From: https://www.davidstockmanscontracorner.com/fiscal-armageddon-another-bastard-off-spring-of-keynesian-central-banking/?mc_cid=a8b93a25c3&mc_eid=23bf5d4e64

Keywords: American-fiscal-democracy, Fiscal-Armageddon, …

Fiscal Armageddon — Another Bastard Progeny Of Keynesian Central Banking

The yield on the 10-year US Treasury (UST) fell to a low of 0.52% early Friday morning, prompting Deutsche Bank’s chief credit strategist to marvel out loud:

……the current nadir in the 10-year yield went back 234 years, based on data spliced together from the various times the U.S. government has borrowed money in the past.

“The U.S. has been through depressions, deflations, wars, restrictive gold standard regimes, market crashes and many other major events and never before have we seen yields so low back to when the Founding Fathers formed the country,” said Jim Reid, Deutsche Bank’s chief credit strategist, in a Friday note.

There you have it. The lowest government bond yield since the founders were making their way to Philadelphia to draft the nation’s constitution juxta-posed with the most recklessly profligate fiscal policy in its entire history.

And, yes, what passes for fiscal policy in the Imperial City today does give the notion of “reckless” an altogether new definition. And it also tells you why the self-proclaimed “king of debt” currently domiciled in the Oval Office will long be known as the father of America’s fiscal demise.

The chart below compares the outstanding public debt with GDP since 1980, but with the enhancement that the public debt is stated at market value as calculated by the research department of the Federal Reserve Bank of Dallas. That removes the distorting effect over time of the Fed’s ever deeper repression of debt yields.

Since 1980, the nominal GDP—or national income from which the public debt must be serviced—has been in a losing race with the public debt. Thus, when the Gipper came to Washington to rollback Big Government and shrink the public debt, the latter stood at $864 billion or 28.9% of GDP, but since then it has been a one-way ratchet with GOP administrations leading the way ever higher.

Based on Q4 values prior to each presidential term, the figures for nominal GDP, market value of the public debt and the public debt ratio, respectively, were as follows:

When we said GDP is in a losing race with the debt, it’s because a 40-year trend doesn’t lie. During the past four decades, in fact, the GDP is up by 6.5X while the mark-to-market public debt has soared by 33.2X!

The army of fiscal flakes and careerist pols who dominate today’s GOP would have you believe, of course, that the explosion of the public debt from 28.9% of GDP in 1980 to the current precarious reading of 147.6% during the quarter ended in June is all the fault of the big spending Dems.

But the figures do not lie on that matter, either. Fully 100.0 percentage points of that 118.7 percentage point gain in the debt ratio has occurred during the 24 years of GOP White House incumbency between 1980 and 2020. That is, 84% of the gain is attributable to GOP presidents and 16% to the Dems.

Nor does the lame GOP excuse that Democratic congresses obstructed the good intentions of GOP administrations wash. Republican presidents have had 23.5 years’ worth of opportunities to veto spending bills and entitlement expansions, but essentially vetoed nothing material except in the early days of the Reagan Administration.

Likewise, the excuse that spending for baseline entitlement programs like social security, the medical entitlements and other welfare programs keeps rising due to higher case loads and benefits levels doesn’t wash, either. The leverage to force entitlement cuts and reforms has been the debt ceiling, which has also been increased by 33.2X since 1980, as well.

Yet Republican presidents during the last 40 years have never once vetoed a debt ceiling increase, owing to the sheer cowardice of the GOP rank-and-file on both ends of Pennsylvania Avenue.

So the scorecard is what it is, and it also tells you why a Fiscal Armageddon is virtually guaranteed during the coming decade. The Dems are spenders, statists and overwhelmingly political careerists, yet there is obviously no semblance of an opposition party when it comes to the nation’s fast approaching fiscal ruin.

For want of doubt, here is the average percentage point gain per year in the debt-to-GDP ratio since 1980.

Average Percentage Point Gain Per Year:

That’s right. The debt ratio had been ratcheting-up for decades, but during the last 42 months, the Donald has literally turned on the after-burners.

And, yes, it is overwhelmingly his fault owing to the fact that:

https://fred.stlouisfed.org/graph/fredgraph.png?g=tFE6

But as culpable as the Donald obviously is, there is another more consequential reason for the catastrophe at hand. Namely, the destruction of fiscal democracy during the last four decades that is an inexorable consequence of the Fed’s systematic and drastic falsification of the price of debt.

That changed everything after 1980, and is the reason why today’s rapid slide toward disaster is absolutely something new under the sun. In fact, the pre-1980 history of the public debt burden proves beyond a shadow of a doubt that it is easy money, not the inherent fiscal profligacy of American democracy, that accounts for the massive run-up of the public debt burden since 1980 shown above.

The truth is, until 1980 the public debt burden tended to soar during periods of wartime, but then was paid-off and ratcheted-down during the subsequent decades of peace and prosperity.

The first great bulge occurred during the Civil War when the public debt reached $2.5 billion in the dollars of the day, compared to a GDP of about $5 billion by 1870. The implied public debt ratio was 50% of GDP at the post-Civil War peak, but then something quite remarkable happened during the 43 years of peacetime between 1870 and 1913.

