 This is Mises weekends with your host Jeff Deist Ladies gentlemen welcome back once again. It's it's our weekend show. We're joined by someone. I'm sure many of you know Dan Mitchell He's an economist. You probably know his work for many many years at organizations like Kato and heritage But for our purposes, I think he is the best guy in libertarian circles and in DC to talk about The federal budget federal spending and especially tax So with that said Dan great to see you and thank you for your time today Yeah, glad to be on the program Well, I want to dive right into this. We all know we had this psychological breakthrough where the federal debt now exceeds $20 trillion. It's about a hundred and five percent of GDP Sort of a devil's advocate question. How do we get people to care about this? We've been talking about it forever Ross Perot was talking about it in the early 90s It was a trillion when Reagan came into office It feels amorphous to people and nothing too bad ever seems to happen. You know what I'm saying and Nothing bad does happen until you reach the point of being Greece where investors no longer trust that you will repay your loans as a government and and I don't like saying this But we probably have decades where we can continue to overspend and borrow money Because guess what the other dominoes will fall before us France Japan these countries will hit a fiscal crisis before We had a fiscal crisis and that means lots of flight capital will come to the United States and International investors still see US government debt as a safe and sound investment I wish they didn't sometimes but the reality is we can continue traveling down this path of high debt for a long time Yeah, it's astonishing to think about and of course we're the least dirty shirt in the laundry the the other difference here is that the status of the dollar as the world's reserve currency makes us quite a bit different when it comes to sovereign debt as opposed to some of these other countries including Japan You know that that gives us an advantage But one thing I want to stress I think it's important to understand that government debt is a symptom The underlying problem is a government that's too big and a government that's overspending I worry sometimes if we just focus on the debt and deficits then you know Nancy Pelosi and Charles Schumer They'll say okay. Yeah, I agree with you. So let's raise taxes. Let's impose a value added tax a carbon tax or something like that So so it's very important that yes the debt is not good all this red ink is a problem It's diverting capital from productive uses in the private sector, but again, it's really the underlying government spending That's the problem. We should be focusing on Right. Who wants a balanced budget if taxes are high and spending's high, but So I want to talk about this this issue of who in Washington. We know where the Democrats are Trump is not a Republican in my mind that we're in a crazy situation There are I hope at least a few people who are serious about this. Maybe people like Senator Rand Paul Maybe someone like OMB director Mick Mulvaney Is there anybody out there who's kind of an adult in the room on this issue? Well, the problem is without strong leadership from the White House Yeah, I don't think you can expect Congress to just buy itself produce good legislation and I say that you know for With frustration because for years The House of Representatives would pass these so-called Ryan budgets that had genuine reform of Medicaid and Medicare You know good caps on discretionary spending. They really were I mean maybe by our libertarian standards They weren't that great, but by Washington standards They were really good budget plans and then when the Senate went into Republican hands in 2014 They even passed budget resolutions that were pretty good. So the underlying theory was oh Well, just get a Republican in the White House and we can actually solve or at least address it Very big chunk of our long-run fiscal problem, but Trump Trump is a bit of a populace He doesn't really seem to have any Strong intention of dealing with entitlements and then of course we saw it just in January This budget deal were on the discretionary spending they gave more money to defense and domestic discretionary programs So I'm afraid right now that the I don't know whether the floodgates are open But there's definitely lots of water I don't know going over the dam going under the bridge, but there's more spending and it's we're heading in the wrong direction Yeah, there's no question Trump is not a limited government guy and his his infrastructure themes I think are crazy I want to talk about briefly about the role the Fed and it's a lot of people don't understand how Significant US debt services as a portion of the budget. It's actually the fourth largest item. It's only about 300 billion these days but with historically normal Infest interest rates, let's say five to ten percent This could it wouldn't take much to make servicing the debt the single biggest item for Congress every year I don't think the American public gets that if interest rates normalize as is the you know the popular phrase nowadays and And even if they go up higher because let's say the inflation genie breaks out of the bottle And then we wind up you're going back to you know, not even the 1970s But just to an environment where inflation is four or five percent. So interest rates are you know, maybe six or seven percent Then all of a sudden you the interest on the debt costs in the federal budget at least will double And they could even triple and this is one of these things and here's the frustration with Washington Politicians their time horizon tends to be the next election Worrying about things like rising interest payments on the on the national debt