Why do Silicon Valley startups never rate loans? Because money is ruthless, and there’s not an interest rate high enough to compensate lenders for loans to business concepts that fail quickly over 90 percent of the time.
Why is money ruthless? See the genius of compounding. It reveals the substantial cost of losing money.
Which is a useful pivot to the idea that federal tax cuts since 1981 have “starved the beast,” and that by extension the starvation of the beast led to enormous amounts of borrowing to make up for reduced tax inflows. No, quite the opposite, and the surest sign it’s the opposite can be found in national debt that is $38 trillion, and counting.
To suggest that the tax cuts instigated copious borrowing by a spending addicted Congress implies that markets are blithe, that those with title to money would eagerly lend in the trillions to an individual, corporation or government with a declining ability to pay monies borrowed back. No, that’s not realistic.
Nor is it realistic that balanced budgets loom as the wise solution to the borrowing. The $38 trillion in debt explains why. It’s a market signal that future revenues flowing into Treasury will be exponentially greater than those at present. Markets look ahead, and the only reason the U.S. can borrow so much in the present has to do with the expectation that future revenues will dwarf those of today.
It’s a reminder that even if budgets are balanced, it will be the achievement equivalent of a 5-foot-tall basketball player slam dunking on a 4-foot hoop. In other words, and assuming balanced budget legislation now or in the future, the budgets in balance will fund annual federal outlays that will render those of the present parsimonious by comparison.
Budget hawks write about incautious borrowing now as evidence of the people of today immorally living off future generations. Such a view implies that there are benign qualities to the central planning of precious resources by governments.
In truth, today’s borrowing is our burden and it’s twofold: central planning is yet again hideous, while the much more perilous burden we face now is unseen: the staggering amounts of progress not happening, the future Amazons, Nvidias, Googles, cancer cures and transportation advances that will never see the light of day thanks to a total failure to starve the proverbial beast, and in failing to starve it, enabling easy borrowing.
Regarding the sainted “grandchildren,” their burden is an inheritance of a much less evolved world, many problems that still require solving that’s inherent in the latter, along with a massive government that requires feeding thanks to a forever obsession with balanced budgets over actually limiting tax inflows to Treasury.
The future burden is the size of government, while the debt that drives all manner of worry among the hawks is the least of the problems. Market signals keep telling us exactly that through falling yields on Treasuries; yields that have logically fallen to reflect growing confidence in our ability to pay the borrowed money back. If money is ruthless, and it is, then $38 trillion is staggeringly ruthless. We’re the polar opposite of “starve the beast.”
Tax cuts happily became voguish 45 years ago, except that they in no way restrained the federal government’s tax-revenue intake as evidenced once again by all the federal debt amassed since. The latter signals market confidence in the present and future incomings for the U.S. Treasury, and why it will continue borrowing at falling rates of interest. Yes, a loud market signal that the beast has never, ever been starved.
Originally posted to Real Clear Markets.
