David Stockman's Non-Recovery Part 5: Peak Debt And The Wages Of Keynesian Sin

Tyler Durden's picture

In the final section of this five-part series (Part 1, Part 2, Part 3, and Part 4) on the dismal reality behind the non-recovery, David Stockman explains what lies ahead. He details in his new book 'The Great Deformation', that the mainstream notion that there is a choice between fiscal austerity and fiscal stimulus is wishful thinking. It does not recognize that owing to the triumph of crony capitalism and printing-press money America has become a failed state fiscally. What lies ahead is a continuous, mad-cap cycling back and forth - virtually on an odd-even day basis - between deficit cutting and fiscal stimulus to the GDP. As Stockman notes, the proximate cause of this recession waiting to happen is the federal government’s unfolding encounter with Peak Debt. The latter is not a magical statistical point such as a federal debt ratio of 100 percent of GDP, but a condition of permanent crisis - "no viable economy can survive on chronic fiscal deficits nor can it fail to save at a sufficient rate to fund a healthy level of investment in productive capital assets. The blithe assumption to the contrary which animates current policy rests on self-serving clichés such as “deficits don’t matter” and the Chinese savings glut." So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin - the price of abandoning financial discipline.

 

 

Via David Stockman's book 'The Great Deformation',

The proximate cause of this recession waiting to happen is the federal government’s unfolding encounter with Peak Debt. The latter is not a magical statistical point such as a federal debt ratio of 100 percent of GDP, but a condition of permanent crisis. From the failed election of 2012 forward, every dollar of additional borrowing will induce new political and financial pressures while every dollar of spending cuts and tax increases will further impair the rate of GDP growth.

The mainstream notion that there is a choice between fiscal austerity and fiscal stimulus is wishful thinking. It does not recognize that owing to the triumph of crony capitalism and printing-press money America has become a failed state fiscally. Deficits and debt have now reached the point where they are too large and too embedded in social, economic, and political realities to be resolved. Accordingly, what passes for fiscal governance will become a political gong show that will make the New Deal contre-temps pale by comparison.

What lies ahead is a continuous, mad-cap cycling back and forth - virtually on an odd-even day basis - between deficit cutting and fiscal stimulus to the GDP. Thus, deficit cutting will be in play every twelve months or so in order to purchase enough “conservative” votes to raise the federal debt ceiling by another trillion dollars or so. Yet every upward increment will become harder to pass in the House and Senate, ever the more so as the debt ceiling soon breaks above the $20 trillion mark and begins to soar well above 100 percent of GDP.

The fact is, the great unwashed masses on Main Street know full well that Washington is trifling with national bankruptcy, so the debt ceiling votes have become the one clarifying legislative moment in which they can demand a halt to the madness. Accordingly, the template from the August 2011 debt ceiling crisis will become the recurring framework of fiscal governance: in return for more debt ceiling, the reluctant House and Senate majorities which are finally assembled will get a new package of fiscal restraint in the form of targets, promises, and processes to develop plans to implement budget savings.

Before the ink is even dry on these deficit reduction packages, however, they will become part of the permanent, rolling “fiscal cliff”; that is, a recurrent series of pending tax and spending shocks that would cause negative GDP prints and adverse job reports if implemented. In effect, the Main Street economy will appear to be continuously confronted by the prospect of a “fiscal recession” or a dip in activity because it will be viewed as too weak to absorb the tax increases and spending cuts needed to close the nation’s yawning and unshakeable budget gap.

And so short-duration fiscal support measures like the payroll tax holiday and extended unemployment benefits will be enacted on even days in order to bolster a faltering economy. These “stimulus” measures, needless to say, will only exhaust the available debt ceiling headroom and accelerate the next debt crisis.

This impending struggle with Peak Debt, in turn, will unleash a hammer blow to household consumption spending that will be orders of magnitude more severe than was the loss of MEW after 2007. This threat is owing to the fact that the fiscal gong show now unfolding will almost certainly trigger a drastic upward lurch in both the savings rate and the tax rate on household incomes.

