Post by Admin on Jul 24, 2021 12:15:26 GMT -6
Originally posted on FaceBook Dec 23, 2020 - moved here July 24, 2021
How the Federal Government Deals with a Problem:
Someone notices that there is an issue, Problem X, that requires a solution.
“I’m from the government and I’m here to help!!”
Let’s skip the step where government agencies and experts study the problem and come up with a solution. Let us instead assume that the problem is simple and only requires that the government throw some money at it. Let’s say the government decides to give each person in the US a one-time payment of $1000 to solve Problem X. It is universally agreed that this payment will indeed solve Problem X, so how does the government come up with the $330 Billion needed?
Legislative Portion:
What should happen – Given that it is universally agreed that the payment will solve the problem, a bi-partisan push from each house of Congress puts together a bill to give each person in the US $1000 from the Federal Treasury for a total expenditure of $330 Billion from the budget for the fiscal year. It passes from committee through each the House and the Senate and is signed into law by the President.
What actually happens – For many reasons both political and personal, there will be disagreement on whether the bill goes too far or doesn’t go far enough. Honestly, these are all reasonable arguments in my mind as Congress members SHOULD fight for their constituents. However, once it is virtually assured that the bill will pass, there will be riders and tag-alongs and adders for additional expenditures and personal/pet projects and promises to special interests that will get added to the wording that may never have gotten passed on their own. Since there is no line-item veto power, these omnibus bills are becoming the norm. The funding gets passed as needed, but an extra 50-200% is added to the bill and the total cost is now $500 Billion to $1 Trillion.
Budgetary Portion:
What should happen – Note, that this should be a part of the bill as it is negotiated/written. The fiscal year budget should have been put in place with some emergency/contingency funds in place in case of cost overruns, unforeseen circumstances or emergency needs. Even if this hasn’t happened, then the governmental entities should get together to figure out sourcing for the funding for the program. If there are revenue excesses, they can be applied to the program. If not, then the bill will need to be funded by either raising taxes, cutting spending in other programs to accommodate this one or by deficit spending/adding to the national debt.
What actually happens – How the program will be funded is never discussed as part of the bill construction because it is known that all funds taken in by the government are already allocated to other programs and cutting those funds is impossible. Raising taxes is the death knell of the politician, so that is also impossible. The cost of the program is added to the national debt via deficit spending, this is never even discussed.
Servicing the Debt (Actually Paying for the Bill):
What should happen – The US government issues US Treasuries (Bills, Notes or Bonds) in the amount of the cost of the bill to be bought up by the public at an interest rate determined by the free market. The holders of the US Treasuries are paid their interest over time or upon maturity for allowing the government to borrow the money. Interest rates on US Treasuries are fixed on the day they are sold. Future Congressional Sessions must include these additional expenditures into future budgets making sure to pay them down before they grow too large. US Treasuries are like your household personal loans or credit cards.
What actually happens – The US Government sells Treasuries first to governmental entities that have budget surpluses (Social Security and several other Retirement fund type agencies) because since the government owes the interest to itself, it can waive it. This is about 25% of the Federal Debt. When people have said that “Congress has raided Social Security” this is what they mean. The Social Security administration is one of the biggest owners of Federal Debt there is, but since the government doesn’t pay itself interest, the debt just rolls over and over . . . without the capital to invest (its invested at 0% interest) there are coming budget shortfalls that cannot be met. Same with Medicare, military retirement programs and several other entities that own Federal Debt. The other 75% is held by the public, meaning anyone that is not affiliated with the government . . . some by foreign countries, hedge funds, banks, everyone. The US Treasuries are basically auctioned off for the lowest interest rate bids on them. Thus, the US government gets its funding and the investors get the guarantee of the US government to repay the investment and the interest rate bid on in the sale when the term of the Bill, Note or Bond is up.
What actually happens Part II – Obviously, if the interest rates being bid for the US Treasuries get too high, then the interest on the debt can get overwhelming and end up costing a lot of the Federal budget for the fiscal year just to pay it. There is an additional problem of “robbing Peter to pay Paul.” As older issued Treasuries mature, they are due with interest and new Treasuries are issued (at the current interest rates) to pay those debts as well. The capital investment of the new US Treasury holder (bidder) goes to pay the capital investment and interest of the mature US Treasury holder. This is very much like using one credit card to pay another as the government kicks the can down the road on the overall debt (now equal to the old debt + interest) by agreeing to the new interest rate on the new lump sum with the new bidder. If only there was some way that the interest rate could be controlled to make sure that the debt never runs away with our future.
