Two Ways Out for America: Debasement or Default

At The American Conservative, Bill Bergman makes the case for Judy Shelton joining the Fed. While doing so, Bergman highlights that the American budget of today looks eerily similar to the budget of the Soviet Union in the days when Shelton was predicting the communist nation’s imminent collapse. Bergman writes (abridged):

As a young researcher and first-time author, Dr. Judy Shelton predicted the coming collapse of the Soviet Union two years before the tanks and human rights protesters converged on Red Square. And while her views on communist economics might not seem timely at the moment, they’re actually quite prescient.

In 1984, Dr. Shelton was investigating global levels of debt at the Hoover Institution during a period in which the Soviet Union was vigorously seeking sources of international credit. The Soviets borrowed money from Western banks; they also sought to join the International Monetary Fund and World Bank. Shelton noted how this behavior seemed at odds with a supposedly self-sufficient economic system, which the Kremlin claimed generated reliable surpluses year after year.

While American satellites tracked everything from Russian aircraft carriers to missile pads, Shelton sharpened her pencils and scrutinized the Russian government’s accounting. She meticulously produced her own estimate of the true deficits and debt being accumulated by the Soviet Union. Her research led to a publishing deal, and in the resulting book, she showed how the USSR had actually been running annual deficits of tens of billions of U.S. dollars.

[Today] [w]e have calculated that the [American] federal government’s true budget deficits have been running about four times higher than the officially reported numbers ($779 billion in 2018) once you consider the accumulation of off-balance sheet debt for social insurance programs. We think that off-balance sheet debt should be counted in the national debt, which would increase it to more than $100 trillion compared to the official $22 trillion figure.

A central bank serves not only as a bank for banks, but also as a bank for the government. Whatever your views about Judy Shelton’s economic philosophy, it will be valuable to have a central banker with experience digging for the truth about opaque state finances.

Of course, America could grow its way out of all this debt, but that seems unlikely. Meanwhile, there are two timeworn escapes from debt for nations that can no longer pay, debasement and default. Jeremy Jones, the Chief Investment Officer at my family run investment counsel firm, says of the possibility of the American economy growing out of its debt “I think that’s unlikely. You are at about 1.8-2% potential growth considering growth in the labor force and 1.5% productivity growth. Maybe we can squeeze another half a point out of productivity growth, but that only puts you at 4.5% nominal growth. Based on a trillion-dollar deficit, you aren’t making a dent in the outstanding debt at that level. It’s more likely taxes will be raised. That extra revenue will have to come from the middle class, so it will probably be something sneaky like a VAT or a carbon tax.” Is there an American politician alive today who is willing to ask the Middle Class to pay more in taxes? Politicians have been enabled so long by nearly unlimited borrowing potential, they have no nerve for cutting spending or raising taxes to balance the budget.

The chief enabler of that dangerous debt accumulation by the federal government has been the Federal Reserve. By keeping rates artificially low, the Fed lowers the cost of borrowing on the federal government, while punishing savers and retirees with pitifully low interest rates on their bond holdings. Former Congressman and presidential candidate Ron Paul is correct in his call to end the Fed. Rationalizing the market for money would force the government to live within its means. Read my two-part series on Paul’s book, End the Fed in which he laid out his case for eliminating the central bank here and here.