To say the national deficit is out of control may be an understatement. Our surging deficit is a sign of "spending has gone wild." The important point is that COVID-19 has again given us a reason to divert our eyes away from the over the top spending taking place. It appears everyone in Washington has come together and simply agreed on, "I will support your spending if you support mine!" The fact remains that while both the Republicans and the Democrats mumble about being dissatisfied over the deficit, pork packed bills continued to be signed into law.
Calling these spending packages "bipartisan" helps spread the blame around and masks just how dysfunctional Washington has become. Sadly, it allows all the players involved to take their victory laps and claim democracy works. When criticism does arise, those we have sent to Washington fall back on the stand that it was all done in order to avert problems down the road that would further damage the economy.
A person would have to be delusional to think this explosion in national deficits is not occurring across the world. It is a reality no matter how much effort is made to mask the truth. It is logical that if Biden does step into the Presidential office and nominate financial uber-dove and former Federal Reserve Chair, Janet Yellen, as the next Treasury Secretary the deficit growth will explode. Those of us appalled by how the Trump Mnuchin team has handled spending should be prepared for further disappointment. It has even been suggested and rumored that Yellen would leap into buying stocks if they were to decline as little as 20%.
A close look at the economy reveals it is only this massive and unsustainable deficit spending that continues driving our economy forward. The 2017 tax cuts have not panned out the way Republicans promised when they slashed corporate and income taxes. While we were told tax reform would mark a major shift in companies causing them to bring jobs back to America not enough of this has occurred. The structural issues that haunt America's competitiveness far outweigh the benefits brought forth from Trump's tax bill and lower taxes. The ugly truth is American companies still have little reason to bring jobs home and the budget deficit is set to widen significantly in the next few years even with healthy economic growth.
It would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. In 1962 Kuznets, the father of the GDP formula emphasized that we must keep in mind the difference between quantity and the quality of growth. While economic growth appears robust and a solid GDP number can result in a feel-good moment building consumer confidence, it can also mask growing weakness in various parts of the economy. Quantity simply does not make up for poor quality, we are talking about two different animals. The false narrative that simply growing the size of an economy by adding more people into the mix or using deficit spending undercuts the importance of a solid economy and the long-term stability of the financial system.
The national debt which entered 2020 at over $23 trillion now tops $27 trillion. Each trillion added to our deficit represents or translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. To clarify, this fails to include State and local deficits as well as a slew of "off-book" promises and spending that are also being made. Adding $13,332 of new debt for every person in the country in just one year spells big problems going forward. If we do not begin to face up to reality and get in front of our problems, we will soon find ourselves solidly behind the eight-ball.
History shows government spending is a poor substitute for the free market when it comes to allocating capital to where it is most effective instead it creates a false economy by borrowing from the future. Deficit spending is not a silver bullet without consequences. The fixation on the stock market and not the real economy represented by Main Street does a great disservice to Americans. While Trump may have been correct in pinpointing many of America's economic ills, his prescriptions for a cure, like those before him, leave much to be desired.
Corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not how much capital is available and in our current cheap and easy money, environment capital is basically free. The problem is not funding new investments, but finding endeavors in which to deploy this capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. This is why stock buybacks have become a corporate priority joining other investments that are not productive.
The deficit spending propping up our economy has gone far past anything we might have envisioned just a decade ago. Nowhere is this more evident than when we visit the active US Debt Clock shown on the right. Many people don't realize it but indirectly this deficit spending by our government also fuels our trade deficit. This contributes to our massive trade deficit with Asia and even our huge trade deficit with Mexico which becomes even more disturbing when you begin to understand that money quickly passes through Mexico and flows to Asia. It could be argued that when all is said and done, the money flowing into Mexico still ends in the far east only, it takes the scenic route.
The idea we will reach a quick fix to the trade problems facing America is a myth and oversimplifies the problems before us in achieving a sustainable trade balance. Reaching a reasonable solution poses a major difficulty in that China is so entrenched in its ideology it most likely will refuse any change that will throttle back its plans of domination. The bottom-line is that Washington has become a hostile and unfriendly environment for those interested in good governance. The crux of this post is to point out deficit spending is not a silver bullet, it has real consequences and with each step forward we get closer to the end of the road. While those embracing Modern Monetary Theory may argue otherwise, Econ 101 teaches that such actions always lead to a very bad place.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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