Trend: According to the Congressional Budget Office, in FY 2009 40% of federal government spending was funded by debt, compared to 15% in 2008 and 6% in 2007.
Michael Panzner calls our attention to a disturbing benchmark. Let's hope that the US government can lower the budget deficit before the consequences undermine the financial system in this country. Excerpts below.
According to research highlighted by Hayman Advisors in their October Letter, the fact that such a sizeable share of government spending is being financed with borrowed money has, historically at least, been a harbinger of trouble ahead:
There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.
Given the extremely bad habits Washington has adopted during the past two years, one has to wonder, as Hayman Managing Partner Kyle Bass puts is, whether America has “reached the critical tipping point”?
...another savvy commentator, Dylan Grice, a member of Societe Generale's Strategy Research team, has also highlighted the unsettling historical relationship between reckless government spending and runaway inflation in a research piece entitled "Popular Delusions: Inflation Is Always and Everywhere a Fiscal Phenomenon":
Even before the “Great Recession”, unfunded fiscal obligations made government finances an accident waiting to happen. The crisis has merely brought forward the day of reckoning. The question isn’t whether developed governments will “default” on them, with attendant consequences for other asset classes, it’s when and how. Yet long-term inflation is priced at 2% in the US. This could be the biggest pricing anomaly across markets today.
Believe it or not, the first great inflation occurred in third century AD Rome. The territorial limits of empire had been reached several decades earlier and the huge army, which in former times had financed itself (through the conquest of new, plunderable and taxable lands), was now needed to protect the border from barbarian invaders.
Just like the baby boomers of today's developed world, that cohort of Roman society which had once been its engine of growth became its unsustainable financial burden, straining imperial finances so thoroughly that the government could only fund itself by debasing the coinage. The silver content of a denarius, which had been 75% in 180AD, was a mere 0.02% by 270AD. Fiscal pressure had caused the first inflation and the Empire would never regain its former greatness.
And since this early Roman experience the theme has repeated itself again and again. Medieval Europe, Sung China, revolutionary France, America during its civil war, Weimar Germany and arguably even post WW2 Britain and America, all saw inflations in which money was the vehicle, but the root cause was a government unable to pay its way.