Guest Post: Fuck The Deficit (Or Will The Deficit End Up Fucking Us?)

Tyler Durden's picture

Fuck The Deficit (Or Will The Deficit End Up Fucking Us?)

Submitted by Gonzalo Lira

Currently, the United States is conducting one of the most remarkable experiments in fiscal finances in world history.

The
American economy is in a severe recession. Coupled with that—as both
partial cause and partial effect of the recession—the United States'
banking system crashed in the Fall of '08, a crash which in many ways is
still ongoing as I write this, nearly two years later.
What
the recession and the concomitant banking crisis have caused are,
essentially, a fall in aggregate demand levels, as well as a fall in
aggregate asset value. In other words, the population is spending less,
and asset values have deteriorated, both nominally and as compared to
any basket of hard commodities.
These are the
two metrics which the two principal camps of current American
macroeconomic thought consider vital. “Saltwater” economists look to
aggregate demand levels, while “freshwater” economists look to aggregate
asset value—each of these camps view their fetish-object as the
cornerstone for economic growth, development and prosperity. Naturally,
when either of these camps see their juju slide, they freak out. They
declare the economy to be “in crisis”—and further declare that
“something must be done”.
Something has been done: It's called The Deficit.
To
combat the fall in aggregate demand levels, the Federal Government has
embarked on a massive spending program. This spending program has been
financed by debt issued by the Treasury. The way things are looking,
another big spending package is in the offing some time soon—that should
keep the “saltwaters” happy.
On the other
hand, to combat the fall in aggregate asset value—and keep the
“freshwaters” happy—the Federal Reserve Board has embarked on an asset
purchase program that is also massive and unprecedented.
Through a
fairly complex scheme that seems to be deliberately opaque, the Fed has
relieved the Too Big To Fail banks of their deteriorated assets, and
given them cash, in an ongoing process. The Too Big To Fail banks have
turned around and used that cash to purchase Treasury bonds—which are
being used to finance this massive Federal Government spending. Whether
there has been collusion between the Treasury, the Fed and the TBTF
banks is for the courts and the historians to decide—but prima facie, it would certainly look so.
This
two-sided scheme—more Federal Government spending on the one hand, and
more propping up of asset values on the other—adds up to The Deficit.
When
I refer to it as The Deficit (it is too majestic for the lowercase), I
am not referring to a mere fiscal shortfall—I am referring to a policy
mentality. This policy mentality—shared by both “saltwater” and
“freshwater” economists—effectively amounts to a suspension of the
notion of opportunity cost. In the realm of The Deficit, the
macroeconomic policy questions cease to be “either/or”—they become
“both/and”. All policy options can be achieved because—according to the
macroeconomic policy known as The Deficit—the American fiscal shortfall
can never bring the United States to bankruptcy. As Dick Cheney so
memorably phrased it, deficits don’t matter—so The Deficit as a
macroeconomic policy can continue indefinitely.
In
a historical sense, The Deficit is unprecedented: Never before in world
history has a reserve currency provider gone into this much debt, with a
currency that floats on nothing but air. This is the key issue: The
dollar is a fiat currency. The Roman, French, British, Austro-Hungarian
empires, all of them world-historical empires in their times, all might
have gone way into the red on more than one occasion—but none has ever
done it on a purely fiat currency before.
America is the first to do so (“U!! S!! A!! WE’RE!! NUMBER!! ONE!!”). Hooray.
The Deficit is the policy that the United States is implementing, and it has had several effects:
1.
The most obvious, it has allowed the Federal Government to finance
every last one of its spending programs, in an effort to boost aggregate
demand levels. No need for Obama’s vaunted talk of “tough choices”—the
Federal Government has officially been renamed the Great American Teet.
2.
It has prevented the TBTF banks from acknowledging the plain fact that
they are broke. Indeed, the Fed asset buy-back has effectively kept the
banks solvent in a practical sense—they have money to pay off any of
their liabilities. But more importantly from the Fed's point of view, it
has sustained deteriorated aggregate asset values in the overall
