How Are We Going to Pay for All of This Stimulus?

On top of the $8.5 trillion dollars the U.S. Federal Government has obligated itself to spend in the foreseeable future, now the Fed has also committed to spending another $300 billion to buy long-term Treasuries over the next 12 months. That's $300 billion. That's just under one-third of a trillion dollars. And where will the Fed get this money?

The pundits would have you believe that taxation is the only option to raise this vast sum of capital, but the reality of the situation is that unless these pundits are utterly incapable of doing basic arithmetic – which they aren't -- they are simply trying to scare you. And perhaps rightly so, because there is only one way the U.S. government can fund $8.8 trillion in spending, and taxation is only a small part of the "solution."

To illustrate the mathematics of what I'm talking about consider this: there are about 304 million people in the United States, which means that the government would have to extract $29,000 in tax revenue from every man, woman, and child to come up with such a staggering sum of money. Even if the government didn't spend one dime beyond the $8.8 trillion, and taxed everyone at the same rate, it would still have to extract $29,000 from every human being in the U.S. in order to cover the debt it is creating.

As an aside, I had to perform these calculations in a spreadsheet, because my BA II Plus wouldn't allow me enter that many zeroes. And I still made a mistake, which a reader promptly pointed out. These numbers are hard to understand, much less work with, and that's what makes this so terrifying.

Over the years, I have collected a fairly impressive collection of skeptics, adversaries, and opponents who delight in criticizing my "radical" theories, and I'm sure that contingency will be out in droves to respond to this article. But before you naysayers get to firing on all eight cylinders – wearing the letters off your keyboards with furious strokes of merciless rebuttal -- I'm anxious for you to consider the cold, hard math I've just laid in your lap. Consider that a large portion of those citizens are retired, or children, or people otherwise incapable of or disallowed from working, and that $29,000 per person starts to get bigger very fast. How on earth can the U.S. government hope to squeeze that much money out of its citizenry?

Of course, the question is rhetorical, and since this is my article, I'll just go ahead and answer it. The U.S. government plans to "deal" with this unprecedented load of debt through the inflationary destruction of the U.S. dollar. It cannot tax enough to service the debt, so it will print the money.

But there's a part of the equation that leaves me scratching my head and chuckling a little, in a wry, disturbed fashion -- sort of like the way I chuckle when I see a dog chasing its own tail – and it's this: the United States government will print all of this money, and then it will turn around and loan that money to itself. That would be like me taking a paycheck, having a lawyer draw up loan documents, signing the check over to myself, and making monthly payments back to me. Now why would I do something like that? Absurd.

Perhaps the most troubling aspect to the whole sordid mess, however, is something I've brought up before: Chinese and Japanese people are not stupid. They know the U.S. cannot hope to suck $29,000 out of each and every warm body within its reach and domain without creating massive inflation. So, yet again, I pose this question: why would the Chinese, the Japanese, or anyone else for that matter, continue to lend massive amounts of money to the U.S. government, at absurdly low rates, if the only possible outcome is steep inflationary price increases and interest rate explosions?

The simplest answer is usually the best answer. They won't. Unemployment will continue to rise, the American consumer will continue to falter, credit card defaults will race skyward, and the Fed will print insane amounts of cash. Foreign governments will get wise to the situation and stop lending, and the Fed will face rapidly rising prices while trying to keep interest rates low. But how will it attract capital if it doesn't increase yields? Oh the conundrum…

For my part, I predicted the Fed would finally buy the long-end of the yield curve – although I didn't think it would be this aggressive. Nonetheless, I lightened my short position in Treasuries significantly at the end of January. I believe the herd will follow Treasuries higher for a while, but sometime in the next 3 to 6 months, shorting Treasuries is again going to continue to be the position of the century.

The other day, I was watching CNBC's Smart Money, during which several of the network's elite pondered the "mystery" of gold's advance in tandem with stocks. They batted the question around like a beach ball for a minute or two before there was a pronounced silence. Then one of them tentatively said, "Could it be because people are scared that inflation is coming back?"

Do you think?

Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Comments

[Hot Richard:]

I have a wife and two kids. That's about $12 million (with tip). I can probably cover that but WHAT ABOUT THE 300 MILLION OTHER PEOPLE WHO CANNOT!! Oh, and I lied about being able to cover $12 million in taxes.

