Jeff Deist explains what’s lurking in the debt ceiling bill, why the debt is larger than most people think, and the reason politicians can’t stop the madness.
00:46 Debt Service
04:30 Dollar Hegemony
05:05 Treasury Debt Service Costs
08:31 Interest Rate Hikes
10:26 Clown World Economy
11:24 Time Preference and Rates
14:22 Mises and Credit
15:50 Global Debt and Stagflation
17:18 Presidential Candidates
19:18 The Structural Problems
22:26 Voting for Austerity
24:08 Gold Fixed Income
Welcome to Debased, a show about the current state of money with Jeff Deist. Welcome back to Debased. My name is Benjamin Vern Nadelstein. I’m joined by Jeff Deist. Jeff, how are you doing today?
Ben, I don’t like this debt ceiling, unholy deal made over Memorial Day weekend. I think it’s actually not a surprise that they hammered out the details of this when Americans were busy preoccupied elsewhere. But nonetheless, here we are.
Yeah, Jeff, I think when Democrats and Republicans can come together and find a solution that works for both of them, it always ends up not working out for the American people. So what do you think is actually going on with this deal? Do you think it’s going to get passed? And what is actually inside of this?
Well, yes, I think it will get passed as of this recording on Tuesday. It’s not yet passed by the House and Senate, but I think they’ll come up with a deal simply because both of these parties fundamentally believe in the spending that Congress engages in. And obviously there’s more spending than taxes, so debt needs to be increased to do so. It’s interesting if we look back to say that really World War I ruined so many things from my perspective. And up until World War I, Congress used to have to approve individually any new expenditures that required debt as a standalone bill. And then as the 20th century progressed, they came up with this idea of a debt ceiling where we could just set an amount up to which Congress could spend without having to worry about it, almost like a credit limit on a credit card. And of course, there’s always this political dog and pony show whenever we get up against it. I was interested to see there was an op ed about a week ago by our favorite economist, pseudo economist, conscience of a liberal, Paul Krugman, over at the New York City New York Times, he made a couple of interesting points in his op ed.
He said, Look, and this is fair enough, he said, governments aren’t like people. Governments don’t die. They don’t have to pay their bills. All they really have to do is be able to service their debts. And he mentioned that the British Empire never really paid off or is in effect still paying off debts from the Napoleotic era. And of course, he’s right in a sense that sovereign governments have the ability to print currency. They have the ability to issue debt, treasury debt, as long as there’s a market for it. Sometimes their own central banks are that market. And so they never really have to worry about servicing their debts in that sense. And this is really the foundation of what we call modern monetary theory, which Janet Yellen, I believe, is somewhat enthralled to. And a fair number of mainstream economists will give it a nod, which is the idea that a sovereign government can never print as much currency as it needs to absent a serious bout of hyperinflation. And so Krugman is echoing this. Let’s be fair here. Dick Cheney famously said back in the W era that deficits don’t matter, we create our own reality.
And so there’s a segment of this on both the left and the right. I would call it almost a messianic view of government. The government doesn’t have constraints or limits on what it can do or what it can imagine or what it can spend and therefore what it can borrow. So the debt ceiling is really a symptom of this messianic complex, I think, which now it pervades America’s view of its own government and what it can do and where money and wealth come from. This idea that money and wealth are the same thing, which of course is incorrect. But what the rest of the world is going to see is a couple of things. First, they are going to take this as yet another indicator that the United States will never get its fiscal house in order. In other words, there’s never going to be a point again, at least in the near future, when Congress will raise as much in taxes as it spends in a particular year, that the United States will continue to issue more and more debt and essentially export inflation by doing so by enjoying this exorbitant privilege of being the world’s user of currency.
So I think that’s a big takeaway. So even though it’s awfully hard for them to do anything about this in the interim, for example, de dollarization, which people like Keith Wiener and Brent at San Diego Capital have covered in-depth, that’s very hard to engineer in the near term because countries need dollars to service their own US denominated debts. But nonetheless, this debt ceiling fiasco, I think, shows them that in the long run, they’re going to have to do something about this to counter the US dollar’s dominance if they ever expect to not be basically strung around by the US Congress forever and ever. The other important takeaway, I think, from this debt ceiling fiasco is that recruitment’s comment about debt service, while correct, does not reflect that things have changed fundamentally in terms of the debt that’s out there. You have to go back and remember that really since about 1982 under Paul Volcker, that basically there’s been a 40 year pattern of US interest rates on treasury debt going down and down and down. Now, there were little hiccups where it went back up, like after 911, for example, but for the most part, we have enjoyed a 40 year precipitous decline in interest rates from well above 15 %, basically down to about zero.
