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The Growing Pile of Public Debt Shows that Inflation Is Here to Stay

After more than a decade of subdued consumer price inflation despite gigantic monetary and fiscal stimuli, last year’s surge in consumer prices took…

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After more than a decade of subdued consumer price inflation despite gigantic monetary and fiscal stimuli, last year’s surge in consumer prices took most central banks by surprise. First, they tried to dismiss it as “transitory” and caused by pandemic-related supply bottlenecks. Within a few months, when wages started rising strongly, Fed chairman Jerome Powell had to admit that “factors pushing inflation upward will linger well into next year.” He is now claiming that the Fed will take appropriate action to address the inflation problem, but the rhetoric is hardly convincing. Both the Federal Reserve and the European Central Bank (ECB) seem to take only baby steps toward ending quantitative easing and raising interest rates, being unwilling to risk a recession in order to tame inflation.

Hiking interest rates will most likely burst the current stock market, real estate, and corporate debt bubbles, revealing the malinvestments stoked by the growth stimuli. The Fed is well aware of this risk because this is exactly what happened in 2019, when financial markets plunged after four interest rate raises in 2018. Instead of continuing the normalization of monetary policy, the Fed lost its nerve and promptly reversed course. That is why many analysts doubt the Fed’s determination to counter the inflation head-on now. Another obstacle to weeding out inflation is the large stock of public debt accumulated since the global financial crisis (GFC) and a worrying relaxation of public spending even in previously frugal economies. Moreover, this trend is backed by growing calls for fiscal laxity among mainstream pundits.

Severe Deterioration of Fiscal Positions

Changes in the fiscal stance have been an important driver of Consumer Price Index inflation in the US during the past seventy years. When budget deficits has widened, annual inflation has pushed close to or above 5 percent, especially after the US went off the gold standard in 1971 (graph 1). The correlation is not one to one, as other factors also contribute to an artificial increase in fiduciary media. But it is almost always the case that when fiscal slippages occur, central banks end up monetizing a larger amount of government debt.

Graph 1: US budget deficit and consumer prices

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Source: FRED.

The last two decades witnessed a surge in public debt worldwide. In advanced economies, the public debt burden soared from about 70 percent of gross domestic product (GDP) in 2001 to above 120 percent of GDP in 2021 (see the International Monetary Fund's [IMF] World Economic Outlook Database). Yet interest payments went down significantly due to record-low interest rates. For example, both France and the US started the new millennium with public debt ratios of less than 60 percent of GDP, which more than doubled in size last year in both countries, to close to 120 percent of GDP in France and above 130 percent of GDP in the US (graph 2). Over the same period, the annual cost of public debt dropped from 2.5 percent to 1 percent of GDP in France and from 3 percent to 2 percent of GDP in the US. Italy’s public debt added about 45 percentage points of GDP, while interest payments halved from about 6 to 3 percent of GDP. A back-of-the-envelope calculation tells us that at the interest rates prevalent before 2001, the annual cost of the current public debt would be about 5.5 percent of GDP higher in Italy and the US and 4 percent of GDP higher in France than it was last year. Moreover, budget deficits in all three countries have swollen to close to or above 10 percent of GDP in 2021 and, according to the IMF, could at best decline to 3–4 percent of GDP in Italy and France and 5 percent of GDP in the US in the aftermath of the pandemic. Facing such a fiscal nightmare, how can anyone expect the Fed or the ECB to move forcefully to normalize interest rates?

Graph 2: Public debt and interest payments

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Source: Organisation for Economic Co-operation and Development and IMF.

