Throughout history, various misguided ideas have emerged, with an array of consequences. For example, rap music and legal tender laws have sparked debates. However, the true measure of a poor idea lies in the extent of its potential destruction.
It is unfortunate that we lack a reliable early warning system, akin to an air raid siren, to alert the public about the latest harmful notion. A bad idea, especially one wrapped in an appealing narrative, can lead countless individuals to self-sabotage. Once such a concept takes root, it often spirals out of control, wreaking havoc repeatedly.
Take communism, for instance, which wreaked havoc during the 20th century. Armed with theories from some of the brightest minds of the time, the Soviet Union’s state planning committee devised ambitious five-year plans to govern the nation’s economic landscape.
The first of these five-year plans aimed to realize the grand vision of collective farming. What could be more efficient than bureaucrats in Moscow dictating what crops to plant and how much land to cultivate? Unfortunately, the planners soon learned that collective farming does not yield the promised bounty; rather, it leads to the barren lands of collective famine.
You might assume that Mao Zedong would have taken a lesson from the Soviet Union’s disastrous agricultural initiatives in the 1930s. However, captivated by the allure of this flawed concept, he incorporated it into his Great Leap Forward 30 years later, resulting in the predictable tragedy of the Great Chinese Famine.
Stimulating Demand with Credit
While communism serves as an example of past failures, it is not the primary issue at hand today. Instead, we must consider a particularly misguided idea that has captivated policymakers and economists around the globe. This notion has almost run its course, yet it appears poised to lead to another significant economic downturn.
The misleading belief is that boosting demand through credit-driven consumption can foster economic prosperity. The Federal Reserve and other central banks have embraced this flawed concept, justifying the issuance of massive amounts of cheap credit with the intent of encouraging borrowing and spending.
The rationale is simple: more credit translates to increased spending, which will then fuel an economic boom, ultimately leading to more jobs and shared prosperity.
In theory, this sounds compelling. However, in practice, these low-interest policies do not create a resilient economy. Instead, they inflate asset prices to unsustainable levels and encourage consumers to purchase unnecessary items, like illuminated reindeer antlers, using money they cannot afford. Inevitably, this results in chaos. Here’s why:
One Destructive Bad Idea
On the contrary, credit comes with a significant burden—debt. This debt serves as an anchor, binding the middle class in servitude to financial institutions. Over time, borrowers reach a point where they can no longer take on additional debt, no matter how much credit is offered, as servicing the existing debt becomes unmanageable.
The U.S. economy, like many Western economies, has hit its limit in terms of debt capacity. This is why the repeated attempts over the past six years to resolve economic stagnation through substantial fiscal stimulus and monetary easing have led to only a sluggish recovery. Simply piling on more debt to mask an existing problem cannot alleviate our current financial predicament; instead, it only compounds it.
When the economic system faltered in 2008, the government gambled that it could restore growth by amassing massive debts. Unfortunately, this gamble has yielded little to no returns. Politicians and voters now find themselves trapped by their own decisions.
They have only exacerbated the situation by financing extensive government spending with an ever-expanding mountain of debt. The national debt has surpassed $18 trillion and, when including unfunded liabilities such as Social Security, prescription drugs, and Medicare, the total climbs to an astonishing $116 trillion. This means each taxpayer is responsible for over $1 trillion.
The consequences of this singular, destructive idea are unavoidable. The sheer scale of the debt makes outright repayment unrealistic. Our only feasible solutions are either default or inflation. Currently, the government seems intent on pursuing inflation. They are determined to continue extending credit until the entire situation implodes. Perhaps then, this misguided notion can finally be laid to rest, at least for a generation or two.
Sincerely,
MN Gordon
for Economic Prism
