In one of the most remarkable speeches ever given by a Federal Reserve official, or for that matter any U.S. government official, Dallas Fed President Richard Fisher, a voting member of the FOMC in 2008, told an audience at the Commonwealth Club of California, in a speech titiled, Storms on the Horizon, the truth about the current state of the United States economy.
He started by warning about the current inflationary problem:
…if inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario. Inflation is the most insidious enemy of capitalism. No central banker can countenance it, not least the men and women of the Federal Reserve.
Note the words “… even in the face of an anemic economic scenario”. Fisher is not talking about raising rates, if the economy gets better. He is talking about raising rates in an “anemic” economy. This is a man concerned about inflation, and he is correct. If you think the sub-prime crisis was a mess—when the Fed cut rates in an attempt to reverse the crisis, just wait to see what the economy is going to look like with the Fed raising rates while the economy tanks. We repeat, this is not us talking, it is a Federal Reserve voting member of the FOMC.
Fisher then goes on to explain just how bad the federal debt situation is in the United States really is:
Tonight, I want to talk about a different matter…I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct…The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road…
In keeping with the tradition of rosy scenarios, official budget projections suggest this deficit will be relatively short-lived. They almost always do. According to the official calculus, following a second $400-billion-plus deficit in 2009, the red ink should fall to $160 billion in 2010 and $95 billion in 2011, and then the budget swings to a $48 billion surplus in 2012.
If you do the math, however, you might be forgiven for sensing that these felicitous projections look a tad dodgy. To reach the projected 2012 surplus, outlays are assumed to rise at a 2.4 percent nominal annual rate over the next four years—less than half as fast as they rose the previous seven years. Revenue is assumed to rise at a 6.7 percent nominal annual rate over the next four years—almost double the rate of the past seven years. Using spending and revenue growth rates that have actually prevailed in recent years, the 2012 surplus quickly evaporates and becomes a deficit, potentially of several hundred billion dollars.
Doing deficit math is always a sobering exercise. It becomes an outright painful one when you apply your calculator to the long-run fiscal challenge posed by entitlement programs. Were I not a taciturn central banker, I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.
Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.
…Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon.
And some wonder why I am forecasting a climb in interest rates for the next 30 years.
Fisher is obviously very scared that pressure is going to come on the Fed to print money to solve the problem. He comes back to the dangers of money printing, in this remarkable speech:
We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid…Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy..
Of late, we have heard many complaints about the weakness of the dollar against the euro and other currencies. It was recently argued in the op-ed pages of the Financial Times… that one reason for the demise of the British pound was the need to liquidate England’s international reserves to pay off the costs of the Great Wars. In the end, the pound, it was essentially argued, was sunk by the kaiser’s army and Hitler’s bombs. Right now, we—you and I—are launching fiscal bombs against ourselves.
Fisher ends his speech with a cry for help:
You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.
When a Fed president sees the only solution being an electorate to save us all, when the electorate has nominated two spendthrifts as presidential candidates, one a domestic social progams spendthrift (Obama) and one an international warrior spendthrift (McCain), you can see why the country is in trouble and why a Fed president would choose Storms On the Horizon as the title to his speech. Storms on the horizon indeed, the financial dark ages are approaching quickly and Fisher knows it.
“Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct…The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road…”
Too bad Fisher isn’t Chairman.