What actually happens Part III – Enter the Federal Reserve Bank (the Fed) and a policy known as Quantitative Easing or QE. The Federal Reserve Bank can buy US Treasuries just like any other bank can. It places its bids and can do its best to keep the interest rates low overall for the issued US Treasuries. Where do the funds for the Fed come from? It creates them. The Federal Reserve can simply print as much money (in US Dollars) as it would like to buy whatever it would like, whenever it would like. The only drawback is that by doing so, it increases the total number of dollars in circulation and thus lowers the buying power of each dollar incrementally. This is the policy of Quantitative Easing and this is what is referred to as monetizing the Federal Debt. Congress spends some amount of money over the amount taken in by taxes, it is added to the debt/deficit, US Treasuries are issued in the amount of the debt, the Fed buys the Treasuries and “prints” enough dollars to cover the expenses. This policy is not normally in use. It was implemented in 2008-2014 to combat the slow economy. It was reintroduced on March 23, 2020 with an unlimited cap on the amount of US Treasuries bought.
What does this mean? – It means that the Federal Reserve Bank has decided to allow Federal spending to exceed Federal tax income and to artificially suppress the interest rates charged for that act by printing more dollars and placing them into circulation. The good news is that this does work, as long as there is strong enough demand for the US Dollar as compared to other forms of currency. However, as something becomes more available, its value naturally declines. Meaning that as the Fed prints more and more dollars, they become worth less and less so it takes more dollars to buy the same things in the future as compared to now. That’s inflation and it can be controlled with a strong dollar. The real question is, at what point will the global demand for the dollar shift from strong to weak? At that point, the quantitative easing practice becomes a death spiral chasing its own tail into complete devaluation of the US dollar. No one knows where that point is. Those at the Fed believe that point is either a long way off or will never be reached. Those in the government are betting that they are right because it serves their purposes.
Everyone that is currently part of this equation is not looking to stop Federal government spending. They see this as a great new plan and are planning for more and more spending of this type. The Fed has outright said that they are committed to keeping interest rates low for the next 5 years and currently have an unlimited cap on US Treasury buying.
So, no matter what Problem X is, it feeds into the cycle described above. Our fiscal policy being fixed or the value of the dollar crashing are the only 2 escapes from this cycle. Sure, the Fed can reverse their policies and stop buying US Treasuries, but then the interest rates on those go up and the large debt can’t be paid for with the interest charges required. That slows the spiral down, but still leaves it active.
Thank you so much for reading this far, if you got here. I hope it was informative and that you have a better understanding of why I am against any deficit spending and believe it will be the end of our Republic. Questions/Comments are welcomed.
How the Federal Government Deals with a Problem:
Someone notices that there is an issue, Problem X, that requires a solution.
“I’m from the government and I’m here to help!!”
Let’s skip the step where government agencies and experts study the problem and come up with a solution. Let us instead assume that the problem is simple and only requires that the government throw some money at it. Let’s say the government decides to give each person in the US a one-time payment of $1000 to solve Problem X. It is universally agreed that this payment will indeed solve Problem X, so how does the government come up with the $330 Billion needed?
Legislative Portion:
What should happen – Given that it is universally agreed that the payment will solve the problem, a bi-partisan push from each house of Congress puts together a bill to give each person in the US $1000 from the Federal Treasury for a total expenditure of $330 Billion from the budget for the fiscal year. It passes from committee through each the House and the Senate and is signed into law by the President.
What actually happens – For many reasons both political and personal, there will be disagreement on whether the bill goes too far or doesn’t go far enough. Honestly, these are all reasonable arguments in my mind as Congress members SHOULD fight for their constituents. However, once it is virtually assured that the bill will pass, there will be riders and tag-alongs and adders for additional expenditures and personal/pet projects and promises to special interests that will get added to the wording that may never have gotten passed on their own. Since there is no line-item veto power, these omnibus bills are becoming the norm. The funding gets passed as needed, but an extra 50-200% is added to the bill and the total cost is now $500 Billion to $1 Trillion.
Budgetary Portion:
What should happen – Note, that this should be a part of the bill as it is negotiated/written. The fiscal year budget should have been put in place with some emergency/contingency funds in place in case of cost overruns, unforeseen circumstances or emergency needs. Even if this hasn’t happened, then the governmental entities should get together to figure out sourcing for the funding for the program. If there are revenue excesses, they can be applied to the program. If not, then the bill will need to be funded by either raising taxes, cutting spending in other programs to accommodate this one or by deficit spending/adding to the national debt.
What actually happens – How the program will be funded is never discussed as part of the bill construction because it is known that all funds taken in by the government are already allocated to other programs and cutting those funds is impossible. Raising taxes is the death knell of the politician, so that is also impossible. The cost of the program is added to the national debt via deficit spending, this is never even discussed.
