Congress, Face Up To The Deficit

by: Karl Denninger

I must respond to the letter from Sens. Mitch McConnell and Jon Kyl, and Reps. John Boehner and Eric Cantor, as published in The Wall Street Journal today:

Dear Chairman Bernanke,

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

Oh there's been plenty of evidence. Most-specifically, Bernanke's actions allowed you, Congress, to deficit spend to the level of 12% of GDP over the last three years. QE1 and 2 made that possible without a reaction in the bond market, and therefore enabled your profligacy.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

It did not facilitate economic growth, nor did it reduce unemployment. As I noted, it did one and only one thing - it allowed Congress to spend at an unsustainable level by making federal credit cheaper than it should have been, exactly as the 2003 easing produced the housing bubble.

The goal was not to stabilize price levels against "deflationary fears." One cannot have deflation when one has in fact had massive inflation in asset prices over the last 30 years, which we have. We have had it due to too much easy money, exactly as a drunk has little reason to stop drinking so long as there's a full case of whiskey at his feet. The result was this:

Reverting that to the mean will bring massive asset price decreases, but this is not deflation. It is the removal of an asset price bubble that pervades the entire economy, and the recognition of bad loans made to people who cannot pay them back. The common word for the sort of economic system that punishes people organically for being stupid, incidentally, is capitalism.

This bubble does not have primary blame on either Republican or Democrat - one cannot point fingers except, of course, at one's self. Both parties and the American people share the blame for these policies equally. The American people deserve blame for being gullible and allowing themselves to go through government "schools" that do not teach the fundamentals of exponents in their math class (despite claiming they do) and both major political parties deserve equal blame for intentionally lying to the people about the ability to provide services that the people are not financing with current tax receipts.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

The goal was never to do any such thing. It was intended to allow you to deficit spend at an unsustainable rate. That is, it was intended to give you, 535 drug addicts, more heroin.

You should all be in Federal prison or even better, we should re-enact the original Coinage Act that mandated the death penalty for conspiracies to debase the currency -- which you have all been complicit in over the last three years.

Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.

The only measurable outcome was the enabling of further descent into economic hell committed by the House under both Democrats and Republicans.

I will remind you that all revenue (and thus spending) bills must originate in the House. Without the consent of the House, no federal spending takes place.

We respectfully request that a copy of this letter be shared with each Member of the Board.

Sincerely,

Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

Here is the reality this nation must face:

We must have an open and public conversation in this nation on exactly what services we all wish our government to provide. For each of those services we must fund them with current taxes - not borrowing. For any such service that the American people collectively refuse to fund with current taxes, the government must withdraw the desired service.

Since both political parties assert that we must also honor out actual debts, we must first dedicate the interest and a modest amount of principal paydown from the federal budget that "comes first." I suggest all interest plus $200 billion in principal per year. Given current tax receipts, this leaves us with approximately $1.7 trillion to spend on all functions of Government, or about half of what the Federal government does now.

This is a difficult set of choices, but it must be undertaken, and it must happen now. Not in three years, not in five, not in ten. Right here, right now, today. You blew it with the debt ceiling debate, and your proposals thus far, given these facts, are a joke, but this is no laughing matter.

Quit screwing around, gentlemen, lest we wind up like Greece.