Easy Money Anesthesia 

Doug Nolan


China’s historic Bubble has been integral to CBB analysis for two decades. 

I’ve on a weekly basis chronicled how interconnected Chinese and the U.S. Bubbles worked in harmony to inflate one epic global Bubble. 

Loose U.S. monetary policy and financial conditions were initially instrumental in stoking expansion of Chinese finance and economic output. 

As for China, it “recycled” massive trade surpluses with the U.S. back into American securities markets, helping sustain U.S. Bubble excess. 

It was a symbiotic relationship of far-reaching historical significance. 

China was desperate for growth and development. 

The U.S. preferred to deindustrialize – while still enjoying access to cheap manufactured goods (lower CPI, greater monetary accommodation and higher asset prices). 

Rather than a fledgling competitor, China development was considered a potentially huge economy determined to adopt free-market capitalism and integrate with the West. 

They aspired to be like us. 

The booming Chinese economy essentially enjoyed unlimited cheap finance. 

And as dollars flooded in, their ballooning horde of international reserves bolstered China’s pegged currency regime. 

This stoked “hot money” inflows, while unleashing domestic Credit creation. 

There were essentially no restraints on Chinese bank lending, as China circumvented the type of currency vulnerability that would typically place constraints on EM Credit Bubble excess.

Bubbles are mechanisms of wealth redistribution and destruction. 

“Symbiotic relationships” – typified by cooperation and integration - are by their nature transitory phenomena, creatures of the early-Bubble notion of an expanding economic “pie.” 

Inevitably, late-cycle insecurities and fears of a shrinking pie spur disintegration and conflict.

The prolonged global Bubble period literally inflated China to superpower status, creating rival Bubbles without precedent. 

The newfound intensity of this rivalry was revealed during the Trump presidency, most conspicuously in fraught trade negotiations. 

Heated trade talks forced Beijing again to retreat from measures meant to rein in Bubble excess. 

Understandably, the perception solidified that Beijing wouldn’t dare risk piercing China’s colossal Bubble. 

The pandemic then incited the most outlandish stimulus measures and system Credit expansion imaginable. 

Risk grows exponentially during the “Terminal Phase” of Bubble excess. 

I assumed Beijing would move decisively to rein in excess, particularly in lending and apartment speculation. 

But what is now unfolding goes way beyond measures to contain excess. 

China has begun a transitioning phase, with momentous yet uncertain consequences and ramifications. 

What began seemingly as a campaign to rein in apartment speculation and crack down on the big tech monopolies has speedily developed into something much more systemic and Draconian. 

August 30 – Bloomberg: 

“Chinese President Xi Jinping chaired a high-level meeting that ‘reviewed and approved’ measures to fight monopolies, battle pollution and shore up strategic reserves, all areas that are crucial to his government’s push to improve the quality of life for the nation’s 1.4 billion people. 

Few details were released about the guidelines discussed on Monday at the meeting of the central committee for deepening overall reform, which includes some of China’s most powerful leaders and has wide powers to shape government policy. 

Xi in particular stressed the importance of strengthening anti-monopoly regulations, a push that has already cost tech giants hundreds of billions of dollars in market value over the past year.”

September 1 – Reuters (Kevin Yao): 

“President Xi Jinping has called for China to achieve ‘common prosperity’, seeking to narrow a yawning wealth gap that threatens the country’s economic ascent and the legitimacy of Communist Party rule. 

‘Common prosperity’ as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled investors in the world’s second-largest economy… 

‘Common prosperity’ was first mentioned in the 1950s by Mao Zedong, founding leader of what was then an impoverished country, and repeated in the 1980s by Deng Xiaoping, who modernised an economy devastated by the Cultural Revolution.”

August 31 – Bloomberg (Daniel Taub): 

“China’s securities regulator said it plans to rein in the country’s private equity and venture capital funds, stop public offerings disguised as private placements and fight embezzlement of assets. 

