Welcome back to the dumb season. It’s debt-ceiling time again.
We’ve been at this two years now. It was back in 2011 when the Republican Party, seized by anti-government furor, first locked on the lifting of the federal debt ceiling – an utterly routine governmental mechanism that allows the Treasury to borrow to pay for spending already approved by the entire Congress, Republicans included – as a place to hold a showdown over . . . government spending. That first battle resulted in a “Mutually Assured Destruction”-type stalemate, in which both parties agreed that if they couldn’t reach a deal by New Year’s Day 2013, a series of brutal, automatic, across-the-board spending cuts would take effect. At the time, it seemed unthinkable Congress would let that happen. By the time we passed that date, the thing that seemed unthinkable was the idea that Congress would ever make a deal. The cuts took effect in March and we were headed for a full-on fiscal crash on May 19th, when fate intervened to stop this stupidest-in-history blue-red catfight in its tracks, if only temporarily.
In early May, Treasury Secretary Jacob Lew announced that the federal government suddenly had enough cash on hand to stay afloat until “at least Labor Day.” We were saved by, of all things, a record quarterly profit from the notorious state-seized mortgage-finance company Fannie Mae, which is paying the state $59 billion, enough to keep us in the black through the summer.
But this reprieve is only for four months, and if anything, the latest stay of execution only underscores the utter randomness and imbecility of our political situation. If the one thing preventing Washington from seizing up in fatal gridlock for even a brief spell is a surprise burst of good fortune from a bailed-out financial zombie like Fannie Mae, we’re screwed. The only thing that will rescue us from having to go through this over and over again from now until the end of time is for our increasingly polarized Congress to come to some broad agreement on tax hikes and spending cuts – the kind of routine deal that now seems politically impossible.
That leaves us in a state of permanent paralysis that is at once more dangerous and even more stupid than the time the business of our entire nation ground to a halt over a blow job. Americans at least know what a blow job is, and they understood how the white stuff got on the dress.
But the national debt? Nobody understands it, and anyone who tells you he or she does is almost certainly lying. In fact the supreme irony of this endless controversy over spending and austerity is that it has pushed the Federal Reserve as well as major European and Asian central banks, especially recently, to bypass the ignorant arguing public and take dramatic interventionist action on their own, tinkering with the world money supply in ways that are highly experimental and have no parallel in modern times. By all rights, this should be stimulating a profound debate around the industrialized world about who controls the process of money creation and about the role of government/central banks in the economy, but here in the U.S., that is exactly the debate we’re mostly not having.
The debate we are having is childish, irrelevant and self-destructive, as has been proved by all the recent developments on the debt front, including:
THE MORONIC NEW HOUSE BILL
Here’s a quick and easy rule: any time any politician, pundit, TV talking head or self-proclaimed financial expert starts comparing the U.S. federal budget to anything other than the U.S. federal budget, that person is automatically full of shit and should be instantly voted off the conversational island, if not outright beheaded.
This whole debt debate really began devolving in earnest into total mindlessness once people like Oklahoma Republican Sen. Tom Coburn started likening the government spending deficits to family budgets, pushing to “make Congress live under the same rules as families across the country and treat the federal budget like the family budget. Families have to live in their means and so should Congress.” Not paying our government obligations, Coburn said recently – remember, this is a U.S. senator talking – might be a “wonderful experiment.”
Comments like these led to Tea Party protesters descending upon Washington screaming about how not raising the debt ceiling is like giving your kids the bad news that they can’t afford to go to the movies – difficult but necessary, a kind of homespun tough love, except that a global superpower intentionally defaulting on its sovereign debt is actually way closer to an act of apocalyptic suicidal madness than it is to good parenting. (“It would be the financial-market equivalent of that Hieronymus Bosch painting of hell,” said JPMorgan Chase chief U.S. economist Michael Feroli.)
Still, the mere fact that the Republicans made such hay with the household analogy forced politicians and economists on the other side of the aisle to respond with similar oversimplifications, in what amounted to a desperate attempt to plant their own flags in the growing mountain of popular anti-knowledge. Even Fed chairman Ben Bernanke has reached for household analogies in his efforts to explain what a default would mean. “This is sort of like a family saying, ‘Well, we’re spending too much – let’s stop paying our credit card bill,'” Bernanke said.
The next agonizing step was the Republican constituency’s slow realization that “not paying our bills” is bad. This should have actually been a good thing. But it only led to this month’s latest harebrained idea: the so-called Full Faith and Credit Act, a Republican bill passed in the House that would direct the U.S. Treasury, in the event that we hit the debt ceiling, to pay interest to bondholders before making any other payments. In other words, we’d pay people who loaned us money by buying treasuries – China’s, for instance – before we’d pay, say, veteran benefits or Medicare.