Say goodnight, America. If this isn't the end, then my name isn't Hot Richard.

Mar 19 04:55 PM

[ron_paulite:]

World War III just like before

Mar 19 05:00 PM

[AlexS:]

I think your calculation is off a bit. Eight point five trillion divided by 304 million is only about 28,000 rather than a few million. But your inflation conclusion remains valid.

Mar 19 05:07 PM

[The Goy:]

Time to get a new calculator and or spreadsheet, your numbers are wrong even though I agree with your thoughts. The interesting thing is that gold while a good investment in inflationary times is beaten by many stocks.(think coppers, oils, jr explorers). So mak sure you spread your investments around and also have some money outside of the US.

Mar 19 05:42 PM

[Nik Kondrat...:]

Paco,

putting aside the math error, the crux of your argument is still right on. The answer is we can't repay it and the sovereign wealth funds and other usual suspects with an appetite for treasuries are not going to make sucker bets.

The bottom line is we're pushing out the great reset that has to happen and when the dollar devalues, prices skyrocket, and people are still out of work, the payback for all our excesses and for all of this insane policymaking is going to be a bitch.

Nik

Mar 19 05:53 PM

[Tricky:]

Like many posters, I agree with the crux of the argument, to at least a degree.

I'd like to see the math corrected and also a factoring in of other sources of govt revenue, such as corp taxes.

I assume the answer will still be quite unpleasant, but probably not so apocalyptic?

Mar 19 06:01 PM

[HiSpeed:]

How will we pay for this? Inflation!

Mar 19 07:46 PM

[Erick Tippett:]

The end of all this central bank covering its ass will be a complete
collapse of the economic system here and perhaps worldwide! The more dollars they print the more the U.S. dollar goes zilch like the German Mark after World War I.

They who sow the wind shall reap the whirlwind! Amen.

EDT

Mar 19 09:59 PM

[@TexasER:]

Paco -- I like your stuff. Ran across one of your articles researching a strategy I was looking at...short treasuries / long gold. Been there since early Jan. and I'm still not budging.

But your math being off by 2 orders of magnitude. You gotta get that fixed, man. (not the article) I did the quick cocktail napkin because it smelled wrong. You didn't, because you got the result you were expecting. Don't fall into the trap of ignoring the data that don't support your beliefs. Been there, done that. It will end up costing you money.

Keep posting, I look forward to your next article.

Mar 19 10:06 PM

[Dave Wrixon:]

I wouldn't worry about the mathematical errors. The Fed and the Treasury can't do the Math either. I am not even sure the Chinese can do the Math, but have said they are worried.

Not sure why the Chinese are worried, however, they can always play the American game. Revaluation of the Yuan will grow their national wealth in dollar terms by much much much more than would stand to lose on their US dollar investments.

Has anyone ever considered that they might just be in that deep so they can pull the rug out?

Mar 20 01:53 AM

[Analyste de...:]

I do think it's all about China. Nouriel Roubini has already written the America's epitaph in two ugly words "Sovereign Default." To avoid that, the US needs to begin a serious dialogue & accommodate China - why is that such a bad thing? They've played their role dutifully, now we must be graceful to our new global partners.

Mar 20 02:10 AM

[Paco Ahlgren:]

Thanks for the comments everyone. I was doing the calculations based on $880 trillion, rather than $8.8 trillion. I got confused because of the $300 billion addition by the Fed. Millions...billiions..... sigh...

In any case, the error has been corrected, and I appreciate all your forgiveness!

Mar 20 08:28 AM

[ArtfulDodger:]

Ah Paco, there you are. I thought you were napping, but knew that Bernanke's newest method of dumping the dollar would awaken you.

You might add that we have some really bad characters running our government and our banking system.

The initial dumping of all this money may not be too bad, but imagine when they finally decide to pull it all back and unwind.

That's when there will be hell to pay.

Good article. Keep it up, as I'm sure you will.

Mar 20 08:44 AM

[ozzy43:]

The destruction of credit continues to outweigh the increase in the printing press side of the money supply, so while the Fed's moves are decidedly inflationary, it seems to me that, on net, deflation will continue to be the dominant trend. Until and unless the credit destruction can be reversed (and that's obviously what the Fed is trying to ignite here), I don't see inflation as an issue.