The China Securities Regulatory Commission will work to root out ‘fake’ private equity funds that are actually sold to the general public instead of targeted investors… 

China’s financial regulators have become more assertive in recent months, cracking down in areas from online lending and insurance to initial public offerings and margin financing.”

August 30 – Reuters (Brenda Goh, Yingzhi Yang and Yilei Sun): 

“China's market regulator said… it would step up oversight of the so-called sharing economy, where consumers share access to goods and services often with the help of an online platform. 

The move by the State Administration of Market Regulation (SAMR) is the latest in a drive by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property.”

August 31 – Financial Times (Edward White): 

“A blogger’s tirade endorsed widely by Chinese state media has called for Beijing’s snowballing regulatory overhaul to target the high costs of housing, education and healthcare while also instituting deep reforms to finance and cultural industries. 

‘This is a transformation from capital-centred to people-centred,’ the writer said, adding that those who sought to block the deep reform efforts would be ‘discarded’. 

The commentary… has been shared by China’s biggest state and party-controlled media outlets including Xinhua news agency, the People’s Daily and CCTV television network, indicating the broad degree of state support.”

August 30 – Reuters (Kevin Yao): 

“China’s move to curb disorderly expansion of capital has shown initial results, state media quoted a top-level meeting as saying… 

Since late 2020, Beijing has been advocating ‘the prevention of disorderly expansion of capital’, kicking off a clampdown on tech giants and private education firms. 

The campaign has been focused on preventing ‘savage growth’ of some platform companies in a bid to deal with their monopolistic and unfair competition behaviors... 

‘Initial results have been achieved in preventing disorderly expansion of capital, and the fair market competition order has been steadily improving,’ state media quoted the meeting on deepening reforms, chaired by President Xi Jinping, as saying.”

Beijing has been bustling with activity. 

Communist leadership has clearly turned against Capitalism, though it’s difficult to fault their effort to curb the “disorderly expansion of capital.” 

Untethered finance has so corrupted today's Capitalism. 

Under the guise of “market reform,” Beijing is in the process of wresting ever-tighter control over the markets, the economy and society at large. 

I’ve long assumed Beijing would respond to a bursting Bubble with various forms of financial, economic and social repression, while casting blame on foreign governments (i.e. U.S. and Japan). 

It appears Chinese leadership has decided to begin executing some sort of plan.

Measures to rein in lending and speculative excess, while clamping down on increasingly powerful business and markets interests, are of little surprise. 

A spate of other pronouncements is not so easily explained. 

August 27 – Financial Times (Sun Yu): 

“A campaign to make children as young as 10 study President Xi Jinping’s political philosophy has been labelled by some parents as ‘disgusting’ and evoked memories of Mao Zedong’s personality cult. 

More than a dozen parents across the country told the Financial Times they were uncomfortable with the rollout next month of classes on ‘Xi Jinping Thought’. 

The eponymous philosophy, which features a mixture of patriotic education and praise for the Chinese Communist party’s general secretary, will become part of the national curriculum from primary school to university next month… 

‘This is disgusting,’ said a father… in central Henan province… 

He hoped his daughter would ‘forget about everything after she is done with the exam’. 

The backlash highlighted the difficulty the party faced in making Xi’s philosophy the nation’s ruling ideology for generations to come.”

August 31 – Reuters (Brenda Goh): 

“China has forbidden under-18s from playing video games for more than three hours a week, a stringent social intervention that it said was needed to pull the plug on a growing addiction to what it once described as ‘spiritual opium’. 

The new rules… are part of a major shift by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property, after years of runaway growth. 

The restrictions… are a body blow to a global gaming industry that caters to tens of millions of young players in the world's most lucrative market. 

They limit under-18s to playing for one hour a day - 8 p.m. to 9 p.m. - on only Fridays, Saturdays and Sundays… 

They can also play for an hour, at the same time, on public holidays.”

