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| Joe Bakewell. |
EPSTEIN DEBT.
Will
today’s tame inflation rate of 1.5% to 2.0% ever return to levels that are
deemed dangerously high? In his 2007 memoir, The Age of Turbulence,
former Federal Reserve Chair Alan Greenspan quite plausibly predicts that
inflation will enter the danger threshold around 2030, less than 13 years from
now. He anticipates a jump in the consumer price index to “4.5% or higher.” The
last time the CPI rose that fast on a 12-month basis was during a brief period
in 2008, when oil prices were surging.
Of course, for reasons both foreseen and unforeseen, inflation could heat up much sooner. But Greenspan was on to something when he outlined this particular scenario. He echoes continued warnings by the nonpartisan Congressional Budget Office about the crushing cost of eldercare entitlements—and the soaring debt that will result. Greenspan’s special contribution is to capture the likely way that government will try to staunch the red ink, which will almost surely be inflationary.
Those who deny that soaring debt can ever be a worry for the U.S. often point out that this debt is denominated in the same U.S. dollars the Fed has the ability to print. Ergo, there needn’t be defaults on that debt. In this case, as Greenspan affirms, the debt deniers are quite right—except they should worry more, not less. Funding the debt by running the printing press would be like pouring gasoline on a fire.
For politicians, if a problem is unlikely to assume crisis proportions during their tenure, then it will be left to future politicians to deal with. This après moi le déluge attitude has marked the approach to soaring debt of George W. Bush, Barack Obama, and Donald Trump. There is little reason to believe that Trump’s immediate successors will do things any differently.
That brings us to 2030, by which point yearly deficits of $1.5 trillion-plus will become the norm, as what Greenspan refers to as the “tsunami” of soaring costs hits the federal budget. And when the Treasury Department has more debt than it feels it can handle, it will pressure the government’s first responders—the central bankers—to buy ever-larger portions of that debt with printed money.
Will the resulting monetary expansion bring a jump in the inflation rate? Skeptics might point out that there seems to have been plenty of monetary expansion over the past decade, and yet price inflation didn’t seem to respond. But one key factor that has subtly curbed inflation has been the disinflationary effects of cheap labor from abroad. As Greenspan notes, by 2030, the “post-cold war wage-price disinflation” will have mostly played out. Then, too, the monetary spigots will be gushing at a far faster rate than anything seen so far.
Other problems are likely to arise, including a fall in the exchange value of the dollar. Since over 40% of the debt is held by foreigners, they are likely to perceive this development as a partial default on the obligations. Result: a selloff in these bonds, which could bring about the fiscal crisis the CBO keeps warning about.
DEBT DENIERS HAVE another arrow in their bow. It’s one thing, they say, for a state or local government, or for a large private institution, to be deeply in debt. But doesn’t the federal government have vast holdings that can be regarded as sufficient collateral on this debt?
There are, for instance, 672 million barrels of crude oil that the government holds in its Strategic Petroleum Reserve. At the current market price of $50 a barrel, that’s worth nearly $34 billion. But assuming the feds will have to start ponying up 10 years from now, let’s quadruple that to $200 a barrel, and mark the reserve at $136 billion.
Then there’s the government’s vast holdings in “nondefense” equipment and structures, including the national parks, currently valued by the Bureau of Economic Analysis, the keeper of the national income accounts, at $1.6 trillion. Since it’s grown in value by one-third over the past 10 years, let’s assume it appreciates by another third, and mark it at $2.1 trillion. But while fair chunks of this might be privatized and thus sold for substantial sums, the government would gain very little by privatizing its own office buildings, since it would then have to pay rent as a tenant.
Finally, there is federally owned land for which no value has been estimated. The feds own approximately 640 million acres, a staggering 28% of the total number of acres in the 50 states. But overwhelmingly, this isn’t exactly downtown real estate, although some is surely worth a lot for its oil and mineral deposits, of which the Arctic National Wildlife Refuge (20 million acres) is the best-known example. Otherwise, the per-acre value of federal lands is probably quite low. Eight western states plus Alaska together account for 505 million of those acres, nearly fourth-fifths of the total.
But let’s imagine that federal land that could be sold would yield a tidy $5 trillion. By 2027, according to CBO projections, the federal debt owed to the public will have climbed to $25 trillion and will rise rapidly from there. By any plausible reckoning, the federal government’s collateral on its debt is woefully inadequate.