So as a result of that, all of this US treasury debt that’s outstanding, issued over the past several decades. If you go to a particular website called treasury direct, you can see the weighted average of all of that debt, meaning the amount times the interest rate, the weighted average of that debt until recently has been well below 2 %, like something like 1.6 %. So even though the US Congress had amassed this 30 trillion dollars debt, the service was actually quite low at 2 % or 1.6 % weighted average. That was only three, four hundred billion dollars a year in the federal budget out of a four trillion dollars budget or so, let’s say. Now in 2023, as that weighted average goes up to 2 % and now rising, all of a sudden we’re looking at about a $700 billion debt service for 2023. So now we’re at about 10 % or more of that roughly six and a half trillion dollar federal budget. So pretty soon, if we were to get interest rates within historical averages, meaning US treasury interest rates from about 5 % to 8 %, that 600 billion or 700 billion dollars figure would triple very quickly to two trillion dollars a year simply on debt service.
So this would be like a family that spends $70,000 a year spending 20 or 25,000 of that on just making minimum payments on their credit cards. So that’s what’s different today. When Ross Perot was warning about all this back in the early 1990s, probably before our friend Ben here was even born, everyone was saying, Well, yeah, that does sound like a problem. But because it’s never really surfaced, a lot of people are now dismissive of it and say, You Hawks have been talking about debt forever and it’s never really become a problem. So why should we worry about 30 trillion as opposed to 20? Why should we worry about 50 trillion? And of course, this debt bill allows for another 4 trillion between now and 2025 without any further acts by Congress. So we’re going to get to 36 trillion very shortly here. So things have really changed. Debt service is not going to be the insignificant matter that Paul Crouben assumes it will be. And very soon, I think within the next decade, the single biggest line item on Congress’s budget every year won’t be DOD, Ben, it won’t be Social Security and Medicare.
It will be paying interest only on the national debt. So that really is a difference. That’s something that we have to grapple with.
Jeff, do you think that that actually factors into interest rate decisions by Powell and the Fed right now? So they’re looking and saying, Hey, listen, we’re coming up against $700 billion just paying on the interest expense on the debt. Do you think that along with bank failures, the crisis is happening, layoffs, maybe a big unemployment number, high inflation, do you think that at some point there’s going to be a tradeoff between what they perceive as interest rates needing to rise for whatever reason and needing to drop to maybe help fix that federal interest expense?
Well, it’s very tough. None of us are inside the mind of Jerome Powell or other members of the FOMC. He appears, by his public pronounceance to be hell bent on breaking inflation, which would indicate probably another rate hike in this coming month of June. But the idea that we are all breathlessly waiting this, Congress has to worry about this, we have to worry about this. We have to worry about this. one who’s out there trying to get a mortgage or a car loan has to worry about this. It brings up Jim Grant’s dictum that we shouldn’t worry about what the Fed has to do anymore than we should worry about the umpires in a baseball game. They’re not supposed to be an active player in the game. They’re supposed to be a referee. And if we go back to the Fed’s intended purpose when it was created, this was supposed to be a backstop. It was supposed to provide liquidity for insolvent banks that had found themselves in trouble. And it was supposed to provide that liquidity at a penalty rate. In other words, to punish those insolvent banks for their own fiscal malfeasance, let’s just say.
But the Fed has become anything but that. It’s become the lender of first resort. It actually pays banks interest on excess reserves to just park reserves with the Fed. So the whole Fed… The idea behind the Fed has been turned on its head. But the idea that we have to wait breathlessly for these pronouncements from drone Powell and the FOMC, I think it really goes to the silliness of our economy. The fact that a key price signal, you might call it, as David Stockton does in our economy, the Fed funds rate is effectively set by a Politburo, a centralized planning committee. I think that has to deeply challenge our idea that we live in a capitalist system. And more importantly, we have to remember that interest rates are supposed to indicate time preference. The idea that we have people setting interest rates is fundamentally anti market. Interest rates aren’t policy tools. They aren’t technocratic dials that policymakers are supposed to fine tune. They’re supposed to be set by supply and demand. And supply and demand when it comes to interest rates is all about time. We’ve forgotten entirely the temporal nature of interest rates. It’s very simple.
