In our complex world, misguided ideas often overshadow sound reasoning. Everyday, we encounter numerous flawed concepts, reflecting a troubling trend: the most implausible ideas frequently gain traction and popularity.
Consider Mickey’s Fine Malt Liquor; its destructive nature rivals that of prescription painkillers, yet it remains a popular choice among consumers.
Then there’s central banking. No other institution has siphoned more wealth from hardworking Americans than the Federal Reserve, whose covert taxation has been robbing citizens for over a century.
Why do these bad ideas receive such warm receptions? It seems they promise the tantalizing allure of gain without effort: the notion that one can thrive on the generosity of others, or withdraw more from retirement accounts than originally contributed.
These promises of effortless rewards are not only unrealistic but also serve as potent tools for politicians eager to secure votes. How can spending more, taxing less, and continually increasing debt be considered a rational proposal? From a fiscal responsibility standpoint, it’s certainly problematic. A more sensible approach would be to advocate for reduced spending and taxes.
However, politicians often cater to immediate desires. Voters might claim they oppose an expanding government, yet they frequently support policies that promise benefits without apparent costs, swayed by the lure of government subsidies.
Self-Cannibalization
The current state of American governance reflects a troubling trend toward self-cannibalization. This perpetual consumption leads the nation to live far beyond its means, primarily evidenced by the alarming rise in federal debt over the past two decades.
When the Y2K scare passed in 2000, the national debt stood at around $5.6 trillion. Fast forward to today, and it has surged to over $20.6 trillion. In just 18 years, this represents a staggering increase of more than 265%, juxtaposed against a mere 36% growth in real U.S. GDP, which went from $12.5 trillion to approximately $17 trillion.
Such a trajectory, we suspect, can only culminate in disaster. But that’s not the entire story…
This national debt increase has occurred alongside a rise in these “something for nothing” policies, flourishing under a backdrop of cheap credit.
Yet, cheap credit can turn costly when interest rates rise, leading to increased payments on the accumulated debt. For instance, net interest payments on the national debt for fiscal year 2017 reached about $266 billion at a 2.8% yield on 10-Year Treasury notes. If this yield were to climb to 4% by 2026, projections suggest $787 billion of the federal budget would be needed just to service debt, nearly doubling the budget share allocated for interest payments from 6.5% to 12.2%.
What happens if the 10-Year Treasury yield exceeds 4% and soars above 15%, as it did in 1981? It could mean that the entire federal budget—and then some—would need to be allocated solely for debt servicing.
This is the ultimate consequence of self-cannibalization. Meanwhile, proposals offering quick fixes and immediate rewards continue to surface, often met with varying degrees of acceptance…
The Donald Saves the Dollar
Some years back, we detailed the annual gathering of the globe’s elite at the World Economic Forum in Davos, Switzerland in an article titled Davos Hootenanny and Salvation Call. If you’re unfamiliar with this event or need a refresher, we recommend reading it.
We bring this up as the 2018 World Economic Forum recently took place, though we were not in attendance. Nonetheless, we learned that Treasury Secretary Steven Mnuchin, formerly of Goldman Sachs, made quite a splash with his remarks. He suggested that a weaker dollar is beneficial for the American economy, stating, “Obviously, a weaker dollar is good for us as it relates to trade and opportunities.”
In the aftermath, the dollar continued its downward trend, plummeting to its lowest point in three years as indicated by the Bloomberg Dollar Index. Mnuchin’s comments were met with skepticism from international counterparts, drawing immediate attention and concern.
On Thursday, IMF Managing Director Christine Lagarde sought clarification, and ECB President Mario Draghi voiced worries about Mnuchin’s apparent breach of an international agreement against depreciating one’s currency. Subsequently, Mnuchin was compelled to reformulate his stance.
He stated, “I thought my comment on the dollar was actually quite clear yesterday. I thought it was balanced and consistent with what I’ve said before: we’re not concerned with where the dollar is in the short term. It’s a very, very liquid market, and we believe in free currencies.”
Then, amid mounting pressure, something unexpected occurred. Mnuchin’s boss, The Donald, who was also at Davos, came to his rescue, proclaiming, “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar. Our country is becoming so economically strong again and strong in other ways, too.”
Trump added that he believed Mnuchin’s comments had been misconstrued. At that precise moment, the dollar experienced a slight uptick.
In conclusion, while misguided ideas may seem appealing, their consequences can lead to greater problems down the road. As economic conditions fluctuate, it’s crucial for leaders to provide clarity and sound policies that promote long-term stability.
Sincerely,
MN Gordon
for Economic Prism
