Legislative actions often become needlessly complicated, largely due to a lack of genuine governance in the process.
The straightforward method to create a buffer between the national debt and the debt ceiling is to generate a budget surplus and utilize the surplus to reduce the debt. However, political dynamics currently make this a difficult proposition.
Unless a significant change occurs, the Senate is poised to pass the debt ceiling bill soon. By the time you read this, it may have already been enacted. Are you pleased?
You shouldn’t be. If you value a limited government, increased freedom and autonomy, and a prosperous future for your children and grandchildren, raising the debt ceiling is a direct challenge to these principles.
Regrettably, the majority of Americans seem indifferent to the increase in the debt ceiling. They are preoccupied with accumulating their own consumer debt and are largely unconcerned with Washington’s actions. Consequently, when they exhaust their funds and max out their credit cards, they turn to borrowing more—believing that tomorrow will bring relief.
There is no denying that U.S. consumers are overwhelmed with debt. Recent data from the New York Federal Reserve indicates that total household debt has surpassed $17 trillion for the first time.
Of this amount, $12.04 trillion is attributed to mortgage debt, followed by $1.60 trillion in student loans, $1.56 trillion in auto loans, and around $1 trillion in credit card debt. Other debts account for $510 billion, while home equity lines of credit total $340 billion.
This $17 trillion milestone has been reached during a time when the personal savings rate is a mere 4.6 percent, significantly lower than the 8.9 percent average over the past decade. What is driving this trend?
Are Americans simply trying to keep up with their neighbors or struggling to cover basic bills? Or is there a deeper psychological shift at play?
Currency Destruction
Americans have experienced the highest levels of consumer price inflation in 40 years. Are they spending their money with the intention of getting rid of it before it loses even more value?
Currently, it seems that the American mindset hasn’t deteriorated to that extent. Instead, consumers may be spending their savings and incurring debt to uphold their inflated living standards.
However, further mismanagement of Federal Reserve monetary policy might push individuals to accelerate their spending. The economic conditions could soon compel Fed Chair Powell to make unwise decisions.
For instance, by the end of this year, it’s probable that the reported gross domestic product (GDP) will show contractions for two consecutive quarters. Politicians prefer not to enter an election year with an economy in recession.
In late fall, figures like Elizabeth Warren and Bernie Sanders will likely demand intervention from the Fed, urging a reduction in interest rates and the purchase of Treasury bonds.
But what if the consumer price index still exceeds 4 percent, double the Fed’s target rate? Will the Fed bend to political pressure?
If so, could this lead to another wave of intense consumer price inflation? Would consumers start to rush to offload their dollars?
These are the troubling questions that arise in a landscape dominated by fiat currency and politicized monetary policy.
In the meantime, American consumers find themselves deeply entrenched in debt. The way out is through saving money and paying down what they owe.
Yet, high consumer prices complicate this process. Moreover, there is little reason to save funds in a currency that is in the process of being devalued.
Price Deflation
It’s important to remember that encouraging consumer spending by debasing the currency has been the underlying goal of monetary policy all along. To policymakers, saving money is seen as detrimental to economic growth.
They believe that saving translates to reduced spending, which could lead to deflation in an economy where consumer expenditures represent over 70 percent of GDP.
Deflation implies a general decline in prices. Unlike inflation, deflation empowers consumers to acquire more goods or services in the future with the same funds they hold today. Astute consumers may choose to postpone purchases, anticipating they can buy more for less down the line.
For instance, if you’re considering buying a new car, now may be an optimal time to wait. A recent report from UBS indicates that over 5 million vehicles will need price reductions before a sale.
In the context of deflation, reduced spending results in decreased earnings for businesses and producers. This leads to less production, layoffs, increased unemployment, and a contraction in GDP.
However, the most significant harm from deflation affects businesses and individuals that are leveraged. As asset prices, profits, and incomes decline, servicing existing debt becomes increasingly challenging. Ultimately, this can result in widespread bankruptcies.
This situation is concerning for lenders and bankers, potentially pushing them toward insolvency. In the end, it could precipitate a financial crisis, a breakdown in the credit market, and an economic recession or depression.
On the Importance of Deflation and Depressions
These scenarios may sound dire—and they are. However, it doesn’t imply that deflation should simply be disregarded or avoided.
Deflation and depressions, much like colon polyps, are natural occurrences that must be confronted with dignity and resolve.
Moreover, following an era marked by significant government-induced inflation, both deflation and economic depression are essential to restore equilibrium among prices, incomes, supply and demand, wants, and needs.
Constantly trying to avert deflation and depressions through excessive credit and mounting debt has constructed an unsustainable economy for hardworking families, effectively decimating the middle class.
Politicians may fear deflation, as it heightens the risk of losing their comfortable positions. Nevertheless, nearly every family could benefit from some relief on their grocery bills—relief that is more effectively provided through deflation than by issuing an increasing number of EBT cards.
Likewise, after years of soaring asset prices, first-time home buyers would gain from a decrease in housing prices. Homes would become more affordable, allowing for greater savings, investments, and wealth accumulation.
It’s challenging to get ahead when a large portion of your after-tax income is directed toward mortgage payments. Deflation could enable many to escape this cycle—bringing back the luxury of affordable treats.
The crux of the matter is that policymakers have fundamentally misunderstood the situation. Boosting GDP through increased spending does not equate to heightened societal wealth. Instead, it cultivates inflation, price distortions, oversupply, wealth gaps, and over-indebted consumers and enterprises.
Real wealth—whether for individuals, businesses, or the economy as a whole—stems from capital formation. This begins with spending less than what you earn and saving the difference.
These savings can then be funneled into new enterprises or existing profit-generating ventures, which is the true pathway to wealth creation.
Admittedly, a phase of deflation would result in many decent individuals losing their jobs. No one welcomes this change. Yet, over time, it would allow people the freedom to pursue more meaningful endeavors.
In conclusion, achieving price deflation and experiencing an economic depression could be vital for realigning the economy—a prerequisite for enabling individuals to focus on enhancing their lives through gradual capital formation. This is achievable as long as there is a stable currency, political freedom, and the discipline to follow through.
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Sincerely,
MN Gordon
for Economic Prism
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