Worrying about the long-run daydream entitlement programs. Those are things that Those of us who think 10 years and 20 years down the road worry about and getting politicians to do that is not that easy What concerns me is I think this puts the Fed in an inherently political posture who wants, you know What Congress what president wants to have the Fed raising interest rates and Killing their budget it there's a political element to all of this that we don't think about Well, I guess I'll start with the good news. We're not Zimbabwe. We're not Argentina The central bank isn't printing money to finance government. We have lots of investors internationally who are willing to buy us government debt But at some point in time Could that happen? I mean, I don't like a lot of what the Fed does because they're playing Keynesian monetary policy But they're not again, they're not printing money to finance the budget So there it's two separate things that we have to worry about one. We have to worry about right now I eat the Keynesian monetary policy and the second thing to worry about is the long run Which is will we get to a point where like the European Central Bank is basically propping up? The welfare states of Italy and Greece by buying up to all their dodgy debt Well, what do you think of proposals? Obviously the Fed itself owns a fair amount of Treasury debt The Social Security Trust fund owns a fair amount of Treasury debt. What do you think of proposals to simply cancel? That portion of outstanding Treasury debt, which would immediately alleviate maybe four or five trillion of this twenty trillion dollar hole We find ourselves in Well, I guess we have to figure out what's the real Meaning and purpose of some of that debt like the Social Security Trust fund Well, that's nothing but IOUs all that happens is that the Social Security Administration Takes one of these IOUs to the Treasury Department and the Treasury Department credits them in their account And they get to send retirement benefits after people but of course the way the Treasury finances that is by Taxing and borrowing today. So the Social Security Trust fund is just an accounting fiction and in terms of the Federal Reserve When they do their open market operations and they buy up US government debt Of course, they're also buying Fannie and Freddie's securities and things like that But when they're buying up US government debt, well, then is it disappearing? Is it vanquishing vanishing? I mean, but what happens now that they're trying to unwind their balance sheet and they're selling some of this Now do you cancel it? I mean even if the Fed does complete normalization and brings their balance sheet, you know cuts it in half You're still gonna have you know one and a half two trillion dollars of US government debt on the Fed's balance sheet So I don't that's a good question. I don't have a great answer for it Well, a cynic might say that the Fed is enabling Congress and monetizing debt in a roundabout way Dan has some TV obligations this afternoon Fox business among them. So we we're gonna leave them with one last question And as you said Daniel, this could be you know, 40 years from now We could have 50 trillion in debt and nothing too too bad has happened. But but just Give us a hypothetical situation how this unwinds normally when you borrow too much money at some point creditors cut you off At some point they require how much higher interest rates You know, how could how could this potentially unwind in the future? How could how could this all blow up in our faces? Well, if you want to do a worst-case scenario At some point with the entitlements on autopilot and the changing demographics of the country I mean, we're going from having a population pyramid to having a population cylinder Which means not enough workers and too many retirees at least given the way that the entitlement programs are designed And you can keep borrowing and you can keep borrowing and you can keep borrowing until That fateful day occurs and all of a sudden investors are looking around at each other and saying wait do we trust Uncle Sam to pay us back and Again as I said at the top of the program You know, I think Unfortunately, we have decades before that point arrives simply because other countries aren't even worse shaped than we are But that doesn't mean that it won't come to bite us sooner or later And that's why it's so important to try to deal with this overspending problem today So we don't have that kind of Greek style crisis in the future Well, how about we treat Treasury owners like Iceland treated some of its sovereign debt holders and give them a little haircut In other words, why should it be a hundred percent risk-free to buy a government debt of any country? Well, that's ultimately what we may wind up with a default. There was a de facto default with Greece And and again, you know, if it happens in the US and when it happens because you know God knows I'm not capable of making a good prediction on it But when that happens in the US We probably will do a haircut instead of full full-scale default But believe me when that happens It's going to be very difficult for the US government to borrow more money because interest rates are going to spike up because of the Uncertainty on whether the US will either repay or fully repay Well, it's an almost unbelievable situation if you're interested in tax and budget, please follow Daniel J. Mitchell at Daniel J. Mitchell on Twitter He's the best guy in DC working in this area and sometimes it's a bit dry It's a bit technical nuts in both but it's so important for our future and obviously our kids future then J. Mitchell Thank you so much. Have a great weekend ladies and gentlemen Subscribe to Mises weekends via iTunes you stitcher and SoundCloud or listen on mises.org and YouTube