It bears mentioning that not only were the grandiose goals of the Obama Administration never met, some Obama policies actually produced results that were the opposite of those promised. Remember, for instance, that if you liked your doctor you would be able to keep your doctor? Or the promise that the cost of health insurance for the average family would decline about $2,500?
Well we know how that worked out. Health insurance costs rose substantially, and plenty of people lost their doctors. The same story can be told about pretty much everything Obama touched. A sane person would go back and check the assumptions backing the failed policies.
But we are not talking about sanity. We are talking about the Biden Administration. They argue that the policy failures of the Obama Administration were not failures at all; the policies just didn’t go far enough. And the Biden Administration, we are told, has no intention of repeating that mistake. They are going to “go big” and repeat the failed policies of the Obama Administration. Except bigger.
Hence the recently passed spending blow out, with more to come.
Fans of the Democratic spending spree keep on insisting (1) that the U.S. economy is weak and needs stimulus and (2) the U.S. needs to spend additional huge amounts of money to get the population vaccinated against Covid-19. Further, they argue, interest rates are exceptionally low so the cost of financing of all this spending is negligible.
However, economic growth has been far stronger than almost anyone predicted. Going forward, Bank of America estimates growth for 2021 around 6% and 5% for 2022. Similarly, the Fed projects GDP growth of 6.5% for 2021 with the unemployment rate dropping to 4.5%. Democrats surely know this, but in the spirit of never letting a crisis go to waste, they are going to spend every dime they can get their hands on, and then some.
While the Democrats claim this is needed stimulus, it is manifestly not so. The party simply passed a progressive policy wish list on a strict party line vote.
Here it is also worth noting that as far as Covid relief is concerned, only about 5% of the spending is actually directed at immediate Covid relief. Not only that, the bill does not allow any states that receive federal money to reduce state and local taxes. This provision will probably be thrown out as a violation of the 10th amendment’s prohibition against the Congress commandeering state resources. Not that the U.S. Constitution holds much sway with progressives.
What is truly interesting about all this is the reaction of the bond market. Net spending by all levels of government (federal, state, local) is going to amount to about $9 trillion this year. From February 2020 to February 2021, the national debt held by the public increased 25% rising from $17.4 trillion to $21.8 trillion. And that’s before the just passed $1.9 trillion in additional spending, all to be financed by borrowing.
Responding to all this, the bond market has sold off substantially with some long rates tripling from their lows. The yield’s of both 10 year Treasury notes and 30 year Treasury bonds have risen more than 1 percentage point since the summer to 1.65% and 2.42% respectively. The auction of 7-year Treasury notes held on February 25, 2021 came close to failing.
If the Democrats continue with their irresponsible behavior, and all signs are that they will, it may not be Republicans they have to worry about. It may just be the bond market. If investors lose confidence in the willingness of the United States to tame its finances and control inflation, they will not be seduced by happy talk from the administration, much less the utterances of ignoramuses like Senators Elizabeth Warren and Bernie Sanders.
Undisciplined fiscal policy, monetized by the Fed, presents the prospect of a collapsing dollar, rising inflation and soaring long-term interest rates. That’s what we experienced in the 1970s. It could happen again.
JFB
