'National Debt Disaster' Is the Most Priced Narrative In Markets
If you want to clear a room at a cocktail party don’t talk about monetary policy, talk the national debt. That’s because everyone in the room has almost certainly heard and read what you’re saying multiple times in the days, weeks and months preceding your ministering.
To write about the oncoming debt disaster is like writing about who occupies the White House: everyone knows. Which means it’s priced.
Despite that, policy types continue to beat stables of horses to death. Even though the markets for Treasury debt are by far the most knowledgeable markets in the world, pundits, editorial boards, and the person you can’t escape at the cocktail party continue to write and say the same thing, repeatedly.
This includes locales of policy sophistication like the Washington Post. In an editorial published last week, the members of the Post’s editorial board observed that “the budget of the federal government is the largest of any organization in human history.” Which is the equivalent of the Post telling us that JD Vance is Vice President. It turns out politicians old and new like to spend, and with taxable access to the richest, most productive people on earth, they spend in gargantuan sums.
The editorial board adds that “In 1952, there were six people between ages 25 and 64 for every one person 65 or older. That meant there were six people whose wages could be taxed to pay for benefits for every one senior. In 2011, there were four. Today, there are 2.7.” The implied point is that fewer Americans per senior makes the risk associated with paying off debt run up to support seniors even more difficult.
Which would have some validity if we humans were static creatures, but we’re not. Our capacity to create taxable wealth for governments to waste, pay seniors, and pay interest on the debt continues to grow. With it, so grows the ability of a government with taxing power to borrow.
The Post’s editorialists give the impression that the debt just happens, that it’s an effect of politicians blithely borrowing from Pluto to make up for any government spending overages by the richest country on planet earth. No, the borrowing is rooted in the expectation inside the world’s deepest, most informed markets that Treasury will easily be able to pay back monies borrowed. The Post editorial page has taken on a pro-market bent, but continues to write as though markets are stupid.
See its conclusion in the form of a warning about the debt that “the 2030s is when the bill comes due.” Except that Treasury markets don’t just look ahead to the 2030s, but also into the 2 nd half of the 2050s. And with 30-year yields the same as they were in 2001 (when the national debt was $5.8 trillion), the pesky markets are saying $40 trillion will be as easy to pay off as $5.8 trillion was.
Which is the point. The markets are screaming at us about a disaster, but it’s not the one promoted by the Post, every other pundit, every think tank scholar, along with every self-regarding cocktail party annoyance in history.
The disaster is not a future, or “when” thing as the Post contends, rather it’s long been with us. And it involves all the progress not happening exactly because our political class so excessively taxes its rich that even $40 trillion borrowed doesn’t remotely spook the markets. Someday, the deficit delusional will finally change the subject to the previous truth, along with a crisis that is humongous precisely because it can’t be seen.
Originally published on Real Clear Markets.