economy, at least on a nominal basis.
3. It has created a fiscal shortfall of staggering proportions—currently about 100% of GDP, and growing without end.
4.
Finally—and most importantly—it has created the generalized impression
among policy makers that fiscal shortfalls indeed do not matter, and
that liquidity and stimulus simply mustbe provided whenever there is a crisis, the rationale being that the economy is too “fragile” to withstand the “shock”.
This
is a key effect of this policy, I would argue the most important of all
of the effects: The fact that the fiscal shortfall has crossed the 100%
of GDP mark, and nothing bad has happened has given everyone a false
sense of security—the sky has not fallen, the world has not ended.
Therefore,
as a practical political matter, the people with decision-making
authority in American public policy have effectively said, “Fuck The
Deficit, let’s keep on truckin’.”
But what if
the sky does fall? What if we are simply living in the lull before the
fall? I mean, it can't be that this enormous fiscal shortfall can
continue growing indefinitely, can it? It has to lead to some kind of
ruinous effect, right? Like drinking a bottle of scotch in a single
sitting—you feel good while you're doing it, sure, but you know you’ll
feel like death warmed over soon enough, right?
I mean, The Deficit will eventually come back and bite us on the ass—right?
Lately, there have been an awful lot of clever people explaining how, in fact, The Deficit will not harm us in the long term.
Very sensible-sounding words, and seemingly-sophisticated arguments, are deployed to make precisely this point. Others further argue
that The Deficit, because of its sheer size, will become its own growth
engine, and hence will grow the economy to such a point that The
Deficit will essentially pay for itself—a bit of financial magic that
almost seems believable.
And to any talk that
The Deficit and the stealth-monetization going on might lead to
hyperinflation, these clever people are scoffing and saying, in effect,
“Haven’t you heard the news? We got deflation, pal—forget about
inflation, let alone hyperinflation: We gotta spend-spend-spend, in
order to whip that deflationary monkey. After that’s taken care of, and
the economy’s growing again, that’s when we’ll be able to bring down The
Deficit.”
Recently, I had a private
exchange with a financial blogger, about precisely this point. This
blogger—who should have known better—argued that since we were in a
deflationary environment, there were currently no inflationary
pressures, and none in the forseeable future. Therefore, she argued,
since the economy was experiencing a deflationary trough and inflation
highly unlikely, then hyperinflation was an impossibility. Nay, an
absurdity, or so she claimed.
She's clever, but she made a common mistake—she confused inflation with hyperinflation.
Granted,
they do seem to look alike—both of them are essentially money losing
value against wages, commodities and goods-and-services over time.
Commonly—and mistakenly—hyperinflation is viewed as simply
inflation-plus, inflation-XL. After all, the name seems to imply it: Hyper-inflation. Inflation’s big brother. Inflation with an extra bit of kick.
This is a dangerous fallacy.
Inflation
is indeed the economy “over-heating”, in Neo-Keynesian parlance—wage
pressures, say, dragging prices up across the economy, or perhaps raw
commodity prices doing the same. Inflation can gallop up to 25% a year,
but still remain a distinct animal from hyperinflation. Ordinarily,
inflation is simply the economy eating up commodities—be it raw
materials or labor—so as to meet demand.
Hyperinflation,
however, is the loss of faith in money. It is not that prices are
rising because the economy is moving forward—it’s that prices are rising
because nobody believes that money is worth a damn anymore.
Hyperinflation
is not simply money-printing: Rather, it is when no amount of money
will get you what you want. Zimbabwe-style hyperinflation is an example
of government money-printing run amok. The Zimbabwe example gives us the
mistaken sense that hyperinflation only happens in “disorderly
printing” regimes. But that’s not the case.
Chilean
hyperinflation in 1973 (which led to the September 11 coup), or Weimar
style hyperinflation (which led to you-know-who), are more indicative of
what I’d call “scarcity” hyperinflation: Both are examples of when the
scarcity of basic commodities suddenly and abruptly leads to a complete
loss of faith in money—the belief that no amount of money will get you
what you want or need.
That’s hyperinflation.
2008
