Why the stimulus bill isn’t

I am mildly annoyed every time I hear someone say “stimulus bill” with a straight face.

In order to get to the bottom of all of this, there are a few realities we need to consider:

The government borrows money.

It seems to be a given that the US government will always spend more than it takes in in taxes. I suspect that only when it becomes impossible to borrow will this behaviour stop.

Typically, in recent years, the US Government had to borrow around $2 billion dollars per work day to keep the lights on. However, given all the current shenanigans, the US Government will probably have to borrow around $40 billion dollars a week to keep going. That’s $8 billion dollars a day, or four times the old level of borrowing.

The government borrows money by selling treasuries and paying interest on them.

So the government has to sell $8 billion dollars of treasuries per working day, a feat never before attempted.

Historically, over half of those treasuries have been bought or are owned by Americans.

People think in terms of foreign entities owning US Government debt, but the largest holder of treasuries is the government, followed by private entities in the USA, followed by foreign entities.

As the financial crisis proceeds, fewer treasuries will be bought by foreign entities.

As American demand for foreign goods dries up, and foreign entities have to deal with their own home-grown financial implosions, both the need and the means for buying US Treasuries will decline.

Tax income is imploding.

We are in a deflationary crash; debt is being written off left and right. Companies are failing. People are losing jobs. Unemployment is rising. This all means that tax income is going to crash. No profit means no income tax. Increasing the tax rate will just make companies implode sooner and individuals declare bankruptcy sooner. Tax returns will not increase without a concomitant negative impact on the economy.

Hence, the stimulus bill and other bailout monies will be paid for by selling treasuries.

There will be less money coming in, and spending has gone up drastically. The only way to make up the shortfall is to sell treasuries.

Those treasuries are going to be disproportionally bought by Americans.

Treasuries are seen as being lower risk than most other types of debt. Historically the US Government has been good about paying its debt, mainly because of the industriousness of its people and stability of its culture (and the fact that people who don’t pay their taxes go to jail). In a declining stock market, people are doing to be trying to decide where to store their money where it won’t be destroyed. Banks are shaky, and the stock market is declining. Because of government intervention in bond markets, and a refusal to force companies to be honest about their balance sheets, people are unwilling to buy commercial bonds (basically the equivalent of treasuries, but sold by individual companies that need to borrow money). Thus, they are left with buying US treasuries.

As more money is sucked out of businesses and the stock market, those entities will fail, making investors even more desperate to find safe places for their money.

So, government spending money will come at the expense of businesses and the stock market.

Any increase in the supply of treasuries in the current environment provides an opportunity for investors to pull their money out of the stock market and use it to buy treasuries. This drives the stock market down. This is called a “vicious cycle” or a “positive feedback loop”. This is bad.

Because of their desperation, the investors are willing to take treasuries for relatively low interest payments. This makes the government more willing to sell treasuries. This is also a vicious cycle.

Hence, the stimulus bill will be funded by destroying companies, employment, and the stock market, and will incur interest payments by the government in the future, which will be paid for out of future taxes.

So, the government is going to pay interest for the privilege of destroying commerce, and is then going to use that money to … improve commerce.

All of this ignores the potential problem that eventually nobody will have the money to buy treasuries, at which point interest payments will explode and the US Government will find itself indigent. At that point most entitlements would have to be withdrawn in a matter of months, and hundreds of thousands (if not millions) of civil servants laid off. Unfortunately, a private sector starved of money won’t be able to take up the load.

Tune in Wednesday for the next exciting episode in this series, titled “When is it okay to borrow?”

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