Joe Bakewell
Of course, for reasons both foreseen and unforeseen, inflation could heat up much sooner. But Greenspan was on to something when he outlined this particular scenario. He echoes continued warnings by the nonpartisan Congressional Budget Office about the crushing cost of eldercare entitlements—and the soaring debt that will result. Greenspan’s special contribution is to capture the likely way that government will try to staunch the red ink, which will almost surely be inflationary.
Those who deny that soaring debt can ever be a worry for the U.S. often point out that this debt is denominated in the same U.S. dollars the Fed has the ability to print. Ergo, there needn’t be defaults on that debt. In this case, as Greenspan affirms, the debt deniers are quite right—except they should worry more, not less. Funding the debt by running the printing press would be like pouring gasoline on a fire.
For politicians, if a problem is unlikely to assume crisis proportions during their tenure, then it will be left to future politicians to deal with. This après moi le déluge attitude has marked the approach to soaring debt of George W. Bush, Barack Obama, and Donald Trump. There is little reason to believe that Trump’s immediate successors will do things any differently.
That brings us to 2030, by which point yearly deficits of $1.5 trillion-plus will become the norm, as what Greenspan refers to as the “tsunami” of soaring costs hits the federal budget. And when the Treasury Department has more debt than it feels it can handle, it will pressure the government’s first responders—the central bankers—to buy ever-larger portions of that debt with printed money.
Will the resulting monetary expansion bring a jump in the inflation rate? Skeptics might point out that there seems to have been plenty of monetary expansion over the past decade, and yet price inflation didn’t seem to respond. But one key factor that has subtly curbed inflation has been the disinflationary effects of cheap labor from abroad. As Greenspan notes, by 2030, the “post-cold war wage-price disinflation” will have mostly played out. Then, too, the monetary spigots will be gushing at a far faster rate than anything seen so far.
Other problems are likely to arise, including a fall in the exchange value of the dollar. Since over 40% of the debt is held by foreigners, they are likely to perceive this development as a partial default on the obligations. Result: a selloff in these bonds, which could bring about the fiscal crisis the CBO keeps warning about.
DEBT DENIERS HAVE another arrow in their bow. It’s one thing, they say, for a state or local government, or for a large private institution, to be deeply in debt. But doesn’t the federal government have vast holdings that can be regarded as sufficient collateral on this debt?
There are, for instance, 672 million barrels of crude oil that the government holds in its Strategic Petroleum Reserve. At the current market price of $50 a barrel, that’s worth nearly $34 billion. But assuming the feds will have to start ponying up 10 years from now, let’s quadruple that to $200 a barrel, and mark the reserve at $136 billion.
Then there’s the government’s vast holdings in “nondefense” equipment and structures, including the national parks, currently valued by the Bureau of Economic Analysis, the keeper of the national income accounts, at $1.6 trillion. Since it’s grown in value by one-third over the past 10 years, let’s assume it appreciates by another third, and mark it at $2.1 trillion. But while fair chunks of this might be privatized and thus sold for substantial sums, the government would gain very little by privatizing its own office buildings, since it would then have to pay rent as a tenant.
Finally, there is federally owned land for which no value has been estimated. The feds own approximately 640 million acres, a staggering 28% of the total number of acres in the 50 states. But overwhelmingly, this isn’t exactly downtown real estate, although some is surely worth a lot for its oil and mineral deposits, of which the Arctic National Wildlife Refuge (20 million acres) is the best-known example. Otherwise, the per-acre value of federal lands is probably quite low. Eight western states plus Alaska together account for 505 million of those acres, nearly fourth-fifths of the total.
But let’s imagine that federal land that could be sold would yield a tidy $5 trillion. By 2027, according to CBO projections, the federal debt owed to the public will have climbed to $25 trillion and will rise rapidly from there. By any plausible reckoning, the federal government’s collateral on its debt is woefully inadequate.
(Oct. 29, 2017. Mea Culpa. It
seems that in my eagerness to take off for a brief (and rain soaked) holiday, I
neglected to clearly state that the article regarding our national debt was
written by Gene Epstein in Barron’s.)
Joe Bakewell
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