September 2 – Reuters (Josh Horwitz and Brenda Goh): 

“Authorities told broadcasters… to shun artists with what they called incorrect political positions and effeminate styles, to strictly enforce pay caps for actors and guests as well as to cultivate a ‘patriotic atmosphere’ for the industry. 

It marked the expansion of a campaign that has targeted what authorities have described as a ‘chaotic’ celebrity fan culture. 

Last month, China barred platforms from publishing popularity lists and regulated the sale of fan merchandise in August after a series of controversies involving performers.”

August 30 – South China Morning Post (Jamie Tarabay): 

“Chinese officials have been warned by President Xi Jinping to ‘discard their illusions’ about having an easy life and ‘dare to struggle’ to protect the country’s sovereignty and security. 

‘The great rejuvenation of the Chinese nation has entered a key phase, and risks and challenges we face are conspicuously increasing,’ Xi said… 

‘It’s unrealistic to always expect easy days and not want to struggle.’ 

He told an event on Wednesday to mark the new semester at the Central Party School… that: ‘[We] must not yield an inch on issues of principle, and defend national sovereignty, security and development interests with an unprecedented quality of mind.’ 

His remarks to hundreds of mid-level cadres from around the country did not elaborate on the need to struggle but were made amid growing tension with the United States on a range of fronts, including geopolitics, the economy and technology.”

They’re battening down the hatches. 

The broad scope of reform measures, the tone, the heavy-handedness and the apparent urgency. 

Beijing is preparing for something - but what? 

Is their focus unfolding domestic hardship, geopolitical or a combination? 

A bursting China Bubble will be fraught with destabilizing economic and social upheaval. 

And it would be understandable – even constructive – to begin preparing society for unfolding challenges. 

Perhaps Chinese leadership even subscribes to the global Bubble thesis - and they’re enacting Draconian measures to ensure China is better prepared for crisis dynamics than its adversaries (employing a similar zero-tolerance mindset adopted with their war against covid).

September 1 – Bloomberg: 

“The world is undergoing profound changes that are unseen in a century and are evolving more quickly, the official Xinhua News Agency cites Chinese President Xi Jinping as saying in a speech at the central party school in Beijing… 

China ‘must not yield an inch of ground’ on matters of principles and uphold China’s sovereignty, security and development interests with unprecedented resolve: Xi. 

It’s not realistic to hope for peaceful days and refuse to struggle: Xi”

I think it’s about Bubbles, but I can’t shake the unsettling feeling Taiwan is playing a role. 

For years, I’ve worried how Beijing might respond to a bursting Bubble. 

A move on Taiwan would stoke nationalism, while diverting attention away from Beijing’s gross mismanagement of its financial and economic systems (they’re not alone in this regard). 

“Xi Jinping Thought” and cultivating a “patriotic atmosphere,” while repressing “effeminate” TV personalities and video games. Crazy, alarming stuff – that might be expected from a regime contemplating international conflict. 

September 1 – Reuters (Kevin Yao): 

“China will boost financing support for small firms by increasing annual relending quotas by 300 billion yuan ($46.39bn), the cabinet said… 

China will step up support for small- and medium-sized firms to help stabilise economic growth and employment, as rising commodity prices push up production costs and receivables, the cabinet said… 

The central bank will provide support via rediscount instruments to help ease financing burdens of small firms, while financial institutions will conduct bill discount financing for small firms, the cabinet said. 

The government will strengthen its policy reserves and improve cross-cyclical adjustments, state media said, adding that local government special bonds will help drive effective investment.”

August 30 – Reuters (Xu Jing, Ryan Woo and Winni Zhou): 

“China's currency regulator has been conducting a rare survey of banks and companies to ask about their risk management processes and ability to handle volatility in the yuan, three banking and policy sources told Reuters. 

The State Administration of Foreign Exchange (SAFE) surveyed ‘how companies in different sectors managed their FX exposure and how they used hedging tools’, said one of the sources, who was directly involved in the survey. 

