Posts published in “National Newspapers”

After an unexpectedly hawkish Federal Reserve raised interest rates by 75 basis points for the third consecutive time last week, all eyes were on markets and the economy. Few, however, paid attention to the effect persistent inflation and higher interest rates will have on Uncle Sam.

That’s surprising. Gross interest expense on the national debt hit $88 billion in August according to the Monthly Treasury Statement. That’s a stunning annualized rate of $1.06 trillion. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious cycle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.

The August numbers barely reflect the impact of the Fed’s interest-rate hikes between March and July, much less last Wednesday’s increase and the additional 1.25% by year’s end implied by the Fed’s new guidance.

The Fed’s more-hawkish guidance calls for “higher rates for longer,” even if it brings on recession.

Not only are rising interest rates driving up federal interest expense dramatically; inflation is propelling growth in government spending on Social Security benefits, Medicare and other government healthcare programs.

Naturally, if we do slip—or plummet—into a serious recession, federal income tax revenue will erode. Even before recession, the last nine months of declining stock and bond markets virtually assure an almost complete collapse in capital-gains-tax revenue.

The national debt is working like a cancer sapping the nation’s long-term economic vitality.

Continue Reading:

• Read here on The Red Line
  
• Read in The Wall Street Journal
  
• Read in CT Examiner
  

The Federal Reserve’s policies of increasing interest rates and quantitative tightening—reducing its $8.9 trillion balance sheet—will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.

The impact will be felt even without a recession, but if the economy does contract, the government will have limited capacity to spur a recovery with fiscal stimulus.

Since February 2020, publicly held U.S. Treasury debt has exploded, growing from about $17 trillion to $24 trillion. Almost half of the increase has wound up at the Fed, whose Treasury holdings have ballooned from $2.5 trillion in February 2020 to $5.8 trillion.

Quantitative tightening is a big initiative. In May the Fed announced plans to reduce its Treasury holdings by $330 billion by the end of the year, and by $720 billion annually thereafter until its balance sheet shrinks to a yet-to-be-determined size. The Fed can reduce its balance sheet, but that doesn’t mean the federal government can reduce its balance of outstanding debt.

Continue Reading:

• Read and comment here on The Red Line
  
• Read in The Wall Street Journal
  

Investors are painfully aware of the plunge in stock and bond markets so far in 2022. Are federal and state officials aware of the damage plunging markets will soon do to public budgets and finances? Tax revenue from capital gains is about to fall off a cliff.

The Monthly Treasury Statement for April indicates that capital-gains tax revenue reached record levels in 2021. The markets are telling us capital gains will shrink dramatically in 2022.

If what the statement and the markets are signaling is correct, the reversal of fortune for federal tax revenue could be as much as $250 billion. In states like New York and Connecticut and others which are heavily reliant on individual income taxes, the reversal could be devastating.

Continue Reading:

• Read and comment here on The Red Line
  
• Read in The Wall Street Journal
  
• Read CT version in CT Examiner
  
• Read CT version in The Day
  
• Read CT version in Journal Inquirer
  
• Read CT version in Hearst CT newspapers
  

The U.S. and key NATO members should occupy western Ukraine and establish a no-combat zone. They should take action despite Putin’s nuclear threats, and they should act immediately, because the window of opportunity is closing.

A full NATO occupation of western Ukraine would preserve a free and independent nation in the west, while diminishing chances of Ukrainian success in the east. Yet those chances seem low at present, despite President Zelenskyy's incredible leadership.

In order not to provoke Vladimir Putin into direct conflict with NATO/U.S. forces, it would have to be a two-sided no-combat zone, off limits to both Ukrainian and Russian aircraft and ground troops and the transit of arms supplies to Ukrainians fighting in the east. It could not be a protected zone from which Ukrainian troops and planes could launch attacks on Russian forces to the east.

Suspension of arms support for Ukrainian fighters in the east would be a bitter pill for President Zelenskyy. Yet in the absence of any NATO action, the crisis is likely to end in total defeat for Ukraine (and the U.S., NATO and the West).

The east-for-the-west dynamic might offer a welcome off-ramp to Putin who has bitten off a lot, if not too much, to chew.

Continue Reading:

• Read and comment here on The Red Line
  
• Read in Real Clear Politics
  
• Read in CT Examiner
  
• Read in Issues & Insights
  

On the first day of his invasion of Ukraine, Russian dictator Vladimir Putin warned Western nations not to intervene lest they face “consequences greater than any you have faced in history.” Three days later, Putin put Russian nuclear forces on some kind of elevated status.

No nations are intervening.

Five days into the war, Putin launched a long-range missile with near-nuclear destructiveness. What looked like a thermobaric missile hit Freedom Square in the center of Kharkiv, Ukraine’s second largest city.

Putin’s nuclear threat has succeeded in scaring off the West, allowing him to employ non-nuclear weapons that are nearly as horrific.

While the West cannot ignore the risk of a nuclear confrontation, it should not be frozen by fear of it in face of Putin’s monstrous acts, those already committed and those in prospect.

With his invasion of Ukraine, Putin has changed the Post-World War II strategic calculus. Until now, nuclear powers have followed the rationale of mutual assured destruction (MAD), namely that, if no one can survive nuclear war, much less win it, then no one will engage in it or even threaten it. This reality has served to channel military confrontations into conventional warfare for three-quarters of a century.

Putin has changed that. He is using nuclear threats and blackmail to create an umbrella under which to conduct one-sided conventional warfare, with his threats immobilizing any conventional military response by opposing nuclear powers.

Continue Reading:

• Read and comment here on The Red Line
  
• Read in Issues & Insights
  
• Read in CT Examiner
  

State governments can do many things with the federal aid they received under last year’s $1.9 trillion American Rescue Plan (ARP). One thing they are expressly prohibited from doing is pouring that money into pensions for well-paid public employees. Connecticut is doing it anyway.

Gov. Ned Lamont’s just-released $48 billion two-year budget proposal funnels $2.9 billion in special deposits into the state employee and teacher pension funds. This is an amount equal to the federal aid the state received under ARP. These special deposits are over and above CT’s regularly scheduled $7.2 billion in state contributions to the two retirement systems.

Mr. Lamont outlined his plan for the federal stimulus money in February 2021, before ARP became law. “If additional federal aid for state and local governments is not enacted,” Lamont's budget proposal last year read, the state would draw down its rainy-day “budget reserve fund” (BRF) to fund its budget. But if “unrestricted” federal assistance came through, the state would use that money—rather than the BRF—to shore up the general budget. That would leave the BRF overstuffed. Under state law, when the BRF exceeds 15% of the annual budget, the excess must be moved into the pension funds.

Continue Reading:

• Read and comment here on The Red Line
  
• Read in The Wall Street Journal