There’s Still No Free Lunch

By David Stockman  |  January 15, 2020

Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so- called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because ‘we owe it to ourselves.’

– Henry Hazlitt, Economics in One Lesson: The Shortest & Surest Way to Understand Basic Economics (1946)

As I alluded to briefly yesterday, “Peak Trump” is a process, folks. But it’s getting more precarious by the day.

Equity indices are reaching for new highs again today on the signing of this “phase one” trade deal. But tariffs on nearly $400 billion of Chinese imports remain in place. And “phase two” talks are nowhere in sight – of course, they’ll never happen.

What we have here is a Wall Street that refuses to get its head right.

After two decades of monetary, fiscal, and financial folly, honest price discovery is dead. And collective reasoning about anything except the next fix from the Federal Reserve has disappeared.

Indeed, it’s fitting that the S&P 500 Index was up 30% and the Nasdaq 100 40% during the final year of a two decade-stretch that’ll go down as the birthing time of the greatest calamity in economic history.

Trade wars and tariffs… those are mere details at this point. The real elephant in the room is debt, both the public kind and the private.

It’s hard to imagine a more feckless two decades than what our fiscal policymakers have produced.

On December 31, 1999, the public debt stood at $5.6 trillion. It was the work of 212 years of the Republic’s history including 42 Presidents and 106 Congresses.

Three presidents and 10 Congresses during the 21st century have rewritten the history books.

The public debt has soared to $23.1 trillion. It’s grown by an average of 8.3% per year, more than double average nominal gross domestic product (GDP) growth of 3.9%.

And there’s more than $43 trillion of public debt baked into the cake for the 2020s.

How the hell have we gone from $5.6 trillion and receding the $43 trillion and rising in less than three decades?

At the turn of the century, such a fiscal calamity wasn’t remotely on the radar screen. The federal budget generated a $235 billion surplus during fiscal 2000; that’s 2.4% of GDP.

More importantly, the Congressional Budget Office’s baseline forecasts projected that the public debt would be completely retired by 2009…

Nowadays, the very idea of a debt-free nation sounds utterly bizarre.

As it happened, the purported debt-free condition projected for the end of the 2000s was owing to two crucial assumptions:

  • that Congress wouldn’t alter current law (i.e. taxes and spending in place as of the year 2000); and
  • that there would be no recession ever again.

Under these happy assumptions, Uncle Sam would have generated cumulative surpluses of $5.6 trillion between fiscal 2002 and fiscal 2011. That would have been enough to pay down the $5.6 trillion debt.

And it would also have been a prudent fiscal steppingstone to the 2020s and beyond, when the Welfare State was positioned to balloon under the weight of 100 million retirees in the decades after 2020.

Well, the Duopoly couldn’t help itself. They appropriated the impending surplus to more Welfare State at home and more Warfare State abroad. They also enacted serial tax cuts to be paid with new borrowing rather than spending cuts.

And these fiscal anarchists did all this even as our monetary central planners generated a truly lunatic housing/credit bubble.

The subsequent Global Financial Crisis/Great Recession sent the U.S. economy into the drink.

From fiscal 2002 through fiscal 2011, Imperial Washington generated cumulative deficits of $6.1 trillion. They turned a prospective debt-free nation into one burdened with a public debt well into the double-digit trillions.

And that was just the preliminaries…

Had the policies in place at the turn of the century actually been adhered to for the next three decades, the $5.6 trillion surplus would have cumulated to $15 trillion by 2028.

America would have had in place a “rainy day” fund to help absorb the demographic time-bomb represented by Baby Boom retirements.

Alas, the “road not taken” has morphed into a fiscal nightmare.

By 2018, Imperial Washington had added nearly $9 trillion to an already bloated spending baseline over a 27-year period.

And, then, after the Duopoly had gorged itself with war, waste, and graft, the GOP tax-cutters took their turn at bat. They made exactly zero effort to follow the norm of fiscal rectitude that the great Dwight Eisenhower had established back in the 1950s, when he inherited the high taxes instituted by FDR and Truman.

Ike properly said that Republican governments must earn the right to confer tax cuts on an appreciative public by first cutting spending deeply and balancing the budget. Ike properly believed that you did no one a favor – most especially future generations – by simply borrowing money to pay for tax cuts.

Ike’s fiscal wisdom had long been supplanted by the nostrums of two great GOP charlatans of the 20th century, Art Laffer and Newt Gingrich.

The former mendaciously insisted that tax cuts pay for themselves, which is not remotely possible – even mathematically – in economy that starts with federal tax burden that’s only 17% to 18% of GDP.

And Gingrich simultaneously argued that Republicans shouldn’t be tax collectors for the Welfare State but also shouldn’t try to shrink Social Security, Medicare, and/or any other big entitlements without bipartisan support, either.

The Gingrich GOP ended up giving hypocrisy a bad name and “fiscal irresponsibility” a whole new definition.

For the last three decades, they’ve ballooned the Warfare State and never once voted for a material retrenchment of the Welfare State. Indeed, they’ve frequently joined the bipartisan fray adding to it.

At the same time, they’ve ceaselessly cut taxes whenever the opportunity arose – even as they blamed Democrats for the resulting mushrooming public debt.

Federal taxes have been cut by a cumulative $14.4 trillion over that 27-year period, with nary a dime of honest, sustained spending cuts to offset the revenue drain.

Thanks to mushrooming public and private debts – which have grown from $27 trillion in 2000 to $74 trillion at present – and the recession-inducing bubbles fueled by the Fed, the economy has performed the very opposite of Rosy Scenario.

Owing to two recession already this century and the weakest recovery in history after the Global Financial Crisis/Great Recession, real GDP has grown by only 1.9% during the last 19 years and just 1.6% per year since the pre-crisis peak in the fourth quarter of 2007.

Those tepid gains are well less than half the 4.1% average annual growth posted during the 19-year heyday of American prosperity between 1954 and 1973.

Another $19.2 trillion of red ink was added to the CBO projections and budget path in place at the turn of the century.

Household debt has risen from $6.6 trillion to $16 trillion. Total business debt has gone from $6 trillion to $16 trillion. Financial sector debt has mushroomed from $7.7 trillion to $16.6 trillion.

In all, domestic non-government debt has risen from $20.4 trillion to $48.6 trillion and from an already high 207% of GDP in 2000 to 225% of GDP at present.

This debt explosion has ground the growth potential right out of the U.S. economy at the very worst time imaginable. That is, at the onset of the Turbulent Twenties when the Baby Boom driven Welfare State and the Washington Warfare State is pushing the nation’s fiscal accounts to the brink

When the 21st century opened, total debt stood at $26.8 trillion and a towering 270% of GDP. The 2010s closed with total debt of $74 trillion. That’s 345% of GDP. Since December 1999, GDP is up by $11 trillion. Total debt is up $47 trillion.

That this is aberrant and unsustainable is evident in the basic math.

All Facts, All Data, All Reason

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market… and we’re here to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR