Morgan Reynolds

I watched the latest interview of the always brilliant David Stockman on the “Liberty Report” and said, Morgan, it’s time to update your April 2017 article on the federal fiscal condition. 

On August 15, 1971 the Nixon administration closed the gold window, thereby removing the last restraint on government inflation of the U.S. fiat paper money stock. Since 1971 money in the form of currency plus checking-type accounts in the hands of the public (M1) has increased from $226.5 billion to a staggering $18.14 trillion (with an interim high of $20.8 trillion in April 2022) which implies an average annual inflation rate of a whopping 82%! Most of that happened between February and May 2020 when M1 shot up from $3.94 trillion to an astounding $16.17 trillion, a four-fold expansion in only four months! Thanks to Jay Powell and his fellow henchmen at the Federal Reserve we all were suddenly very rich, right? That’s about $36,000 for every man, woman and child. Well, I missed getting my share and noticed that this was pretty common. Some people obviously made out like bandits, something to do with the elite. Then there is the bothersome side effect of price inflation, aka, serious depreciation in the value of each paper/digital dollar.  

We should suspect some interdependence between monetary and fiscal policy, so what about federal debt? At $412 billion in 1971, that debt grew to $10,700 billion (= $10.7 trillion) by early 2009 and then doubled to $19.9 trillion under Obama by early 2017 when Trump took over. Blame Obama? Be my guest, Obama presided over $1.2 trillion annual increases in total debt yet that average national debt increase was 8.8% per year anyway since 1971. Obama came in with an average debt increase of “only” 8.13% per year.

And what happened under Trump? He boosted the the average annual gain to 8.62%, close to the long run average, with $1.9 trillion in new borrowing per year, taking spending from $20 trillion to $27.7 trillion in only four years. As Donald Trump told donors in early 2020, “Who the hell cares about the budget?” 

And Biden? In three years the debt has gone from $27.7 trillion to $34.1 trillion and counting, a handsome average of $2.1 trillion per year but “only” an average annual increase of 7.17%. Nothing like a big growing denominator to make runaway spending look like the new normal. So Biden, amazingly, on a percentage basis, comes in last in the topsy-turvy spending race among the last three presidents. Does this delay federal bankruptcy a few more months?!

Then we have the interest cost of servicing the national debt. ”The federal government closed out its 2023 fiscal year in September having spent $659 billion on interest payments, up from $476 billion in fiscal 2022 and $352 billion in fiscal 2021″ and on track to top $1 trillion this year. That’s a “one” followed by 12 zeroes. 

Finally, what’s going to happen? It’s called default. That is what happens when the government cannot meet its financial obligations. Two forms of default/bankruptcy are available: hard and soft. Hard means the government “stiffs” debt holders totally or partially—“sorry, we cannot repay any of your principal or interest” on your bonds and T-bills or “we can make only part payment.” The “soft” default method is for the Federal Reserve to run its printing and digital presses red hot, paying off the debt with zillions in money with new zeroes, ultimately making the money worthless. Without sound money, economic chaos and disaster ensue. Irresponsible? Yes. Hyperinflation? Yes. Would the Fed do it? Don’t ask me, ask the bailed-out masters of the universe on Wall Street what they want the Fed to do.

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