The SAFE did not give a reason for the survey…”

September 3 – Bloomberg: 

“China’s various industry crackdowns from technology to education mean monetary and fiscal policies will likely remain loose on the margin to offset the drag on economic growth, economists at Goldman Sachs... said. 

The economy is in a ‘micro takes and macro gives’ environment, where regulatory tightening in specific sectors will likely be accompanied by supportive policy from monetary and fiscal authorities, Goldman’s chief China economist Hui Shan and others wrote in a note.”

We certainly observe the dynamic at play in U.S. equities: virtually any risk is today viewed constructively, as it ensures a more protracted period of zero rates and massive QE. 

So risk is disregarded. 

Momentous changes are afoot in China, which are difficult not to regard as alarming developments. 

Yet apparently all that matters is that Beijing will maintain loose fiscal and monetary policies. 

We’ll see how long the Easy Money Anesthesia continues to work its magic. 

How America found itself fighting the last war — again

Even as political Washington points fingers over Afghanistan, many in the defence establishment are fretting about China

Peter Spiegel in New York

     © Shonagh Rae


It is the oldest and most persistent plague to infect Washington’s national security bureaucracy. 

Faced with a fresh threat, strategic planners and weapons buyers nonetheless “fight the last war” — that is, build intelligence and military capabilities to combat a threat that has already faded in its potential to do America harm. 

Twenty years after the September 11 terrorist attacks, it remains the most potent lesson of that horrific morning. 

The Pentagon and CIA were still acquiring high-end fighters for air-to-air combat against a non-existent Soviet Union and prioritising cold-war-era intelligence targets — and failed to see the “next war” coming against Islamist terrorism.

With all eyes in the capital focused on the ignominious end of America’s presence in Afghanistan, it seems an appropriate time to ask if two decades of retooling the US Army for irregular warfare and hiring scores of Arabic-language specialists in Langley has become another case of fighting the last war — and whether the US is overlooking the next threat.

If the defence establishment — military officers, civilian leaders and defence contractors — is any indication, the answer is an unequivocal yes. 

Even as Kabul falls, Washington is full of hand-wringing that China, which has spent years investing in precision long-range missiles that can target US installations in the Pacific and intelligence satellites that can track American troop movements, has stolen the march on the US in the next battlefield.

“China is very different from the threat of the past 20 years,” one senior military officer involved in weapons development told me. 

“Either we change, or we become unprepared for China.”

But over the past 18 months, there have been signs that the national security bureaucracy is beginning to move, however belatedly, to counter the rising Chinese challenge, with a handful of bets on technologies and strategic plans aimed at gaining ground back from Beijing.

US Marine Corps commandant General David Berger has proposed ridding his storied service of all its tanks and most of its artillery batteries, as well as several large amphibious assault units — which allow Marines to “storm the beaches” but provide big targets for Chinese missiles — in exchange for the long-range missiles, unmanned reconnaissance drones and smaller-scale amphibious groups that would be needed for a geographically sprawling fight in the Pacific.

He will also redeploy assets away from the Middle East, where Marines have essentially been a second US Army, towards the Japan-based III Marine Expeditionary Force. 

Perhaps it’s no surprise that Berger commanded all Marine forces in the Pacific before becoming commandant.

The other service chief who has come to Washington after a tour in the Pacific is Air Force General Charles Brown, whose weapons acquisition team recently decided against replacing its fleet of traditional reconnaissance aircraft, called J-Stars, and to invest instead in a new command and control system intended to adapt commercial advances in technology, particularly artificial intelligence, to help commanders make quicker decisions — also with an eye on China.

“The side that wins is the side that decides the fastest,” said Brigadier General Jeffery Valenzia, the US Air Force’s most senior officer on the project. 

“It’s no longer the side who has the biggest bombs or the most bullets.”

Two decades of investment in drones, satellites and advanced radars have left the US military with an endless number of sensors to track enemies, but no way to pull together that information into a single view of a battlespace in real time, one that can include weapons at the ready to quickly attack a threat. 