These inexorable developments will mark the beginning of the great unwind from decades of borrow and spend. Needless to say, the Keynesian doctors and their Wall Street fellow travelers have not even begun to contemplate the repudiation this will bring to their model of printing-press prosperity.

There will now be relentless tax increases and spending cuts as far as the eye can see. This fiscal sword of Damocles will hang over the American economy on a permanent basis, cutting down to size that great artificially swollen edifice known as the American Consumer Economy once and for all.

One prong of this shift will be a drastic increase in the household savings rate because chronic threat of cutbacks in Social Security and Medicare will finally drive home the need to save for retirement. As indicated earlier, the pre-1980 household savings rate averaged 8.5 percent of disposable personal income at a time when the baby boom was only entering the labor force. Now with 4 million boomers scheduled to reach retirement age each and every year until 2030, the fiscal basis of the New Deal’s Faustian bargain on social insurance is certain to buckle.

The resulting continuous debate on actual and potential benefit cutbacks will instill fear throughout the population, even if the actual social insurance cuts are modest, halting, and prospective. Consequently, the savings rate could easily return to the pre-1980 norm or even higher. Yet if the current 3.7 percent savings rate merely reverted to the 8.5 percent historical average, it would extract an incremental $600 billion from DPI.

In the same manner, the crash of bubble finance and desperate Keynesian tax cutting it elicited have resulted in a sharp but unsustainable decline in the rate of taxation on household income. Thus, in late 2007 personal income taxes and employee payroll tax contributions amounted to $2.49 trillion, or 17.5 percent of GDP. On the eve of the 2012 election, however, the direct tax take from household income had actually declined to 15.5 percent of GDP, thereby releasing $300 billion for additional consumption spending.

Needless to say, the era of fiscal reckoning ahead will result in a reversal of this free lunch tax policy at the same time that the savings rate is rebounding. In rough order of magnitude, the combination of these reversals from the current artificial régime of low taxes and low savings could take upward of $1 trillion out of the household consumption stream. And that assumes savings rates and tax rates revert only modestly to the pre-1980 norm.

Nor would this represent some kind of harsh punishment for high living or a reversion to reactionary Hooverite policy. In truth, no viable economy can survive on chronic fiscal deficits nor can it fail to save at a sufficient rate to fund a healthy level of investment in productive capital assets. The blithe assumption to the contrary which animates current policy rests on self-serving clichés such as “deficits don’t matter” and the Chinese savings glut.

THE EPIC GENERATIONAL MISTAKE

Dick Cheney’s shibboleth is now receiving a brutal comeuppance, however, as the Fed and other central banks reach the outer limits of their capacity to absorb incremental bond issuance. In this respect, it is evident that the crisis of government deficits and debt throughout the developed world—Japan, Europe, and the USA—reflects a common condition. Sovereign debt everywhere is vastly overvalued owing to monetary repression. Yet that condition is also artificial and unsustainable: the lesson of southern Europe is that sovereign debt will succumb to a violent free fall when and as central bank “price keeping” operations are withdrawn, fail, or even come into doubt.

At the same time, the hoary tale that America’s savings function had been outsourced to China and other mercantilist exporters was but a lame invention by the Fed to camouflage its destructive money printing. In truth, the pitifully low US savings rate over the past several decades reflects a colossal financial deformation; namely, a mistaken belief among US households that there was no need to save out of current income, but that they could spend all that came in and then borrow some more.

This epic generational mistake stemmed in large part, as has been seen, from the Fed’s serial asset bubbles in stocks and housing, which egregiously misled households about their true wealth; and also from the unwarranted confidence that the nation’s vast social insurance benefit distributions could be sustained indefinitely and in full. A crucial pivot point in American financial history has thus arrived because all of these foundational assumptions are about to be invalidated.

