Money, Motivation and the Future of our Nation

The economic challenges of the moment are significant and complicated. As a people, we are being confronted with existential questions that we’ve never anticipated or planned for, most notably (and publicly) the balance of our health and our individual solvency. In the discussions regarding these questions, there are any number of false equivalencies and projections being offered by either side, making the analysis by those most affected even more problematic. There is more to share about these questions than one blog could reasonably hold, and I hope to address many of them in the next few writings.

There is one problem — perhaps the most critical challenge of all — that is being largely ignored and unspoken: how can this country manage the current crisis without creating an equal or greater one tomorrow? The nation faces a critical balancing act in responding to the present needs against caring for the future solvency of our economy, and by extension, the preservation of our national identity.

It is a question that is not being openly discussed, or even raised, within the national discourse.

What Has Been Done So Far

The predicate of the problem has already been established. In response to the pandemic’s arrival, the government has closed down the economy and consigned the population to a period of isolation. That decision was likely inevitable since the alternative was projected as the deaths of millions, and an accordant collapse of the economy as a result. The immediate price of that decision was the closure of much of the economy, the sudden elimination of tens of millions of jobs, and a decline in the various stock market indices of some 30% or more. The prescribed remedy was the infusions of trillions of dollars, loosely assigned and apparently without oversight. The CARE act (at around $2 trillion the most significant financial bill in history) was cobbled together in a matter of days, and overmatched by the infusion of trillions more into the banking system by the Federal Reserve.

The intent of this urgent capital was… well, it’s not exactly clear. In a general sense, there are sections intended to provide a safety net for those whose jobs were forfeited through no cause of their own — extensions in unemployment qualifying and duration, provisions for covering testing, and treatment of victims of the virus — but these constituted a minor portion. There is a loan program nominally designed to preserve small businesses that retained a high percentage of their workforce through the shutdown, but those funds (some $350 billion) ran out in a few days in the midst of questions and revelations of major corporations raiding the till. There is a direct stimulus program, sending out checks to some 150 million Americans, for a bit less than $200 billion. Direct aid intended for Main Street businesses and workers to date will end up less than $750 billion including the various loans and stimulus payments.

Then there are the larger payments, for the major capital organizations. There’s a $500 billion fund, theoretically for general aid for larger corporations, and more funds being directed to specific industries, but none of those allocations are publicly revealed, so we truly don’t know their destinations (there’s a six month waiting period before we learn their recipients). There are as yet un-tallied numbers for bailing out the airlines, the hotel industry, even the cruise lines. There are potentially trillions of dollars allocated to the Fed’s asset purchase programs, widened in an unprecedented fashion to permit purchasing of not only treasuries but municipal and even corporate debt from the open market.

With the additional half-trillion dollars or so being bandied about for replenishing the loan program, and the states and various industries needing help, we can expect a total bill on the cash side in excess of $3.5-4 trillion before the dust settles, all of which will be added to the existing trillion-dollar deficit that we accrued in a period of unprecedented corporate success… and again, that is assuming that the Reserve’s actions all come out in the wash eventually, and that the dramatic expansion of money in the system is somehow without cost, or that it fails to create inflationary pressure.

The First Questions

The response to all of this accrual of debt is unanimous — a call to spend whatever it takes to protect our businesses, to save our people, to battle this “invisible enemy”. Noble and acceptable rationales, and at the risk of wading against the river of sentiment, I have some questions to pose, first about the large capital side, which we’ll assume at about $1.25-1.5 trillion, but which will likely end up considerably higher: what are our actual objectives? What are we saving, exactly? And at what cost versus the benefit?

The pandemic arrived with the economy doing well — not spectacularly despite pronouncements from the administration but maintaining a GDP growth rate of plus or minus 2.5%, with projections for a slight decline in those numbers in the coming year. By most measures, the economy sat at near full employment. Despite that growth, the federal government was running up record peacetime deficits and showing no inclination to address them. Corporate America was sitting on unprecedented amounts of cash, with several industries reporting epic levels of profitability, aided and abetted by lowered tax payments and historic levels of regulatory relief. These companies have been hurt, without doubt, but is it the responsibility of the U.S. taxpayer to restore them to the same record levels of profitability and solvency that they enjoyed prior to the virus, or merely to provide a backstop against their demise?