Even worse, fiscal profligacy seems to be spreading quicker than the pandemic. If Italy and France have never excelled in fiscal discipline, countries like Australia, Korea, Germany, and the Netherlands used to be well known for their fiscal restraint. That seems to be all gone now. Through recurrent fiscal stimuli, Australia’s public debt surged from a very low level of 10 percent of GDP before the GFC to 62 percent of GDP in 2021 (see the World Economic Outlook Database). Correcting the deficits and debt has now become a serious challenge which is further compounded by a menacing real estate bubble. Since 2017, when President Moon Jae came to power in South Korea, his income-led economic growth strategy, based on boosting consumption and on income redistribution, led to a sizable fiscal expansion. Korea’s long streak of large fiscal surpluses ended abruptly just before the pandemic, and the budget had a deficit of 3 percent of GDP in 2021 (graph 3). This year’s budget spending is projected to grow by another 8 percent in order to expand Korea’s social safety net, subsidize small businesses, and invest in green transition.

Graph 3: General government deficits

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Source: World Economic Outlook Database.

Germany and the Netherlands used to be the euro area’s most prominent “frugal” members, running balanced budgets for several years and trying to restrain the fiscal extravagance of other members and the EU common budget. Now both countries have large coalition governments that promised an unprecedented increase in public spending in addition to the expansion seen in the pandemic. The Netherlands’ fiscal position deteriorated from a surplus of 2.5 percent of GDP in 2019 to a deficit of above 6 percent of GDP in 2021 (graph 3). The budget is expected to remain in the red over the next years, as the government plans to spend more on housing, education, childcare, and green transition. Germany ended 2021 with a budget deficit of close to 7 percent of GDP, and its new coalition government has very ambitious green and social agendas. The coalition wants to speed up the abandoning of coal energy by eight years, to 2030, put 15 million electric cars on roads, build 400,000 social housing units and raise the minimum wage to €12 per hour, while still pledging to reinstate the so-called debt brake by 2023 and not raise taxes.

Germany’s inclination toward fiscal loosening is evident not only in higher spending plans, but also in a more dovish stance toward a relaxation of EU’s fiscal rules. The latter were suspended during the pandemic, and heavily indebted countries—such as Italy, France, and Greece—are pushing to relax them in order to accommodate the great need for green investments and to reflect much higher postpandemic debt levels. The EU’s extremely ambitious climate targets are estimated to cost up to 1 percent of GDP in public investment annually during this decade, complicating the challenge of fiscal consolidation even more.1 With less opposition to the relaxation of fiscal rules from the Netherlands and Germany and growing fiscal divergence among euro area members, it is very likely that financial stability and short-term growth considerations will take precedence over fiscal discipline.

Growing Calls to Inflate Debt Away

The same voices asking for large growth stimuli in the aftermath of the GFC are arguing again in pure Keynesian style that austerity is a road to failure, whereas public “investment” will boost growth and ultimately improve fiscal stability by reducing the debt-to-GDP ratios. According to them, Europe should not return to prepandemic fiscal rules, although these were hardly observed even then. The main arguments advanced are the so-called obvious successes of massive deficit spending during the pandemic and the United States’ better growth performance during the Great Recession. But, together with Japan’s “lost decades,” these are precisely very good examples that growth stimuli do not work.

The economic recovery has remained subdued not only in the US, but in all advanced economies that chose to spend their way out of the Great Recession. The levels of public and private debt continued to soar in parallel, while stock exchange and real estate bubbles were reinflated to new highs. With the monetary and fiscal stimuli still in place, the “recovery” is mainly an artificial doping up of GDP, which is likely to burst when the stimulus is withdrawn. The investment and growth strategy advocated by mainstream economists is nothing but a call to inflate debt away via public spending. This is fully oblivious to the disastrous effects that an acceleration of money printing would have—exacerbating capital erosion and distortions in the structure of production.

Some inflation proponents also try to use econometric modeling to show that monetary policy has not been expansionary enough so far, being constrained by the zero lower bound. In their view, quantitative easing can help reach inflation targets and reduce debt costs so that fiscal policy can intervene more aggressively to support growth and eventually stabilize the fiscal position. If this is true, why have debt levels not stabilized already, after decades of generous fiscal stimuli? And what explains the asset bubbles that have mushroomed during the last two decades if monetary policy has been too tight? In reality, the supposed “virtuous” synergy between monetary and fiscal relaxation can only end in a senseless spiral of debt and inflation out of control. The historical examples of Argentina and Germany illustrate very well the risks of debt monetization slipping into hyperinflation and economic collapse. All the mainstream proinflation propaganda is definitely not a good sign that governments are about to put inflationary policies on hold any time soon.

