No Free Lunches
May 19, 2020·4 comments·In Brief
Markets are celebrating massive deficit spending as a crisis solution. But the mechanism that funds this spending is quietly shifting power away from elected representatives toward unelected institutions. If the Federal Reserve is willing to monetize any deficit, taxation becomes optional and legislative authority becomes hollow.
• The Treasury market rejected massive government debt issuance twice in recent months. Only Federal Reserve purchases stabilized it. This reveals something about how dependent the system has become on central bank intervention rather than actual market demand.
• If the Fed can monetize any deficit, then taxation isn't about funding government anymore. It becomes something else entirely. This raises a strange question about what Congress is actually authorizing when it spends without needing to raise revenue.
• Historical data shows fiscal stimulus is less effective than advertised. Government spending multipliers range from 0.3 to 0.8, not the one-to-one or higher returns politicians promise. Japan's decades of monetization haven't produced the results central banks expected.
• When spending no longer requires taxation, legislators face no constraint on pet projects as long as the Fed is willing to buy the debt. This creates incentives for exactly the kind of inefficiency and self-dealing that weakens democracies.
• Emerging market central banks are already trying to copy this model. But what works for a reserve currency doesn't translate elsewhere. If this unravels across multiple economies simultaneously, the consequences are unknowable but potentially systemic.
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Comments
“Perhaps most scary, is it allows legislators to act without worry about where their self-interested spending eventually goes.”
And that is at the root of crony capitalism……elites screwing the pubic and presenting the bill to the government.
Reminds me of Indonesia under Soeharto……authoritarian and extremely corrupt, where crony capitalism was THE way of life.
Nobody paid anywhere close to their real taxes.
Made no sense when there was always the ‘hidden tax’ of bribes every body had to pay to get anything done….
In reference to Pete Cecchi’s No Free Lunch fake outrage by Senators must be all show at suddenly discovering at the Powell/Mnuchin testimony the “$454 billion CARES Act wasn’t really just $454 billion. It is to be leveraged up by factor of 10 to 1 into a $4.54 trillion bailout for Wall Street. The $454 billion is designated by Fed’s SPVs as “loss absorbing capital,” meaning taxpayers will eat the 1st $454 billion in losses”. And, no one in Congress knew before voting on it? https://wallstreetonparade.com/2020/05/senators-express-outrage-at-hearing-over-mnuchins-sneakiness-with-500-billion-of-taxpayers-money/
For many, many years now, taxation has had nothing to do with the budget at the Federal level and everything to do with the behavior of the taxpayers. It’s like the drain at the bottom of the fiat system bathtub. Breathe…
Welcome to the long now
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