Death By 750 Cuts
The Federal Reserve recently concluded its last policy meeting for 2019 and the Federal Open Market Committee (FOMC) unanimously left interest rates unchanged at a target range of 1.50% to 1.75%. The U.S. central bank’s dot-plot – a forecast of 12 FOMC members – signaled that it would not move on rates next year unless it was necessary to sustain economic growth. Even without a rate cut at the December powwow, the Fed still reduced rates three times in 2019 and restarted expanding its balance sheet. It was quite the year for the Eccles Building.
Prior to the announcement, Bloomberg News published an interesting piece that examined how central banks around the world are in a good place to fight the next recession. While this could be disputed by just looking at the putrid results of global quantitative easing, the real meat of its analysis is this number: 750.
Over the last decade, central banks worldwide have slashed interest rates 750 times. As these institutions continue to ease, even during the boom phase of the business cycle, it is extraordinary that they have lowered rates this many times. Plus, with even more accommodation on the horizon, this figure could easily top 800 or even reach 1,000 in the next couple of years.
Another interesting aspect of this number is just how unsuccessful these entities have been. Sure, the U.S. economy is booming and is attracting investors all over the world. It is not the same story for other markets. Liberty Nation has documented just how anemic the global economy has been, despite the soaring levels of debt and central bank intervention since the financial crisis.
The expansion cannot last forever. Central banks were supposed to normalize by now, but they are either sitting on their hands hoping that the whole thing blows over or are distorting markets by artificially suppressing rates. When the next substantial downturn happens, what will be left besides subzero interest rates?
A Stick of Dynamite
We’re only two months into the fiscal year 2020, but the federal budget deficit is already billions more than during the same period last year. According to the Congressional Budget Office (CBO), the federal deficit has already reached $342 billion, which is $36 billion more than the deficit recorded during the same time a year ago. The CBO projects that the deficit will surpass $1 trillion by September 30, 2020, and the non-partisan watchdog says this is unsustainable.
The biggest drivers of red ink have been increases in Social Security benefits ($5 billion), Medicare ($3 billion), and Medicaid ($3 billion). These are the hardest spending programs to stop or at least curtail because they are politically motivated. Both sides use these entitlements as political footballs; Democrats want to maintain the status quo and Republicans sound the alarm when in opposition but do nothing when in power.
With across-the-board tax cuts in place and hardly any spending reductions, the U.S. government only has two options: print and borrow. The Fed will print the money by scooping up notes or the Treasury will auction off government debt and hope that investors take the bait, which they have been doing.
However, like the economic expansion that is in its 128th month, this fiscal irresponsibility cannot last forever. Eventually, the house of cards will fall, and the federal government will have no other alternative but to start reining in its trillions in spending. Moreover, because price inflation will inevitably mirror that of the late 1970s and early 1980s, the Fed will dramatically raise interest rates, after potentially adopting ZIRP or NIRP. When it does, servicing the debt will be an impossible task for elected officials and they will be forced to make tough choices.
Republicans say that they plan to be more fiscally responsible should they hold onto power after the 2020 election. But how many times have fiscal conservatives been told this by the party that is supposed to care about debt and deficits? Fool me once …
Is Kansas City Fare?
Free bus rides in Kansas City? That might be the new norm in the City of Fountains after the municipal government voted unanimously to ask the city manager to come up with a plan to eliminate fares on all city buses. Local politicians say implementing free fares is good for the environment and helps low-income riders. It seems like these bureaucrats have never heard of the expression: There ain’t no such thing as a free lunch.
Kansas City currently spends approximately $75 million per year to operate its bus and bus rapid transit services. Revenues from the farebox only account for about 11%, or $8.5 million, of its operating costs. The city requires additional subsidies to make up for the shortfall. In fact, city officials look under every rock for extra public transit funding, except in the pockets of the riders who actually use the system.
This has been the norm not only in Kansas City but in most North American cities that possess a vast transit system. The farebox recovery ratio – the system’s total fare revenue divided by its total operating expenses – has been dwindling over the years as politicians ensure that everyone but the riders pay for transit. In Toronto, for instance, fares cover about 60% of the Toronto Transit Commission’s (TTC) annual costs, relying on funding from the three levels of government and other modest mechanisms to make up for the deficit.
While this is troublesome, the real frightening trend is the push for free transit. Across North America, elected officials are listening to activists and, thus, considering making subways, trams, and buses free to use. For example, last month, Member of Provincial Parliament and Ontario Liberal Party leadership hopeful Michael Coteau proposed letting Torontonians access the TTC for free to fight climate change. Anyone who has ever been on the TTC, especially at rush hour, understands how overcrowded the system already is: Passengers are packed like sardines on subway carts, buses run late all the time, and you may need to wait for three other streetcars before you can travel to your destination.
When something is free, you are certainly going to increase consumption, making the system more expensive to operate. Any jurisdiction that has tried going this route has suffered from falling revenues, higher operating costs, and a surge in passenger-related incidents. The only solution to transit issues is to adopt a so-called users pay-users benefit model, which means that riders pay nearly the full cost of their ride. This may not go over well with professional activists, left-leaning politicians, and pundits, but it is the only way to create fairness and raise money without punishing those who do not ride the bus.
When you have access to a vast ocean of money, it can be easy to be seduced by the Mephistophelean spirit and start spending on everything you want. At the same time, you have an elected position to keep, so you want the people to love you and vote for you. This is a difficult and dangerous combination. Politicians want to give away free stuff, officials desire to break the budget, and central banks have carte blanche to employ monetary tools that lead to trillions in new money. Plato wrote, “The measure of a man is what he does with power.” We see in real-time what these individuals do with power, and the results make you want to hang your head in shame.
Read more from Andrew Moran.