Deflationists (of which I am a member) argued that after the credit
crisis, there would be a deflationary trough. The reasoning of the 2008
Deflationists was, credit should be considered as part of the money
supply—so when credit contracts sharply, as happened following the
banking crisis in ’08, then that’s the same as if total money supply had
contracted. A constriction in the money supply obviously leads to
deflationary pressures: Less money is available for the same or more
goods. Hence prices fall to meet lowered demand. Hence wages fall as
business incomes fall. Hence less money. Hence downward spiral.
As
the 2008 Deflationists predicted, today the U.S. economy is in a
deflationary trough—I am certainly not arguing otherwise: The evidence
is all around, and too obvious.
But what I am
saying is, our current deflation can trip over into hyperinflation at a
moment’s notice. The stumbling block—the thing that could trip us over
from deflation to hyperinflation literally overnight—is The Deficit.
Not just the Federal shortfall itself, but the policy
implicitly embodied by The Deficit: The belief that all you need to do
is throw money at the problem—open up as many liquidity windows as
needed, or expand Federal spending as much as necessary, to prop up
those twin aggregates I mentioned before, aggregate demand and aggregate
asset value.
The pernicious sense among
American macroeconomic policy makers that fiscal shortfalls don’t
matter—and don’t matter especially in a financial or economic crisis—is
what I believe will lead to hyperinflation. Policy makers—who have lost
any fear of providing as much liquidity and stimulus as necessary to
steamroller any problem—will have no compunction about adding to The
Deficit at the next crisis.
That’s when hyperinflation will kick us in the teeth.
If
I had to make a prediction, I’d say that the immediate trigger for a
hyperinflationary catastrophe will be a sudden and unexpected commodity
spike. It won’t necessarily be big, but it’ll be flashy—enough to cause a
panic.
This will be the opening stages of hyperinflation: It will be a market panic, and it’ll be fast.
At
the next panic-inducing crisis, American public-policy makers will once
again turn to The Deficit, providing more liquidity and more
stimulus—and this will make the financial markets realize that the
fiscal shortfall is unsustainable: It will be obvious that all those
Treasuries cannot be repaid—or if they are ever to be repaid, it will be
done by the Fed via surreptitious monetization. In other words, a
dollar with lesser value.
Thus, everyone will
want to be the first to get out of the dollar—and everyone will want to
be the first out the door all at once.
Markets
turn on a dime, and they are not rational in the short term—they’re
rational like a herd of thundering buffaloes hopped up on crystal meth.
As
everyone gets out of the dollar in the financial markets, there’ll be a
cascading effect, as everyone—both Wall Street sophisticates and Main
Street naifs—try getting out of their dollars, and into hard assets:
Gold, land, food, whatever.
In other
words, hyperinflation as I have described it above: A loss of faith in
money. The belief that no amount of money will buy you what you want.
The
Deficit—that’s the demon’s name. The Deficit. Not, as I have argued,
the fiscal shortfall, but the macroeconomic mentality that fiscal
shortfalls in a reserve fiat currency do not matter. The sense that as
much liquidity and stimulas must be and can be provided to maintain
aggregate demand levels and aggregate asset value.
Policy
makers are not exactly known for being prescient timers of the
markets—at the next market crisis/panic, they will without hesitation
provide stimulus and liquidity, adding even more to the fiscal
shortfall. But it will be the market’s and the public’s loss of faith
that that fiscal shortfall will ever be repaid that will lead them to
abandon the dollar.
Once they lose faith in
the dollar, hyperinflation will ensue, as public policy officials
continue providing “stimulus” and “liquidity” which the market will
interpret as nothing but worthless paper.
Actions
have effects—it is stupid to think that massive deficit spending of a
fiat currency won’t have consequences. The policy embodied by The
Deficit has brought the U.S. economy to the brink of oblivion—with no
way to pull back from that brink. So at this point, the only question
is, what will finally tip it over, and when will that tip-over happen,
and what will the . So at this point, there are only two questions that
need to be answered: One, when will the economy finally tip over the
brink, and two, what will give us that final push.

