The Fiscal Jig Is Up, Part 2

The Donald and his MAGA Band are about to find out that the fiscal jig is up. For the last 37-years the Fed has been recklessly monetizing the ballooning Federal debt in the guise of macroeconomic management and the twin goals of full employment and just the right amount of inflation (viz 2.00% per annum). The effect has been to drastically suppress interest rates, thereby short-circuiting the historic process by which rising interest rates and “crowding out” in the bond pits alerted politicians to the dangers of rising public debts.

Of course, this de facto assault on fiscal rectitude by the nation’s own central bank was justified by the claim of the Eccles Building and its megaphones and sycophants on Wall Street that this persistent and massive purchase of the public debt was for the greater good of society. Supposedly, the gains in economic growth, jobs and financial stability were worth it.

Except, except. The whole stiick was a big fat lie. Economic growth, productivity, living standard gains and inflation have all worsened markedly since Alan Greenspan put the Fed in the big time debt monetization business in the fall of 1987. For want of doubt, here are the key macroeconomic performance parameters during America’s golden age of post-war prosperity between 1953 and 1965 compared to the same measures since mid-1987.

The crucial matter to note, of course, is that the Fed’s balance sheet grew at an very impecunious 1.44% annual rate during the former period or by just one-seventh of the 9.50% rate recorded during the 37 years since Greenspan took control of the Fed in August 1987. If money-printing were the economic elixir it is cracked-up to be, the results shown below would actually be reversed.

Per Annum Macroeconomic Performance, 1953 to 1965 versus 1987 to 2023

• Real Final Sales Growth: 4.0% vs. 2.5%.

• Nonfarm productivity: 2.68% vs. 1.41%.

• Real Median Family income: 2.8% vs. 1.9%.

• CPI increase: 1.43% vs. 2.60%

• Fed Balance Sheet Growth: 1.44% vs. 9.50%.

As the man said, there you have it. In return for three-fifths of the economic growth and one-half the productivity gains you got nearly double the inflation.

What you also got was the complete falsification of government bond yields and a signal to elected politicians that they could run large, persistent government deficits with impunity. Again, the data leave absolutely nothing to the imagination.

During the 1953-1965 period, the politicians at both ends of Pennsylvania were not about to trifle with massive flows of red ink. After the Korean War spending and borrowing wound down in 1953, the Federal deficit averaged just 0.5% of GDP through 1965.