We know that all things equal, people would rather prefer to have stuff or consume stuff now than in the future. This is just something we can understand axiomatically about human beings. That’s why all things equal, you would rather have your dream home at age 40 rather than age 90. Because at age 90, you’re probably not going to be around too much longer to enjoy it. Okay? So that’s an axiom about human nature that we prefer present consumption to future consumption. So if we’re going to loan someone $1,000, even if they’re a friend or family member, maybe we want some psychic reward instead of interest. But if we’re going to loan $1,000 to a stranger and say, A year from now, you pay me back, we would never loan, say, A year from now, just give me back $1,000. Or worse yet, negative interest rates, A year from now, give me back 900. We would never do that for the very simple reason that over the course of that year, the borrower could abscond, they could disappear. He or she could go bankrupt. They could certainly fall on hard times not being able to repay us.
We might die ourselves in that year. There’s a lot of uncertainty in the next 12 months of anyone’s life. Even a young person could get hit by a bus. So we would never loan a stranger at least $1,000 today in exchange for $1,000 or less a year from now. So that’s why interest rates exist. They are there to express the relative time preferences of people who are willing to give up some consumption today in exchange for interest, getting more money back. And on the flip side, the relative time frame preference of people who want that money now that they don’t yet have so they can go consume something. We see this every day. We see millions of Americans buying houses and cars that they don’t have the money to pay in cash, and they would prefer to have it now but pay some interest in exchange. So that’s just simple time preference on each side. And so not that long ago, this wonderful mechanism of borrowing and lending and interest rates was determined by the relative savings habits of savers, certainly within my own grandfather’s lifetime. He was able to go to his local bank and he didn’t have a Fico score.
He was somewhat known locally. He had kept his job. He was an upstanding guy. And as a result of that, he was lent a certain sum of money in back then, a 15 year mortgage, which he paid off in about 10 years. Back in the 70s, of course, he should have been borrowing more in the 70s because of inflation, but he was a frugal guy. So it really was the idea that a bunch of people have to save money in order for a bunch of other people to have money to borrow. But in today’s banking world, we don’t have that at all. Banks can literally create credit. And so Mises distinguished between what he called commodity credit and circulation credit. Commodity credit was the old fashioned kind where because some other people had put their money aside and saved some and put it at risk for lending with a bank, that money was available to someone like my grandfather to borrow and build a home. But while he was borrowing that money, that money was not available to the savers, to the lenders themselves. In other words, there was one pool of money and someone was using it.
Whereas with circulation credit, which is totally un backed by anyone else’s savings today, we have this ability by banks to simply create credit, not money, two different things, but to create credit. And as a result of that, credit can expand very quickly. And we see the debt levels that we have in American consumer society today on the individual, personal household level with respect to student loans, with respect to credit cards, with respect to automobiles, with respect to mortgages. And I think we can all surmise this is a bit of the unseen, but we can surmise that in a hard money environment, there’d be a lot less debt in America because you would have to have actual savings, actual commodity credit to make debt available. And so we’re in a very different environment today. And it’s amazing if we think about it, but the total amount of global or worldwide debt has more than doubled since the crash of 2008. And the MMTers and the Khrutments of the world would say, Jeff, that’s no problem. That all that debt is somebody else’s asset on a double entry bookkeeping. But you know what? That’s what people thought before the housing crisis of 2007.
And a lot of banks and mortgage companies had huge breakdowns. So I don’t think the world has gotten twice as rich or twice as productive just since 2008. I think this debt is a real problem. I think it’s going to be an anchor on the American people, on the Congress, and on America’s standing and position in the world going forward. And I think we are going to enter a really tough period of stagflation where economic growth is anemic, weak, maybe even negative, despite all the credit expansion, despite all the new debt, despite all the congressional spending. But at the same time, we’re going to have price inflation. So price is rising while economic growth is stagnant is the worst of both worlds. I think Congress has really gotten us to this place, and it’s gotten us there with this idea that debt doesn’t matter. I think we’re going to want to find out whether it does or not.
Jeff, before we wrap here, we’ve had some announcements for possible presidential candidates coming up. I want to get your take on this. W e’ve got Trump and Biden both rethrowing their hats in the ring again. Can you maybe give us your thoughts on what they might mean for the debt, for the dollar, for the economy in general? If you had to bet, who’s going to do what if they do get elected?