It's the multiplier effect on the credit side, due to fractional reserve banking, that makes printing money the weak partner when it comes to the rate of change of the total money supply.

Additionally, I think that the answer to the Chinese question is more complicated. Occam's Razor may be useful as a tool, but it's not a mathematical theorem. In this case, the Chinese are dependent on us to buy their exports. If the Fed can convince them that igniting a new lending boom, via lowered mortgage/refi rates, will get Americans borrowing and spending again, then even as their dollar stash decreases in value, their export-based economy can make up for it. What the Chinese (like all authoritarian States) dread is *not* falling value of their dollar portfolio so much as a rising domestic unemployment rate and civil unrest. After all, the Chinese government is not just an investor - it is an oligarchic power structure, and it's true goal is to maintain power. Falling dollar may hurt, but civil unrest of a billion or so peasants - which already was an issue - is a far more dangerous threat. So to view the Chinese State as being motivated merely by investment issues seems to me to be a misreading of the situation.

Also, that sizable dollar holding gives the Chinese a very strong hand when it comes to dealing with America on numerous levels - which makes it a strategic reserve, and not merely an investment. The more US bonds they buy, the more leverage they have, even if they lose some money-on-paper in the process.

It's a complicated question, and I don't pretend to know the ultimate answer, but there is clearly a LOT more going on than a simple investment decision based on the time rate of change of the dollar value.

All that said, I love your articles and analysis Paco - even if we disagree on some of the central issues. We need more adherents of the Austrian school posting articulate pieces like you do.

Mar 20 09:32 AM

[Jonathan Ch...:]

First: I agree that the effects of the Government actions (FED and Treasury) will eventually result in Inflation.
Second: There are parts of the "Budget Deficit" that are only temporary- Much of the securities being purchased will eventually result in both repayment and even profits to the Federal Government. Remember that the Resolution Trust Corporation eventually resulted in profits to the government, as did the Chrysler Bailout.
Third: The dollar is now worth about four cents, compared to a dollar in 1933. This collapse in the dollar has occurred without a collapse of the society. While we may end up with a dollar worth only two cents instead of four cents, that will not be the end of the world, but it probably means $100/barrel oil and $2000 per oz gold.

Please turn off the hysteria button.

Mar 20 10:30 AM

[ozzy43:]

Yes - as any of the last dozen or so Rascals-in-Chief have insisted in the face of all evidence to the contrary - the State of our Union is Strong! ;-)

The overall economic environment today, both domestic and global, is so vastly different from that of the 30s as to obviate any outcome of a comparison between the RTC and today's shenanigans, IMO. Any "profits" from current government "investment" will undoubtedly be of the smoke-and-mirrors variety. To believe differently is to reject the lessons of of human history - to insist 'this time it's different!'

I'm also curious to know: what is the difference between a "budget deficit" and a budget deficit?

And I do not think it is a stretch to say that, while $100/bbl oil may not be the 'end of the world', $150/bbl oil - if sustained - will most definitely mean the end of the world as we know it.

On Mar 20 10:30 AM Jonathan Christopher wrote:

> First: I agree that the effects of the Government actions (FED
> and Treasury) will eventually result in Inflation.
> Second: There are parts of the "Budget Deficit" that are only temporary-
> Much of the securities being purchased will eventually result in
> both repayment and even profits to the Federal Government. Remember
> that the Resolution Trust Corporation eventually resulted in profits
> to the government, as did the Chrysler Bailout.
> Third: The dollar is now worth about four cents, compared to a
> dollar in 1933. This collapse in the dollar has occurred without
> a collapse of the society. While we may end up with a dollar worth
> only two cents instead of four cents, that will not be the end of
> the world, but it probably means $100/barrel oil and $2000 per oz
> gold.
>
> Please turn off the hysteria button.

Mar 20 11:21 AM

[Paco Ahlgren:]

On one one hand, you see credit destruction as a problem, which to me means that the consumer is tapped out -- among other, less significant, but no less important aspects. But if the consumer IS tapped out, then we're going to buy FAR fewer Chinese exports. Again, the Chinese aren't stupid; they see this too.

