Ben Bernanke’s grand economic experiment of quantitative easing is nothing more than a policy of implementing negative real interest rates. That policy may provide support to puff the markets but it also promotes a very real transfer of wealth and income. The simple fact is quantitative easing and negative real interest rates as a formal monetary policy are neither practical nor sustainable over the long haul.
What do I view as a very real and dangerous consequence of Bernanke’s policy? I am of the strong opinion that Bernanke has created a facade by which many in Washington and around the country continue to “fiddle while the United States burns.” We evidence this fiddling reality in the midst of the petulant and pathetic budget debate ongoing in Washington.
While our leaders nitpick over pennies in order to ‘keep the lights on’, the destructive structural deficit our nation faces casts a very long shadow across our nation’s entire landscape. I firmly believe that many politicians have little appreciation for that reality.
Who spells out this reality and can define just how long and dark a shadow the deficit casts? I welcome introducing readers to Dr. Brian Taylor, President and Chief Economist of Global Financial Data, who wrote Paying Off Government Debt: Two Centuries of Global Experience. I commend Taylor for his providing an historical and global perspective on this issue while writing in layman’s terms. Let’s navigate.
Taylor addresses the impact of structural deficits by highlighting that,
A structural deficit that is used to pay for services or transfer income, unlike capital investment, does not add to the net wealth of society, and implies higher taxes or lower government services in the future to offset the accumulated structural deficits.
A structural deficit implies structural adjustments in the future; however, it may be difficult to generate the future surpluses needed to pay off this debt for demographic reasons. An ageing population implies both a higher recipient to taxpayer ratio, and higher health care costs for the elderly. Calculations of the implied cost of the entitlement programs the government has promised in the future, such as Social Security, Medicare, Medicaid and other programs, predict large increases in these costs in the future without large reductions in the promised benefits. Any attempt to run surpluses to pay back the debt will require large increases in taxes.
Increasing taxes in and of themselves will not solve our structural problem. We need to simultaneously restrain spending and reform/restructure our massive entitlement programs. If our nation does not aggressively address this structural deficit now, the global markets and global investors will address it for us. How so? What is the greatest risk if we do not address this problem? As Taylor so poignantly addresses,
Higher interest rates can spark a financial crisis that forces the government to reform, especially if the debts were created because of rising secular social costs. War debts are more likely to face inflationary default than rising social costs because the war debts are a one-time non-recurring cost. Since social expenditures largely redistribute income, governments cannot inflate their way out of these costs, but must eventually reform. For this reason, eventually the entitlement problem, which is the basis of the current rising deficits, must be fixed. The only question whether this problem is taken care of now or the government waits until a financial crisis forces the government to reform, is fiscal ineptitude.
Fiscal ineptitude? Yes, we have plenty of that in Washington. Fiscal ineptitude is the equivalent of “fiddling while the United States burns.”
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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.