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Monkey Craig's picture

people will wake up about the deficit when 60% of their paycheck goes to taxes, interest rates are double digits, or the paycheck won't even buy a lunch or pack of cigarettes

Guillermo's picture

Europeans get health care, good schools, good vacations and state support for their taxes. We get bombs with which to kill muslims for Israel.

 

 

TBT or not TBT's picture

Europeons get to wait in lines, get their kids programmed in state schools, get forced to have a lot of free time and "vacation"...time essentially..in exchange for the very little income available after a million taxes on everything they do and want.   They're so depressed and repressed that they're not even having kids, which is causing the gigantic welfare states over there to collapse in slow motion.  The motion will speed up quickly, as it has repeatedly in European history.

TBT or not TBT's picture

EUO bitchez!      (and not TBT just yet)

Zina's picture

Europeans are much happier with life than Americans.

Wanna proof?

We don't see crazy europeans shooting room-mates and co-workers every month, as we see in the US...

And we don't see crowds of europeans trying to emigrate to the US.

Life in Europe is much better than in the US. If I had to leave Brasil and choose to live in the US or in Europe, I obviously would go to Europe.

cmalbatros's picture

+1 , europeans live longer than Americans - for now - less stress due to "Free" medical & Higher education & a much better Social safety net.

Quantum Nucleonics's picture

Longer lifespans in Europe have less to do with socialized health care (survival rates for cancer in Europe are signficantly lower than in the US, for example) and far more to do with demographics and diet.

Edmon Plume's picture

That's proof?  You should be unhappy for the sole reason that you aren't even coherent.

You can keep your fat dumb and happy lives.  I'll cling bitterly to my guns.  Betcha the Greeks are starting to rethink this whole happiness thing.  In time, you will too.

Yes, please stay out of the USA.  We don't need any more teat sucking entitlement victims.

SWRichmond's picture

I'll cling bitterly to my guns.  Betcha the Greeks are starting to rethink this whole happiness thing.  In time, you will too.

I share this idea.  Welfarism doesn't work; eventually, everyone figures out that hard work is for suckers, and no one works anymore. 

Guillermo's picture

It's an either/or. Either we pay taxes for bombs OR we pay taxes for benefits. I would rather my taxes benefit me and the city/state/country I live in than the cash be used for a fucking horrid degenerate empire.

SWRichmond's picture

False choice.  I don't want to do either.

Guillermo's picture

What you want doesn't matter.

Arkadaba's picture

Give me a break. U.S. education is a joke. I'll never forget meeting one person who had a Master's in the same field as I did- and I wasn't sure how she got out of high school let alone got a Masters.  Yeah she was Catholic so I'm sure she will reproduce. 

-Michelle-'s picture

Did you also obtain your degree from the US educational system?

Edmon Plume's picture

True, a degree is no longer proof of mastery of any subject, except for perhaps math or engineering.  I'm seeing some trending toward skills-based employment, rather than degreed employment.  Employers are weary of not being able to trust the broken education system, and are responding in kind.  There are still a great many holdouts to the old "bachelor's degree required" theme.

Europe is losing the demographics war, and the US isn't far behind.  I wouldn't sneer at reproduction - it is a country's saving.  Unless you think that a citizenry doesn't need citizens.  The Catholics and Protestants were right about the carnage wrought by the birth control/sexual freedom/abortion/no-fault-divorce movements in the 1960s and beyond.

BobWatNorCal's picture

Even Euros in the US don't have kids. It's kind of creepy.