Ozzy, thank you for the kind words, and thank you for the feedback and insight.

Paco


On Mar 20 09:32 AM ozzy43 wrote:

> The destruction of credit continues to outweigh the increase in the
> printing press side of the money supply, so while the Fed's moves
> are decidedly inflationary, it seems to me that, on net, deflation
> will continue to be the dominant trend. Until and unless the credit
> destruction can be reversed (and that's obviously what the Fed is
> trying to ignite here), I don't see inflation as an issue.
>
> It's the multiplier effect on the credit side, due to fractional
> reserve banking, that makes printing money the weak partner when
> it comes to the rate of change of the total money supply.
>
> Additionally, I think that the answer to the Chinese question is
> more complicated. Occam's Razor may be useful as a tool, but it's
> not a mathematical theorem. In this case, the Chinese are dependent
> on us to buy their exports. If the Fed can convince them that igniting
> a new lending boom, via lowered mortgage/refi rates, will get Americans
> borrowing and spending again, then even as their dollar stash decreases
> in value, their export-based economy can make up for it. What the
> Chinese (like all authoritarian States) dread is *not* falling value
> of their dollar portfolio so much as a rising domestic unemployment
> rate and civil unrest. After all, the Chinese government is not just
> an investor - it is an oligarchic power structure, and it's true
> goal is to maintain power. Falling dollar may hurt, but civil unrest
> of a billion or so peasants - which already was an issue - is a far
> more dangerous threat. So to view the Chinese State as being motivated
> merely by investment issues seems to me to be a misreading of the
> situation.
>
> Also, that sizable dollar holding gives the Chinese a very strong
> hand when it comes to dealing with America on numerous levels - which
> makes it a strategic reserve, and not merely an investment. The more
> US bonds they buy, the more leverage they have, even if they lose
> some money-on-paper in the process.
>
> It's a complicated question, and I don't pretend to know the ultimate
> answer, but there is clearly a LOT more going on than a simple investment
> decision based on the time rate of change of the dollar value.<br/>
>
> All that said, I love your articles and analysis Paco - even if we
> disagree on some of the central issues. We need more adherents of
> the Austrian school posting articulate pieces like you do.

Mar 20 11:35 AM

[Tetrapod:]

Paco,
I had assumed you just expressed the numbers in 2012 dollars ;-)

On Mar 20 08:28 AM Paco Ahlgren wrote:

> Thanks for the comments everyone. I was doing the calculations based
> on $880 trillion, rather than $8.8 trillion. I got confused because
> of the $300 billion addition by the Fed. Millions...billiions.....
> sigh...
>
> In any case, the error has been corrected, and I appreciate all your
> forgiveness!
>

Mar 20 08:03 PM

[ozzy43:]

Regarding the Chinese question, a recent blog by James West put it this way - an argument which seems worthy of consideration:

"The conundrum for China lies in the fact that if they keep the increasingly fragrant U.S. paper comprising $1 trillion of their foreign reserves, the gradual yet inevitable erosion of the value of that position means the net worth of China will be concurrently dragged downward.

But if they do start dumping Treasurys [sic], then the value of the U.S. dollar would likely collapse as China’s move would lead the broader market into a wholesale rush to the exits, thereby accelerating their foreign reserve devaluation."

I guess we'll find out where the Chinese stand soon enough. Either way, there is no doubt this is dollar negative/gold positive.

On Mar 20 11:35 AM Paco Ahlgren wrote:

> On one one hand, you see credit destruction as a problem, which to
> me means that the consumer is tapped out -- among other, less significant,
> but no less important aspects. But if the consumer IS tapped out,
> then we're going to buy FAR fewer Chinese exports. Again, the Chinese
> aren't stupid; they see this too.
>
> Ozzy, thank you for the kind words, and thank you for the feedback
> and insight.
>
> Paco

Mar 21 10:17 AM

[popey:]

Paco, the opportunity to short treasuries is not 3 - 6 months away. It is now. Treasuries should range trade for 3-6 months and then begin their inevitable crash. Now that the Fed has opened the printing press fully, there are no more buyers. You should be writing a more interesting article = exactly how to technically trade this catastrophe.

Mar 22 07:02 PM