What is needed is a “militarised internet of things”, in the words of one former Pentagon official. 

Elements of the new command and control system are being rolled out every four months in a way that mimics Silicon Valley software patches. 

A few months ago, an upgrade allowed a cold-war-era tank to network with a satellite-based radar to shoot down a cruise missile, a highly evasive weapon that normally can only be stopped by specialised missile defence.

But the Pentagon bureaucracy and overseers on Capitol Hill have been resistant to both Berger and Brown’s initiatives. 

Some of Berger’s missile batteries were cut by Congress, which ordered more helicopters instead. 

And the Air Force’s new advanced battle management system has struggled for backing because it does not fit into the procurement world’s traditional performance checklists. 

Earlier this month, the US Navy’s top officer, Admiral Michael Gilday, lit into defence contractors at a major industry conference for lobbying Congress to “build the ships that you want to build” and “buy aircraft we don’t need” rather than adapt to systems needed to counter China. 

“It’s not the ’90s any more,” Gilday railed, saying he needed the rest of the military-industrial complex to understand “the sense of urgency that we feel every day against China . . . in a bureaucracy that is really not designed to move very fast”.

Will Roper, a former top Air Force official who championed the new command and control system, said the Pentagon seems addicted to “innovation tourism”, where officials order up a demonstration of an advanced capability — and then let it sit on a shelf. 

“You do the demonstration and no one calls you back,” said Roper, now the chief executive of a tech start-up that suffered that exact fate.

“The Pentagon pukes on agility,” added Roper, who worries that innovations aimed at countering China will continue to struggle against financial and bureaucratic interests wedded to “last war” deployments and programmes. 

“It is a heroic departure from the acquisition system that is losing against China. 

It is more in jeopardy because of us than because of our enemy.”


Peter Spiegel is the FT’s US managing editor

The Taliban and the Dollar

In the half-century since US President Richard Nixon closed the curtain on the Bretton Woods system, the US dollar has been the dominant global currency, largely because there were no other aspirants to the throne. Nonetheless, recent events have reminded us that conditions can change both gradually and suddenly.

Jim O'Neill


LONDON – This month marks the 50th anniversary of the end the Bretton Woods system, when US President Richard Nixon suspended the US dollar’s convertibility into gold and allowed it to float. 

We are also approaching the 20th anniversary of the Taliban’s removal from power in Afghanistan at the hands of US-led coalition forces. 

Now that the Taliban has again prevailed, we should consider whether its victory over the world’s most powerful military and largest economy will have any implications for the dollar and its role in the world.

Looking back over the 50 years since Nixon closed the gold window (39 of which I spent being professionally engaged in financial markets), the biggest takeaway is that the floating-exchange-rate system, and the dollar’s dominant role in it, has turned out to be more robust than initially expected. 

Even knowing what we know now about the evolution of the world economy, most experts would have doubted that the system could survive for as long as it has.

Given this resilience, it is tempting to dismiss America’s failure in Afghanistan as inconsequential for the dollar. 

After all, the greenback weathered the fall of Saigon in 1975 and the debacle in Iraq following the US invasion in 2003. 

Why should this time be any different? 

Ultimately, the answer depends on one’s expectations about the evolution of the world economy and the behavior of its principal financial players, namely China and the European Union.

To understand the dollar’s prospects, consider three key reasons why the current system has persisted. 

First, most countries did not choose to have their currencies float freely against the dollar. 

Even though more countries have floated their currencies in recent decades, others have maintained fixed exchange rates, devised their own regional exchange-rate relationships, or launched a common currency – as in the case of the euro.

Second, and on a related note, the few countries that had enough economic heft to influence the global monetary system – Japan, Germany (previously West Germany), and, more recently, China – made a conscious decision not to do so. 

True, the German Deutsche Mark played a regional role from 1973 until the establishment of the European Monetary Union in 1992 and the introduction of the euro in 1999. 