Guillermo's picture

Who can afford them? Between taxes and inflation a family with more than one kid requires an income that very few people have. It is only going to get worse.

lolmaster's picture

You're welcome to move to Cuba or Saudi Arabia

Fred C Dobbs's picture

No you're not.  One cannot immigrate to just any country.  

breezer1's picture

i emailed the cuban consulate once asking about immigration and business regs and recieved no response after several times.

israhole's picture

How true, we get more wars for Israel, and all the enemies that come with it.  

Max Hunter's picture

Come on now.. You can't tell me you don't get that deep down clean feeling for hating Muslims and brown people like we are conditioned to..

Besides, Israel is our best friend. They would do anything for us..  They are a beacon of democracy.. It's all good.. Go back to sleep..

B9K9's picture

Overall, a nice analysis. Nothing new to any regular ZH readers, but it still conveniently summarizes all the key points.

The only thing I would quibble over is that there should at least be a nod to the notion that our current policy initiatives were never implemented (nor are being maintained & potentially ramped up) with any sincere intent.

Ultimately, regardless of the current crisis, there are a number of large-scale domestic macro trends that really would have confounded any established status quo. Among these are ongoing demographic changes, resource depletion, de-industrialization & debt accumulation.

So faced with these underlying facts, would someone with both awareness & power set up a purposeful fail, or would they merely humor & go along with academics who proposed these farcical policies in order to loot & strip any last remaining asset values?

(I guess a potential third option is that certain members of the power-elite might actually hope & believe - guffaw - that any of these actions might actually succeed.)

I guess that's up to the historians to argue over. For those of us living in the here & now, about the only thing one can count on is this mofo is not gonna last very much longer. Benny, Bammy, Timmy & the cabal of hench people are shit out of time.

If extensive Congressional hearings don't bring Barry down after Nov, team Petraeus might take matters into their own hands. Either way, as many others have noted, the USA we grew up with & have always known, as if it was some kind of natural absolute like the sun rising each day, is done, over, kaput, all pau.

DoChenRollingBearing's picture

+ $1.4 trillion to the author and to you B9K9.

There appears to be no way out of the box.  It is either hyperinflate or default.  Hyperinflation seems to be the solution most go for.

Congressional hearings to bring Barry down.  Only if the 'R's win big.  Even so, I doubt there is the will among almost any politician to resolve all of this.

Woe will be upon us.  Prepare...

MeTarzanUjane's picture

Maybe, but Tyler does not need to resort to such vulgarity to drive home the facts. Catchy titles are a ZH staple and normally set the tone. I hope they institute a policy regarding such or soon each title will be descriptive of all things excretionatory.

defender's picture

And I thought that I was conservative.  If you look at the top of the page you will notice that it says "guest post".  That means that the title and body are both from another author.  But outside of that, if you think that these phrases aren't common language, you must not watch any TV, or go to any grocery stores.  I think you need to get out more.

MeTarzanUjane's picture

TRUST me Defender, Tyler & Co have the final right of refusal and can therefore edit and or influence editors.

Meaning; ZH blesses every article posted.

I rest my case.

(Your sphere of influence is TV and the grocery store? You may want to look in the mirror, council.)

MaximumPig's picture

Bring Barry down and replace him with what?  A military receivership run by Petraeus?  Is he a follower of Austrian school?  Otherwise, if it's just another Republicrat, we'll be having more of the same.  Sure, you could point to a couple of Republicans here and there who follow Austrian school thinking, but what chance do you think someone like that has in the mainstream Republican party?  Paging Ron Paul . . .

Hedge Jobs's picture

all this useless bitching and moaning, has any noticed the H&S reversal pattern that has formed in the DOW over the last 6 months?

shorters have all capitulated (we dont have any more down days they all say!the market only ever goes up! boo hoo!)as they got carted out thanks to the FED. Well if this isnt a right shoulder at 10700 i dont know what is. Even the most basic algo would be able to recognise this, and so would humans if they stopped complaining and actually started paying attention.

likes like a pretty good set up to go short now on technicals, sentiment and definatelty fundamentals although i realise these dont matter much anymore.

time to put the shorts back on bitchez!

