US Debt Bomb III: "Is this time different" ?

As it is  often the case with populism -and Sebastian Edwards explains in his conference about the long and dramatic experience of Latin American countries with it - , US might be entering a debt-default crisis stage. That might be what is behind the sustained hike in the 10-year bonds and interest rates on US debt.

Unlike what happens with populism in the developing world, in US there are not one but two populist parties: the Democrats practice "Left" wing populism inflating entitlements to get minorities' votes and Republicans do the "Right" wing version subsidizing Wall Street and the military-industrial complex with tax cuts. Both policies -deeply ingrained in the parties' platforms- are predicated in increasing spending.

The arguments -or excuses- for either side are that public spending creates jobs and fuels demand (a distorted version of Keynes' -who warned  against debt and justified public spending only for short periods of time-) (the Left wing argument) or that low taxes attract investment and create jobs. Notice that "jobs" is the key populist word here.

The invariable result of the swings between tax cuts and spending is the growth of the national debt, now reaching 20 trillion dollars, a level that goes over the 100 % of US GDP  (104 % to be precise)

and would put any other country in imminent risk of default, as economist Kenneth Roggoff and  Carmen Reinhardt explain in their study of 500 years of debt, "This Time is Different"

Alan Simpson and Erskine Bowles produced a detailed and uncontested diagnostic of the debt problem created with these two-sided seesaw that both parties are using to chop down our shared economic tree. They recommended both spending cuts (in defense and social entitlements) and tax hikes to return the runaway deficit to sustainable levels. 

Simpson used his gift for the vernacular to describe the reception they got as"the one that you get when you fart at a garden wedding". Both Obama and the Republicans promise to act on it and they did. They both stop talking about Simpson-Bowles.

Populists politicians might brag when the stock market goes up -much as a rooster bragging about bringing sunrise- only to fall silent when the inevitable "correction" comes back and erases paper gains.

Now, the "correction" menaces to erase more than previous gains with record falls that bring stock values below what they were 2 years ago, making all Americans feel the pinch in their savings -which in turn can aggravate the crisis by depressing consumption-.

The real bad news is that the cause of this continued fall and two serious symptoms: higher 10-year rates (which baloon the existing 20 trillion debt) and inflation (which hits cost of living for millions). That combination costed Jimmy Carter and Gerald Ford their presidencies, and took a disciplined Fed years of high rates and dreaded "austerity".

If the current trend continues to unfold, the first openly populist president since Jackson will face the challenge of managing an era of austerity. Looking at how other populist leaders did it in Latin America - Maduro, Kirchner, Rousseff- it might not be easy

US Debt Bomb II : Who remembers Simpson-Bowles ?

I took very seriously the Simpson-Bowles report and its proposals when they first appeared.

They were the first bipartisan -or even non-partisan- serious study and proposal I have read so far on the matter of long-term (50 years) financial management of our country.

Unfortunately, after more than 15 years of being issued, presented and discarded, Simpson-Bowles remains the only serious and comprehensive proposal for fiscal reform. In the intervening years, the 2001 deficit has ballooned from the 5.4 trillion legacy that George W Bush received to the 19 trillion that welcomed Donald J Trump in 2016. 

Moreover, measured as a percentage of GDP -as experts Kenneth Roggoff and Carmen Reinhardt found the 90 % debt/GDP as the tipping point at which debt becomes unpayable- is represents a jump from under 60 % to over 100 %, a level that in any other country would put US interest payments in the double-digit ballpark.

Rogoff seems to be more optimistic about the short-term levels of growth that Trump's economy can achieve.

Having said that, the Harvard economist cautions about the challenges ahead if for some of several reasons, trust on the dollar strenght -and the toying with defaulting our sovereign debt (something explicitly banned in our Constitution) instead of doing a harder adjustment on government spending.

Trump -a businessman who called himself "the king of debt"- has flirted with the idea of indirectly defaulting the 19 trillion debt he inherited by repurchasing bonds at a lower price -thereby stiffing bondholders- if necessary.