Expectations for Higher Inflation

Surveys show that people are starting to realize that inflation is likely to increase further rather than fade away. This is gradually fueling requests for higher wages and a willingness to part more quickly with cash. As argued in a recent article, once inflation expectations become entrenched, the central bank’s space to control inflation and use it to inflate debt away will significantly narrow. Thorsten Polleit brings good arguments that the Fed may only want marginally higher inflation, in a range of 4 to 6 percent per year, without letting it get out of control. But given the toxic interaction with already very high debt levels and rising inflation expectations, the central banks’ plans could easily be derailed.

  • 1. The green transition has already contributed to a surge in gas and energy prices following the closure of many coal and nuclear power plants in Europe.

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Is the National Guard a solution to school violence?

School board members in one Massachusetts district have called for the National Guard to address student misbehavior. Does their request have merit? A…

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Every now and then, an elected official will suggest bringing in the National Guard to deal with violence that seems out of control.

A city council member in Washington suggested doing so in 2023 to combat the city’s rising violence. So did a Pennsylvania representative concerned about violence in Philadelphia in 2022.

In February 2024, officials in Massachusetts requested the National Guard be deployed to a more unexpected location – to a high school.

Brockton High School has been struggling with student fights, drug use and disrespect toward staff. One school staffer said she was trampled by a crowd rushing to see a fight. Many teachers call in sick to work each day, leaving the school understaffed.

As a researcher who studies school discipline, I know Brockton’s situation is part of a national trend of principals and teachers who have been struggling to deal with perceived increases in student misbehavior since the pandemic.

A review of how the National Guard has been deployed to schools in the past shows the guard can provide service to schools in cases of exceptional need. Yet, doing so does not always end well.

How have schools used the National Guard before?

In 1957, the National Guard blocked nine Black students’ attempts to desegregate Central High School in Little Rock, Arkansas. While the governor claimed this was for safety, the National Guard effectively delayed desegregation of the school – as did the mobs of white individuals outside. Ironically, weeks later, the National Guard and the U.S. Army would enforce integration and the safety of the “Little Rock Nine” on orders from President Dwight Eisenhower.

Three men from the mob around Little Rock’s Central High School are driven from the area at bayonet-point by soldiers of the 101st Airborne Division on Sept. 25, 1957. The presence of the troops permitted the nine Black students to enter the school with only minor background incidents. Bettmann via Getty Images

One of the most tragic cases of the National Guard in an educational setting came in 1970 at Kent State University. The National Guard was brought to campus to respond to protests over American involvement in the Vietnam War. The guardsmen fatally shot four students.

In 2012, then-Sen. Barbara Boxer, a Democrat from California, proposed funding to use the National Guard to provide school security in the wake of the Sandy Hook school shooting. The bill was not passed.

More recently, the National Guard filled teacher shortages in New Mexico’s K-12 schools during the quarantines and sickness of the pandemic. While the idea did not catch on nationally, teachers and school personnel in New Mexico generally reported positive experiences.

Can the National Guard address school discipline?

The National Guard’s mission includes responding to domestic emergencies. Members of the guard are part-time service members who maintain civilian lives. Some are students themselves in colleges and universities. Does this mission and training position the National Guard to respond to incidents of student misbehavior and school violence?

On the one hand, New Mexico’s pandemic experience shows the National Guard could be a stopgap to staffing shortages in unusual circumstances. Similarly, the guards’ eventual role in ensuring student safety during school desegregation in Arkansas demonstrates their potential to address exceptional cases in schools, such as racially motivated mob violence. And, of course, many schools have had military personnel teaching and mentoring through Junior ROTC programs for years.

Those seeking to bring the National Guard to Brockton High School have made similar arguments. They note that staffing shortages have contributed to behavior problems.

