“We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.”
— Ronald Reagan, over 40 years ago
On Friday the House passed the “Build Back Better” legislation — which is separate from the $1 trillion infrastructure bill that President Biden signed last Monday.
It’s focused on child care, health care and fighting climate change. The reported price tag is $1.5 trillion… but the actual costs could end up being much, much higher.
In my latest Session, I talk to my friend and mentor Bill Bonner. As you probably know, we co-wrote the bestsellers Financial Reckoning Day and Empire of Debt — two books about government spending and the attitudes that accommodate it. Bill takes a shot at explaining what Build Back Better’s backers are leaving out.
“They say things like, ‘This tax provision will expire’ or ‘This spending thing will expire after a couple of years,’” Bill says with customary aplomb. “They take the most favorable look at these things in order to get the numbers down.”
The problem is that these provisions never go away. “You can give people stuff, but it’s very hard to take it away.”
When the “temporary” stuff becomes permanent, Build Back Better’s costs skyrocket. “The Penn Wharton model says that this bill is not $1.5 trillion. It’s not $2 trillion,” Bill says. “It’s $4.6 trillion.”
The Committee for a Responsible Budget — “which always sounds a little bit oxymoronic to me,” Bill quips — says the final number will come out somewhere close to $4.9 trillion.
And don’t expect the new taxes the bill creates to actually end up covering its costs. Taxes “have a way of never coming quite in the way they expect,” Bill says. “What’s really going to happen is the taxes are never going to be applied, never going to be collected, never going to be continued long enough to make any difference.”
I shouldn’t have to tell you how the government will be forced to make up the difference. As Bill explains, “In the last two years, something like 96% of the deficits have been covered by printing money.”
That is, “bonds that the government issued to pay for its deficits were bought by the Fed.”
Of course, “money’s got to go somewhere” — and we know it’s going into stocks, cryptocurrencies, billionaire space races and the like. Eventually the cash starts to influence prices for everyday goods and services.
“You go to the store and you see your gallon of milk is a lot more expensive than it used to be,” Bill says.
So Build Back Better threatens to put even more money into the system — which is “going to goose up those inflation rates a whole lot more.”
“It’s not going to be very nice,” Bill says — perhaps understating things a bit much.
There are only two ways this can end. The people in charge can “voluntarily do things” to bring inflation under control. The other is to “print more and more money, and you just let it run until it blows up completely.”
We’ve talked before about how Paul Volcker was the last Fed Chairman to take a stand against inflation, radically raising interest rates… mostly because he didn’t have any other choice.
Today, “everybody depends on low interest rates,” Bill says. So he doesn’t “think it’s possible to do what Volcker did.”
When will investors’ joyous roister end? We’ll share Bill’s thoughts over the next few days. It’s a wonderful subject for you to broach at the Thanksgiving Day table. We’ll do our best to give you the eloquence you’ll need to rain down on your guests.
Follow your bliss,
Founder, The Financial Reserve