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Doug Kass & Me on Debt & Deficits

David R. Kotok
Sun Jun 2, 2024

Doug Kass sent a 12-point missive on May 22, at 6:20 AM EDT. Here’s the title: “12 Frightening Charts and Tables … you will not see them being discussed in the business media today.” Doug was kind enough to give me permission to quote him on the first two items. We are not addressing the other 10 items.


US Deficit and Debt:    
We are on an unsustainable path of government debt creation and fiscal imprudence. The unprecedented partisanship that exists in Washington, D.C., is unlikely to change as we lean into a Presidential election in November. Nor will the political schism between Democrats and Republicans narrow post-election. Fiscal discipline will likely continue to be ignored by both political parties until it is too late:     

Item #1 from Keith McCullough    
Doug Kass & Me on Debt & Deficits - Tweet of charts 01    
Item #2 from The Kobeissi Letter    
Doug Kass & Me on Debt & Deficits - Tweet of chart 02

Here’s my Item #3.    
I have previously published a series on debt and deficits. The links to those writings are at the end of today’s missive. Now let’s get to the item that I think is missing from Doug’s list. 

That is the Congress, not the Fed nor the US Treasury nor the White House, although both the Trump and Biden WH have been very complicit and complacent about debt and deficits as we detailed in our writings. Trump’s deficits were huge, and the Republican debt critics fell silent. Biden followed with large deficits, and the Republican debt critics found their voice. They are now again “radio silent,” since their presumptive nominee has a history of ignoring the deficit. 
So, some in Congress have found a new form of a grandstanding political game. It’s called “Abolish the Fed”. And while no one expects that bill #8421 to pass the House, let alone the Senate. This sham piece of legislation will now allow there to be hearings and investigations. IMO, this stuff has a cost which I will demonstrate in the graphics below. 
Here’s the link to the bill introduced by Congressman Massie. The title is H.R.8421 - To abolish the Board of Governors of the Federal Reserve System and the Federal reserve banks, to repeal the Federal Reserve Act, and for other purposes: And the list below of co-sponsors reminds me of the famous line in the movie Casablanca: “Line up the usual suspects.”    
Rep. Biggs, Andy [R-AZ-5]*    
Rep. Boebert, Lauren [R-CO-3]*     
Rep. Brecheen, Josh [R-OK-2]*     
Rep. Burchett, Tim [R-TN-2]*     
Rep. Burlison, Eric [R-MO-7]*     
Rep. Cammack, Kat [R-FL-3]*     
Rep. Cloud, Michael [R-TX-27]*     
Rep. Crane, Elijah [R-AZ-2]*     
Rep. Duncan, Jeff [R-SC-3]*     
Rep. Gaetz, Matt [R-FL-1]*    
Rep. Good, Bob [R-VA-5]*     
Rep. Gosar, Paul A. [R-AZ-9]*     
Rep. Greene, Marjorie Taylor [R-GA-14]*     
Rep. Hageman, Harriet M. [R-WY-At Large]*     
Rep. Norman, Ralph [R-SC-5]*     
Rep. Perry, Scott [R-PA-10]*     
Rep. Roy, Chip [R-TX-21]*     
Rep. Self, Keith [R-TX-3]*    
Rep. Spartz, Victoria [R-IN-5]*     
Rep. Tiffany, Thomas P. [R-WI-7]*     
Rep. Rosendale, Matthew M. [R-MT-2]     
Rep. Mills, Cory [R-FL-7]     
Rep. Reschenthaler, Guy [R-PA-14]     
* = Original cosponsor    
Normally, I would dismiss this type of attention-getting grandstanding. But there is a second bill by a serious Republican that has also been introduced by Congressman French Hill, a respected and more thoughtful conservative ("RELEASE: REP. HILL REINTRODUCES LEGISLATION TO FOCUS FEDERAL RESERVE ON CURBING INFLATION”). So, what concerns me is that the House may hold hearings and we will again see a parade of behavioral antics that alarm financial markets. And we may again see a threat to Speaker Mike Johnson who seems to be interested in governance some of the time rather than grandstanding. Remember, I said some of the time.    
My “proof of cost is below. Let me first say that critics have challenged me when I said that credit default swap (CDS) pricing was influenced by bizarre political behavior in the House. One of those critics is an MMT (Modern Monetary Theory) proponent, and he refused to acknowledge that the CDS pricing was attributable to anything other than volatility. Note that if CDS pricing is valid because of US debt issuance, the whole notion of MMT becomes weaker and is undermined. Readers who want to engage in serious research on why this is so may read about the “Triffin Dilemma,” as it is conceptually a discussion that long preceded the existence of MMT but can help explain the flaws in MMT.    
Anyway, with the help of my colleagues Shaun Burgess and Tom Paterson, we have prepared some charts. They depict recent political history by noting some of the key events. And those events are coincident with the movement of CDS pricing. Please note that these three charts are using maturities of 1-year, 5-year, and 10-year CDS and are only applicable to the US government’s treasury debt.     

 Chart 1    
Doug Kass & Me on Debt & Deficits - Chart 01    
 Chart 2    
Doug Kass & Me on Debt & Deficits - Chart 02    
Chart 3    
 Doug Kass & Me on Debt & Deficits - Chart 03    

I will leave it to readers to decide if there is causality between congressional behavior and CDS pricing or if this is just volatility. But before you say “no”, please read this NBER research paper by Thomas Drechsel. Then you decide: "Estimating the Effects of Political Pressure on the Fed.” Here’s the paper’s introduction:    
This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. “Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political pressure, I develop a narrative identification strategy based on President Nixon's pressure on Fed Chair Burns. I exploit this narrative through restrictions on a structural vector autoregression that includes the personal interaction data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, by having a stronger effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, for six months, raises the price level more than 8%.”    
(Hat tip to Torsten Slok for the link.)     
Dear readers, IMO, interest rates are higher than they would otherwise be because of political antics and not only because of volatility. That’s my opinion and I’m sticking to it.
Here is my current and prior recent writings on debt, the debt ceiling, deficits, and destructive politics:

“Deficits & Lame Duck POTUS,”    
“Deficits & Lame Ducks, Part 2,”    
“Deficits & Lame Ducks, Part 3,”    
“Deficits & Lame Ducks, Part 4,”    
“More on Debt & Deficits,”    
“Doug Kass & Me on Debt & Deficits,”    

David R. Kotok
Co-Founder & Chief Investment Officer

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