But beyond that, Germany consistently took steps to keep its currency from assuming a larger global role.

Moreover, German authorities have persistently opposed the idea of pan-European bonds (notwithstanding the EU’s decision last year to launch a COVID-19 recovery fund based on mutualized debt obligations). 

Without a common budget, the euro will always be held back from competing with the dollar or playing a much bigger role in the world financial system.

As for Japan, it never showed any interest in a global role for the yen, even in the 1980s and 1990s, when it was fashionable to believe that the Japanese economy would catch up to that of the United States.

Finally, despite its frequent objections to the current global monetary system, China has long been reluctant to expand the renminbi’s footprint in financial markets – both internally and internationally. 

Instead, China has indicated occasionally that it would prefer a global monetary order centered more around the special drawing rights (SDRs), the International Monetary Fund’s reserve asset, whose value is based on a basket of five currencies (the US dollar, the euro, the renminbi, the yen, and the British pound).

This idea has some appeal, especially in terms of global fairness. 

But it would be difficult to implement in practice. 

Not only would it depend on China allowing for more free use of the renminbi; an SDR-based monetary system also would have to be embraced by the US, which is probably a non-starter – at least for now.

That brings us to the third reason why the current system has lasted: the US wanted it to. 

As we saw during Donald Trump’s presidency, the US enjoys the benefits conferred by issuing the dominant global currency, not least its potential as a tool for pursuing diplomatic and security objectives. 

The Trump administration’s use of secondary sanctions against countries that did business with Iran was a perfect example of this. 

If current or future US leaders choose to use the dollar’s dominance in a similar fashion – perhaps against countries doing business with a hostile Afghanistan – that could have a significant bearing on the currency’s future.

While the world marks the 20th anniversary of the September 11, 2001, terrorist attacks in the US, the IMF will be working on its mandated five-year review of the composition and valuation of the SDR basket. 

To the extent that the exercise increases the share allocated to renminbi, that will be taken as a sign that the world’s currency system is slowly but ineluctably evolving.

Just as China’s growing share of the global economy implies the need for a fundamental rebalancing, the renminbi’s share of the SDR basket cannot continue to grow without that increase meaning something for the future of the world financial system.


Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is Chair of Chatham House and a member of the Pan-European Commission on Health and Sustainable Development.

How the $1 Trillion Infrastructure Bill Would Impact the Economy

Jon Huntley from the Penn Wharton Budget Model speaks with Wharton Business Daily on SiriusXM about the potential impact of the $1 trillion infrastructure bill recently passed by the U.S. Senate.


The $1 trillion infrastructure bill that the U.S. Senate passed on August 10 is touted as the largest federal investment in infrastructure projects in more than decade. 

But higher government debt and its effect of crowding out private capital will undermine the impact of public investment. 

Consequently, GDP growth would be unchanged by the end of the 10-year budget window in 2031 or in the long run up to 2050, according to an analysis by the Penn Wharton Budget Model (PWBM), a nonpartisan initiative that analyzes the economic impact of public policy proposals.

The bill is a compromise over a $2.7 trillion package the Biden administration had proposed in March and a diluted version in June. 

It comprises $550 billion in new infrastructure investments on top of $450 billion in funding for existing programs. 

Its biggest allocations are for transportation, including roads ($121 billion), rail service ($66 billion), public transit ($39 billion), and airports ($25 billion). 

Other notable allocations are for power infrastructure ($73 billion), water infrastructure ($50 billion), and high-speed internet ($65 billion).

All of those investments “will be in productive assets,” PWBM’s senior economist Jon Huntley said on the Wharton Business Daily show on SiriusXM. 

Huntley conducted the PWBM study along with John Ricco, associate director of policy analysis, and Efraim Berkovich, director of computational dynamics.

Huntley noted that the bill also recognizes the importance of investing in increasing access to digital assets with its allocation for high-speed internet, and in clean energy with an allocation for electric vehicle infrastructure such as charging stations and electric buses ($15 billion). 