Yes, Trump versus Biden, round two is a psychological experiment for which I don’t think the American public is quite yet ready. But it’s coming. It looks like it’s coming in less than a year. What combined age of those two men is? What? 240 or something like that. So obviously, from any fiscal or monetary policy perspective, both of these men are deeply unserious actors, and we would have to basically say that they would simply want your own Powell & Company to cover them politically. Some of the other candidates have a little bit more interesting viewpoints. I have noticed that I believe RFK Jr, Ron DeSantis have both made some noises about Bitcoin. Rfk is saying, hey, you’re going to be able to run your own node and we ought to keep Bitcoin in America. We shouldn’t be punishing you or trying to outlaw it. Vivek Ramaswamy, I’m saying that correctly, I hope, he has certainly said some good things about the Fed and its role in society. I think he’s a real capitalist at the end of the day. So that’s encouraging that we’re actually seeing a little bit of this. I haven’t heard much from Rick Scott.
Mary Ann Williamson, I guess, is also a Democratic candidate. I’m not exactly sure what her monetary policy is. It might have something to do with Astrology like Nancy Reagan’s. I don’t know much about Nikki Haley’s policy, but none of these people, however well intentioned, have said anything to my knowledge about the underlying fundamental structural problems with the dollar and debt. And by structural problems, I mean, first and foremost, the inability of the US Congress to live within its means and not keep adding to the debt, to raise enough in taxes and to cut spending enough to live within its means. Number two, and equally important to deal with the entitlement reality. The promises we have made to Americans aged 65 and over in terms of Social Security and Medicare are completely unrealistic. Those promises can never be paid in any meaningful way. The cohort of Americans over age 65 is going to double by 2050. The net present value, in other words, the discounted value. And again, we go back to time preference and interest rates. What’s future money worth? Well, we assign a discount to it because it’s uncertain. But the discounted value of likely tax receipts over the period between now and 2050, and the discounted value of entitlement payments we’re going to have to make between now and 2050, there’s a huge gulf between those two.
About a 200 trillion with a T gap between those two numbers, which a pristine economist named Lawrence Khotlikov has done a lot of work in coming up with. And so we’re basically not only $30 trillion dollars or 31 trillion dollars in the red. Realistically, in terms of our pension obligations, we are over $200 trillion in the red in terms of what we’re going to owe in the future and what we will realistically have to pay. Any public company CEO who treated his company’s or her company’s pension obligations as off balance sheet would be put in jail. But Uncle Sam doesn’t have to account for social security and pension liabilities, in part because the US Supreme Court has a rule that you don’t have a property right or an ownership right in your social security. If you die when you’re 64 and you’re on your single, too bad. Nobody gets it, no survivor benefit, and that’s it. But nonetheless, those obligations are real. And an awful lot of Americans are counting on those things and calculating their retirement years based on, I’m going to get that $1,800 a month from Social Security. I’m not going to have to pay a $1,500 a month health insurance premium because I’m going to be able to avail myself of Medicare.
So in terms of people’s actual well-being, those debts are very real. And so I wish some of these candidates would begin to talk about the underlying fiscal realities. We can’t keep spending as much as we are overseas. We can’t keep spending as much as we are domest. We have to grapple and wrestle entitlements to the ground. And those things are awfully, awfully tough. The American public is not known for its voting for austerity to put it mildly. I’m going to be watching that with great interest, but I’m partially optimistic that the Fed and monetary policy will at least be minor issues in the upcoming presidential election. I think that’s in large part because inflation is running so high that the American people are forced to pay attention to that. So I think that’s encouraging. I hope that one of these candidates or perhaps a different candidate than those we mentioned will emerge as someone who’s serious about getting the fiscal house of the United States government in order without relying on monetization of debt by our central reserve banks. These are big structural problems. They’re fascinating problems. We love to watch them. Obviously, we think alternatives like gold are one way to hopefully protect yourself against these depredations.
But I don’t have a lot of hope for the political process. And at the end of the day, that’s on us. These politicians are catering to us. They’re telling us what they think we want to hear, and we respond by voting yes or no. So I think we all have an obligation. Those of us who care about this stuff, those of us who care about people your age, generations not yet with us, I think we all have an obligation to be out there doing what we can.
Absolutely, Jeff. I think we should end it there on that sober analysis. But for those interested in a brighter future, maybe look into a gold fixed income and monetary metals, you can check out Monetary Metals. Com. Jeff, any final closing thoughts on the debt ceiling and where you think we go from here?
No, but we’ll come back and look at this. Maybe in just a few days if we have to keep people up to date.
Absolutely. Thanks so much.
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