Of all modern economic dogmas, the one held dearest by the ruling elite is the belief government can spend the economy to growth using debt. Certainly, government spending redirects economic growth to government preferred industries.
But government stimulus doesn’t grow the economy. How could it? Aside from stacks of legislation, levies, and fees, government doesn’t produce a doggone thing.
To the contrary, government usurps capital and uses it in ways businesses and individuals otherwise wouldn’t. Specifically, the government uses its heavy hand to distribute capital to places that, absent coercion, people wouldn’t pay for. These generally equate to value subtracting endeavors – like bullet trains in California’s Central Valley at a price tag of $105 billion and growing.
The great government giveaway that was executed by the Federal Reserve and the U.S. Treasury to somehow counteract the economic consequences of mandatory lockdown orders has come with its own consequences. Namely, the printing press financed stimulus has propelled consumer price inflation to a 40 year high.
The mechanics of the giveaways were rather crude. If you recall, starting in March 2020, the Treasury issued $3 trillion of new debt. This new debt was bought by the Federal Reserve using $3 trillion of new reserves that were created from thin air. This printing press money was then sent by the Treasury via stimmy checks to people and businesses.
The process was then repeated to the tune of another $2 trillion in printing press money. The U.S. national debt rose over 30 percent in less than 24 months and now tops $30 trillion. Should it be a shocker that inflation’s raging out of control?
It was for the Fed. The central bank’s models and charts missed it. But if it had expanded its parameters ever so slightly, even Fed Chair Jay Powell would have seen what was coming…
The difference between the 2008-09 bailout of Wall Street via AIG and the 2020-21 lockdown giveaway is that in 2020-21 the stimulus was not just monetary. Rather, it was also fiscal.
This is an important distinction. Whereas monetary stimulus is what’s responsible for stock and real estate price inflation. Fiscal stimulus is what’s responsible for consumer price inflation.
Thus, consumer price inflation will not be tamed with just a monetary policy response from the Fed. Higher interest rates. Balance sheet tapering. These may crush financial markets and drag the economy down. But they won’t slow consumer price inflation.
To slow consumer price inflation, Washington will have to do something it’s largely been incapable of doing for over 100 years. It will have to maintain fiscal discipline through austerity measures and balanced budgets. It will have to make major reforms to entitlement programs and tax policy.
Otherwise, price inflation will continue its insidious process of destroying lives and livelihoods with exacting precision.
Yet Washington’s not politically capable of getting its fiscal house in order. Congress prefers the expedient. Members of Congress want the Fed to rein in inflation by tightening the money supply. They have no clue as to what’s going on and why higher interest rates are not the proper solution to consumer price inflation.
Indeed, Fed interest rate hikes can play a supporting role to taming consumer price inflation. But the primary response must be fiscal.
When it comes down to it the clowns in Congress have no clue of the grave damage their shortsighted panic policies have caused. Nor do they understand how much pain the populace will have to endure to overcome them.
For these reasons, and others, consumer price inflation will continue to rage. What’s more, this is all coming down the turnpike at the worst possible time. Here’s why…
Would Putin Have Attacked if Oil was $50 per Barrel?
Mass consumer price Inflation does not occur in fundamentally sound and healthy economies. It does not occur in countries where governments operate responsibly, with a light touch and balanced budgets.
To the contrary, inflation comes to countries that are in fiscal trouble, with high debt levels and liabilities that are impossible to pay without debauching the currency. In short, inflation comes to countries that invite it through massive amounts of printing press financed government spending.
The U.S. debt to GDP ratio is currently about 125 percent. This is above the prior all-time high debt to GDP ratio of 119 percent that was reached at the end of WWII.
Wars – real life and death hot wars – are not times for fiscal restraint. Money must be pumped into the war effort at all costs. Hence, it is understandable the debt to GDP ratio blew out during WWII.
After the war, however, the debt to GDP ratio was brought down to just 31 percent in 1981. Then, from this low inflection point, the ratio progressively increased to about 125 percent today. And for no good reason.
The U.S. debt to GDP ratio has blown out over the last 40 years combating perceived monsters with government printing press money. Poverty. Drugs. Terror. Unemployment. Recessions. Bear markets. Viral microbes.
The solutions always the same. Run up the deficit, and finance it with printing press money. And for these efforts, Washington succeeded at making an utter mess of things.
Do you care about what’s happening in Ukraine or what soon may happen in Taiwan? Should you?
The U.S. government, through decades of waste and self-destructive policies, has put the nation in a position of weakness.
Would Vladimir Putin have attacked if oil was below $50 per barrel?
Who knows? But if he had, he would have done so without the extreme leverage he holds over Europe in the midst of a cold winter.
At this point, Biden says U.S. forces will not fight in Ukraine. Maybe this will change. Maybe not.
But regardless, Washington’s already shot off its fiscal wad…and it did so for no good reason.
Putin has leverage. There’s no way the U.S. can fight a real war and contain inflation at the same time…
…and big bad Vlad – Pootie Poot – Putin knows it. Winnie the Pooh knows it too.
[Editor’s note: With clowns like Biden – and America’s insane foreign policy leaders – running point the prospects for something crazy happening are more likely than most people care to recognize. Certainly, positioning some chips to exploit this scenario is a sensible move. Recently, paid up Wealth Prism Letter subscribers discover exactly how. But it’s not too late. If you’d like to exploit this opportunity too, take action and subscribe today!]
for Economic Prism