With those allocations, this bill reflects the priorities for both Republican and Democratic senators, and the administration, he added. 

Its passage in the Senate by a 69-30 vote was “uncommonly bipartisan,” as The New York Times noted. 

The bill will go next to the House of Representatives.

“[The latest] version of the bill uses more deficit financing, and this offsets the positive effects from infrastructure investment.”–Jon Huntley

Missed Gains

But the way those investments are proposed to be financed will erode some of the gains they could have potentially generated, according to Huntley. 

“[The latest] version of the bill uses more deficit financing, and this offsets the positive effects from infrastructure investment a little bit more than it did in the June bill,” he said. 

“The positive effects on GDP are a little bit smaller now. 

They’re closer to zero than they were before.” 

Overall, GDP does not change in 2031, 2040, or 2050, PWBM concluded.

According to PWBM’s analysis, the June version would have increased government debt by 0.4% between now and 2031, but progressively reduced it by 0.9% before 2050. 

But in the latest bill, government debt would grow by 1.3% by 2031 and 0.6% by 2050. 

Under the March plan, government debt would have increased by 1.7% by 2031 but fall by 6.4% by 2050, according to PWBM projections.

A PWBM explainer on infrastructure investment captured how such investments boost the productivity of private capital and labor. 

For example, it noted that improved transportation allows private firms to get their goods to market at a lower cost, which raises both the value of the firm’s capital to private investors as well as the value of the labor that they employ.

“Even with current government borrowing rates being at historical low values, higher government debt mitigates the positive impact of public investment, as U.S. and international savings are diverted from private capital investment toward public debt,” PWBM said in its latest analysis. 

“The additional public capital makes workers more productive, but this is offset by the decline in private capital, which makes workers less productive,” it noted. 

“Overall, workers’ productivity is unchanged, which is reflected in wages that do not change in 2040 and 2050.”

Revenue Downers

According to PWBM’s analysis, the bill will be funded by $132 billion in new tax provisions and $351 billion in new deficits. 

The spending allocations are mostly unchanged between the June version and the latest bill; most of the changes in the latest version are on the revenue side, Huntley noted. 

The June version had envisaged higher tax revenues from increased IRS enforcement with audits and investigations ($100 billion), but that has been replaced by other provisions that are expected to bring in much less revenue, such as increased cryptocurrency reporting requirements ($28 billion) and fees on government-sponsored enterprises ($21 billion).

Much of the bill’s provisions will be paid for with additional borrowing, Huntley continued. 

“They’re taking money that would have [otherwise] been returned to the U.S. Treasury, either through spectrum auctions ($87 billion) or unused COVID funds ($205 billion) and applying those to pay for this bill.”

Among the new revenue sources the bill has identified is the sale of oil from the Strategic Petroleum Reserve in the private market ($6 billion). 

It helps that “oil prices are pretty reasonable these days,” Huntley said. 

But that will be only a “temporary windfall,” since the government would have to buy back that oil later to replenish the stockpile, he pointed out.

Growth Effects

The bill also identifies $56 billion in revenues from “dynamic scoring,” which captures the total fiscal impact of policy changes, including secondary economic effects. 

Huntley explained how that happens: “When we create new public infrastructure, we create additional economic activity. 

Public infrastructure raises people’s wages. 

It raises the returns to capital. 

It makes people more productive, and that’s reflected in higher GDP.”

The bill’s impact on GDP growth is “closer to zero” because it has not identified as many new sources of revenue as in earlier versions, Huntley said. 

But some elements of the bill will not be easily captured in GDP calculations, such as the health benefits that will accrue from investments in water infrastructure, he added.

The overall upshot from analyzing the bill is that the outcomes of investments depend on how they are financed, Huntley noted. 

“The choice of the revenues that you use to build out [infrastructure] has additional economic effects [beyond those] from public infrastructure. 

And certain types of taxes may be more or less efficient than the sources of financing that they’ve settled on.”