In praise of mammoth deficits
In crisis there usually is opportunity.
Now, here’s the opportunity if the latest global financial-market upheaval worsens: The U.S. government, still the borrower that never lacks for lenders, can launch a major economic-stimulus plan to be financed by yet more sales of Treasury securities.
Frightened global investors would again be happy to shovel their money into Treasuries at low-single-digit interest rates.
The U.S. would, in effect, then recycle those dollars back into the economy, preferably through business and personal tax cuts this time rather than another pork-barrel spending bill. Real jobs would be created, finally putting the economy back on sound footing, boosting tax revenue and eventually paring the deficit.
The economic and fiscal policy of madmen? Maybe.
This is the deficits-are-good-for-you argument, which at this point sounds almost treasonous. Haven’t we all embraced the idea that the U.S. faces certain ruin from its soaring debt?
Baloney, says Marshall Auerback, an investment advisor who also is a member of the brain trust at the Roosevelt Institute. He believes that the deficit hawks are dead wrong, and always have been.
The far greater risk to the economy, he and others in his camp assert, is that the Obama administration will cave in to calls for fiscal piety exactly at the moment when the economic recovery needs more oomph.
Of course, with the deficit projected at $1.6 trillion this fiscal year and $1.3 trillion the next, it hardly looks like Washington is exercising budgetary restraint.
Yes, the U.S. can borrow aggressively -- and it should, Auerback wrote this week on the blog of the Roosevelt Institute, a not-for-profit group that promotes the values of Franklin and Eleanor Roosevelt.
He has some esteemed company. Joseph Stiglitz, the Nobel laureate economist, derides the critics of deficit spending as “deficit fetishists” who are ignoring what he believes is the clear and present danger of rampant unemployment.
“The long-run cost of not addressing this issue is greater than the [deficit] cost imposed on our society by a long shot,” Stiglitz said at a forum of business leaders who met at the White House in December.
The 50-year-old Auerback takes deficit defense beyond even what many advocates of Keynesian government intervention support. He really believes that deficit spending is always desirable.
I called him to ask how he could make that case, particularly given what has been happening in Greece, Portugal and Spain this week. Investors, fearful of ballooning budget deficits in those nations, have sharply pushed up market interest rates on the countries’ bonds. That in turn helped trigger a heavy sell-off in European stocks Thursday that spread worldwide.
The British-born Auerback, who lives in Denver, is a portfolio strategist for money manager RAB Capital in London. Besides his gig with the Roosevelt Institute, he is a consultant to bond fund titan Pimco in Newport Beach.
After working in money management for 27 years, Auerback says, he has increasingly become interested in government policy.
Not surprisingly, a main thrust of his deficit defense is that the U.S., as the source of the world’s reserve currency and the largest economy by far, retains financial flexibility that Greece, say, would never have.
The federal government can create money at will, and its spending “is constrained only by what our population chooses as national goals,” Auerback said.
Although foreign creditors such as China have become major buyers of U.S. debt, he notes that they’ve obviously done so because it has served their purposes. Auerback doesn’t see why that should change any time soon, even though the Chinese grumble publicly about the level of U.S. borrowing.
Besides, government-bond investors prize liquidity, and that’s still what Treasuries provide above all other bond markets. It isn’t just hubris to say that, for the time being, the world doesn’t have an alternative to the Treasury market.
As for the two most-cited fears about deficit spending -- that it will drive up inflation and interest rates -- Auerback points to the U.S. experience of the last 30 years: The government spent more than it took in for mostly that entire period, yet inflation and rates remained in long-term decline.
Still, it doesn’t seem far-fetched that foreigners could at some point decide the U.S. had become less creditworthy. Pimco bond guru Bill Gross, among others, has warned that the country won’t hang on to its AAA credit rating forever.
Then what? Let’s say investors decided to demand higher yields on Treasuries than the current paltry rates. That would devalue older bonds issued at lower rates, but it also would make new Treasuries more attractive to investors.
Presumably many Americans who have no appetite for a five-year T-note paying 2.2% might be very interested if the yield just got back to the 4.5% level of 2007.
As Auerback notes, because the government creates money, “Debt owed by the government yields net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.”
Higher T-bond yields would cost the government more but also would pump more income into the economy, and could encourage more homegrown financing of the deficit.
The risk, however, is that higher Treasury yields would sharply drive up all other interest rates. That could be deadly for housing, for example.
Another key risk is that the rising supply of deficit-generated dollars at some point could spark a currency crisis that would result in a rapid devaluation of the buck. That would hurt Americans’ purchasing power, but it also would put the country on sale for foreigners, which in theory should lure capital back. It isn’t as if American assets have no value just because our national debt rises.
Besides, the dollar’s appeal has to be judged against its main rivals -- and at the moment, it’s hard to argue that the euro and the yen are more attractive.
Putting aside the questions of interest rates, inflation, currency values and other unknowns, the most compelling case Auerback can brandish against the deficit hawks is this: To pare back government spending now, when the Treasury can borrow with ease, is to risk short-circuiting the global economic recovery for no good reason.
“If your economy collapses, the deficit will go up inexorably,” he said.
Auerback favors a temporary deficit-financed elimination or reduction of the Social Security payroll tax, which would boost income of both businesses and consumers. Both Democrats and Republicans ought to be able to agree on that kind of stimulus, he said.
The most specious argument for slashing the deficit, Auerback contends, is that rising debt constitutes intergenerational theft because it burdens future generations.
If you want to commit intergenerational theft, he said, hack spending on education and other things that “give our children and grandchildren the resources they need to compete” in the future. “That is the true intergenerational theft.”