Locked and Loaded

The Credit Strategist - June 2023

The debt-ceiling negotiations exposed the grim fiscal future facing America.  They demonstrated that our political system is locked and loaded – with weapons of mass financial destruction aimed at our own heads.  When the deal expires on January 1, 2025, the federal deficit will be ~$35 trillion, annual deficits will be between $1.5 and $2.0 trillion, and the annual cost to service this debt will be ~$1.0 trillion.  The modest spending limitations in the debt-ceiling extension barely make a dent in these forbidding numbers. Goldman Sachs estimates the bill will cut spending by -0.2% of GDP in nominal terms.  That’s a joke but the joke’s on us.  The only thing the deal accomplished was avoiding a near-term default and giving financial markets more excuses to rally into even more overvalued territory.  We are witnessing a slow-motion train wreck except Americans are the ones lying down on the tracks being run over by the very legislators they elected to drive the trains. 

Apparently nothing less than a crisis even more severe than 2008 will be required to effect the kinds of changes necessary to fix our budget problems.  This was probably the best deal that could be reasonably expected in our current political climate and it accomplished virtually nothing.  Most disturbing is that a significant group of progressive legislators oppose any attempt to impose even modest work requirements on able-bodied, dependent-less recipients of government aid.  They seem to think it is immoral to ask people to help themselves, that it is more demeaning to take handouts than to seek to improve one’s circumstances.  This attitude of indulging and encouraging dependency rather than a culture of self-reliance and self-respect is profoundly immoral and inhumane and poses a direct threat to long-term freedom and prosperity.  Fortunately, this position was rejected (including by President Biden) though only modest work requirements were adopted.  Still, the inclusion of work requirements was a small sign of hope that everyone in this country has not completely lost their minds though we have a long way before we return our political discourse to any sense of equilibrium and sanity.  It’s not that our problems can’t be solved; it’s that too many people don’t want to solve them.

Virtually everyone (except perhaps progressives) acknowledges that we can’t maintain our unsustainable economic path.  Yet there is little indication that enough people are prepared to do what is necessary to change course.  I sympathize with conservative members of Congress disgusted with how little the debt-ceiling bill does to cut spending, but they are mostly lone voices in the wilderness.  Only radical political upheaval or a wrenching financial crisis can alter the inexorable growth of unsustainable debt and the increasing allocation of financial and intellectual capital to unproductive uses.  While the former is unlikely (especially under our Constitution – see below), the latter is steadily growing more likely.  The debt-based U.S. and global economies are growing more fragile every day, posing both short-term and long-term risks.  If history is any guide, economic instability will lead to political upheaval, not vice versa. We began to see this happen in the wake of the 2008 financial crisis in many Western democracies where populists were elected as a result of resentment over failed economic policies.  Now, after governments addressed that debt crisis by issuing more debt, the political reaction to widening wealth inequality is growing more intense (and more violent). 

It may appear that the reaction is focused on issues like racial and gender equality but underlying these issues is deep resentment over economic inequality suffered by minorities and other excluded groups.  These groups are growing more impatient as they see their positions eroded by the policy responses to economic crises such as ZIRP and QE that further widen the gap between rich and poor (or more broadly favored and disfavored groups) by privileging favoring owners of capital.  What people view as a “culture war” may in fact be an economic war fought under the guise of social issues that reflect the underlying fractures between rich and poor that are growing wider and more deeply entrenched due to government policies ostensibly designed to do the opposite of what they are actually accomplishing (see the discussion about banks and mortgages below for more on this).

Government borrowing will limit economic growth, especially coupled with suffocating levels of government regulation.  There can be no other outcome.  Printing and borrowing unlimited amounts of money to fund policies that increase dependency on government and redistribute wealth from the most to the least productive citizens will erode economic vitality (that includes immigration policies or the lack thereof).  Again, there can be no other outcome.  Losing productive potential locks us into a worsening set of future choices that inhibit human freedom and limit human potential.  These are certainties, not hypotheses.

Right now the political structure of society makes it virtually impossible to effect the type of changes required to create a better future.  Ironically, a society founded on the promise of individual liberty is undermined by parts of the very founding document on which it was established. The United States Constitution was designed in and for a different time. The document has great strengths but also suffers from serious weaknesses – in particular the lack of term limits imposed in a time of much shorter lifespans and limited technologies.  Despite warnings in The Federalist Papers (Federalist No. 10) about the dangers of faction, the Founders omitted perhaps the single most important means of preventing the ability of factions to cause damage – term limits.  As a result, America has a corrupt, self-perpetuating political class that gerrymanders elections, ignores the rule of law, and enriches itself in office while failing to serve the long-term interests of the majority of its constituents.  Some of this is accomplished directly but much indirectly through delegation to an unaccountable administrative state that protects the interests of the political classes and their political sponsors regardless of which party is ascendant.

Apologists can dispute this view but the evidence is difficult to dismiss – in every important area of governance (the economy, healthcare, education, foreign policy, you name it), the government is producing suboptimal results.  And because of the structure of government established by the Constitution and laws passed under that constitutional system, changing course is virtually impossible.  In fact, as we see from gerrymandering and related efforts to lock-in power, political parties exploit flaws in the system to their advantage.  The Founders believed they were setting up a system that would save us from ourselves by creating structural roadblocks to change but they underestimated how human nature would lead people to act in their own interests at the expense of the common good (this is known as “the tragedy of the commons”).  The genius of our constitutional order is the balance it establishes among the three branches of government, but that order only works if it is respected.  Too often, branches of government ignore the boundaries set for them and assert power that does not properly belong to them, leaving it to the other branches to rein them in.  The Supreme Court is now finally starting to restore the proper constitutional order in a series of opinions that are considered controversial by those unhappy at the unravelling of the progressive project of redistributing power among the branches of government to their liking. But those who believe in the proper constitutional order welcome its restoration and trust in the wisdom of the American people at the state level to make their own decisions and reclaim power from the federal government.  That was how our system was designed and intended to operate as messy as the process may be.