Trump has not come back to such suggestions, but his seems to be a "supply-side" approach to debt that can leave a serious bubble burst like the one that exploded in 2007-2008.

The fact that dealing with such levels of mounting debt was ignored for such long period of time without any cry for action is just another example of the dangerous disregard for unpopular facts that characterizes populism and partisan thinking.

An over 100 % debt/GDP ratio (still growing) should raise a red flag for anybody holding US dollars or T bonds and Simpson-Bowles should be revisited. But that is, of course, assuming that hard choices are something that partisans want to discuss in an "election year" (code word for "ever", since all years are election years). 

Although Alan Simpson remains one of the most straight-talking, knowledgeable and respected speakers today, his candor, bipartisanship and expertise is not enough to recapture the attention of the majority of voters distracted by 24/7 multimedia partisan networks, droning surrogate talking heads and tweeter name-calling wars. They remain unaware about the growing quicksand where their finances and those of their children and grandchildren are gradually sinking.

A national debt over 100 % of our GDP is the real "swamp" in Washington, a bipartisan 19 trillion dollar-black hole punched by each new administration.

Given the precipitous growth of fiscal deficits (through either spending or tax cuts) Bowles-Simpson should be a starting point to propose an equally fact-based and professionally elaborated long term proposal.

Here is the access to the full Simpson-Bowles report.

US Debt Bomb I: Populism Fuels Partisan Spending out of control

When Senator Daniel P. Moinyhan famously said that "everybody is entitled to his own opinion but not to his own facts" nobody imagined that 40 years later someone will come back with "alternative facts".

I plan to post regularly facts that may or may not please those on one or another partisan position -there are many parties to each set of facts- but I hope will help keep discussions honest and conclusions closer to reality.

It's a tall order for a time in which we as a society live in almost parallel universes divided by invisible gerrymandered lines, that keep voters homogeneous and congresspeople glued to their seats. That old practice has been refined and compounded since the inception of cable TV newscasts and later, partisan websites, which create "echo chambers" that repeat party lines at a set of 3 or 4 daily "news cycles" brainwashing, rinsing and repeating willing viewers with the partisan talking points decided by partisan campaign managers and their press agents. All of this, financed by billions of dollars of media moguls turned into kingmakers.

Such activity requires as well a constant dissing of expertise as "elitism" and replace facts with conspiracy theories and urban legends. 

Partisanship has infected all areas of public life to an almost comic level: universities create "safe zones" to protect college students from the "microagressions" of unacceptable opinions and facts.

Both "Left" and "Right" partisans pick or drop friends, family, clubs, associations, careers, colleges and even jobs based increasingly on partisan politics.

The 2016 election and its aftermath -the first year of Trump's unexpected and dysfunctional presidency- brought the war on facts to a new level of virulence.

First fact-check: "Obama grew the national debt more than all previous presidents together"

Well, although Math can be used creatively, this is too much even for that. Thanks to the useless "debt ceilings" we have a long time-series of national debt from 1981 to 2014:

As we can see, it's awful and dangerous -we are in the 19 trillion level with a new round of tax cuts- and ignores the Bowles-Simpson bipartisan commission recommendations almost to detail -as senator Simpson forecasted-

Obama received a 11 trillion debt from George W Bush in 2008 (together with the Great Recession 2008-2011) and left a 19 trillion -a 68 percent increase) to Donald Trump.

Obama didn't increase the debt more than all his predecessors together, but did increase the debt in dollar terms more than his immediate predecessor: 7. 9 trillion against 5.8 trillion generated by George W Bush -who had the title of "biggest spender" in dollar terms before him. (more details)

In relative terms, however, George W Bush rose the remaining debt he received from Clinton (who made a surplus in his last years) more than 100 % against 68 % for Obama. 

