By Ron Cohen, CPA
Dear Clients and friends,
After much negotiation in Congress and with the Administration, “President Trump on Friday signed legislation providing $484 billion to replenish a popular small business lending program and support hospitals and COVID-19 testing amid the coronavirus pandemic.”
I know many of you are working on securing PPP loans and other SBA loans and grants. Congress is working on (at least) two additional bills regarding Corona virus relief. I hope you are all doing as well as possible.
I just want to share my personal view, in a non-partisan way. The money to fund this spending, as necessary as it is, does not exist (lacking a significant tax increase); it must all be created by issuing new U.S. debt. Today, there are still U.S. Treasury Bonds outstanding and paying interest that refinanced the money borrowed by the U.S. Treasury to purchase bullets for the Civil War.
That debt has been refinanced many times, and the interest paid over the years is at least 10 times the original amount borrowed to purchase the Civil War supplies. U.S. debt is a means to pass current expenses on to future generations. There are at least two more Corona Virus appropriation bills in the works.
George Washington once remarked to James Madison, “No generation has a right to contract debts greater than can be paid off during the course of its own existence.” Indeed, the rules of economics don’t change. What changes is how markets forget and then re-learn the basic rules.
I blame both parties for spending habits after John Kennedy was president. President Kennedy was very concerned about spending the projected $20 billion (in 1963 dollars) needed to land on the Moon. Kennedy reached out to the Russians in a United Nations speech to see if they wanted to do a joint venture, as Kennedy was so concerned about debt and government overspending, and to avoid military issues if the Russians got to the Moon first. President Eisenhower and Kennedy actually made progress paying off US debt from WWII. Unthinkable, today.
As an accountant, I advise against using long-term debt to finance short-term operating expenses…as, over time, without a miracle, it mathematically leads to bankruptcy. …but that is exactly what the U.S. Treasury is doing. In the past few years, our taxes only covered about 75% of U.S. government spending, and the rest is borrowed to pay normal expenses. That is not sustainable, regardless of politics. The U.S. Government Accountability Office, each year, issues a report saying the current system is not sustainable. There are exceptions for emergencies, that are hopefully, short-term…but U.S. debt was a mess, even before the virus.
Literally, 100s of times in history, countries have spent their way to disaster using paper (or electronic) money, not tied to gold, silver or shiny beads or anything else with a limited supply, until one sad day the people or the modern bond markets lose faith in the currency.
History shows, it usually happens overnight with little warning. The next day there is a major currency devaluation, impoverishing millions who stored their wealth in the currency.
Since the 1970’s when the US$ was de-linked to gold, the only things that back the US$ are:
1) Most of the oil in the world must be purchased in US$s.
2) The U.S. military can blow-up the rest of the world in 30 minutes – so people and countries tend to use the currency of the most powerful military.
3) You and I get up to go to work every day, to be productive and get paid and pay our taxes in US$, creating demand for the currency…and people in many other countries get paid and spend US$s because they don’t trust their home country’s currency.
Currently, demand for oil and unemployment are big problems, which weaken #1 and #3. While the US$ is the “coin of the realm” and protected by various federal and state laws, history clearly tells us none of that matters if the objective economics go bad.
We’ve never seen any set of circumstances like this. The U.S. Federal Reserve says it is solvent in a circular answer. It counts as assets, cash and government debt it creates. There is an assumption, the US$ is immortal. It is not.
If a U.S. credit rating downgrade occurs, that will start a cascade of horrible events.
As a loving grandfather, I sincerely hope these horrible events are avoided. It’ll take someone in authority demonstrating heroic intestinal fortitude to make the required changes and our determination to support them.