Housing asset values have already crashed by 33 percent and have mounted only a tepid recovery. But they will soon undergo another thundering setback when the baby boom retirement army is forced to liquidate millions of empty nests in order to survive financially. Needless to say, the next generation, saddled with $1 trillion of student debts and small earned incomes, will not be open to buy. Since prices inexorably fall in a bidless market there will be nothing to break the decline except an insolvent government.

The social insurance system is now entering an era of permanent funding crisis and chronic political turmoil. And, as detailed in chapter 32, the Bernanke stock market bubble is heading for a thundering meltdown which will vastly eclipse that of September 2008. So what lies ahead is endemic fiscal crisis, wrenching financial market dislocations, and relentlessly rising fear about financial security on Main Street.

All of this will cause household behavior to change fundamentally; that is, it will lay low America’s vaunted “consumption units.” Indeed, the coming sharp rise in tax rates and savings rates will cause a drastic hit to consumption spending even if these adjustments take several years to unfold. For example, if a $1 trillion increase in household savings and taxes is rolled in over five years, it would reduce the nation’s $11.1 trillion level of PCE by nearly 2.5 percent annually in nominal terms. For a half decade running, therefore, the central component of GDP could be reduced by 5 percent annually in real terms (assuming 2–3 percent inflation).

Needless to say, recidivist Keynesians and their supply-side fellow travelers will propose “economic growth” as the way out of this emerging economic box canyon of higher taxes and higher savings. But their fiscal panaceas of lower taxes or higher spending will be powerfully thwarted because these measures require extensive balance sheet runway - that is, short- and medium-term deficits - that no longer exists.

To be sure, advocates of fiscal stimulus will claim growth multipliers based on one or another set of “goal-seeked” statistical manipulations. But unless they want to sign up to Art Laffer’s magic napkin, none of the policy measures available will be close to 100 percent self-financing. Given a 20 percent marginal Federal tax take, for example, fiscal stimulus measures would need to generate a 5X GDP multiplier in order to break even. And that is the profound dilemma of peak fiscal debt: there is no remaining headroom in the national debt for policy makers to gamble with play money stolen from future taxpayers.

So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin—the price of abandoning the financial discipline achieved by Dwight Eisenhower and William McChesney Martin during the mid-twentieth century’s golden age.

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Atomizer's picture

Noooooooooooooooooooooooo. You must not tell the truth! It’s the terrorist who are at fault.

 

/sarc

Anusocracy's picture

I would say that the epsilon-minus semi-moron voters who elected the alpha-male epsilon-minus semi-morons to office are to blame. The government has squandered 200+ years worth of accumulated capital.

Good job, all of you.

Pool Shark's picture

 

 

The wages of sin is death,

but the wages of the median American worker are far worse...

 

 

markmotive's picture

Maybe we have a cyclical paper boom for a couple years, but the real smart money is investing in guns, ammo and cans of food. That and waffles...tasty waffles with lots of syrup.

http://www.planbeconomics.com/2013/06/selling-united-states.html

glenlloyd's picture

This is what I have always said, the bill for past sins is coming due and it will have to be paid.

If you still have a 401k or IRA get it out now before the tax rates get to such a point that it's all eaten up in taxes when you take it out, after all, it's NOT going to be there by the time you're 59.5 anyway...

Prairie Dog's picture

We're all doomed! Doomed!

Atomizer's picture

Not really. The ass puckering falsehoods are on the doom creators.

Blano's picture

Damn I'm falling behind.

francis_sawyer's picture

Wasn't 'PART V' the one where 'The Empire Strikes Back'?...

NidStyles's picture

This is the abridged edition.

fonzannoon's picture

anyone else watching the 10yr gently creep up while asia sells off? 2.56%

oh boy.

JLee2027's picture

Rising interest rates will wreck the best laid plans of mice and men.