The stock market is an imprecise measurement of our economic wellbeing since so many of the defining corporations are global in nature… but it is a not unreasonable yardstick for corporate health. The most commonly referenced index is the DJIA, which as of this writing is sitting at 23,650 in the midst of the chaos. While this level is some 6,000 points below its recent high watermark, it is important to realize the current level is less than 2,000 points, or about 8.5% below where it was just eight months ago, and higher than it was about a year and a half ago… how high is it necessary to bump it up to?

The Unrecognized Future Costs

The general mindset is that the country should spend whatever it takes, then address the damage afterward. After all, borrowing rates have been held to historically low points, so the cost of handling a few trillion dollars of additional debt is relatively minor, isn’t it? There is this permission from the Treasury Secretary, Steven Mnuchin, who emphasized that lawmakers shouldn’t be concerned about the deficit.

“Interest rates are incredibly low, so there is the very little cost of borrowing this money,” he told reporters. “And as I’ve said, at different times we’ll fix the deficit. This is not the time to worry about it.”

Harvard economist Jason Furman, who served in 2009 in the Obama White House, suggests that Congress will have to spend another $1 trillion this year to resupply the small business rescue program, further, extend unemployment benefits and provide another round of checks to households… and another $1 trillion could be needed next year if unemployment remains high. Those numbers don’t include corporate funding, but there’s little to indicate that the flow there will stop while there’s an argument to be made for a compromised economy.

So, at the end of the day, here’s the big question: Is there any limit to the money that the U.S. can print? Does debt even matter any more? If it is decided that our objective is to preserve corporate America at unprecedented levels and to run up another $7-10 trillion in the process over the next 12-18 months, should anyone care?

We, the people should, and must.

The True Costs of Unrestrained Debt

Mnuchin’s reference to low-interest rates reflects his stated intention to finance the debt with relatively short term instruments, particularly 10-year treasuries. He is correct superficially; at current rates, the interest payments on the soon-to-be $30 trillion is “only” about $200-225 billion per year. To understand that in perspective, the United States spent $676 billion on defense, coming out of a $1.3 trillion dollar discretionary spending budget. Federal revenues from all sources last year totaled $3.5 trillion, a number that already was $1 trillion less than we spent, despite the strong economy. Adding another $200+ billion to that picture is hardly meaningless… and that doesn’t reflect the fact that in ten years, that new $7.5 trillion comes due, along with some portion of the other $22.5 trillion of debt that the country is rolling forward.

Let’s look at what that means. What if the Fed doesn’t artificially hold our interest rates down to these unprecedented levels for another decade, and rates move towards market norms? A 3% rate (which was common only two years ago) on the next bonds would be about $900 billion a year in interest payments. Move that to 4%, which has been crossed in the last dozen years, and you’re talking about $1.2 trillion per year just in interest payments.

In an environment where the government has been consigned to paying twice as much for interest on the debt than it pays for the military, are we still the nation that we believe that we are? What compromises are we forced to make in order to slow, let alone stop, the annual accretion of additional debt to the picture, a death spiral towards insolvency? What services and commitments do we abandon because there is no money left to pay for them? How, exactly, do we “fix the deficit”?

The Price of Printing Money

While we’re here, let’s factor in one more idea: inflation. The Federal Reserve chairman, Jerome Powell, stated in an interview that the funds that the Fed would bring to bear to preserve the economy were “unlimited”. Under any rational scenario, the printing of more money would cheapen its value, the buying power of the existing dollars… when you have to spend more dollars to buy the same goods, that is inflation. For more than a decade, our financial leaders have assumed that the laws of monetary physics no longer apply. They have printed record amounts of money, and yet inflation has remained historically low. They assume, therefore, that inflation no longer exists, and their actions in printing money are without consequence.

This is wonderful news, but vastly underused. Since there are no consequences to expanding the money supply, my worries about the deficit are irrational. Let’s flood the economy, pay everyone a monthly stipend to improve their lifestyle, and consume more goods, and let’s have a party. When the bill comes, we’ll heat the presses and pay with crisp new bills. Constraints are for suckers… we’ve got a magic press, and we’re happy to use it.

