Net interest and entitlement 98.4% of tax receipts

 

This is a crazy number - over 98% of all Federal Government Receipts go to net interest and entitlements. Only 2% of tax receipts cover the other expenses, the real activity of government. Put differently, we pay for all our non-entitlement programs, like the military, by borrowing money. I don’t think the American public knows this. I don’t think they may care. We aren’t even accounting for future commitments we have made that we will not have the money for. 

The only good news is that entitlements and net interest, if held by domestic investors, can be viewed as a large transfer payment with deadweight costs. We borrow from citizens who then pay taxes to meet the interest payment. We tax citizens and then give the money back to other citizens. Significant money moves between taxpayers and entitlement recipients, from one set of consumers who may save more to another set of citizens who spend more. It could be worse, but that doesn’t mean this money is being used productively. It is a great transfer of wealth

The shifting Overton window

 

The Overton window is an effective tool for describing changing opinions in politics and science. The window is a simple construct. Joseph Overton,  a public policy specialist, wanted to show how think tanks and political strategists can change public policy by shifting the boundaries of what people are willing to discuss, rather than just arguing within existing limits. There are degrees of acceptance, yet those ideas that can be acceptable are subject to change. Policy experts can shift those boundaries by changing public opinion.

The issue today is that the boundaries are shifting fast, and the process of shift means that extreme voices become more vocal in an effort to move the window. 

We are seeing the economic policy Overton windows shifting on monetary and fiscal policy, and that creates uncertainty. A shift in policy thinking also shifts the potential effects from these new policies, and markets may not be prepared for these chnages. 

1873 - the first depression and monetary mistakes

 

1873: The Rothschilds, the First Great Depression, and the Making of the Modern World by Pulitzer Prize-winning historian Liaquat Ahamed expands on the themes of global financial fragility introduced in his acclaimed Lords of Finance. It is a compelling story that most economists who focus on economic history since the Great Depression have largely forgotten. 

The key takeaway is how a normal recession became a major upheaval based on changes in the financial system. The shift from many countries using a bimetallic (gold-and-silver) monetary system to a gold standard significantly reduced the money supply in the global economy. The shortage of money and credit exacerbated the financial crisis. The implications were significant: a decline in the Ottoman Empire, an intervention in Egypt, a period of deflation, a rise in anti-Semitism, and an extended recession that some may call the first global depression.

Unfortunately, the author wanted to focus on personalities like the Rothschild banking families. Still, the real story was policy mismanagement driven by a lack of understanding of credit markets and money.  

How bad are the bond market returns?

 

Bonds are a bad bet, or have been a bad bet. In fact, the current period has been the worst in the longest history available. It is worse than the period of high inflation in the 1970's, worse than the Civil War. 

However, there is hope. As rates move higher, current yields rise, which offsets some of the capital loss. Coupons provide a cushion for further yield increases. Total returns can improve quickly if overall yields are higher.