The Shootist's picture

Laissez les T Bills roulez.

kito's picture

fonz....lets be real here..are you saying that the fed has lost control of bonds???? that they couldnt crush the shorts like a bug now????

fonzannoon's picture

kito sorry for the late reply. what I am saying is this. the longer they don't squash those shorts like a bug the more carnage that will take place in equities when they do. Why they are letting it go this far is insane. This is less about flow right now and beginning to become about stock.

I also think this scenario is going to end up with the fed having to backpedal on the taper and create the realization that QE4eva is here.

One last thing. There are massive hedges on by insurance companies/banks in the interest rate markets. We keep going in this direction and someone is going to end up in deep shit.

ebworthen's picture

fonzanoon said:  "anyone else watching the 10yr gently creep up while asia sells off? 2.56%"

C'mon 4.0%!

NoDebt's picture

This would all come as a shock to me, I'm sure, if it hadn't already been explained to be (fairly accurately, I might add) by my father about 25 years ago.  Collapse under the weight of entitlements (for both the poor and the rich)..... say it ain't so.  Please?

 

 

Scro's picture

I believe my dad had the coming crisis talk with me in 1993. But I didn't listen, I had an economics degree!

thestarl's picture

Don't need no economics degree to understand this shit mate just commonsense.

cynicalskeptic's picture

Why is everyone ignoring the TRILLIONS spent on unneeded 'defense'?  - we spend more than the restof the world combined on our military including tanks that have no opponents and billion dollar fighter aircraft that are horrible perfiormers.   We're wasting too much of our limited revenue on an evergrowing 'security state' thatseems to exist ONLY tfor the purpose of keeping itself employed and very well paid.

If we gave up on 'Empire' and pulled our troops back home and downsized our military and security apparatus the rest of the world might not hate us as much - eliminating the cause of the 'war on terror'

Meanwhile we waste money pn subsidies for damn near everyone - paying farmers NOT to grow, and promoting the consumption of everything from pork to caviar.  

We need to end the pork in government spending for EVERYONE and bring government back to its basic functions.

We also might want to put financiers in prison and confiscate their ill gotten gains instead of rewarding them by bailing out failed banks and brokers with trillions. 

Optimusprime's picture

Well said.  But our masters in Tel Aviv would not permit any of these measures you advocate.

Solon the Destroyer's picture

They might be willing to let us end the whole pork thing.

marathonman's picture

We had a chance in 2012 to do that.  The RNC and the media made it abundantly clear that the American people would never get that option as long as they controlled the selection process.  That was the moment that the scales fell from my eyes and I can see clearly.  Small government by the RNC is pure bunkum.  It's just a bone thrown out to the party faithful.  The real agenda is set by JPMorgan and Goldman Sachs in the back room.  And they voted Democrat.

dolph9's picture

Peak empire, bitchez.

Monk's picture

The problem isn't a choice between one or the other but an unregulated derivatives market with a notional value of over a quadrillion dollars. The 2008 crash was brought about by only a fraction of that market.

 

Cabreado's picture

We will apply labels and argue about policy and bicker about decisions made and not made,

all the way 'til it doesn't matter that we forgot to factor in the part where those-who-control don't give a shit.

Your gift-horse of simple won't hang around forever.

gaoptimize's picture

I'll be very surprised if the twilight lasts more than two years, before darkness engulfs us.

bonin006's picture

It's always darkest just before it goes pitch black.

