In the realm of Murphy’s Law, the notion that “Anything that can go wrong, will—at the worst possible moment” finds its corollary in Finagle’s Law, suggesting that “The perversity of the Universe tends towards a maximum.” This concept has profound implications, particularly when examining the perverse outcomes of central planning within our economy.
This trend has been unfolding for over a century, initiated by the establishment of the Federal Reserve and the federal income tax in 1913. However, our focus today will be on the last decade, which provides a clear illustration of these principles in action.
For instance, on June 1, 2009, General Motors filed for Chapter 11 bankruptcy protection, marking the fourth-largest bankruptcy in U.S. history. Rather than disappearing, GM was effectively nationalized, with the government acquiring a 60 percent stake following a $50 billion taxpayer-funded bailout. President Obama remarked:
“We are acting as reluctant shareholders because that is the only way to help GM succeed.”
In essence, we must dismantle capitalism in order to salvage it.
In reality, genuine free market capitalism had already begun its decline long before the GM bailout. Nevertheless, this event represented a pivotal moment in America’s shift towards a more centrally planned economy—an evolution that has had significant consequences over the past decade.
Coincidentally, June 1, 2009 also marked the beginning of an unprecedented economic expansion. Now at 121 months, this period stands as the longest uninterrupted growth cycle since World War II.
But what does this expansion really signify? Shouldn’t the wealth generated during economic growth be benefitting everyone? Typically, such waves of prosperity elevate all sectors. However, over the last decade, only the upper echelons of society have enjoyed the benefits of this surge in cheap credit, while the majority have struggled under its weight.
A Big Fat Goose Egg
For the average worker, the last ten years have rendered the workplace increasingly intolerable. Despite claims of low unemployment, employees often find themselves juggling multiple roles, all while their wages remain stagnant.
Job security has nearly vanished, and connectivity via email and smartphones means that the workday has no definitive end. Job demands intrude on personal lives, following workers home and disrupting family time. The barrage of calls, emails, and texts has created an expectation of constant availability.
This longest economic expansion in modern U.S. history has ultimately left many feeling that their efforts have resulted in little more than a “big fat goose egg.” Years of extreme fiscal intervention, characterized by heavy deficits and aggressive monetary policy, have largely benefited only a select few, while the rest have little to show for their labor.
Central planning initiatives, such as the GM bailout and the financial rescue of large banks through AIG, are precisely the actions that led us into this predicament. Yet, despite their past failures, decision-makers in Washington—including the President, the Federal Reserve, and the Treasury—remain committed to perpetuating this hollow expansion with more of the same misguided strategies. The alternative—allowing a cascade of debt to bury us—is simply too daunting.
In recent weeks, the Federal Reserve has indicated a forthcoming rate cut at the FOMC meeting scheduled for July 30-31. Financial markets have eagerly anticipated this move, further illustrating the irrationality dominating current market conditions.
Unlike the last rate-cutting cycle in September 2007, where the federal funds rate was 5.25 percent and the Fed’s balance sheet stood at $900 billion, the Fed is currently easing from an already ultra-accommodative stance. Despite zero interest rates and quantitative easing, the S&P 500 lost half its value during that prior period.
Today, the federal funds rate hovers around 2.5 percent, while the Fed’s balance sheet has ballooned to approximately $3.8 trillion. As we approach a new recession, the Fed possesses considerably less leverage. Future quantitative easing measures could inflate the Fed’s balance sheet to $10 trillion or more, necessitating a plunge into negative interest rates to salvage financial markets.
Tending Towards Maximum Perversity
Enormous monetary injections, like quantitative easing and negative interest rate policies, threaten to further distort an already skewed economy and financial system, leading to unrecognizable disruptions. Yet this is only a fraction of the challenge; central planners at the U.S. Treasury also face significant hurdles.
U.S. Treasury Secretary Steven Mnuchin, a former Goldman Sachs executive, is racing against time to negotiate a budget deal concerning the debt ceiling with House Speaker Nancy Pelosi and her colleagues. Should a consensus not be reached soon, Congress will not reconvene until September 9, leaving Mnuchin without the funds needed to keep the government’s operations running.
Ultimately, a deal will likely be brokered at the last minute. The members of the House may not always act wisely, but they know who ultimately employs them. Why halt now?
With a national debt surpassing $22.5 trillion, we have long passed a critical threshold. There is no feasible way to repay this debt outright, leading to an implied default through currency devaluation as the government’s preferred path.
In efforts to manage skyrocketing debt, new, extreme methods of currency devaluation will inevitably emerge. After quantitative easing and negative interest rates fail, the principles of Modern Monetary Theory (MMT) will be put to the test.
Under MMT, government debt is reframed as spending yet to be covered by taxation. Hence, the government can generate as much money as necessary to stimulate the economy without concern for debts or deficits.
Should this blatant money devaluation lead to inflation, MMT proposes a countermeasure: increasing taxes and issuing bonds to withdraw excess money from circulation. In this view, taxes serve not to fund government operations, but to regulate the money supply and strive for a delicate equilibrium between growth and inflation.
If this concept resonates as a clear portrayal of maximum perversity, it’s because it undeniably reflects our current trajectory. Each passing day increasingly nudges us toward this disconcerting reality.
Sincerely,
MN Gordon
for Economic Prism
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