According to House Speaker John Boehner, fast becoming the pope of the blossoming new national Church of Budgetary Misunderstanding, this would solve the “not paying the bills” problem. “I think doing a debt-prioritization bill makes it clear to our bondholders that we’re going to meet our obligations,” he said. He added, ominously, “Listen. Those who have loaned us money, like in any other proceeding, if you will, court proceeding, the bondholders usually get paid first. Same thing here.”
Boehner was now moving the ill-considered metaphor from the government being like a household needing to pay its bills to the government being, apparently, like a business in bankruptcy (the only kind of court proceeding where bondholders move to the front of the line).
Guaranteeing that Chinese bondholders would get paid off before veterans or elderly citizens waiting for medical care is politically a weird enough idea to begin with, but for the House speaker to think that getting Congress to prepare the government to behave like a bankrupt business would reassure the markets about the stability of U.S. sovereign debt is pure lunacy. Remember, Standard & Poor’s has already downgraded the United States once, and we’ve paid more than a billion in increased borrowing costs, thanks to delays in raising the debt ceiling last time around, meaning the Boehner bill is dead on arrival – Wall Street is already not reassured by the behavior of our bozo Congress.
The national debt is totally unlike a family budget for about a gazillion reasons, not the least of which being that families cannot raise money by fiat or deflate the size of their debt unilaterally and that family members die instead of existing infinitely. Comparing your family budget to the sovereign debt of the United States is a little like comparing two kindergartners tossing a paper airplane to the Apollo 11 mission. It’s an automatically bogus argument, which raises the question of why it’s made so often, and not only by Republicans of the Coburn type, whom we expect to be clueless dopes. In fact, the overuse of this loony household analogy just proves that when it comes to debt, people may have ideas, but nobody knows exactly what he or she is talking about, a fact proved dramatically by another recent story:
THE HARVARD FACEPLANT
Do deficits matter or don’t they? are we on the edge of collapse or aren’t we? The only thing anyone can say with absolute certainty is anyone who claims to have the exact answer to that question is either lying, misguided, or both. We saw a graphic demonstration of this recently with the comeuppance of Harvard economists Carmen Reinhart and Kenneth Rogoff, whose May 2010 paper “Growth in a Time of Debt” was cited by austerity-lovers across the world as a prescient warning against the perils of government spending.
Reinhart and Rogoff posited that catastrophe would ensue if government debt exceeded 90 percent of gross domestic product. Wisconsin Congressman Paul Ryan, a political one-trick pony who’s about 10 minutes from his next career modeling for the Gap in red states, cited that stat in his 2013 budget as proof that the United States (whose debt is near 104 percent of GDP, according to the St. Louis Fed) is on the track to stagflation. But then, in mid-April, a trio of University of Massachusetts economists reviewed the Harvard hotshots’ work and found that they made a series of errors, including some ridiculous Excel spreadsheet gaffes, that essentially nullified their anti-stimulus thesis. That they had helped provide the intellectual justification for austerity policies around the world (Britain’s loathsome Chancellor of the Exchequer George Osborne was a huge fan), and who knows how many thousands or millions of job cuts, was no matter. Two weeks later, in the Financial Times, the two Harvard windheads reversed course, arguing that they had been in favor of using debt to stimulate growth all along. “Borrowing to finance productive infrastructure raises long-run potential growth,” they wrote. “We have argued this consistently since the beginning of the crisis.”
Actually, they hadn’t made anything like such an argument (at most, they allowed that existing government stimulus should be reversed slowly), but that’s not the point. The point is that when it comes to whether or not deficits matter, economic arguments are always crafted to fit the politics. The party in power almost always unapologetically engages in deficit spending, while the other party argues passionately against the evils of debt and deficits.
This simple, once-cheerful law of politics is the reason why one can jump on the Internet anytime and find examples of Dick Cheney sounding like Paul Krugman (“Reagan proved deficits don’t matter”) and/or Barack Obama sounding like Paul Ryan (Candidate Obama in 2008: “The problem is, is that the way Bush has done it over the past eight years is to take out a credit card from the Bank of China in the name of our children . . .”). The reigning party spends, the opposition pisses and moans – until now, things have never been any different.
