Let’s Not, and Say We Did

Two decades ago I became friends for life with a fellow from Ohio. He had all manner of wonderful sayings that still ring through my mind. One of my favorite was ‘safety first, or not at all’. Of course, many in our orbit of adventurers would focus on the ‘not at all’ portion. Because this was unhealthy and prone to end badly for a bunch of testosterone infused young men, my friend took to sincerely saying ‘let’s not, and say we did.’ It quickly replaced the first saying and led to a sifting out of some that were a bit too eager when it came to endangering our lives.

These past two months I have been reminded that ‘let’s not, and say we did’ even applies to the Federal Reserve and federal government. Let’s not cap the debt ceiling and say we did. Let’s not cap spending and say we did.

To explain why, take a look at the following table which details the average period of time between a doubling of the USA national debt.

Average Period of Time Between a Doubling of the USA National Debt

The table begins in 1971 because that was the year when President Nixon closed the so called ‘gold window’ in the aftermath of the French government presenting billions of dollars in trade for the same value of gold. This was a perfectly legitimate request at the time as the USA dollar was exchangeable for gold amongst the central banks of the world.* It had been this way since 1913 when the Federal Reserve (the USA’s third central bank – the first two failed) set the ratio of gold on hand to paper money in circulation at 40%. The word aftermath is used above to describe the French action because once the USA delivered on the request, the French noticed up President Nixon that they would essentially be back to do it again. Thus the gold window was slammed shut out of apparent fear that it was only a matter of time that what gold remained would be traded away for paper money.

Since 1971 the USA has engaged in one heck of a spending spree. On average it used to take about 25 quarters, or six to seven years, to double its national debt. This changed in the 1990s as the incredible productivity benefits from computing and telecommunications advances began to filter into the economy and eventually make it to the US Treasury in the form of unexpectedly higher tax revenue. I believe that the USA’s executive and legislative branches literally could not figure out how to spend the revenue fast enough and that is why it took 41 quarters, or about ten years, for the debt to double yet again. Finally, the last number in the table shows that the USA is once again moving closer to doubling the debt about every six to seven years.

So what’s the big deal with the current concerns over the debt ceiling? After all it has been raised 75 times since 1971. Well, none of the so called belt tightening that citizens were assured would take place actually did take place. That is why this process had to occur 75 times. What is worrisome now is that for the vast majority of the last forty years the debt limit averaged three to four times the USA’s tax receipts. It has moved from this range as recently as 2008 to a level now that is rapidly approaching eight times. Further, the USA is well on track to use 50% of annual tax receipts just to cover debt payments. So in this case, ‘let’s not, and say de did’ is showing through. There has never been a period since 1971 when the USA has actually tightened its belt. Now it appears unsustainable as tax receipts are shrinking as a percentage of what needs to be paid. Unless, of course, the printing presses are once again engaged in a broader round of money printing to fill the void left by annual budget deficits. Printing,which really has not ceased anyway; the Federal Reserve has printed about $25B in July so far and will be printing roughly another $1B per day until August 15th. Granted it is less than 20% of what they were doing over the past year on a daily basis, but clearly, ‘let’s not and say we did’ applies here too. So, the printing continues. There is no other choice. At this point it is very unlikely that a true debt ceiling will be put in place or that the printing of money will soon end.

This brings us to a final point. Even if the debt ceiling is raised through one of the very few remaining options in order to stave off a default, the pressure is leaking out through a decline in the value of the USA dollar. This has been the case for the past decade. The ovals on the chart below show four major shocks to the dollar in the past three years.  Each time a shock occurred as shown in ovals 2, 3, and 4, the US dollar had less and less of a rebound driving it upwards from the effects of folks seeking perceived safety.

Federal Reserve Trade Weighted Exchange Index? Broak

If the USA desires to arrest a melting away of the dollar, then it will have to do something that, believe it or not, has transpired four times since 1776. The adoption of some form of precious metals standard appears to be about the only way out. There are two rules of thumb to guide this decision. If a 40% backing (similar to what was utilized in 1913 as an answer to the financial panics of 1893 and 1907) is to be used this time around it would imply a gold price of $3,780 per ounce and a historically estimated silver price of $252 per ounce. At 100% backing gold would be to be valued at $9,445 and silver at nearly $630.

However, it appears that it may not be the government’s goal to arrest the melting away of the dollar. Through high rates of inflation stoked by printing of money, the dollar will continue to fall in value. The USA’s industrial based exports should surge as what is produced in the USA becomes cheaper in devauled dollar terms relative to goods produced elsewhere. Also, the USA’s public debts, private debts, and corporate debts will become easier to pay off due to the inflation. History is replete with examples similar to the one that we are now participating in. Only time will tell how long the healing process will take.

In any event, a capping of the debt limit or the printing of money is best described in the way this article began; ‘let’s not, and say we did’.

*For individuals the ability to exchange paper notes for gold ceased further back in 1933 when then President Roosevelt effectively outlawed gold through executive order – and congress agreed by passing the hardly debated ‘Gold Reserve Act’ of January 1934.