Golmaal Hai, Bhai, Sab Golmaal Hai

Seedhe raste ki yeh tedhi chaal hai

Like we discussed yesterday, Trump signed (no, he didn’t use his angutha) the US $2.2 trillion emergency relief bill to support the U.S. economy crippled by the Covid-19 pandemic. Barring a Republican representative (self-avowed libertarian), Thomas Massie of Kentucky, no one in the House of Representatives had any qualms passing the bill unanimously. It is a remarkable piece of legislation in size, speed and scope. Unsurprisingly, it raised a lot of questions. I will tackle the libertarian objection later.  

Let me tackle another question first that was raised by the rising star of the Democrats, Rep. Alexandria Ocasio-Cortez (popularly called AOC). The gist of her argument is this. Every year millions of poor Americans die or have to quit workforce because they can’t afford medical care. The estimates peg the number to be around 80 million people (~25% of the US population). That easily surpasses the likely number who will bear a one-time impact because of the pandemic. Similarly, college education is terribly expensive in the U.S. and about 44 million students are buried under college debt that’s already crossed a $1 trillion in total. When a Bernie or Warren stumped for free healthcare or free college education in their campaigns, they were met with two reactions. The moderate wing within their party asked how will we pay for these concessions? The Republicans just called them socialists.

So, AOC’s question is how are we not asking the same question now? How will we pay for the $2.6 trillion aid package? What explains the collective amnesia? The terrible truth is expensive medical care and college education only hurts the poor who have no voice. But this thing hurts everyone including the establishment. No surprises then with the speed of response. Her simple warning is this: “don’t you ever tell us again we can’t afford to pay for something”.

I have to admit I can see the double standards here. Despite all the justifications I can muster for relief package, there’s a logic in AOC’s question that you can’t ignore. The cynics would argue that politicians are beholden to their donors and to the establishment and the media is busy ‘manufacturing consent’. The upshot? The ordinary American watches bedazzled the grand charade that’s U.S. democracy. The realists would point to the substantial part of the $2.2 trillion package meant for the average American. And the fiscal hawks would helpfully suggest the reason they rile against deficit during the ‘normal’ years is to ensure there’s enough dry powder to manage crisis like this.

On the balance, I think the cynics have a point.

How the math works out

The US debt with this package goes up to about $25 trillion. About $6 trillion is what it owes to itself. Take that out and the US government has a debt of $19 trillion. The US GDP is about $ 21 trillion. In a normal year, the government was adding about $1 trillion to the debt. It was spending $1 trillion more than it was earning.

Now here’s the thing. In the short term the government isn’t terribly exercised by these large numbers. Politicians have a horizon that extends only till the next elections. All that the government is worried about is paying the interest on its debt that comes up every year. Last fiscal the interest burden for the Treasury was about $393 billion (not including interest credited to Social Security and other government trusts). That’s about 1.7% of the GDP. Now, with the Fed bringing down interest rates sharply, the interest burden next year might actually be lower despite the increase in total debt. Let’s put this in perspective a bit. The highest ‘interest paid to GDP’ ratio was about 3% during the go-go days of 1999. Nothing bad happened when the ratio went that high. If you use that as the upper limit, Treasury can afford to go up to $45 trillion of debt.

I don’t think any other deeper analysis would have been done to justify the $2.2 trillion package to the Senate or the Congress. For Trump, they’d have made a short cartoon film, I guess.

So, who pays for this emergency aid and the total debt?

There are 2 parts to this question.

The first is quite literally who pays the $2.2 trillion. The answer is two-fold. The treasury will sell government bonds at attractive rates which will have the investors sell other asset classes and buy them. The problem this leads to is ‘crowding out’ of other asset classes. If investors dump all their investments including corporate bonds to start buying government bonds then all other borrowers including businesses, small companies and even the local governments will find it difficult to raise debt to fund their growth. So, in a coordinated action, Fed has announced it will buy corporate bonds and other mortgage backed securities till it is needed (‘no limits’). We spoke about it here. The second is the Fed prints money. Not literally the greenbacks these days. They will simply add numbers into various computers that will show money added in the system. This will then keep getting transferred in digital forms between players as monetary transactions without any real money exchanging hands. In case real money gets withdrawn more than what’s in circulation, Fed will have to actually print money. That won’t be much.

The second part is what are the long-term ramifications of this kind of large fiscal debt. This is where the libertarian argument against this comes up. The simple answer is we and, more importantly, our future generations will pay for all this profligacy. The crowding out effect will impact the ability of various value-creators to raise funds and drive growth in society. This hurts all of us in the long run. The huge supply of money will lead to inflation (in prices of consumer goods) or in prices of assets. People will be poorer in future and the same hundred dollars will give them less utility than before. Dollar will weaken against other currencies and that will have huge implications on economy and on U.S. geostrategy. These will entail a huge payout that will be borne by the future generations.  And, that payout will make all these numbers look like chump change.

If all of the above sounds needlessly complicated, trust me, it is. On one hand you can marvel at the beauty of the global financial system – the number of players, varied instruments and the multiple interwoven strands that run in the background with a clockwork precision while we go on with our daily lives. This is our web of life. On the other you can ask what’s the damn point to all of this.

Money, as Yuval Harari wrote in ‘The Sapiens’, is the greatest story we have told ourselves. We are so deep into the story now we can’t find an exit out. May be there is none.


We started this blog post with a line from that delightfully funny Hrishikesh Mukherjee film, Golmaal (1979). In the title track Gulzar channels his inner Ogden Nash to write some delightful nonsense lyrics. And, like Nash, Gulzar comes up with some remarkably pithy and insightful lines.

There’s one line in there that kind of sums up both the underlying philosophy and the paradox of all modern finance.

“Paisa kamaane ke liye bhi paisa chahiye.”

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