Second Fact-check: Clinton left a surplus to Bush and he turned into debt

Here the facts also resolve the dispute. CBO's chart shows how the surplus generated  during Clinton's second term thanks to the bipartisan welfare reform and the new economy boom turned into debt later:

Clinton's surplus expected for 2001 never materialized because they were mostly used to finance new spending -tax cuts and wars-. 

There was a huge overestimation of the surplus (estimates of the surplus 27 % were over what it turned to be) but what came in went out in those two ways almost immediately:

Wars and tax cuts combined with Fanny and Freddie real estate debt amounted to almost 70 percent of new public debt by 2019.

So, that second fact is correct, but omits the real estate bubble (Fannie, Freddie and TARP) that remains a bipartisan responsibility.  

Peter Pan Politics

While the country experiences once again the closing of its own government because its two parties play "chicken" withholding funds to pay for the functions they were entrusted to oversee, it's hard not to see government institutions operating as high-school playgrounds.

With a President that communicates by tweets and brags about himself as an old adolescent and public officers and CEOs turning their offices in frat houses and having public temper tantrums, it is not illogical to think that power turns Americans into versions of Peter Pan -that eternal child invested with magic powers that refused to grow-. 

Or perhaps it's the other way around, and Americans vote for Peter Pans that promise to take them away from hard choices in magic trips to Neverland: MAGA, the Great Society, and so on.

In the meantime, back into reality, things don't change. They only get worse.

Government shutdowns are a perfect example of what happens when bad behavior isn't punished. 

There are no punishments for this obvious dereliction of duty. Nobody gets fired, sued or  goes to jail. Government is allowed to stop working without penalties but the governed keep being fined or even serve jail sentences for not paying the taxes. And our soldiers can face court martial for not showing up, even if their paycheck is retained.

Sooner or later, of course, the consequences of not keeping the basic services will come back to affect us and then, adult behavior will return briefly to clean the mess left behind. Moreover, it will be adult behavior what will keep basic services running on the backs of unpaid public servants.

Psychologist Erik Erikson defined adulthood as the sixth and seventh of eight stages in the life cycle. Unlike children, adults' focus is on providing care to others, taking responsibility for those who can't provide for themselves -the too young and the too old-.

Psychoanalist Eric Berne added an interesting explanation: adult behavior is defined as negotiating between our "wants" or impulses and our duties dealing with the constraints of reality.

We would love to double our spending, but we can't do it unless we increase our income before. We cannot hold a debt that exceeds our possibilities of repaying and making a living at the same time. We can't stop eating for too long, and our creditors can't keep loaning additional money to us  indefinitely.

We know we cannot lose our control with our neighbors in ways that will generate retaliation and turn our daily life in constant confrontation and stress.

As adults, we know all that, but as partisan voters we seem to prefer Peter Pan and pipe dreams such as self-paying tax cuts or entitlements. Even more:both parties in the United States now support both options at once: tax cuts AND increased spending.

All of course, will be solved by issuing IOUs  and passing them to the next government  each four years arguing that "growth" or "well-being" fairies will take care of reducing it.

What we did as a society with our last budget surplus speaks volumes. Paying up the debt? Well, not. Neither what Milton Friedman recommended at the time (2000). Friedman considered debt relief politically unfeasible (he knew Americans better) but economically correct, but thought that individual Americans would know better how to allocate the surplus than the Peter Pan government. 

Friedman was half-right and half-wrong. American voters decided for giving themselves a "tax cut" but authorized their government  -POTUS and COTUS- to balloon the spending with a 2 trillion dollar debt war of choice in Iraq for the following 8 years. 

The newly added debt established the foundations for the current 19-trillion-dollar debt.

Winston Churchill's comment on American's behavior seems to describe also that of a Peter Pan:

Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.

Partisan voters are played by their faction leaders into Peter Pan politics merry-go-rounds.

The last time adults were asked to take the floor was, arguably, when the Bowles-Simpson Debt Commission issued its report (2001). 

With Peter Pan politics and politicians in full swing, it's good and sobering giving them the last word to remind reader that reality hasn't changed but in size -quite like tall adolescents-: