Time to pay the piper? (part 2)

Over at Econlog, I have a post entitled “Time to pay the piper?“, which looks at the cost of recent monetary policy. That cost actually doesn’t concern me too much, as from the perspective of the consolidated government balance sheet it’s mostly a wash. (That’s not to deny that QE went overboard. In retrospect, policy was clearly too stimulative.)

My bigger concern is fiscal policy. While I failed to correctly predict the upsurge in inflation, I nonetheless did oppose the Covid fiscal stimulus, albeit for other reasons. Here’s what I said in 2020:

With the seemingly endless stimulus now coming out of Washington, it’s time to revisit the question of whether deficits matter. In recent weeks, I’ve seen lots of pundits say that government spending is virtually costless, as interest rates are close to zero. There are two flaws with this argument.

In other posts I pointed out that if you run up a large national debt at the zero lower bound, then you expose your country to the risk of ballooning financing costs if interest rates rise to more normal levels. I did not actually expect rates to rise as much as they have, but then I didn’t expect the Fed to abandon average inflation targeting and start running highly inflationary monetary policies. And yet even though I didn’t expect much higher interest rates, I did not believe that fiscal stimulus was worth the risk.

When I spoke of “future tax liabilities”, I got a lot of pushback from people suggesting that we would never need to repay our national debt. That’s true in a sense, but very misleading. Even if we never actually repay the debt, it still must be serviced. Because of rising interest rates, we’ll have to pay higher (distortionary) taxes in future years to pay interest on the reckless fiscal stimulus of the Trump/Biden administrations. The UK is facing the same issue.

It was possible to view the fiscal stimulus during the Great Recession as a one time thing. We usually don’t have recessions that large. But then Covid comes along and we get a far bigger stimulus. Again, we are told it’s a one time thing. Then a massive bailout of student loans, and a promise we’ll never, ever do anything like that again. UK taxpayers are being told they must now bail out energy consumers, And today we’re told that hurricane Ian will be the most costly ever. Doesn’t it seem like governments are more and more willing to write massive checks whenever people are even slightly inconvenienced? If so, is it any surprise that markets are pricing in higher real interest rates going forward? Our deficit projections are unreliable.

PS. I’ve been asked about the recent market turmoil in the UK, but I don’t have any good answers. The rise in the UK’s real interest rate may partly reflect the recent stimulus announcement. But as many have pointed out, that would normally lead to currency appreciation. Furthermore, real rates have risen sharply in the US, so it seems that global factors are also a factor.

Market indicators continue to show very little default risk for UK public debt, so that doesn’t seem to be the issue. A more plausible risk is the BoE being pressured to monetize the debt. But inflation spreads did not rise during the period when the pound plunged. And the pound seemed to rally on monetary stimulus. So I’m at a loss to explain the situation.

I had a very negative view of Boris Johnson, who promoted a foolish Brexit policy and ran large budget deficits. But while Brexit tended to depreciate the pound, that factor was already priced in before the recent market turmoil. I’ll take a wait and see attitude on Truss, who seems likely to continue the UK’s overly expansionary fiscal policy. To her credit, she does have a number of excellent pro-growth policy initiatives in areas such as housing, investment, and immigration. Let’s see what she is actually able to deliver.



28 Responses to “Time to pay the piper? (part 2)”

  1. Gravatar of Brandon Berg Brandon Berg
    30. September 2022 at 02:15

    A thought that occurred to me yesterday is that, while the public is usually wrong to blame the party in power for recessions, this will likely be a rare (AFAIK) case where a clear causal connection can be drawn from the policies of the party in power to a recession (excessive stimulus => inflation => aggressive Fed action to bring inflation down => recession).

  2. Gravatar of Matthias Matthias
    30. September 2022 at 03:54

    Brandon, wasn’t the massive stimulus in the US passed mostly with bi-partisan support?

  3. Gravatar of Michael Sandifer Michael Sandifer
    30. September 2022 at 04:10


    You don’t see some of the new UK proposed policies as weakening the pound via larger current account deficits?

  4. Gravatar of George George
    30. September 2022 at 05:57


    Biden shares the blame. Many of us were saying this would happen AS BIDEN POLICIES WERE BEING IMPLEMENTED

  5. Gravatar of George George
    30. September 2022 at 06:00

    Globalism is foolish, Nationalism is the only force stopping world communism. Brexit was a step in the right direction. UK would have been worse off had they stayed in the EU.
    The PEOPLE of the UK democratically wanted to exit EU, and communist commissar site owner believes his ‘Gnowledge’ should overrule Democracy.


    There is a criminal communist infiltration in the highest levels of government.

  6. Gravatar of George George
    30. September 2022 at 06:33

    It isn’t a ‘coincidence’ that the loudest accusers of Trump as being ‘anti-Democratic’, are themselves the very anti-democracy ideologues they denounce.

    The iron law of woke projection never misses.

    Some children are born into families who are members of a cult, and if they don’t or can’t escape, of they don’t ‘know’ what is happening, they would suffer from epistemological demoralization.

    In North Korea, where information is even more controlled than it is here, children are raised to become adults whose mindset is so very different than western more ‘liberal’ (classical) that the people can be absolutely convinced that what they are thinking is a representation of reality as it is.

    One could reasonably argue that North Korea is a state run cult.

    The dialectic faith religion is extreme in places like North Korea, the communist logic is after all coded entirely in Hegel’s dialectical faith. It’s not a coincidence that North Koreans believe ‘the dear leader’ is like a God. Hegel himself believed himself God becoming man in history, not knowing itself as God until the Utopia. Marx took that logic, ‘turned it on its head’, and proclaimed the real truth is that man is becoming God, where man does not know he is becoming God until private property is abolished.

    The dialectical faith PLAGUES the legacy media that the site owner and many of his followers align their minds with. There is a religious cult logic embedded in the structure of the ‘mainstream narrative’, that ‘converts’ people into cult followers WITHOUT THEM KNOWING THE SOURCE, just like how in North Korea (and Soviet Union, and communist China) children are born into and grow up to become adults who don’t see the very water bowl they’re swimming in.

    The site owner is a devotee of the cult of the communist logic that seeks to defeat God by harming and destroying everything it believes is closest to God, including children, and Abrahamic religions.

    Epstein Island: The cult ‘elite’ raped and murdered children, Haitian children were kidnapped by the Clinton crime family, using ‘aid’ as cover. They were caught kidnapping 30 children and that became open source.

    The religious cult that heretofore ‘ruled the world’ by controlling 90% of the information (6 CEOs of 6 media orgs all aligned politically and ideologically controlled 90% of all ‘news’ up until recently with the creation of ‘alternative’ media that as expected are being attacked by those still plugged into the cult logic) is what is being dismantled, and the events we are all seeing, are extending from a spiritual war taking place in what the true meaning of meaning is, the IDEA OF INFORMATION itself is being attacked by this cult logic that presents truths as lies and lies as truths, literally, in the logic of ‘dialectic’ opposites, ‘negations’.

    All evidence thus far published points to Biden, Nuland, and Blinken as at least KNOWING months in advance that the Nordstream 2 pipeline “one way or the other” will not go forward, that “contrary to it being Russia’s leverage over EU, it will be EU’s leverage over Russia”, that “I promise you, it will not happen”. Then it was sabotaged in an act of destruction.

    These events are extending from the very war over the meaning of information that the cult ‘elite’ do not want to lose.

    Question is, are you going to keep yourself as a cult member in the Hegelian negation logic that seeks to replace the transcendent God with a ‘God as History’ that only the ‘elite’ can parse and know and direct the world (like North Korea, USSR, CCP, Nicaragua, Cuba, etc), or, will you unplug yourself and accept that you have been swindled and despite how smart you think you are, you are only as smart as the smartest cult devotee?

    I have rejected the cult logic, and for that I cannot post to Facebook or Twitter, censored, not that I want to post there at this point anyway.

    Happily Trump in the last week openly confirmed the Q operation is real. Military was the last ‘uncorrupted’ org, and psychological warfare was ‘flipped’ back onto the cult, and the only way to get the country to know what was happening (think of yourself as in North Korea) was to BYPASS the MSM that is itself the political propaganda arm of the very same cult network which would never willingly be a throughput for what was really happening.

    So, the only way to get people to KNOW, was to SHOW them. Hence, ‘hoax after hoax after hoax’ against POTUS. Impeachment 1, impeachment 2, muh Russia hoax, fbi raid hoax, NY AG sham investigation hoax, FBI WHISTLEBLOWERS REVEALING THE FBI IS A WEAPON OF THE DEMOCRAT PARTY, the ‘domestic’ political force of the global communist war.

    You SEE the corruption and crime from the D party because if you didn’t then you would never have believed it, just like North Koreans would never believe what is happening in the world because there the information IS EVEN MORE tightly controlled.

  7. Gravatar of George George
    30. September 2022 at 06:53

    While the racist NY AG is egotistically ingratiating herself in her TDS illness, devoting time and resources to ‘get Trump’, this is happening:


    The Democrat Party is the party of defunding the police, the party of crime, the party imposing and protecting the global communist mafia seeking to defeat the transcendent God by invoking a dialectic that God is ‘really’ in the historical process ONLY, where ONLY the communist ‘elite’ have the intellectual ‘access’ to the secrets of history, where ONLY they can reveal the divine in history, by introducing lie after lie after lie, conflict after conflict after conflict, contradiction after contradiction after contradiction, exactly in logical lock step with Lenin’s famous dictum ‘accelerate the contradictions.’


    How many in your face realities does it take to see what their REAL motivation is for the world?

  8. Gravatar of Randomize Randomize
    30. September 2022 at 07:23

    Michael’s take feels correct. Definitely more plausible than my own take which was that the international market finally said they’d had enough of the UK’s stupidity and pulled out.

  9. Gravatar of Spencer Spencer
    30. September 2022 at 07:43

    Economists also run a propagandized campaign. Bernanke censored the FED’s Ph.Ds. You used to be able to write them and they would always respond. Now they’re told not to.

    Then: “The Federal Reserve Plans to Identify “Key Bloggers” And Monitor Billions of Conversations About the Fed on Facebook, Twitter, Forums and Blogs”. But there’s no feedback.

    No surprise about the UK. That’s where Keynes was from, and he was only supposedly good at math.

  10. Gravatar of Spencer Spencer
    30. September 2022 at 07:59

    See: “UK’s Current Account Deficit Smaller than Expected, But Set to Grow into Year-end”

    See: “UK trade deficit hits a record £27.9 billion fueled by soaring energy prices”

    The UK has an outsized productivity problem.

  11. Gravatar of Spencer Spencer
    30. September 2022 at 08:21

    Truss’ tax-cutting has Larry Summer’s calling this “utterly irresponsible”.

    Again, the solution is the 1966 Interest Rate Adjustment Act.

  12. Gravatar of ssumner ssumner
    30. September 2022 at 08:34

    Brandon, Trump had the exact same stimulus policy. Indeed he appointed Powell.

    Michael, Brexit has been priced in for years. Most of Truss’s new policies should strengthen the pound.

  13. Gravatar of Spencer Spencer
    30. September 2022 at 09:02

    Greenspan said: “Because monetary policy works with a lag, we need to be forward looking, taking actions to forestall imbalances that may not be visible for many months. There is no alternative to basing actions on forecasts, at least implicitly.”

    But Powell only started tightening recently:

    Reserve Bank Credit:
    2021-12-01 8678.115
    2022-01-01 8780.344 start
    2022-02-01 8852.336
    2022-03-01 8891.820
    2022-04-01 8910.015
    2022-05-01 8907.146
    2022-06-01 8888.579
    2022-07-01 8862.560
    2022-08-01 8828.338
    2022-09-01 8783.417

  14. Gravatar of foosion foosion
    30. September 2022 at 09:53

    The choice in 2020 seemed to be (1) spend lots of money to make sure people don’t suffer unduly from the pandemic, given public health measures to deal with the spread of the disease, or (2) risk more death and disease. A risk was future inflation, but a more competent Fed should have been able to deal with that, or at least not have it be as bad as it is today. On the plus side for policy, compare how quickly unemployment came down to the experience following the Great Recession.

    As to sending checks to Bezos, it’s simpler to send everyone a check and get the money back from Bezos et al. through the tax code. There would be too much red tape confirming everyone’s eligibility. Alas, recouping a bit from those not worthy of getting the checks ran into our political system.

  15. Gravatar of Michael Sandifer Michael Sandifer
    30. September 2022 at 10:22


    What about the increase in energy imports that will presumably be needed to facilitate the lowered “price cap” on home energy bills?

  16. Gravatar of George George
    30. September 2022 at 10:37

    Some social media sites are linked to anti-semitism, one telltale sign a site is anti-semitic is the conflation of any and all criticisms of the actions and beliefs of communists who happen to be jews, with criticisms of all 17,000,000 jews.

  17. Gravatar of George George
    30. September 2022 at 10:51

    As descended from Jews on my mother’s side, I see accusations that I am anti…myself every now and then. I have compassion for all those innocent who are killed in war. I pointed out a historical truth that 7-10 million Ukrainians were killed during the Holodomor, and that the perpetrators were disproportionately Jews, and was called anti-myself for saying it. That tells me there is a coding error in the mainstream narrative that goes DEEP. A sort of embedded defensive dialectic immune system that immediately detects and latches onto and smothers any ‘foreign’ information that gets into the narrative.

    It’s interesting, a lot of times I see that the very times that anti-Semitism arises, is when people are thinking to themselves that they are denouncing it by calling people anti-semitic for questioning or criticizing individual people who happen to be Jews.

    It is as if what is being criticized, the actions/statements, are deterministically a product of the criticized person’s ‘background’, which is itself racist and anti-semitic.

    Oh well, keep plugging away

  18. Gravatar of ssumner ssumner
    30. September 2022 at 11:09

    foosion, Some increased spending was appropriate, but they went way overboard.

    Michael, Yes, but how important is that as a factor? I don’t know.

  19. Gravatar of Effem Effem
    30. September 2022 at 11:37

    I think part of the answer is for central banks to explicitly link rate hikes to excess fiscal spending. Want to throw $500b at student loans with 9% inflation? Well that’s an almost immediate 75bp hike.

    At least if CBs lose their independence in that scenario it will be transparent. Instead we seem to be getting some sort of hidden loss of independence.

  20. Gravatar of Doug M Doug M
    30. September 2022 at 14:47

    I was on-board with the idea of stimulus (monetary and fiscal) in 2020. With businesses forced to suspend operations, government action was in order to keep the money flowing through the system. The failure was in not realizing that this stimulus would need to be withdrawn as the economy returned to normal.

    Too many people are addicted to the government’s crack, and politicians dispense it to hold onto their respective offices. It is much harder to withdraw fiscal stimulus than it is to grant it in the first place.

    Congress is still talking about stimulus packages, wrapping it up as “inflation reduction” when it will be inflationary, or covid relief when covid infections have dropped to nearly non-existent levels.

    Another infuriating mistake was to write off the classic pattern of inflation as a monetary phenomenon as a transitory or “supply chain” event. The great resignation was underway. People don’t quit their jobs because of the supply chain. They quit their jobs when their pay is too low compared to alternatives, or for the stresses of the job.

  21. Gravatar of agrippa postumus agrippa postumus
    30. September 2022 at 17:05

    re the recent pound strengthening after the boe “draghi” channeling: its the natural effect of buying pounds to buy bonds to sell at a profit to the clueless boe. it will end in tears.

  22. Gravatar of Spencer Spencer
    1. October 2022 at 06:32

    The rate-of-change in short-term money flows, the volume and velocity of money, the proxy for real output, bottomed in July. Will go up to Christmas.

    Contrary to Nobel Laureates Dr. Milton Friedman and Dr. Anna Schwartz’s “A Program for Monetary Stability”: the distributed lag effects of monetary flows (using the truistic monetary base, required reserves), have been mathematical constants for > 100 years.

    I.e., the increase in the currency component of Friedman’s base, MO, was contractionary.

  23. Gravatar of Spencer Spencer
    1. October 2022 at 06:53

    Link: “Bank Reserves and Loans: The Fed Is Pushing on A String” – Charles Hugh Smith

    “The interesting part of this chart is in two places: one in 1960, where the ratio was 10:1, and the other in 2008, where the ratio was 219:1.”

    Dr. Milton Friedman’s “high powered money” is a misnomer. MO also included “applied vault cash” since 1959, or prudential reserves (liquidity reserves).

    As the evidence demonstrated, required reserves weren’t liquidity reserves.

  24. Gravatar of Spencer Spencer
    1. October 2022 at 07:38

    The Great Inflation was due to William McChesney Martin, Jr. changing from using a “net free” or “net borrowed” reserve approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.

    The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand increased.

    Since the member banks had no excess reserves of significance, the banks had to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion. If they used the Fed Funds bracket (which was typical), the rate was bid up & the Fed responded by putting though buy orders, reserves were increased, & soon a multiple volume of money was created on the basis of any given increase in legal reserves.

    This combined with the rapidly increasing transaction velocity of demand deposits resulted in a further upward pressure on prices. This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70’s, et. al.

    Interest is the price of credit. The price of money is the reciprocal of the price level. The money stock can never be properly managed by any attempt to control the cost of credit.

    We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

    We just keep repeating old errors. Greenspan’s Conundrum, Powell’s delay in tightening, etc.

  25. Gravatar of bill bill
    1. October 2022 at 14:56

    The Treasury could limit itself to one type of security. Perpetual TIPS. And then only borrow to the extent that it could issue these perpetuities at negative real rates. There probably is some demand for that. But definitely not at today debt to GDP ratios.

  26. Gravatar of Spencer Spencer
    2. October 2022 at 11:22

    The rebound in R-gDp is due to the reversal of money flows. The demand for money has fallen, while the means-of-payment money has risen. It is likely to force the FED to tighten faster than expected.

  27. Gravatar of Spencer Spencer
    2. October 2022 at 12:10

    Historically, the markets bounce when R-gDp rises.

  28. Gravatar of Sara Sara
    5. October 2022 at 22:17

    This seems to be a common sense post.

    So what are these bimbos — Oh, sorry, they call themselves “economists” thinking. Of course, you have to service the debt. And what do you think is going to happen when it becomes more expensive to borrow, when interest rates rise, and 25% of tax revenue is going to service the unsustainable. Does it surprise anyone that AOC has a bachelors degree in Economics? And from BU no less. It’s not like she attended Fitchburg state.

    She is a perfect representation of the idiocy in that profession. This is a woman who can barely count to ten, and the output (i.e., the end product) says a lot about the input (i.e., the teacher), and the teachers, especially the postmodernist neo-marxist freaks, who no doubt gave her passing grades, have a crazy view about debt. You cannot print your way into prosperity. We knew that once, but apparently the profession has been dumbed down lately.

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