Perpetual Motion Machine Finance

Simple answers are not always correct answers.  However, simple answers are often accepted as correct when people are too lazy or distracted to bother to know any better.

Mundis vult decipi, ergo decipiatur.  The world wants to be deceived, so let it be deceived.

President Biden – a conniving politician – is fond of blaming corporate greed for rising prices.  This has proved to be a simple and effective answer for why consumer prices are so high.

In one simple statement he shifts the focus away from the government’s failed policies.  In doing so, he also points to a boogeyman which the broad populace can direct its anger toward.

Biden’s logic is simple.  Prices are increasing; therefore, corporations are greedy.  But if corporations are greedy because prices are rising, isn’t the government also greedy because prices are rising?

Specifically, if corporations are increasing prices because they are greedy, does that mean the U.S. Postal Service (USPS) is also greedy?

When the forever stamp was rolled out in 2007, it could be purchased for just 41 cents.  In January of this year, the price of a forever stamp increased from 66 cents to 68 cents.  This amounted to a 3 percent increase and a 66 percent increase from the original price.

Still, a price of 68 cents per forever stamp hasn’t been cutting it for the USPS.  In fact, the USPS intends to raise the price of a forever stamp an additional 5 cents, to 73 cents on July 14, 2024.

That will bump the cost up 10.6 percent just this year alone, and a combined 78 percent since the forever stamp was introduced 17 years ago.  What gives?  Is the USPS greedy, or something?

The Inflation Tax

If the USPS was a private company, it would have shuttered its doors decades ago.  Presently, the USPS is operating at a massive loss.  It reported a $6.5 billion loss for fiscal year 2023, and it is projecting a $6.3 billion loss in 2024.  But with Uncle Sam and your taxpayer dollars backing it, the USPS will continue to operate at a loss forever.

These losses, of course, are made up for with government deficits.  And deficit spending, which borrows consumption from the future into the present, is inflationary.  Thus, the USPS is guaranteeing that the cost of forever stamps and other consumer goods will continue to rise and rise.

According to Biden, this is because corporations – and by his logic, the USPS – are greedy.  But is this the correct answer?

A more discerning answer is that money is losing its value.  Why?  Because the value of money is being systematically destroyed to finance government spending which is completely out of control.

For the first six months of the 2024 fiscal year, the U.S. Treasury reported a deficit of $1.065 trillion.  At this rate, the 2024 fiscal year deficit will easily top $2 trillion.  All this excess spending is massively inflationary.

Perhaps some of the USPS’s price hikes are due to government incompetence.  Still, that incompetence was going on long before 2007, when the forever stamp was first introduced.  Hence, the price increases are primarily due to the government’s debasement of the dollar.

A 78 percent price increase over just 17 years implies about a 44 percent loss of dollar purchasing power.  In other words, when using forever stamps as the inflation gauge, it takes $1 today to buy what 56 cents could buy in 2007.

This is but one of many examples of how your hard-earned savings are being stolen through the government’s inflation tax.

The Burden of Debt

Massive amounts of government deficit spending over the last 25 years have amassed into a mega $34.6 trillion national debt.  Moreover, all this deficit spending, in combination with easy money policies from the Federal Reserve, brought on rising consumer price inflation – including rising forever stamp prices.

Over this period, as the debts piled up, they did so in an environment of ever decreasing interest rates.  So, as more and more debt was added, the cost of servicing it went down.  This signaled a false perception that the gigantic pile of debt was sustainable.

Interest rates bottomed out at an all-time low in July 2020, with the yield on the 10-Year Treasury note at just 0.62 percent.  Since then, along with consumer price inflation, interest rates have gone up in earnest.

Currently, the prospect of higher inflation is driving interest rates up, as debt investors demand a higher yield to protect the value of their principal.  Year-to-date the yield on the 10-Year Treasury note has jumped from 3.93 percent to 4.64 percent.  And these higher interest rates are making the financing burden of government debt increasingly expensive.

Over the first six months of the 2024 fiscal year, while the U.S. government was racking up a $1.065 trillion deficit, the U.S. Treasury paid $429 billion in net interest.  That amounts to over 40 percent of the deficit.  Over this time, spending on national defense was $433 billion.

By comparison, over the first six months of the 2023 fiscal year, net interest on the debt was $300 billion, while national defense was $407 billion.  Between FY2023 and FY2024, net interest, as a slice of the government’s overall spending pie, dramatically increased.

Perpetual Motion Machine Finance

In the years ahead, net interest on the debt will continue to grow and consume more and more of the government’s budget.  And the government will finance it with more and more debt.

Using debt to pay the interest on debt, like some sort of perpetual motion machine, is a dead-end street.  Yet this is precisely the direction Washington is taking America’s finances.  And no one in Congress can stop it.

The U.S. Treasury is preparing to sell roughly $386 billion of bonds in May.  This is on top of the $7.2 trillion of debt the U.S. Treasury sold during the first three months of 2024, the largest quarterly total on record.  This is also on top of the “record $23 trillion of Treasuries issued last year, which raised $2.4 trillion of cash, after accounting for maturing bonds.”

According to Torsten Slok, chief economist at Apollo Global Management, a record $8.9 trillion of Treasuries are set to mature in 2024.  Of note, the financing costs – the interest rates – are about seven times higher today than they were just four short years ago.  This is why net interest on the debt will quickly surpass $1 trillion per year.

Fed Chair Powell had intended to help manage all the government’s debt refinancing by cutting interest rates.  Persistent inflation, courtesy of the Fed and Washington, ruined those plans.  Even the BLS’ doctored CPI report cannot fully conceal rising consumer prices – and the rising cost of forever stamps.

This week, at a Q&A session in Washington, Powell lowered expectations of forthcoming rate cuts, stating the Fed would leave rates at their current level “as long as needed” to bring inflation down.

Are you prepared for a long wait?

When the federal government borrows and spends $2 trillion a year more than it collects in taxes, cutting rates is not an option.  Stock market investors finally appear to be grasping this.

[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth.  And right now, at this very moment, I’m preparing to make a contrary decision once again.  >> And I’d like to show you how you can too.]

Sincerely,

MN Gordon
for Economic Prism

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