy, it is quite clear that the recent bump in ten-year yields has to do entirely with the tapering-off of the Quantitative Easing money-print fest that started with the outbreak of the Great Recession. Figure 3 reports the total purchases of Treasury Bonds, securities from federal agencies (of marginal importance) and Mortgage-Backed Securities (MBS):

Figure 3
Source: Federal Reserve

The Fed split its investments about evenly between Treasuries and MBS. Herein lies an important policy point that ties back to the Democrat drooling over Mad Monetary Theory. Mortgage-Backed Securities are a form of economic-redistribution instrument, allowing for artificially low interest rates on mortgage loans. By depressing those rates, the Federal Reserve makes loans cheaper for those who do not earn enough to pay pure market rates on their home debt.

Likewise, by purchasing more than $2 trillion worth of Treasury bonds over the first five years of the Obama administration, the Federal Reserve allowed Congress and the President to conduct economic redistribution (by means of entitlement programs) at artificially low political, fiscal and economic cost. The Treasury did not have to borrow at market rates to nearly the extent that would otherwise have been the case.

Nor did they have to raise taxes.

Which brings us back to what Senator Kamala Harris said about her funding plan for Medicaid for All. She claims she can do it without raising taxes. Why? Because someone has told her about Mad Monetary Theory. By churning out debt instruments to the Federal Reserve she will avoid the heavy political cost of having to raise taxes.

As we have just seen, using the Federal Reserve for economic-redistribution purposes is not without precedent. The only difference is that under Mad Monetary Theory the Democrats would take this practice to a level where it will rapidly, and completely destroy the U.S. economy. Instead of a slow-motion drag on the private sector in the form of artificially low interest rates and inflated but not totally destructive government spending, we would see a rapid-fire implosion of all the remaining institutional structures that keep government within some sort of boundaries.

To be brutally honest: when the Democrats combine their entitlement frenzy with MMT they have a concoction venomous enough to hurl us from the top of the world to a Venezuela on steroids within one presidential term.

If you look forward to that, then by all means - vote for them. 

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