http://www.despair.com/despair.html

 

disabledvet's picture

i do agree a "fiscal awakening" is well underway...has been underway actually for some time. even Republicans are starting to look at the "incarceration State" that we've had since the 1960's amazingly enough. the idea of course that we have some "huge State" hanging over us however is simply ludicrous. there is nothing to compare vis a vis the Government of today with the Government of the Cold War. in other words "these debts will get rolled over" either in the form of front running the Fed or a stronger dollar...at least in the foreseeable future. i think David Stock simply cannot see the forest through the trees here...a place Paul Krugman ironically enough is seeing all too well and something i have talking about ever since i got here. This is the massive AGGREGATION of capital into New York and the creation of "monopoly rents" over various asset classes. this is highly DEFLATIONARY and is why the Banks were "liberated" from the securities divisions under Glass/Steagal. the fact of the matter is with all this trading in house "the fear wasn't that the trade would fail but it would succeed"...and that is exactly what is happening right now. "at some point the USA might even get a trade surplus out of the deal" but as it stands even that looks to be a long way off. in other words by having Glass Steagal you could actually create inflationary policies that could provide more varied sources of capital...something very hard...but certainly not as hard as it was then...today. the USA is very lucky not only to have the dollar as the world's reserve currency but to have a multi-faceted financial system that doesn't really need New York City much anymore in order to "get the economy moving." having said that there is much mischief making that can still result from the "reaggregation of capital" which the Federal Government has aided and abetted here...not the least being banks becoming "mere trading vehicles" for crazy speculators "with taxpayers on the hook for their losses." the Fed appears now to be moving against that...which clearly has created quite the spasm...we shall as this New View takes hold however how all the pieces shake out. a nominal return on savings (4%) would not be a bad thing in my view. if it can be sustained indeed that would be a sign of confidence in the recovery as a whole. having said that "i'll believe it when i see it." the biggest threat is obviously the one that is ongoing and getting larger...namely of outright defaults of State and municipal bonding agents...the largest in US history "only getting larger" (with the current case being Detroit.) I think to argue "this is a sign of good economy" is a sign that there are a lot of economist that need to be checked into a facility to have their heads examined. simply put we never had these problems in the 80's...and obviously interest rates were far higher back then. this time they're at or near zero !!!!! and the Fed says enough of that now as well!!!!!!! CRAZY!

NidStyles's picture

Paragraphs dude, use them ffs.

Optimusprime's picture

".we shall as this New View takes hold however how all the pieces shake out..."

 

Looking for a verb?

q99x2's picture

"Wall Street fellow travelers"

I say get rid of Wall Street and  Washington. They are enemies of the United States of America. Replace them with open source software and lets see how the United States of America does. The FED showed everyone how stock markets and a monetary system can be replaced with software. Thanks to them we don't need them anymore.

Poor Grogman's picture

Government by the people for the people.

Welcome to the age of the code monkeys...

FieldingMellish's picture

Let's face facts here. The forces of evil and tyranny have won. The forces of justice and liberty have lost. Gold and silver will be rendered worthless along with those that mine it. We were wrong. Now pass me the whiskey and a gun with a single bullet in it... so long dear family, it was fun... for awhile.

The Shootist's picture

"Don't be scaring the lads now." -Color Sgt. Bourne

g'kar's picture

Zulu does seem like a good movie to go watch right now. Bourbon, blood, beans and bacon.

EastCoast90's picture

I'd like to invoke my problem free philosophy Hakuna Matata.

Dr. Engali's picture

I would have thought the Bernank would try to exercise some control over the bond market this weekend. It looks like he is going to let this thing go full retard and collapse.

HowardBeale's picture

Anything he does at this point has a 1.X stock and bond market deflator attached to it; i.e., pump the stocks Y% and they will eventually fall 1.X * Y%. The absurd game of Feeding the Oligarchs has run its course, and like Deninger says, "it is either the penetentiary now or the gallows later."

