Some chilling words from David A. Stockman in Saturday’s New York Times:

With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls. …

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today. Since our constitutional stasis rules out any prospect of a “grand bargain,” the nation’s fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. …

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

Boomergeddon, anyone? We’ve shot all our ammo. Interest rates are near zero. Five years into the business cycles, deficits still are close to $1 trillion a year. There are no arrows left in the public-policy quiver but economy-wrecking a slow-motion repudiation of the debt through inflation, and that will have hideous consequences of its own. You thought the Great Depression was bad? At least half the population lived on farms back then and could raise subsistence crops. Today many urban Americans, rendered supplicants to the government, have no ability to survive on their own.

The federal government is beyond salvation. Virginia is not yet there. We still have a few years to build “antifragile” state and local government institutions. Alas, Virginia’s governing class, though less reckless than their federal counterparts, are blind to the danger.


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13 responses to “State-Wrecked”

  1. Peter Galuszka Avatar
    Peter Galuszka

    More doom and gloom from the naysayers.
    Take a Valium and call me in the morning.

  2. reed fawell III Avatar
    reed fawell III

    As Months and years roll by the hole gets deeper while the bad policies go unchanged and actions like million dollar bus stops grow more pervasive, so its gets harder to disagree with what you never would have agree with before.

  3. When companies are bailed out by taxpayers, their officers and employees should be limited in compensation to what the SES and GS scales provide. Nothing more unless and until the bailout is repaid. If this were national policy, we’d have a helluva lot fewer businesses seeking bailouts.

  4. Ghost of Ted Dalton Avatar
    Ghost of Ted Dalton

    Perhaps you are correct. However, I just listened to a segment on Marketplace on NPR. The story was about how the sequester did not wreck havoc on the economy.

    One wonders if that might be a glimmer of hope.

  5. larryg Avatar

    We take in 1.5t in Ind/corp taxes. That’s all. That’s a problem.

  6. larryg Avatar

    One irony is that over the last last 3decades that FICA paid for ALL of SS /MEDA plus had 2 trillion left over to carry it over the transition to boomers. Twice as ironic, FICA/SS is the ONLY govt spending that by law cannot spend more than it brings in yet the gloom/doomers cite SS as out-of-control spending that is a current serious problem when it’s not.

    We don’t have intelligent discussions about govt spending and how to deal with it. It’s turned into one massive culture anti-govt culture war.

  7. The Washington Post reported recently that already one agency has figured out a way around its “sequester” cuts and that other agencies are likely to follow suit.

    Is it true (as I haven’t researched this myself) that the Fed bought it’s own T-bills recently when it couldn’t find any buyers?

    1. The Fed has become the largest buyer of Treasury bills…. by far.

      1. Whoah! I thought *I* was pessimistic!

  8. DJRippert Avatar

    Anybody who doubts the coming economic calamity is in serious denial. A few facts:

    1. Multiple bilateral agreements between countries have chosen currencies other than the dollar as their reserve currency. Last week China – Australia joined the list of trading partners to make this decision.

    2. The Federal Reserve’s balance sheet has grown from $928B in 2008 to over $3T this year. The Fed’s balance sheet is now 20% of GDP. The last time the Fed had such a large balance sheet was during WWII. Since the late 1970s the Fed has held a balance sheet of approximately 5% of GDP. Most people believe that the Fed will have to significantly unwind its balance sheet sometime before 2017. As of today, the Fed is continuing to buy T-bills and mortgage backed securities thereby expanding its balance sheet.

    3. Total US government spending as a percentage of GDP is approximately 40%. It has been steadily rising. In 1950, for example, it was approximately 20%.

    4. The failing large governments of Europe are evidence that increased government spending (in relation to GDP) retards growth and extends recession.

    5. Recent US recoveries have been shallower, more delayed and shorter in duration than in the past.

    We are left with real trouble in the 2015 – 2020 timeframe.

    1. The US dollar will become less of a reserve currency. The “ready market” for our printed money will decline precipitously. Since the advent of high scale global trading there have been a number of reserve currencies. They all stop being the reserve currency at some time. The US dollar is at the end of its useful life as a reserve currency.

