02.04.2019 | Full Faith and Credit

Start with the dollar bill in your wallet. Actually, this piece of paper is labeled a Federal Reserve Note. A note suggests it's a debt instrument i.e. that someone owes you something. What does this even mean? There's no real obligor, no claim against some balance sheet or, in fact, a claim to any real asset at all. The "legal tender" language thus suggests its worth is presumed without regard to something tangible. That legally imposed (fiat) presumption is supported by an intangible called full faith and credit.  All one can do with this irredeemable piece of paper is trust the next guy will value it the same way. 

Or else. Who can forget the blinding epiphany rendered by Federal Reserve Chairman Ben Bernanke not even a decade ago (humor warning)? 

US Economy Grinds To Halt As Nation 

History teaches us that other fiat currencies -- that of the Weimar Republic, Zimbabwe, and, in process, Venezuela -- have suffered The Onion black fantasy. In the end, it really falls back to the full faith and credit of the system. While there's no suggestion here the U.S. Dollar is a near-term candidate for such ignominy, the examples of the past do highlight the reason we need to pay attention to the nation's monetary and fiscal dealings.

Our focus article provides a very readable be-not-afraid context to what anyone who is used to managing the household budget would otherwise regard as a harrowing violation of basic financial prudence i.e. our annual deficits and the attendant burgeoning national debt (link: Economists reconsider how much governments can borrow ). The absolute numbers are so mind-boggling --  a trillion dollars added annually to the current twenty-one trillion debt balance -- that they need to be expressed in terms of percentages of our gross national product in order to be (somewhat) comprehensible.

Even we non-economists had become somewhat comfortable hearing about Keynesian economics with its associated deficit spending applied to modify the inevitable business cycles through the expansion and contraction of the money supply

. Monetary policy employing deficit spending as a shock absorber seems to make perfect sense. Now, however, it has morphed into something else -- deficit spending as a somewhat permanent financing vehicle.

The article makes reference to this "Modern Monetary Theory" which is really neither modern nor a theory -- it's an argument that significant sovereign debt is actually a good thing and that budget balancing efforts on a national scale do much more harm than good. Maybe so. But note the important qualifier i.e. that the annual growth rate of GDP exceeds the interest rate or, to others, that the spending is applied to that which adds to increment net growth. Perhaps the real issue is not how much, but for what, we are borrowing.

Therein lies the heart of our discussion -- is this "theory" ultimately just a tool with which to bypass the hard fiscal choices we need to make regarding spending, taxes, etc.? We now hear constant chatter about things like Medicare-for-all, universal basic income, and the latest Alexandria Ocasio-Cortez dream of democratic socialism. And, it need be added, that $21 trillion debt number mentioned at the outset is dwarfed by certain excluded future financial obligations (e.g. Social Security; Medicare) -- these so-called unfunded liabilities have a present value conservatively estimated to be over $50 trillion.     

How much abuse (debasement) can a reserve currency withstand and still remain as such? Is not the incurrence of debt with the prospect of its everlasting roll-over (rather than repayment) not the same as stealing (rather than merely borrowing) from the future? Who now speaks for full faith and credit? 

What comes to mind is the quote (misattributed to many), "When the people find they can vote themselves money, that will herald the end of the republic." 

Steve SmithComment