 

Personally, I hope the Bernanke gang opts for the pump, as I don't think I would be satisfied to know he was being rammed up the ass by Bubba and friends for the rest of his life. I want the death sentence for these heinous crimes against the World.

malek's picture

No worries here - if the 10yr keeps rising, you going to see another Queasing tsunami unleashed soon!

kennard's picture

I see the Austrians at mises.org reprint teasers of Stockman's book, but Stockman falls short as a praxeologue. He is concerned about the effect of declining consumption from government expenditure cuts, increased savings and tax increases, though calling tax reduction irresponsible. This is inconsistent with Stockman's early 80s record in Reagan's cabinet. In essence Stockman cautions against a reduction in aggregate demand a Keynesian concept. This runs counter to Stockman's 1985 criticism of Reagan in "The Triumph of Politics", where he states that tax cuts must be accompanied by expenditure cuts. Mises would applaud government belt tightening and increased savings, but not the 2013 Stockman. Later he rails against claims of a multiplier effect, but the damage is done. Plus, buzz words in virtually every sentence detract from credibility. What exactly is "monetary repression" in the context of your book, Mr. Stockman, because my reading indicates that you use the term without understanding it?

Stockman has some good ideas and can often be a courageous visionary. He can also play fast, loose and inaccurately with ideas, just as he did in the Cabinet, long ago.

Poor Grogman's picture

+16tn

Not many people try to espouse elements of both theories In the same Work.

Sadly we can only talk about Austrian concepts in a theoretical sense as we live in a full Keynesian system.

Krugman can't understand any Austrian concepts because to his way of thinking you really can just keep increasing the debt. In this he is correct if the debt is paid off there is no more money!

Stock mans approach is populist and doesn't take the extra time necessary to explain what a fully fledged alternative would look like. Is this because he thinks it cannot work?

The way I see it a hard money system will eventually emerge from the market place once more, as knowledge and understanding create the need for a more tamper proof kind of money.

Government itself will drive this as it steals more and tampers more with what currently passes as money.

tony bonn's picture

...But unless they want to sign up to Art Laffer’s magic napkin...

lmao!

ebworthen's picture

"And that is the profound dilemma of peak fiscal debt: there is no remaining headroom in the national debt for policy makers to gamble with play money stolen from future taxpayers."

SPOT ON, THE ENTIRE POSTING.

The last adult as Commander in Chief appears to have been Eisenhower.

J.F.K. was assassinated for trying to restore sound money.

Reagan befuddled by Mandarins, apparatchiks, and age.

Any others have been juveniles, robots, or both.

Ratscam's picture

Eb, what is your take on Walter Burien's CAFR revelations. It would mean that debt is much lower for the US.
http://m.youtube.com/#/watch?v=KvCJ2Cndqcw&desktop_uri=%2Fwatch%3Fv%3DKv...
Thanks for your view point

ebworthen's picture

Hmmm...

Seen his stuff before, not sure.

As much money as government wastes I don't know that they have trillions hidden somewhere; and if they are "offshore" how do they keep them safe from pilfering?

It is possible that the U.S. Government has secret accounts; but with as much money as they openly throw at Wall Street and the Military Industrial complex, I'm not sure what the purpose of secret surpluses would be (?).  They seem happy perpetuating chaos, debt, and the Yo-Yo "crisis/recovery" psyops on the populace.

If there are secret surpluses they will never see the light of day; how else would they justify confiscating 401K's and I.R.A.'s and replacing them with "Annuities" while reducing already taxed and promised S.S. and Medicare benefits?

Also, trillions of dollars are required for all the N.S.A. and secret weapons programs to "keep us safe"; so that money may very well be funneled to the skunk works and building a Death Star.

Optimusprime's picture

Joseph P. Farrell (and others) apeculate that an enormous stash was confiscated from Japanese and Nazi lootings after WWII, and used subsequently to fund alternative technology, black ops, a parallel vast financial system (integrated with the big drug industry), and ultimately what he calls a "brakaway civilization" that basically does not care for the rest of us.  He further claims that this stash and its minders have thoroughly penetrated both the above-ground financial systems and the intelligence/security systems.  In other words, they use their intelligence and financial powers to "trade on their own account", while simultaneously manipulating all the "public systems".  Pretty much in line with ZH thinking, in other words.

 

Politicians are those whose job is to help obfuscate this system, while being warned not to overstep their bounds.