One school board member stated: “I know that the first thought that comes to mind when you hear ‘National Guard’ is uniform and arms, and that’s not the case. They’re people like us. They’re educated. They’re trained, and we just need their assistance right now. … We need more staff to support our staff and help the students learn (and) have a safe environment.”

Yet, there are reasons to question whether calls for the National Guard are the best way to address school misconduct and behavior. First, the National Guard is a temporary measure that does little to address the underlying causes of student misbehavior and school violence.

Research has shown that students benefit from effective teaching, meaningful and sustained relationships with school personnel and positive school environments. Such educative and supportive environments have been linked to safer schools. National Guard members are not trained as educators or counselors and, as a temporary measure, would not remain in the school to establish durable relationships with students.

What is more, a military presence – particularly if uniformed or armed – may make students feel less welcome at school or escalate situations.

Schools have already seen an increase in militarization. For example, school police departments have gone so far as to acquire grenade launchers and mine-resistant armored vehicles.

Research has found that school police make students more likely to be suspended and to be arrested. Similarly, while a National Guard presence may address misbehavior temporarily, their presence could similarly result in students experiencing punitive or exclusionary responses to behavior.

Students deserve a solution other than the guard

School violence and disruptions are serious problems that can harm students. Unfortunately, schools and educators have increasingly viewed student misbehavior as a problem to be dealt with through suspensions and police involvement.

A number of people – from the NAACP to the local mayor and other members of the school board – have criticized Brockton’s request for the National Guard. Governor Maura Healey has said she will not deploy the guard to the school.

However, the case of Brockton High School points to real needs. Educators there, like in other schools nationally, are facing a tough situation and perceive a lack of support and resources.

Many schools need more teachers and staff. Students need access to mentors and counselors. With these resources, schools can better ensure educators are able to do their jobs without military intervention.

F. Chris Curran has received funding from the US Department of Justice, the Bureau of Justice Assistance, and the American Civil Liberties Union for work on school safety and discipline.

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Chinese migration to US is nothing new – but the reasons for recent surge at Southern border are

A gloomier economic outlook in China and tightening state control have combined with the influence of social media in encouraging migration.

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Chinese migrants wait for a boat after having walked across the Darien Gap from Colombia to Panama. AP Photo/Natacha Pisarenko

The brief closure of the Darien Gap – a perilous 66-mile jungle journey linking South American and Central America – in February 2024 temporarily halted one of the Western Hemisphere’s busiest migration routes. It also highlighted its importance to a small but growing group of people that depend on that pass to make it to the U.S.: Chinese migrants.

While a record 2.5 million migrants were detained at the United States’ southwestern land border in 2023, only about 37,000 were from China.

I’m a scholar of migration and China. What I find most remarkable in these figures is the speed with which the number of Chinese migrants is growing. Nearly 10 times as many Chinese migrants crossed the southern border in 2023 as in 2022. In December 2023 alone, U.S. Border Patrol officials reported encounters with about 6,000 Chinese migrants, in contrast to the 900 they reported a year earlier in December 2022.

The dramatic uptick is the result of a confluence of factors that range from a slowing Chinese economy and tightening political control by President Xi Jinping to the easy access to online information on Chinese social media about how to make the trip.

Middle-class migrants

Journalists reporting from the border have generalized that Chinese migrants come largely from the self-employed middle class. They are not rich enough to use education or work opportunities as a means of entry, but they can afford to fly across the world.

According to a report from Reuters, in many cases those attempting to make the crossing are small-business owners who saw irreparable damage to their primary or sole source of income due to China’s “zero COVID” policies. The migrants are women, men and, in some cases, children accompanying parents from all over China.

Chinese nationals have long made the journey to the United States seeking economic opportunity or political freedom. Based on recent media interviews with migrants coming by way of South America and the U.S.’s southern border, the increase in numbers seems driven by two factors.

