Government Debt is Not the Enemy

Pandemic Diary Day 32

There is so much conflicting information going on about our economy I wanted to sift through some of it, which mind you, is not easy, but I had some time on my hands.

This is without a doubt an oversimplification of a complex issue, I admit that upfront, but if you want to get technical there are a lot of economists out there writing tomes and I suggest you go find them.

According to the Committe for a Responsible Federal Budget the federal government will run a $3.8 trillion deficit this year and $2.1 trillion next year. That does not include any of the stimulus packages already passed or those to come, which could easily climb past $10 trillion.

US Government debt consists of two types of debt. The first is debt held by the public in the form of bonds. Buyers of those bonds are US citizens, international investors, and foreign governments. The second is intergovernmental debt, or monies the government owes other government departments primarily the Social Security Trust Fund.

Debt goes up when the government spends more than it receives in taxes, and the debt goes down if there is a budget surplus.

Whether carrying debt is good or bad is argued ad infinitum by people far more qualified than I, but it is important to understand that government debt is not like, and can not be discussed like, personal debt.

If you don’t pay mortgage payments for an extended period of time you are tossed out of your home on your ear, government debt doesn’t work that way.

During the 40s (1945 to be exact), think WWII, the budget deficit was 114% of Gross Domestic Product or GDP. This would be a period of history that feels to be economically similar to what we are going through now.

The Balance has a phenomenal chart showing the GDP to Debt Ratio from 1929 to present. It is too large to put up the entire thing so I am including the relevant years for this discussion.

I won’t get into the minutiae of government finance (interest, bond rates, borrowing) but suffice it to say, that debt was eventually paid off… in 1985. OK, that sounds horrifying, and yet if you really want to get technical it was never actually paid off, but paid off by buying more debt. What happened was the economy grew and we grew faster than that new debt. Is this making any sense at all? To put it as simply as possible, we never really pay off debt we just grow out of debt, this works because we aren’t carrying a 30 year mortgage, we have, well…forever to pay it off.

Data from Office of Management And Budget and Federal Reserve

I have said before, my crystal ball is as clear as mud, so I have no projection on how this country will grow after Covid-19, but heck we are, by nature consumers, so we will probably be fine. I personally (see crystal ball) think that the recovery is going to take several years, and even more years beyond that to get to spending on “luxury” items, but we will get there. Yes, I expect some of those tax breaks this administration gave to the rich will most likely be taken away, as they should. That is a completely different economics subject, not touching that.

I would be remiss in not at least mentioning the flations (in, de and stag). At this point I am reticent to introduce it to the conversation, as the oil situation plays so heavily into the equation that I think everyone’s crystal ball is muddy on this point.

What sent me down this path was an interview I saw on April 22nd with Chamath Palihapitiya. It lead to a few headlines the next morning like this: A Venture Capitalist Is Going Viral For Saying The Government Should Let Some Billionaires “Get Wiped Out”.

Keep in mind Palihapitiya is CEO of venture capital firm Social Capital who is worth in the neighborhood of $1.5 Billion, so this is someone with money and a conscience.

This line of questioning not only sent the interviewer into apoplexy but I am sure much of Wall Street.

At this point, Wapner’s (the interviewer) jaw is nearing the floor. “Why does anybody deserve, using your word, to get ‘wiped out’ from a crisis created like this?” .

Palihapitiya reply: “Just be clear, like, who are we talking about, a hedge fund that serves a bunch of billionaire family offices?” “Who cares? Let them get wiped out, who cares! They don’t get to summer in the Hamptons? Who cares!”

The next question: “Are you arguing to let airlines, for example, fail?”

And here is an answer that explains it so well, and why bailing out huge corporations as a priority in the Senate confounds me.

“This is a lie that has been purported by Wall Street. When a company fails, it does not fire their employees — it goes through a packaged bankruptcy, right?” says Palihapitiya. “If anything, what happens is the people who have the pensions inside those companies, the employees of these companies, end up owning more of the company. The people that get wiped out are the speculators that own the unsecured tranches of debt or the folks that own the equity.” “And by the way, those are the rules of the game, that’s right,” he continues. “Because these are the people that purport to be the most sophisticated investors in the world. They deserve to get wiped out — but the employees don’t get wiped out, the pensions don’t typically get wiped out.”

Palihapitiya goes on to say: “On Main Street today, people are getting wiped out, and right now rich CEOs are not, boards that had horrible governance are not, hedge funds are not — people are,” Palihapitiya says. “Six million people just this week alone are saying, ‘Holy mackerel, I don’t know how I’m going to make my own expenses for the next few weeks, days, months.

“It’s happening today to individual Americans, and what we’ve done is disproportionately prop up and protect poor-performing CEOS, companies, and boards,” Palihapitiya says. “You have to wash these people out.”

In a different interview in the month of March, (This is the last quote, I promise) Palihapitiya iterated something that I too have pointed out “If you factor in suicide, domestic violence, separation, drug addiction, and other illnesses, and you add that all together, and then if you want to look over a 5- or 10-year period, it will be devastating,”

The latest economic ridiculousness being bandied about and the attitude of our “leaders” that has me throwing shoes at my television set is the ridiculous notion that all these monies somehow are the proprietary rights of those in Washington. Somehow the knowledge that this money comes from taxpayers has been lost in the great maw of political contentiousness.

Senate Majority Leader Mitch McConnell has proposed that state governments should be able to “use the bankruptcy route” rather than receive aid from the federal government.

This feeds into the trope that borrowing is bad, I hope I have demonstrated that that concept is a non-starter.

There are glaring issues with McConnell’s statement. Humorously, it would take an act of Congress to allow states to declare bankruptcy.

Sure, we all know that a lot of cities have declared bankruptcy under Chapter-nine and used the process to restructure debts and cut costs, but states can’t do that. And while I have no special worm hole to view the future, I am pretty sure it would have a devastating effect on our already struggling national economy.

I think McConnell is proposing this, and my Spidey senses are telling me the real reason for his comment, is that state bankruptcy most likely would wipe out state pension funds and definitely kill government employee unions.

Even members of McConnell’s party have come out against this idea, but it also leads to another discussion about federal monies.

Our great country is made up of states that give money to the government and states that take money from the government. McConnell’s state of Kentucky receives $150 million dollars more from the Federal Government than it pays in federal tax dollars.

The states McConnell is suggesting declare bankruptcy are primarily New York which pays $41 million more to the federal government than it gets back and California which pays $13 Billion more to the federal government than it receives back.

Do the math. Drop the partisanship. Discover some Compassion. Big business may be where donor money comes from to allow our politicians to remain in office years on end, but it is the citizens that vote, and it is the citizens that make up this country and it is the citizens the people in Washington should care about. No business, large or small, will be financially healthy until the citizens are financially healthy.

Trivial Things

My Horoscope for today: What started out sweet is turning sour but don’t blame the vicissitudes of fortune. You’re going through a time that will test and strengthen your resolve.

The NYT Crossword Puzzle: exceptionally difficult today compounded by my deplorable spelling

San Francisco weather: 64 degrees and sunny, which is hot for San Francisco

NYSE is closed

Italian word of the day: favorevole (positive)

Spanish word of the day: la bahía (bay)

OED word of the day: puntabout (The action of kicking a rugby ball about for practice)

Days under Shelter In Place: 43

Reading: The City Not Long After by Pat Murphy

Reading Canto I, II, III of Dante’s Purgatorio

My Black and White Picture of the Day

Something Silly From the Internet: · Day 6 of Homeschooling: My child just said “I hope I don’t have the same teacher next year”…. I’m offended.

If you liked this please clap and let me know. Thank you



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