While simple explanations may be appealing, they are not always accurate. Often, they are embraced out of convenience or distraction, leading to a general acceptance of misinformation.
Mundis vult decipi, ergo decipiatur. The world prefers to be deceived, so let it be deceived.
President Biden, a shrewd politician, frequently attributes rising prices to corporate greed. This simple narrative effectively diverts attention from the government’s flawed policies and provides a convenient scapegoat for the public’s frustration.
Biden’s reasoning is straightforward: prices are rising, hence corporations must be greedy. But if corporate greed is the reason behind rising prices, doesn’t that make the government guilty of the same charge?
For instance, if corporations are jacking up prices due to greed, should we consider the U.S. Postal Service (USPS) equally greedy?
When the forever stamp was introduced in 2007, it was priced at just 41 cents. As of January this year, the cost increased from 66 cents to 68 cents—a 3 percent rise and an astounding 66 percent increase from its original price.
Yet, even this 68-cent stamp is insufficient for the USPS. The agency plans to raise the price further to 73 cents on July 14, 2024, representing a 10.6 percent hike for this year alone and a staggering 78 percent since its launch 17 years ago. What’s going on here? Is the USPS driven by greed, too?
The Inflation Tax
If the USPS were a private enterprise, it likely would have ceased operations long ago. Currently, it’s running at significant losses, reporting a $6.5 billion deficit for the fiscal year 2023, and expects a further $6.3 billion loss in 2024. Thanks to government support backed by taxpayer funds, USPS will continue operating at a loss indefinitely.
These losses are offset by government deficits. Borrowing from future consumption to cover present expenses is inherently inflationary, ensuring that the prices of forever stamps and other consumer goods will keep climbing.
Biden attributes this inflationary trend to corporate greed and, by extension, to the USPS. But is that the whole story?
A deeper analysis shows that the value of money is deteriorating. Why? Because excessive government spending is systematically eroding its value.
In the first six months of fiscal year 2024, the U.S. Treasury reported a deficit of $1.065 trillion. If this trend continues, the deficit for the entire year may surpass $2 trillion. Such lavish spending is profoundly inflationary.
While some USPS price hikes may indeed stem from bureaucratic incompetence, this issue began long before the forever stamp’s launch in 2007. Therefore, the primary reason for these price increases can largely be attributed to the government’s devaluation of the dollar.
A 78 percent increase over 17 years correlates to roughly a 44 percent reduction in dollar purchasing power. To put it differently, what you could buy for $1 today would only cost about 56 cents back in 2007 if gauged by forever stamps.
This example highlights how government-induced inflation is stealthily diminishing your hard-earned savings through an inflation tax.
The Burden of Debt
Over the last 25 years, rampant government deficit spending has contributed to a staggering $34.6 trillion national debt. Coupled with easy money policies from the Federal Reserve, this spending has driven up consumer prices, including the costs associated with forever stamps.
During this time, as debts have accrued, they have done so in an environment of declining interest rates. Therefore, as more debt has piled up, the cost of servicing that debt has decreased, creating a false sense of sustainability regarding this monumental debt.
Interest rates hit an all-time low in July 2020, with the yield on the 10-Year Treasury note dropping to a mere 0.62 percent. However, as consumer prices have risen, interest rates are climbing once more.
At present, expectations of higher inflation are driving interest rates upward, prompting investors to demand greater yields to compensate for potential erosion of their investments. Year-to-date, yields on the 10-Year Treasury note have risen from 3.93 percent to 4.64 percent, increasing the cost of servicing government debt.
In the first half of fiscal year 2024, while the federal government faced a $1.065 trillion deficit, it paid $429 billion in net interest, accounting for over 40 percent of that deficit. Notably, spending on national defense during this same period was $433 billion.
In comparison, during the first six months of fiscal year 2023, net interest amounted to $300 billion as opposed to $407 billion spent on national defense. Between these two fiscal years, net interest as a percentage of overall government spending saw a significant increase.
Perpetual Motion Machine Finance
In the coming years, net interest on the debt is projected to escalate and consume a growing portion of the government budget. The administration will inevitably finance this by accruing even more debt.
The practice of using debt to cover interest payments on existing debt resembles a perpetual motion machine—a futile cycle. Sadly, this describes the current trajectory of America’s financial future, one no member of Congress seems capable of altering.
The U.S. Treasury is gearing up to issue approximately $386 billion in bonds this May, in addition to the record $7.2 trillion of debt sold in the first quarter of 2024. This follows a staggering “record $23 trillion of Treasuries issued last year, raising $2.4 trillion in cash after maturing bonds were accounted for.”
According to Torsten Slok, chief economist at Apollo Global Management, a historic $8.9 trillion of Treasuries are set to mature in 2024. It’s worth noting that financing costs—interest rates—are now about seven times higher than they were just four years ago. This trend will likely push net interest on the debt past $1 trillion annually in the near future.
Fed Chair Powell had hoped to alleviate the burden of government debt refinancing by lowering interest rates, but persistent inflation, fueled by both the Fed and Washington, nullified those plans. Even the Bureau of Labor Statistics’ adjusted CPI report struggles to mask the ongoing rise in consumer prices—and the climbing costs of forever stamps.
This week, during a question-and-answer session in Washington, Powell tempered expectations regarding imminent rate cuts, indicating the Fed will maintain rates at their current levels “as long as needed” to combat inflation.
Are you prepared for a prolonged wait?
When the federal government continues to borrow and spend $2 trillion more annually than it collects in taxes, lowering rates simply isn’t an option. Stock market investors seem to finally be awakening to this reality.
[Editor’s note: It’s remarkable how a few contrary decisions can lead to life-altering wealth. I’m currently preparing to make yet another contrary decision, and >> I’d like to share how you can do the same.]
Sincerely,
MN Gordon
for Economic Prism
Return from Perpetual Motion Machine Finance to Economic Prism