But today’s Republicans have gamely spent the Obama years predicting the imminent arrival of a giant Earth-smashing debt asteroid. That this is transparently an effort to target social programs loathed for purely ideological reasons is obvious, but it’s hard not to admire the balls: After spending much of the past decade borrowing from, among other places, the Social Security trust fund to pay for massive tax cuts and bank bailouts, America’s wealthy are now turning around and demanding both $5.7 trillion in new tax breaks and significant cuts to things like Social Security, which incidentally is self-funding and running a huge surplus.
It’s easy to claim that Social Security is driving the deficit, or that the U.S. will imminently become insolvent “like Greece” (it can’t, for the simple reason that it has its own currency, while Greece’s debts are in Euros) when the public’s baseline knowledge level is zero. Almost nobody really understands high-level economics, but people have very concrete ideas about whom they don’t want to spend taxpayer money on, and in this debate, that’s usually enough. Politicians are so dense about this, they often argue both sides of the issue simultaneously without realizing it. “We have spent more than what we have brought into this government for 55 of the last 60 years,” Pope Boehner said recently. “There’s no business in America that could survive like this. No household in America that could do this.”
Right. No household in America could, but America could – and did – ride deficits for decades into the world’s biggest economy. Whether or not the U.S. deficits are too big is another question, but that they can go on more or less infinitely as long as the economy grows – or for at least 60 years – is something Boehner himself seems to be admitting, despite himself.
Even the economists who pretend to know where all this is going are only guessing. “As a general rule,” quipped economist Dean Baker after the Reinhart-Rogoff fiasco, “economists are not very good at economics.”
This is especially concerning, given that we’re all entering uncharted waters, now that:
THE FED ANNOUNCES: MORE COWBELL
As is pretty much always the case with modern American politics, people seem to find hobgoblins and conspiracies everywhere in every place except where the real thing, or something close to it, actually exists. In the case of the debt issue, we have a raging national controversy over something as meaningless and routine as raising the debt ceiling, while a genuinely radical experiment in something vaguely like centrally planned economics is going on at the Fed and the other central banks around the world, and the public has mostly yawned in response.
Since the beginning of the crisis in 2008, the Federal Reserve, under chairman Ben Bernanke, has attacked our stagnating economy with an array of tools never before used by our central bank. Backing up for a moment, since 1977 – when Congress amended the Federal Reserve Act – the Fed’s official mandate has been to promote maximum employment and low inflation. The Fed’s traditional method of addressing these matters has been to increase or decrease the money supply by raising or lowering interest rates, i.e., by making money cheaper or more expensive to borrow. In other words, when the economy is stalled, the Fed cuts rates and waits for that to result in more lending and more employment. When the economy is growing too quickly, which can lead to inflation, the Fed backtracks to slow things down.
But in 2008, when the economy was not merely feeling a little unwell but was actually flatlined on the ER table, slashing interest rates all the way to zero wasn’t enough to stimulate lending and investment. So Bernanke took a step further and started to inject new money into the financial bloodstream directly, willing trillions of dollars into existence and using that newly created money to buy things like mortgage-backed securities and treasuries. This vast central bank money-printing/stimulus program, which ought to have frightened conservatives every bit as much as the $800 billion stimulus Obama took out of the Treasury in 2009, was successfully camouflaged by its dull-sounding moniker, Quantitative Easing, a term that, in one of the genuine curiosities of recent financial history, has no known origin.
In any case, the original QE program, which began in November 2008, was supposed to last only a year and a half and add about $1.75 trillion to the economy. Almost two years later, with unemployment still hovering near 10 percent, Bernanke tried again with another $600 billion. QE2, as it was dubbed, didn’t work either. So last year, the Fed announced a different tactic: It would simply pump $40 billion a month into the economy on an open-ended basis, including mass purchases of mortgage-backed securities, which would have the effect of artificially lowering mortgage rates and propping up the housing market.
That was dubbed QE3, and it lasted for a few months, until December of last year, when the Fed decided it had to be even more aggressive and more than doubled the size of the program to $85 billion a month. Wall Street refers to the open-ended program by the affectionate nickname QE-infinity.
And just a few weeks ago, when some thought Bernanke might signal an exit strategy for the program, the Fed cryptically announced that it “is prepared to increase or reduce the pace of its purchases,” which made it clear that there was no immediate end of the program in sight and that the Fed’s already outrageous bulge may grow even bigger before all is said and done.