 

 

 

 

goldfish1's picture

yeah yea, technicals schmechnicals...it's the guy(s) behind the curtains running the numbers so don't get overly confident or bet against the house.  

Hedge Jobs's picture

Thanks for tip GF1, But i closed out my shorts and went long at the start of July (check post history if you dont beleive me) and this looks like a very low risk time to go short again. You certainly wouldn't be going long here.

So how do make money for yourself and clients in this market then? Or are you just another one of the many armchair spectators who likes to pass comment but has no skin in the game?

Panafrican Funktron Robot's picture

Yeah I'm looking at late August through early October as being the period when the shorts accelerate.  Now's the time to get in while it's still relatively cheap.  700's might actually turn out to be right on lol.

dark pools of soros's picture

make money for your clients???  you surely aren't doing god's work

Blano's picture

The DOW had one of these last summer too, and it failed miserably.

Right or wrong, I believe this one will fail too.

Failed patterns is the name of the game these days.

Hedge Jobs's picture

Blano / GF1 you are exactly the sort of sentiment indicators i am looking for and are typical of beaten up bearish investors everywhere.

There is no H&S last summer except in your imagination. They form over months not weeks. Please dont tell me you went short the market last summer at 8000 points? you did didnt you! GF1 was probably right there with you.

Shocker's picture

We are going to pay dearly for all this reckless spending.

Jasper M's picture

Dear boy, some of us with long time horizons, never took them off.

Hedge Jobs's picture

good move JM!

The FED has done its job wiping out all the nasty shorters and ramping the market enough to get them through the bad GDP number last week and the bad NFP number tonight.If they keep ramping the market they are going to make it too obvious and the game will be up. people are already starting to ask questions.

They wont care if the market drops back to 10,000. they will probably be the ones that sell it down there,close out their longs and replenish cash so they can add support lowed down becuase they know they will need to.

either play the game or sit on the sidelines Bitchez! Im going short.

realtick's picture

I disagree - look at this

http://i35.tinypic.com/ztjgnt.jpg

You're all mixed up like pasta primavera
Why'd you throw that chair at Geraldo Rivera
Cause one man's ceiling is another man's floor

 

MeTarzanUjane's picture

QE2 will be the juice to send this thing into overdrive. The shorts will get creamed again. Cream corn for errbody.

DosZap's picture

Obama planning on a 800 Billion dollar bailout without Congressional Approval?.

Go here................if you haven't already.

http://jsmineset.com/category/jimsmailbox/

Blano's picture

ZH's cohorts at Calculated Risk are debunking this story.

MeTarzanUjane's picture

My money is on the zero's. Free haircuts sponsored by The Demon Barber of Liberty Street.

Moneygrove's picture

End bush tax cuts now !!!!!!!!!!! why do we need more jobs ?? didn`t bush tax cuts make all the jobs we need ? lol !!!!!!

walküre's picture

The author's name is Gonzola "Lira"

A great name when you want to debate the coming hyper inflation.

Lira was Italy's infamous chewing gum of a currency.

When I spent time in Italy during their currency crisis, it was always an exciting visit at the markets. One day I paid 1000 Lira for the water melon, next day it was 2000 and after that it went up to 3000. I never held any Liras overnight. Just had my hard Deutsch Mark and exchanged one day at a time. One day my 100 Deutsche Mark gave me 100,000 Lira, next day I got 200,000 and so on ... It was fun!

Oracle of Kypseli's picture

Same thing happened with the Israeli Lira in the 70's (before switching to the Shekel). Supermarkets had 4 people repricing everything every night. Israelis will buy gold chains food and other assets that retained value as soon as they got paid. They were even buying hard liquor. All the paycheck was spent that day.