If you recall, fiscal and monetary policies employed to counter the effects of government mandated lockdowns were supposed to stimulate a self-sustaining economic boom. Instead, these policies of extreme intervention have stimulated chaos and destruction.
The official inflation rate, as measured by the government’s consumer price index (CPI), is rising at an annualized clip of 5.4 percent. But that’s nothing. Alternative inflation rates, which better reflect what consumers are actually experiencing, are double and triple the official CPI.
At the same time, the economy appears to be slowing down…
According to the Atlanta Fed’s GDPNow forecasting model, as of October 19, real gross domestic product (GDP) growth in the third quarter of 2021 is estimated to be just 0.5 percent. This is down from 1.2 percent on October 15, 6 percent in late August, and 14 percent in May.
At this rate, by the next GDPNow update, which is scheduled for October 27, growth estimates could be negative. And if you factor in the inflation adjusted growth rate, the economy’s already shrinking at a rate of 4.9 percent per year. In other words, the U.S. economy’s in an inflationary recession.
How could that be?
The occurrence of simultaneously rising inflation and declining growth is an unnatural manifestation. In fact, we’d posit that such an occurrence would be naturally impossible if there were balanced budgets and a stable money supply. Thus, attaining the misery of stagflation is the result of massively excessive fiscal deficits and monetary stimulus.
And now, with the misery now bearing down upon us, fiscal and monetary policies are becoming grossly disjointed. The Democrats in Congress want to burp a $2.2 trillion – down from $3.5 trillion – social spending bill into the economy in the face of rising inflation. At the same time, the Federal Reserve wants to taper back its asset purchases as the economy is slowing.
In effect, fiscal and monetary policy will soon be working against each other. Namely, they’ll be promoting rising inflation and slower growth. What to make of it…
No Free Lunch
The era of stimmy checks and cheap consumer goods was fun while it lasted. Like a hot lunch, it always tastes better when free. The smell is more aromatic. The bites are more flavorful. Most of all, the belly leaves the table more contented.
But is a free lunch ever really free?
“It is an immutable economic fact,” said WWI Brigadier General Leonard P. Ayres many years ago, “that there is no such thing as a free lunch.” With that brief statement Ayres crystalized one of the world’s essential axioms. Like gravity or the golden rule, you can’t refute it.
Fred Brooks, the man who changed the IBM 360 series from a 6-bit to an 8-bit byte, thus allowing the use of lowercase letters, elaborated the idea when he said, “You can only get something for nothing if you have previously gotten nothing for something.”
Similarly, if one person or group gets something at no cost, someone else must pick up the tab. This, in short, is why fiscal and monetary stimulus are such a massive sham.
Wealthy asset owners get a boost to their stock portfolios and property holdings. Wage earners get scraps. The unemployed get stimmy checks. Everyone pays for it through rising prices and a skyrocketing debt burden. Future generations get screwed.
One group of people get a free lunch off the backs of another. The rich and the poor get something for nothing. The lowly wage earner gets nothing for something.
Certainly, all entitlement programs are doomed for this reason. There’s no way around it…there are no free lunches. But this simple fact doesn’t stop policy makers from promising them anyway. For promising something for nothing is good politics.
Just this week, for instance, the monetary policy virtuosos at the Federal Reserve told the world they’d keep giving them something for nothing…but not quite as much as before. Here’s Fed Governor Christopher Waller…
“While there is still room to improved on the unemployment leg of our mandate, I believe we have made enough progress such that tapering of our asset purchases should commence following our next FOMC meeting, which is in two weeks.”
Walking the Path of Self Destruction
If you recall the Fed has been creating credit from thin air to buy $120 billion a month of U.S. Treasuries and mortgage-backed securities since early 2020. These purchases have held interest rates artificially low and supplied free lunches in the form of low borrowing costs. Consequently, government debt and housing prices have soared to unbelievable heights.
Who knows how much the Fed will initially taper? We suppose we’ll find out following the next FOMC meeting. But suppose the Fed starts by tapering back asset purchases by 20 percent. What would this mean?
The tapering of asset purchases from $120 billion to $96 billion a month is like a cigarette smoker cutting back from 40 to 32 cigarettes a day. The tapering’s really of no significance. The Federal Reserve, like the smoker, has signed its death certificate regardless.
Until the Fed eliminates asset purchases and starts reducing its balance sheet, its policies are still inflationary. Until the Fed meaningfully raises the federal funds rate, it isn’t serious about getting its monetary policy house in order.
As a result of its asset purchase program, the Fed’s balance sheet has exploded to over $8.4 trillion. Just 15-years ago, the Fed’s balance sheet was about $800 billion.
Moreover, the Fed created this $8.4 trillion out of thin air. In other words, it created something from nothing on a grand scale.
Who pays for this?
By the law of the no free lunch axiom, we must get nothing for something to balance out the Fed’s money games. That’s how you get something for nothing. What we mean is, we’ll all pay for it in the end.
We’ll pay with our time. We’ll pay with our talents. We’ll pay with our soul. We’ll work for a diminishing standard of living.
The havoc to be wreaked will also show up in seemingly unrelated places. Rising food prices in northern Africa – with the help of the CIA – could prompt another coup. Wage inflation could pop up in China, derailing its economic miracle and causing mass civil discontent. Here in the U.S. the dollar could plummet on the world currency market…sending everything to hell in a hand bucket.
There are dramatic consequences for pursuing something for nothing. To get it, you must walk the path of self-destruction. This is the path the central planners have paved. Avoiding it as best you can will be the ultimate challenge.
for Economic Prism