Servicing the Debt (Actually Paying for the Bill):
What should happen – The US government issues US Treasuries (Bills, Notes or Bonds) in the amount of the cost of the bill to be bought up by the public at an interest rate determined by the free market. The holders of the US Treasuries are paid their interest over time or upon maturity for allowing the government to borrow the money. Interest rates on US Treasuries are fixed on the day they are sold. Future Congressional Sessions must include these additional expenditures into future budgets making sure to pay them down before they grow too large. US Treasuries are like your household personal loans or credit cards.
What actually happens – The US Government sells Treasuries first to governmental entities that have budget surpluses (Social Security and several other Retirement fund type agencies) because since the government owes the interest to itself, it can waive it. This is about 25% of the Federal Debt. When people have said that “Congress has raided Social Security” this is what they mean. The Social Security administration is one of the biggest owners of Federal Debt there is, but since the government doesn’t pay itself interest, the debt just rolls over and over . . . without the capital to invest (its invested at 0% interest) there are coming budget shortfalls that cannot be met. Same with Medicare, military retirement programs and several other entities that own Federal Debt. The other 75% is held by the public, meaning anyone that is not affiliated with the government . . . some by foreign countries, hedge funds, banks, everyone. The US Treasuries are basically auctioned off for the lowest interest rate bids on them. Thus, the US government gets its funding and the investors get the guarantee of the US government to repay the investment and the interest rate bid on in the sale when the term of the Bill, Note or Bond is up.
What actually happens Part II – Obviously, if the interest rates being bid for the US Treasuries get too high, then the interest on the debt can get overwhelming and end up costing a lot of the Federal budget for the fiscal year just to pay it. There is an additional problem of “robbing Peter to pay Paul.” As older issued Treasuries mature, they are due with interest and new Treasuries are issued (at the current interest rates) to pay those debts as well. The capital investment of the new US Treasury holder (bidder) goes to pay the capital investment and interest of the mature US Treasury holder. This is very much like using one credit card to pay another as the government kicks the can down the road on the overall debt (now equal to the old debt + interest) by agreeing to the new interest rate on the new lump sum with the new bidder. If only there was some way that the interest rate could be controlled to make sure that the debt never runs away with our future.
What actually happens Part III – Enter the Federal Reserve Bank (the Fed) and a policy known as Quantitative Easing or QE. The Federal Reserve Bank can buy US Treasuries just like any other bank can. It places its bids and can do its best to keep the interest rates low overall for the issued US Treasuries. Where do the funds for the Fed come from? It creates them. The Federal Reserve can simply print as much money (in US Dollars) as it would like to buy whatever it would like, whenever it would like. The only drawback is that by doing so, it increases the total number of dollars in circulation and thus lowers the buying power of each dollar incrementally. This is the policy of Quantitative Easing and this is what is referred to as monetizing the Federal Debt. Congress spends some amount of money over the amount taken in by taxes, it is added to the debt/deficit, US Treasuries are issued in the amount of the debt, the Fed buys the Treasuries and “prints” enough dollars to cover the expenses. This policy is not normally in use. It was implemented in 2008-2014 to combat the slow economy. It was reintroduced on March 23, 2020 with an unlimited cap on the amount of US Treasuries bought.
What does this mean? – It means that the Federal Reserve Bank has decided to allow Federal spending to exceed Federal tax income and to artificially suppress the interest rates charged for that act by printing more dollars and placing them into circulation. The good news is that this does work, as long as there is strong enough demand for the US Dollar as compared to other forms of currency. However, as something becomes more available, its value naturally declines. Meaning that as the Fed prints more and more dollars, they become worth less and less so it takes more dollars to buy the same things in the future as compared to now. That’s inflation and it can be controlled with a strong dollar. The real question is, at what point will the global demand for the dollar shift from strong to weak? At that point, the quantitative easing practice becomes a death spiral chasing its own tail into complete devaluation of the US dollar. No one knows where that point is. Those at the Fed believe that point is either a long way off or will never be reached. Those in the government are betting that they are right because it serves their purposes.
Everyone that is currently part of this equation is not looking to stop Federal government spending. They see this as a great new plan and are planning for more and more spending of this type. The Fed has outright said that they are committed to keeping interest rates low for the next 5 years and currently have an unlimited cap on US Treasury buying.
So, no matter what Problem X is, it feeds into the cycle described above. Our fiscal policy being fixed or the value of the dollar crashing are the only 2 escapes from this cycle. Sure, the Fed can reverse their policies and stop buying US Treasuries, but then the interest rates on those go up and the large debt can’t be paid for with the interest charges required. That slows the spiral down, but still leaves it active.
Thank you so much for reading this far, if you got here. I hope it was informative and that you have a better understanding of why I am against any deficit spending and believe it will be the end of our Republic. Questions/Comments are welcomed.