Easy money delays the day of fiscal reckoning
The Wall Street Journal takes a dim view of the Fed’s latest attempt to monetize the debt, stimulate the economy, use some of Uncle Sam’s credit cards to make payments on his other credit cards, print money, or however you prefer to characterize the next round of monetary easing:
Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.
That’s the contradiction at the heart of the Fed’s latest foray into “unconventional policy,” which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. In the words of the immortal “Saturday Night Live” skit: We need “more cowbell.”
That’s the philosophy of our new era of incompetence: we can’t go back to the “failed policies of the past,” which actually did produce growth, so we have to double down on the failed policies of the slightly more recent past.
The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed’s balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.
The Fed’s goal is to push down long-term interest rates even lower than they are, to the extent that’s possible when the 10-year Treasury note is trading at 1.7%. The theory goes that this will in turn reduce already very low mortgage rates, which will help spur a housing recovery, which will lead the economy out of its despond. This has also been the theory for the last four years.
It’s painfully obvious none of this is working, in the sense of improving the economy… but monetizing the debt is the only way this Administration can pretend it hasn’t brought America to the brink of an outright depression, so that’s what they’re going to do, because they’re afraid of what will happen if they stop. It’s like the way Wile E. Coyote can hang in mid-air for a while after he runs off a cliff, as long as he keeps his legs moving.
So what happens when the cartoon coyotes running the Fed stop running on their imaginary midair treadmill? It might just be the event that introduces America to the real fiscal cliff, the vast canyon of insolvency lying just beyond the relatively small financial ditch at the end of 2012:
The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.
The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.
That’s why it’s so dangerous that Washington’s big spenders managed to convince American voters to ignore those credit downgrade warning shots all the big financial agencies were firing last year. We’re not talking about a small, somewhat embarrasing increase in debt financing costs when America’s credit rating is comprehensively downgraded; we’re talking about the rubber bands of incredibly, perhaps unreasonably low interest rates snapping, and the whole damn debt-fueled machine flying apart. Debt service is mandatory federal spending – it comes right off the “top,” and is not subject to political gamesmanship. Imagine the day when somewhere between one-third and one-half of current federal tax revenue abruptly vanishes, because $15 trillion in debt had to be refinanced at 6 percent… and on that same day, the interest rates for everything from credit cards to home mortgages skyrocket, causing entire industries to tremble on the verge of collapse. And thanks to Obama’s policies, it will all be happening in the context of an economy struggling to produce 2 percent growth and real unemployment that doesn’t reach into double digits.
It’s supposedly unthinkable to leave the debt ceiling alone, because refusing to let Obama borrow more money would require agonizing immediate spending cuts of $400 or $500 billion a year. But the alternative is setting up a situation where the Fed simply cannot buy any more government debt… and that $400 or $500 billion suddenly evaporates in a cloud of higher debt service costs, breaking the financial back of a government that too many Americans are already dangerously dependent upon. You won’t be hearing any soothing nonsense about how everything will be all right if we just tax the rich a wee bit more on that day. The longer we allow the true government debt crisis to fester, the worse the inevitable day of reckoning will be.