Sarcasm, you say? Then help me to understand why. If the premise is that printing more money has no impact on the value of that money — the standard theory at present — then why would we not merely write our way out of whatever debt we accrue? Ah, there are limits you say. Only so much money is protected from the corrosive impacts of inflation. Despite the difficulty in defining that — inflation is inevitable, but only under certain circumstances — how do we know when we’ve reached that mystical threshold? Is there a book with columns and charts? Or, more likely, will we know it when we trip over it and fall on our faces?

If inflation is the result of our compiling of this unimaginable debt, what will that cost us? First and foremost, one of the unavoidable consequences of an inflationary period is the elevation of nominal interest rates. So, in an inflationary period, we’ll find that the payment on the debt that we’ve accrued will be markedly higher. During the Carter years, interest in the ten year Treasuries exceeded 10%. At that level, the service on $30 trillion would be about $3 trillion a year. Remember, all of the revenues that the government took in last year totalled $3.5 trillion, and discretionary spending was limited to $1.3 trillion. To limit the cost of debt to “only” the total of all of our discretionary income, it would take only a little over that 4% that we mentioned before, a number lower than the average yield on those bonds just a decade ago.

Motivation Versus the National Interest

The scenarios are uniformly frightening, and the impact on the economy — on the nation — in a decade or so are impossible to quantify. This brings us to two questions: why is this not a more significant part of the national discourse, and what should we be doing.

The first question is related to the nature of our politics and our systems of wealth. Let’s ask a critical question: who in the realm of influence and power is motivated to worry about the future? Politicians are creatures driven by their clinging to their office, a charge which limits their concerns to the next election. In a country where terms are short (2, 4, and 6 years) the motivation is to govern to the end, not to the existential benefit of the nation… history is littered with the few political forces that chose to sacrifice their careers to unpopular champion causes. The leaders of industry? We long ago abandoned judgment of their success or failure — and most importantly, their compensation — on the long term success of their companies.

Consider this question: I offer to pay you $10 million a year for ten years, but at the end of the ten years, the country will experience depression. Your evaluation would have to include this: in that decade, you’d have amassed $100 million, enough to insulate you and everyone you love from the ravages of that depression, and to get you to the other side in excellent style. Would you decline that offer? Or would you feel compelled to accept, knowing the impact that it would have on those that you care about most?

Culture of the Marketplace

Business leaders have that offer on their table in these times, except for a lot more than $10 million. Push for the government’s money to insulate their companies today, and reap years of rewards… future debt is the next one-ups’ challenge. Do we expect them to forgo current success for a future award when their financial motivation is opposite, and the culture of the marketplace offers them no rewards? We cannot… and our leaders of industry are inexorably drivers of our policies and political positioning.

There is no constituency in our country that is motivated to confine instant success for future solvency. As Mnuchin said — dealing with the debt will wait. Now is not the time to worry. The portion of the populace that will pay the most significant price (potentially, all of the vital part of it) will be the various layers of the economy from the bottom to the middle, and a bit above… a population that has little voice, little control over the discourse that permeates the halls of government and the superficial media.

A Call To Action

This leaves the second question: what should we, the future victims of today’s excess and greed, do about it?

The pandemic-based crisis that we face today is not imaginary, and it is lethally real. There are several critical functions that we must attend to, and they will create more difficulties in the future. We have a moral obligation to protect the tens of millions of workers that our choice in treatment has disenfranchised. We have an existential need to attack the virus aggressively, and to bring about long term solutions to its presence. These are necessary, expensive, and immediate.

What we cannot do is to pretend that money is a construct, a thing without substance or meaning. We have to consider — publicly and transparently — what our priorities are when it comes to the support of the economy, the marketplaces, and financial institutions. We need to do what is necessary for the good of the country, but we need to be vigilant about those significant dollars in a time of swirling numbers and a stricken populace.

Now is the time to solve a problem that has reached our shores uninvited, but it can also be the time that we create a similar, unsolvable problem for the next generation and beyond. We must be vigilant, demanding, and attentive… and we must remember that virtually all of the motivations that are in place are pointed towards decisions that will destroy much of what we value.

We can counter those motivations by remembering our powers: we vote, and we can make those who ignore our interests irrelevant by removing them from office. We watch, and we can support those in the media who bring these issues to light and share our concerns. We buy, and we can choose to spend our capital where it aligns with our beliefs. Individually, we have only a small voice… collectively, we can balance the scales and save our country’s future.