To wit, the Federal budget was in surplus 30 out of those 43 years, permitting the public debt to be cut in half to $1.2 billion by 1913. Meanwhile, the GDP had soared to $39.6 billion in dollars of the day, meaning that the debt-to-GDP ratio had been slashed to just 3.0% of GDP by the eve of the Great War.

During those 43 years of prosperity, real GDP had grown by 4.6% per annum, and per capita in living standards had gained 2.5% per year—a level far higher than anything recorded since then.

That is to say, American fiscal democracy has no inherent death wish as conservatives are want to argue—not when the cost of the public debt is palpable and [is thus] freeing-up the national savings pool to fund  private sector investment produces its own validation in the form of robust economic growth.

Unfortunately, then came Wilson’s Folly and the madness of US entry into a European fratricide that had no bearing whatsoever on the security and liberty of the American nation lodged between the great ocean moats. But by the time the slaughter had finally stopped in the killing fields of France in 1919, the public debt had soared to $25.5 billion to fund the war and Wilson’s bankrupt European allies (France and England).

So now the debt was back to 30% of the $84.0 billion of GDP at the end of the war, but once again America’s fiscal democracy proved its mettle, slashing both wartime spending and taxes, but more of the former than the latter. By 1928, the debt had been rolled back to just $17.6 billion, which amounted to just 18.0% of the $97 billion of GDP recorded in the last year of the Roaring Twenties boom.

We’d call that real supply-side policy, as distinguished from the bogus theories of Art Laffer, who named a curve after himself, claiming that tax cuts alone would pay for themselves and that GOP politicians need not bother with the messy business of cutting spending and curtailing the free stuff implicit in the post-war growth of the Welfare State.

But, still, here’s the dispositive but rarely acknowledge truth which demonstrates that even the rise of both the modern Welfare State and Warfare States alone did not bring about the ruin of American fiscal democracy;
it was bad money and bad money alone.

[Bad money not so much because it might hyperinflate, but more because of lack of risk-free long Bonds with a real yield meaningfully above zero.]

Thus, on the eve of Franklin Roosevelt’s ascension to the Oval Office at the end of 1932, the public debt had risen modestly to $19.5 billion, despite Herbert Hoover’s claim to being a budget-balancing conservative, while the nominal GDP had plunged to $58 billion owing to the Great Depression.

What that means is that we started the modern era of the Welfare State and the permanent Warfare State with a public debt ratio of 33.0% of GDP. But the next 48 years you will not find anywhere in the GOP oratory and only unflattering references in the Keynesian textbook.

That’s because notwithstanding the huge fiscal expansion of the New Deal, the massive military spending for WWII and then the Cold War thereafter and the further fiscal excesses of the Great Society and the 1970’s spend-a-thons under Nixon and Carter alike, the public debt ratio ended up back where it started!

That’s right. After 13 years of the New Deal and the massive borrowing for WWII, the public debt had soared by 13X to $270 billion, where it amounted to 127% of GDP by the end of 1945.

But then the debt ratio marched down hill again, pretty much steadily outside of  LBJ’s “guns and butter” interlude in the mid-1960s, to the 28.9% ratio the Gipper inherited in 1980. And that happened because there was still enough of the old time religion on Capitol Hill to enable the post-war growth of GDP to out-run the rise in the public debt and the drift of policy to fiscal deficits most years, albeit moderate ones generally less than 2.0% of GDP.

No more. As shown above, the race has now been decidedly lost, with the public debt (at market value) now weighing in at an unprecedented 148% of GDP and gaining momentum rapidly. Indeed, even if the Covid/Lockdown Nation disaster miraculously vanishes in the years just ahead, the tsunami of 10,000 baby boomer retirements per day during the 2020s will supply the fiscal coup d’ grace.

There is virtually no turning back the tide of fiscal disaster now, and here, alas, is the smoking gun.

Once upon a time there was meaningful daylight between the brown line (nominal yield on the benchmark 10-year UST) and the purple line (running inflation rate measured by the 16% trimmed mean CPI). That is, even so-called risk-free US Treasury debt had a real yield of 200-400 basis points to account for taxes and a real return on investment.

But after the final leap into monetary madness after the financial crisis of 2008-2009, the real yield had virtually disappeared; and then after the massive $3 trillion Fed bond-buying spree commencing in mid-March, [real yield on] the benchmark security of the entire global fixed income market went deeply negative in real terms.

As of Friday, the running inflation rate had clocked-in at 2.27% (June LTM) compared to an all-time low yield on the 10-year UST of the aforementioned 52 basis point.

Needless to say, when the real cost of debt is negative 175 basis points the politicians become euthanized; and when you get a financial buccaneer and fiscal know-nothing like Donald Trump is the White House, it’s Katy-bar-the-door time.

Self-evidently, Fiscal Armageddon is not on the radar screen of the day traders, robo-machines and Robin Hood platform retail mullets who bid the NASDAQ to yet another record today.

Alas, it soon will be.

https://fred.stlouisfed.org/graph/fredgraph.png?g=tFt1