The debt buildup continues to melt up, with another $483B in “stimulus” heading somewhere, after the previous $2T. And there will be more–count on it. And that doesn’t include the Fed’s monetary “whatever it takes” policy of buying bonds and other assets, to include state and local government debt. Fed assets are up over $2.5T in just 7 weeks. These are indeed desperate times, but not equally for everybody. If you are a federal government worker (or other recipient of a federal check), you have been inconvenienced, but there is virtually zero threat to your livelihood. The private sector, however, is being squeezed like never before. Ostensibly this stimulus is to help those private businesses survive until we are allowed to reopen, as well as help states/localities with expenses as their tax base shrivels. And many are lining up to the trough, both government and bigger business than should (although many are being publicly shamed now and returning the loans meant for small business). Nobody has a real clue where this will end, except that we’ll be much deeper in debt.

That is difficult because we’re starting from a position of what I call the “actuarial end game” over the next decade and beyond, with trillion dollar annual budget deficits scheduled regardless of tax policy and president*, if we do not do something with scheduled benefits. And this current economic shutdown will just draw the end down sooner. How much sooner? Who knows. A common retort to people like myself is that, hey, Japan has a Debt/GDP ratio much higher than ours. So the U.S. can handle it. I think it all depends on what you mean by “handling it.” In all economic history (or at least the last eight centuries), governments do the same thing, they default or debauch (inflate) their debt away. I see no way for the US to escape this trend. This all arises because a fundamental weakness of our human flesh: we want something for nothing. The political corollary is that we want something that someone else will pay for. And then the ideological corollary is that we have rights to some things that others must provide for us. Yet my understanding of the Biblical model is just the opposite: we work to produce so that we might have resources to share with others. Rather than demanding our rights, we are called to surrender our rights. But it is foolish to expect Biblical values to rise to the top of this secular age, so we will do as all other nations do–we will default, and our mechanism of choice will be to debauch our currency.

There is a lot of discussion on bailing out states ongoing, which we may hit another day, yet I want to focus briefly on the broader issue of bailouts vs. bankruptcy. We have gotten to the point that bankruptcy, at least when there is a crisis, is not allowed. Especially if you’re big. And really especially if you’re politically connected. But the economic fact is that whether you bailout or go through bankruptcy, someone is going to receive less than they were promised. Bailouts simply take the loss and apply it to future generations of taxpayers–taxpayers who have practically no voice in this process, and who certainly didn’t do anything to cause any particular loss. In contrast, bankruptcy applies the loss much more appropriately to those who were responsible to ensure it didn’t happen in the first place–the owners (often shareholders) and the debt holders. But we can’t just let them fail can we? They are too important! Dirty little secret: if we let Boeing fail, there will still be planes manufactured in the future. Probably with many of the same workers, and much of it likely in the same location. Just not with the same owners, and not with the same union wages. Maybe not the Boeing moniker. Markets are all about profit and loss–by bailing out the losers you are taking away capital from those who behaved well and give it to those who were unwise in their use of capital. Bailouts leave in place the ownership that at least did not prepare well enough for the mess in the first place.

Obviously that general reality has to be adjusted in the wake of the coronavirus. There is a difference in how I think about a bailout of say, Boeing, which is suffering from both falling airline traffic and its 737 MAX fiasco, and a business that is being ordered to close on behalf of public safety. Bailing out the latter seems to me to be more akin to the Fifth Amendment’s just compensation when taking private property–when you’ve denied a business the right to operate. It’s a legitimate social goal (reducing the spread of pandemic) but then the cost should be borne socially, or at least some of the cost. I’m sympathetic to this line of thinking. Some will say that businesses should have had more of a nest egg ready (certainly the harsh critics of stock buy-backs say this). I’m sympathetic to this too, when the issue is slow sales–just less sympathetic when this is due to forced shut down, especially when we’re not talking a week or two. I was listening to one businessman say to the effect that any well run business ought to be able to last a month without revenue–if they couldn’t, they had underlying problems anyway. Two months gets really to the bone, and almost nobody can survive three months. Well, we’re heading well into the two months now and shortly into three. I think it’s time to phase in the reopening.

* Sure you could make a dent in it with different tax policies. But only a dent. For the last 75 years we’ve roughly averaged 18% of GDP in tax revenue regardless of the highest marginal tax rates ranging from 91% to 28%. Fiddling with the rates doesn’t appreciably solve this problem. Especially when spending is scheduled to go north of 25% of GDP w/baby boomer retirements over the next decade. The only cure on the tax side to support this level of spending is taxing the poor and the middle class more, like Europe does, through a Value Added Tax (VAT).