Meanwhile, the Bank of Japan in April announced its own massive QE plan, which could reach $1.4 trillion by the end of next year. Japanese officials say they want to essentially double the Japanese money supply. The Bank of England also has been steadily increasing its own QE program for years; it sits at $581 billion now, but may increase again in July, when former Goldman Sachs banker Mark Carney arrives to head the Bank of England. And European Central Bank president Mario Draghi (another Goldmanite, by the way), who created a one-trillion-Euro-size QE-style program called Long Term Refinancing Operations (LTROs) in late 2011 and early 2012, has recently signaled that his bank was “ready to act” if it looked like a QE-ish program was needed to intervene to save the cratering European economy.
Essentially, all of these central banks are creating vast sums of money and thrusting themselves into the world economy as gigantic buyers of stuff, be they mortgages or treasury bonds. In theory, the banks will eventually “sterilize” or reverse the process by selling off all this stuff they’ve bought and draining the economy of its “excess liquidity,” but no one knows when that will be, and for the time being, QE is pure financial steroids. It’s stimulus on a much bigger scale than Obama’s recovery program, it’s open-ended, and it’s not voted upon. In fact, apart from the fact that the Fed chairman is nominated by the president, the actions of the central bank are not merely undemocratic but intensely secret, with minutes of its Federal Open Markets Committee (which debates decisions like the raising of interest rates or QE) only released three weeks after decisions are made. The Fed therefore never has to engage the public in real time about its decisions. Instead, it hands down edicts, and Wall Street watches for clues into its mysterious behind-closed-doors deliberations the way Catholics watch the Apostolic Palace for smoke before papal elections.
Economists disagree, sometimes passionately, on the benefits of QE, but virtually all of them agree that nothing like this has ever been seen before. “These are quite unprecedented policies,” says Michael Woodford, a professor at Columbia University, widely considered one of the world’s leading experts on monetary issues. Woodford points out that the Fed would defend these actions by saying it is trying to avoid repeating the mistakes made after the Great Depression. “But certainly,” he added, “they don’t have prior experience on the basis of which to judge the effects of the policies being tried.”
“We are living in a time of experiment,” says Christian Menegatti at Roubini Global Economics, the independent research firm led by Nouriel Roubini, famous for predicting the housing crash.
If you don’t work in the financial sector and you’re wondering why you haven’t seen $85 billion a month in stimulus show up on the job market or any other place where most ordinary people can see it – well, that’s another serious issue with QE. The program is designed to stimulate employment, but after many years and trillions of dollars, there’s been little growth in the economy. On the other hand, housing prices are up and the stock market has soared to an all-time high. “Anyone who has owned stocks in the past few years has fed at the trough of Bernanke,” the financial website YCharts wrote. QE carries a natural risk for financial bubbles because it artificially depresses the values of the long-term “assets” the Fed buys, like treasuries, which forces banks and other investors that hold those instruments to move into other investments that yield more – like the counterintuitively giddy stock market.
What has the global financial community in a fever is widespread uncertainty over when QE will end. The central bank programs are a high-wire act of extraordinary difficulty. If you yank on the leash and stop them too abruptly or too soon, the economy might crater or plunge into a new recession or depression. If you keep the giant money hose on full blast for too long, you risk overheating the economy and creating financial bubbles. And everywhere in between, there’s the twin risk that the policies won’t work and the banks and businesses will become a little bit too used to central bank largesse. What if Bernanke miscalculated his ability to stimulate lending and job creation, and all of this intervention not only doesn’t create jobs but just reheats a financial sector that exploded under the weight of its own stupidity and greed just a few years ago?
“It all works if it’s followed by growth,” says Menegatti. “If people buy [stocks] but banks are worried about lending, to small businesses, for instance . . . then you have QE1, and then QE2, and then QE3, and then you have to continue to do it because the markets are addicted to it. But if you don’t have growth, you have another correction.”
Ironically, by gumming up the federal budget with this moronic debate over the debt ceiling, anti-government stalwarts may have inadvertently helped trigger this unprecedented experiment. After all, part of the rationale behind programs like QE is that central banks say they have to stimulate the economy because our idiot politics have blocked the more traditional path of regular government stimulus.
“The only other solution is the fiscal solution,” says economist Michael Klein, a professor at Tufts University’s Fletcher School of international affairs. “And that’s off the table now.”
What a crazy time we live in. Domestic politics have devolved into an ongoing hostage crisis in which the opposition party threatens to blow up the financial universe every six months or so, and the leading political minds in the country can’t figure out how to keep this from being a permanent feature of our budgetary process. Meanwhile, global monetary policy is drifting in the direction of semipermanent stimulus, and no one has any idea how it all ends. It’s two different runaway-freight-train action movies going on at the same time. God help us.
This story is from the June 6th, 2013 issue of Rolling Stone.