First, the most common path for immigration for Chinese nationals is through a student visa or H1-B visa for skilled workers. But travel restrictions during the early months of the pandemic temporarily stalled migration from China. Immigrant visas are out of reach for many Chinese nationals without family or vocation-based preferences, and tourist visas require a personal interview with a U.S. consulate to gauge the likelihood of the traveler returning to China.

Social media tutorials

Second, with the legal routes for immigration difficult to follow, social media accounts have outlined alternatives for Chinese who feel an urgent need to emigrate. Accounts on Douyin, the TikTok clone available in mainland China, document locations open for visa-free travel by Chinese passport holders. On TikTok itself, migrants could find information on where to cross the border, as well as information about transportation and smugglers, commonly known as “snakeheads,” who are experienced with bringing migrants on the journey north.

With virtual private networks, immigrants can also gather information from U.S. apps such as X, YouTube, Facebook and other sites that are otherwise blocked by Chinese censors.

Inspired by social media posts that both offer practical guides and celebrate the journey, thousands of Chinese migrants have been flying to Ecuador, which allows visa-free travel for Chinese citizens, and then making their way over land to the U.S.-Mexican border.

This journey involves trekking through the Darien Gap, which despite its notoriety as a dangerous crossing has become an increasingly common route for migrants from Venezuela, Colombia and all over the world.

In addition to information about crossing the Darien Gap, these social media posts highlight the best places to cross the border. This has led to a large share of Chinese asylum seekers following the same path to Mexico’s Baja California to cross the border near San Diego.

Chinese migration to US is nothing new

The rapid increase in numbers and the ease of accessing information via social media on their smartphones are new innovations. But there is a longer history of Chinese migration to the U.S. over the southern border – and at the hands of smugglers.

From 1882 to 1943, the United States banned all immigration by male Chinese laborers and most Chinese women. A combination of economic competition and racist concerns about Chinese culture and assimilability ensured that the Chinese would be the first ethnic group to enter the United States illegally.

With legal options for arrival eliminated, some Chinese migrants took advantage of the relative ease of movement between the U.S. and Mexico during those years. While some migrants adopted Mexican names and spoke enough Spanish to pass as migrant workers, others used borrowed identities or paperwork from Chinese people with a right of entry, like U.S.-born citizens. Similarly to what we are seeing today, it was middle- and working-class Chinese who more frequently turned to illegal means. Those with money and education were able to circumvent the law by arriving as students or members of the merchant class, both exceptions to the exclusion law.

Though these Chinese exclusion laws officially ended in 1943, restrictions on migration from Asia continued until Congress revised U.S. immigration law in the Hart-Celler Act in 1965. New priorities for immigrant visas that stressed vocational skills as well as family reunification, alongside then Chinese leader Deng Xiaoping’s policies of “reform and opening,” helped many Chinese migrants make their way legally to the U.S. in the 1980s and 1990s.

Even after the restrictive immigration laws ended, Chinese migrants without the education or family connections often needed for U.S. visas continued to take dangerous routes with the help of “snakeheads.”

One notorious incident occurred in 1993, when a ship called the Golden Venture ran aground near New York, resulting in the drowning deaths of 10 Chinese migrants and the arrest and conviction of the snakeheads attempting to smuggle hundreds of Chinese migrants into the United States.

Existing tensions

Though there is plenty of precedent for Chinese migrants arriving without documentation, Chinese asylum seekers have better odds of success than many of the other migrants making the dangerous journey north.

An estimated 55% of Chinese asylum seekers are successful in making their claims, often citing political oppression and lack of religious freedom in China as motivations. By contrast, only 29% of Venezuelans seeking asylum in the U.S. have their claim granted, and the number is even lower for Colombians, at 19%.

The new halt on the migratory highway from the south has affected thousands of new migrants seeking refuge in the U.S. But the mix of push factors from their home country and encouragement on social media means that Chinese migrants will continue to seek routes to America.

And with both migration and the perceived threat from China likely to be features of the upcoming U.S. election, there is a risk that increased Chinese migration could become politicized, leaning further into existing tensions between Washington and Beijing.

Meredith Oyen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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