    2. The next recession will likely occur before 2017.

    3. The European experiment in economic success through ever larger amounts of government spending has failed.

    4. As interest rates inevitably rise the assets on the Fed balance sheet will become less valuable. The Fed will incur losses selling the T-bills and MBSs. These losses will be made all the worse as the Fed has to pay a higher interest rate on the bank reserves as rates rise during the unwind.

    The next recession will be the last in the superpower era of the United States. The Fed will not be able to print money since the US dollar will no longer be the world’s reserve currency. Beyond that, the Fed will have lost considerable domestic credibility by losing money through the unwind.

    Banks that have been sitting on reserves during the period of low rates will have to start lending as rates rise. The cash strapped Fed will be unable to pay an appropriate return on the banks reserve deposits thereby squeezing the banks. Banking industry lobbyists will convince the political class to reduce reserve requirements “for the good of the economy”. Banks will fail and large depositors will lose their money. A run on the banks will ensue.

    Increased interest rates and automatic COLA adjustments will push US government spending straight into the Euro death zone. Several US states will be unable to fund pension payments precipitating a default by these states. The Supreme Court will rule that the federal government cannot allow a sovereign state to default.

    The federal government will attempt to implement confiscatory taxation of both income and assets. The Supreme Court will rule the asset seizure unconstitutional prompting the Congress to seek the enactment of a constitutional amendment allowing federal asset seizure without compensation.

    Several states, starting with Texas, will seek to peacefully leave the United States. Nullification will become a household word.

  9. reed fawell III Avatar
    reed fawell III

    I largely agreed with Don’s facts and near term predictions. As to the rest of his predictions, perhaps they will be the least of it.

    For beyond them, I would add that the chances of international unrest and conflict will increase dramatically, given that the rapid US financial decline. This will shake and threaten the collapse of international markets and structures and systems of all sorts, military, trade, and financial. Indeed what held the world together since WW11 might then quickly unravel.

    This world wide collapse into chaos and war is particularly apt given the wild card nature of China. Its rising strength and authoritarian system is matched only by its own fragility if US markets fail. China then may well launch into aggressive war only to to avoid the internal collapse it might otherwise face, not to mention the potential a US collapse offers China.

    China thus would view aggression essential to its security. And devastating aggression by then will be easy – China’s cyber war making power will be able to shut down the US in a nanosecond – paralyze us back into the stone age. And Russia is another huge wild card, one quite capable of the same aggression west into a Europe and south into the middle east both of which are growing as debilitated and irresolute now as in the 1930s before WW11.

    Amid all this there will not be the strong US of old to save the world. Quite likely here a demagogue (s) will arise to inflame and capitalize on our own social unrest bred out of today’s irresponsible class warfare style of national and local politics. At the same time a authoritarian figure or group will arise to squash that unrest and restore order using the US Army and Marine Corps impose martial law by force in the name of the US Constitution.

    In any case, I share Don’s views generally. And fear we may be rapidly approaching the point of no return. A place beyond which there can be no landing without great pain for the troubles and disasters we are now willfully and irresponsibly bringing down on ourselves.

    And of course by Don’s 2017, tuition at the University of Virginia for the entering class of Virginia residents will be $62,000 per student as President Sullivan confronts cost overruns, time delays, and Chinese bug infections to her inoperable Big Data machines. Students there, and faculty too will likely be rioting in the streets over only God knows what. And old grads will still be bemoaning the lost of those grand Easter Weekends of old that the more recent version of modern day University administrators found so disturbing and dangerous to their delicate sensibilities.

  10. DJRippert Avatar

    Stockman’s New York Times Op Ed piece was tame compared to his speech back in Sept:

    1. reed fawell III Avatar
      reed fawell III

      Quite a speech, Don, thanks. It’s worth paying close attention to.

      Another iteration of Arlington’s County’s Million Dollar Bus Stop, this one deals with another critical national asset, our capital markets. Stockman says our wealth is being wasted by tens of trillions at the hands of public officials with the consent of their superiors under a broken corrupt system. Whatever its intention, it allows a few crony speculators to make billions off transactions that devalue most everyone else property and disrupts our capitalist system to abject failure.

      This is not a political speech but he cast blame wide, starting with Reagan.

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