#562 Musings Beyond the Bunker (Friday January 20)
Good morning,
We are nearly three years into the “pandemic world.” One would hope we are now in the “post-pandemic world” but, alas, I think this virus is adjusting to become a regular occurrence of a flu-like disease (and not mutating into something worse). And I think history has taught us that the next pandemic is around the corner. We hopefully will be better prepared and quicker to respond.
Last week, two indicia of the reemergence of travel were (a) the number of pedestrians in Times Square now equal pre-pandemic levels, and (b) the number of hotel rooms occupied in Las Vegas has reached pre-pandemic levels. Trying to get a reasonably priced airline ticket or a restaurant reservation is proving to be a challenge. Unemployment remains low, inflation is abating, the energy crisis in Europe appears manageable (in part due to a milder than normal winter), and economic growth is on an uptick. It seems the economy is roaring back.
AN ECONOMIC “SELF-INFLICTED WOUND”?
So, what could go wrong? Well, a few things. China is experiencing economic slowdown and population shrinkage. This could bode poorly for global supply chains of manufactured goods and might also make China a bit more provocative in the geopolitical games in Asia. Russia could further cripple Ukraine and could inflict further damage on Europe’s economy through its strategy of energy deprivation. The U.S. could spend even more and increase the deficit. Artificial intelligence and other technological advances could endanger jobs. And of course there are the “unknown unknowns” (to paraphrase former Secretary of Defense Rumsfeld).
But by far the greatest risk to the American economy this year is the unwillingness of some in Congress to raise the debt ceiling. We go through this game of chicken every several years and manage to get past it just in the nick of time. The Republicans will hold out for what largely will be “window dressing” compromises on government spending. It will be a roller coaster of dares and double dares, as no one with half a brain thinks defaulting on the debt is a good idea for anyone.
The concept of a “debt ceiling” is, of course, a ludicrous fiction. Dollars already have been appropriated. The nation’s obligations are known and must be paid. The cost of debt has risen with inflation. Yet periodically, Congress must vote to raise the approved debt ceiling (again, even though the money must be spent). Failure to do so would mean that the government would run out of money. There are those (generally on the political right) who would like their constituents to believe that failing to raise the ceiling will make government more fiscally conscious and would force reductions in spending. This of course is flawed reasoning for the benefit of the base. There may some changes around the periphery but this is hardly the way to legislate fiscal responsibility. All it will do is make it difficult for government to pay its debts.
Secretary of the Treasury and former Fed Chair Janet Yellin says that the failure to raise the debt ceiling will “cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability.” Whether or not you believe the U.S. government should tighten its belt, it’s pretty clear that the childish performative tantrum of refusing to raise the debt ceiling not only will fail to accomplish the goal of reducing government spending, but will forever taint the U.S. dollar and the government’s ability to borrow cheaply.
Failure to raise the ceiling, and the accompanying failure to timely pay U.S. debt will result in reducing the stature of the U.S. dollar, the lynchpin of the global economy. The “reference currency” will be tainted, the world will entertain the new reality that the U.S. treasury obligations are risk free, the cost of debt will rise and the favored status of our economy will be forever damaged—perhaps irreparably.
The Republicans in the House that are signaling a debt ceiling battle are playing with fire. Much like the toddler holding up a glass family heirloom, threatening to throw it to the ground, the child is not considering the consequences of its behavior. Once the heirloom is thrown and broken it cannot be put back together—not without significant cost, reduced value and the nasty signs of repair. In the past, the firebrands stepped away from the precipice and the government—and the dollar—survived. This time around, I’m not sure I’d bet on Congress doing the right thing. I think there is not an insignificant number of Congresspersons who believe Yellin is full of hot air and this is all a game. Much like the kid who is told not to grab the white-hot pan in the kitchen, some of them I think actually don’t trust that it’s as hot as it is. This would be bad—for them and for us…
INACTION IS WHAT THE PEOPLE WANT?
Politics has been described as the art of the possible. Today, it seems like getting very much done by government is nearly impossible.
I once thought that there were intractable views that could not be reconciled, resulting in gridlock. Eventually, that deadlock forces serious discussion and negotiation. But I now have come to believe that it is far more sinister. I think there is a calculus in Congress that suggests the best thing to do is not cooperate with the other side and to let rational legislation fail. Why? Not because it isn’t wise to work together, but because the failure to reach a compromise keeps a wedge issue in the headlines and because politicians actually run on the inability to achieve a result.
I think we will see a lot of this in the next two years.
Have a good day,
Glenn
PS: Rest in peace, David Crosby. The creators of the soundtrack of our youth seem to be dying off. We had him around longer than it seemed likely, as Crosby’s, body outlived the damage he inflicted on it.