| This issue is brought to you by:Early Bird tickets now available – Register today! “The creation of debt should always be accompanied with the means of extinguishment.” — Alexander Hamilton |
 The case for hard assetsThe first-ever Social Security check, for $22.54, went to 65-year-old Ida Fuller on January 31, 1940. Fuller, who had paid just $24.75 in payroll taxes in the three years since the government started collecting them, lived to be 100 years old — she collected a total of $22,888.92 in Social Security benefits. It was a good return for Fuller and a bad sign for the government — paying benefits out of current revenue created a giant liability mismatch. The Social Security program has been officially mismatched since 2010 when it started paying out more in benefits than it collects in taxes. By 2033, the “trust fund” that Social Security amassed while revenue exceeded benefits will be depleted — at which point, by current law, benefits will have to be cut to match revenue. That would require an immediate 25% reduction in benefits, with deeper cuts thereafter as the ratio of workers to retirees continues to fall. Retirees are not going to stand for that, so the law seems likely to be changed. Benefits will probably be paid in full, probably with borrowed money. The US government is, of course, already borrowing a lot of money and will be borrowing a lot more for fast-growing expenses like Medicare, defense, and debt service. There may not be enough buyers for the coming avalanche of bonds required to pay for it all — in which case the Fed will be asked to buy them instead. The bull case for hard assets (like Bitcoin!) is that they’ll say yes. Promises, promises Governments don’t have to borrow money by selling bonds. They could just print the money instead — economically, it’s the same thing. But the US government chooses to sell bonds because that was Alexander Hamilton’s way of signaling to investors that whatever deficits the government runs while things are bad will be offset by surpluses when things are good. A bond is a promise to pay money later and a government bond is a promise to at least try to someday balance its budget. That basic idea held for more than 200 years — until 2008, when the Fed started printing money in response to the Great Financial Crisis. Since then, it’s seemed less and less likely that the US government had any intention to offset current deficits with future surpluses. Now, with trillions of dollars printed in response to the pandemic, Hamilton’s promise appears to be completely out the window — specifically, the Overton window. The “Overton window” is the idea that there’s a spectrum of acceptable governmental policies within which politicians can operate. The government’s response to the pandemic has thrown the Overton window on deficit spending wide open — now, there seems to be effectively no limit to how much money we allow politicians to spend. We no longer expect lawmakers to adjust federal spending to account for inflation, the budget deficit, or economic cycles. Instead, we expect the Fed to fully offset profligate government spending by tightening monetary policy. This will become increasingly difficult. For the fiscal year ending September 30, the US government took in $4.5 trillion of revenue and paid out $6.5 trillion of expenses. That’s a $2 trillion deficit in a year of full employment and booming tax revenue, which means it’s a structural (rather than cyclical) deficit. $2 trillion a year as a baseline for deficit spending is enormous — and getting more so. Social Security, the largest government expense at $1 trillion per year, is growing rapidly as the population ages. The defense budget, nearing $1 trillion a year, is a bi-partisan favorite. Medicare, at $700 billion, is growing faster than inflation due to spiraling healthcare costs. And the fastest growing part of the budget, interest payments, may soon exceed all of these. Together, these expenses account for about 88% of federal spending and are considered non-discretionary — as in, they will not be up for debate in the upcoming budget negotiations. That leaves just one-eighth of the budget for politicians to bicker over. Economist Marc Goldwin estimates that to fulfill Hamilton’s promise and balance the budget within ten years, one-eighth of the budget would have to be cut by 85%. Or, taxes would have to be raised by (coincidentally) 85%. Those two things seem equally unlikely, leaving us just one other option: letting the Fed deal with it. Who blinks first? The Fed is currently dealing with inflation by keeping short-term interest rates artificially high. If it’s tasked with managing the government’s ever-growing mountain of debt, it would have to keep interest rates artificially low. It can’t do both. Unless lawmakers find the political will to enact some combination of drastically higher taxes and drastically lower spending, it will have to ask the Fed to buy its bonds. It will then become a monumentally consequential game of chicken. Either the Fed will have to abandon Hamilton’s promise to bondholders or politicians will have to abandon the promises they’ve made to voters like Ida Fuller. Bitcoin is a bet that politicians won’t be the one to blink. |
| – Byron Gilliam SBF Live |