Earlier this week the Trump administration announced their proposed budget for 2018. The plan bears some striking resemblance to Trump’s first budget attempt in three key ways: it contains some legitimate cuts to a number of government programs, it features increases to America’s irrational war budget, and all together it reflects a significant increase in government spending from current levels. It also has zero chance of passing in Washington, which may be the most significant aspect of the budget.
As soon as details emerged, it was already being torn apart by a web of pundits, think tanks, and politicians. Not because it doesn’t adequately address America’s growing debt bomb, but because it promoted an “extreme” view of austerity. In spite of its refusal to address the trillions in entitlement obligations for Social Security and Medicare, the budget’s modest reductions to Medicaid were deemed “radical.” New York City mayor Bill de Blasio warned that proposed cuts to additional social programs will literally kill children. Meanwhile, the dependably absurd Jennifer Rubin was up in arms because Trump wasn’t spending enough on war.
In spite of the obvious failings within the Trump budget, it’s hard not to sympathize with his Director of Budget and Management, Mick Mulvaney. In defending the proposed cuts, he told Congress on Thursday:
This is a moral document and here’s the moral side: If I take money from you and have no intention of ever giving it back, that’s not debt — that is theft. If I take money from you and show you how I can pay it back to you — that is debt.
This makes sense in the real world, but not in a city that hasn’t had to worry about paying off its debt in quite some time. By controlling the world’s reserve currency and placing massive entitlement programs off the books, politicians have mastered the art of kicking the can down the road.
Of course, this can’t last forever.
In any reasonable, lawful world, spendthrifts are punished. The rest of the world knows America will never get its fiscal house in order. No sane accounting standard would ever permit a government to keep trillions of dollars in entitlement promises off its balance sheet.
If we think about it rationally, this should mean creditors cut us off entirely, or at least demand junk bond interest rates. It should mean haircuts and means testing for Social Security and Medicare. It should mean selling off federal assets, including vast western lands. It should mean significant cuts to the federal budget. But Congress will do none of these things, nor can it.
We’re past the point of political solutions.
This is why, as I’ve noted repeatedly, the most prescient thing Trump said on the campaign trail was suggesting that America was going to end up defaulting on the debt. America IS going to default, just as we have before. The only matter is when, and how.
This could, perhaps, be playing a role in the growing valuation in Bitcoin and other crypto-currencies.
After all, these alternative currencies share the same advantage enjoyed by gold and non-fiat money, by being free of increasingly reckless governments and central bankers. In fact, in recent years we have seen consumers shift to Bitcoin when confronted with a crisis in currency.
For example, when the Indian government banned the use of their largest bank notes, demand for crypto-currency accelerated dramatically in the country. Similarly, as crippling inflation grew in Venezuela, so did the appeal of Bitcoin. It’s also possible that the Bank of Japan’s negative interest rate policy played a role in Bitcoin use becoming so common that the country now accepts it as a form of legal payment.
While it’s difficult to figure out how much of Bitcoin’s extraordinary rise in value is a product of sound economic reasoning — and how much is speculation — it is easy to see that the world is awash in government debt. Just this week, Moody’s downgraded China’s debt for the first time in decades due to concerns about growing its way out of its financial liabilities. Given that reality, and the obvious lack of courage on the part of politicians to tackle these very difficult problems, it’s easy to see how crypto-currencies could become increasingly attractive in the future.
We may be past the point of political solutions, but not market ones.