QVMS - The Debt Limit

Summary

• We have hit the debt limit; we have a problem.
• How can we put off the problem and make someone else deal with somewhere down the road?
• Both political parties, in my opinion, don't really want a solution to the "debt" problem; they just want to send it off once again into the future.
• The faces change, but the problem doesn't.
• Debt really never goes away, unless you take it seriously.

It was always going to be a question of when I would write my post on the debt limit and what is going on in Washington D.C., not whether I would write it at all.

What do I feel about the federal debt and the federal debt limit?

In my perfect world, I would place the debt limit at zero and would argue for a rule that would see the government pay off any of its debt within a relatively short period of time.

Truth be told, I am a banker from the Midwest. I don't like debt.

My grandfather was a "Missouri" banker, and my hero in the central banking world is William McChesney Martin, the longest-serving chairman of the Federal Reserve, who served as chairman from 1951 to 1970.

Mr. Martin's father was also closely involved with the Federal Reserve System. In 1913, Martin's father was summoned by President Woodrow Wilson and Senator Carter Glass to help write the Federal Reserve Act that would establish the Federal Reserve System on December 23 of that year. His father later served as a governor and then president of the Federal Reserve Bank of St. Louis .

Oh, by the way, Mr. Martin was born in St. Louis, Missouri. So was I.

Some of my background: I completed three successful bank turnarounds: two were as the president and Chief Executive Officer; one was as an executive vice president and chief financial officer.

The family joke? The only people I really want to lend to are those that don't need the money.

Matter of fact: I only oversaw one loan decision in my career and that was when I was a management trainee.

So, financially I tend to be on the conservative side.

The Federal Debt

The size of the federal debt, to me, is ridiculous.

Now at $31.4 trillion, the size of the total debt of the U.S. government has done nothing but accelerate in size in recent years.

This picture, in my mind, captures the whole budget situation in existence for the past sixty-some years.

To me, the current thinking began in the early 1960s, with the election of John F. Kennedy as the U.S. President. Mr. Kennedy wanted to get the U.S. economy "going again" and he brought a lot of new, young thinkers to Washington to help him build a "new" economic policy.

The program that evolved out of this effort was primarily "Keynesian" in format and as it was applied, it was closely connected with the statistical relationship called "the Phillips Curve," which showed how, statistically, unemployment and inflation seemed to be tied together.

The new economic program was based upon creating federal budget deficits to stimulate the economy and "get the economy growing again."

Monetary policy was supportive in the sense that it kept interest rates low so that private investment spending could be financially feasible.

And, according to the Phillips Curve, modest amounts of inflation could be tolerated as a higher rate of inflation seemed to be associated with lower amounts of unemployment.

This became the economic policy of the country for by 1968 Richard M. Nixon, from the Republican side of the political spectrum, bought onto the program and confirmed this move with the statement "We are all Keynesians now!"

With the exception of the years Bill Clinton was the president of the United States, the U.S. government, Republican or Democratic, supported a Keynesian approach to fiscal policy and, one way or another, drew on the support of the Phillips Curve to justify its actions.

(In his new book, "21st Century Monetary Policy," former Federal Reserve Chairman Ben Bernanke shows how the "Phillips Curve" was drawn on to support economic policies. And, both Republicans and Democrats used the relationship, equally. Furthermore, the use of the "Phillips Curve" continued into the second decade of the 21st century.)

This became the background for me to develop the idea of "credit inflation," the policy procedure I attributed to the economic policy of the federal government that ended up where most of the government stimulus went into the financial circuit of the economy, passing by the real spending circuit of the economy. As a consequence, from the middle 1980s on through the late 2010s, the economy saw very little consumer price inflation, but saw lots of asset price inflation, like in stock prices, and only mediocre rates of growth in the real economy.

During this time, I did very little writing on fiscal responsibility because, given the situation, it was close to useless to talk about controlling the deficit. I spent my time writing about other paths to fiscal and financial prudence.

Now, however, I sense that the time has changed and now I need to write more about my ideas on controlling deficits and limiting the growth of the federal debt.

So, here we go.

Going Forward

Right now we have a huge dilemma.

We have a federal government that is pumping out lots and lots of debt built around helping the economy to grow faster.

At the same time, we have a central bank that is in the middle of a fight to reduce inflation back to its Phillips Curve goal for inflation and is using 'quantitative tightening" to achieve this goal.

See any conflict?

The policy approach I have called "credit inflation" is no more in place.

So, we have to choose a different approach.

Debt is a problem.

Unless one pays off what they owe others, debt never goes away. It is always something that has to be dealt with. It is always something that can come back to haunt you.

Right now, the debt that the U.S. government has created is coming back to haunt it.

And, we are seeing that debt all over the world is coming back to haunt its issuers.

Debt has to be paid off. We must get away from our fantasy narratives.

Debt payments always loom over the future.

The economist Robert Barro has been the only major economist in recent years that has addressed this issue. I commend his writings to you.

So, the work is just getting started. The problems, right now, are so big that it is hard to expect much will be done in the near future.

But, we must begin to work to, not only stop the debt from increasing more, we need to work out how we can start to reduce the size of the total debt outstanding.

This is not the time to "kick the can" further down the road.

This is what usually happens. We have a debt problem. Our solution...postpone the solution. Deal with it another day.

Well, the problems will come back. That is the true story we get from history.

But, people always seem to find a reason to postpone the "crisis" once more.

Then we can just borrow more and make the numbers at the next time of disaster just that much higher.

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