Last Thursday marked a significant milestone as the DOW soared past 17,000 for the first time in history. This remarkable achievement showcases how a combination of mass money creation and speculative enthusiasm has propelled the market to heights that many deemed unimaginable for individuals of sound judgment and integrity.
According to the Bank for International Settlements, in its recently published Annual Report, “financial markets are euphoric.” Furthermore, the BIS suggests that central banks should consider raising interest rates during periods of economic growth to better arm themselves for the next inevitable recession. Jim Edwards from Business Insider elaborates on these findings…
“The underlying message (and not so subtle one) from BIS’s annual report is that many central banks, having reduced interest rates to near zero — including the U.S. and Japan — find themselves without tools to stimulate the economy in the event of another crisis. You simply can’t go lower than zero.”
“The comments from the BIS should alarm anyone who believed that central banks were ill-equipped for the last recession in 2007, when U.S. interest rates stood ‘high’ at around 5.3 percent.”
It is evident that another recession is on the horizon. In fact, we may already be navigating through one. Given the aggressive monetary policies of the Fed and other central banks, they will find themselves strapped for tools when the next downturn arrives.
Spending and Debt vs. Savings and Investment
It is possible that the Fed may implement measures similar to those recently adopted by the European Central Bank. This could involve negative interest rates, meaning banks would incur charges for holding excess funds beyond their reserve requirements. Subsequently, depositors may find themselves paying fees rather than earning interest on their bank savings.
Although this concept may seem ludicrous, proponents argue that such a strategy could incentivize banks to lend more freely and encourage consumers to spend rather than save. According to the experts at the Federal Reserve, heightened borrowing and spending would lead to increased demand, economic expansion, and job creation. However, this perspective borders on irrationality.
Real, long-term economic vitality stems from increased savings and investment, not from mounting debt. Artificially inflating GDP through consumer debt leads to shallow growth, one that drains capital and diminishes wealth.
On the fiscal front, the federal government continues to outpace its tax revenues significantly. This year’s budget deficit is anticipated to reach $492 billion, which, while lower than the over trillion-dollar deficits recorded between 2009 and 2012, remains an unsustainable trajectory.
As you know, each annual budget deficit adds to the overall national debt. Presently, the national debt exceeds $17.5 trillion, supported by a $16.8 trillion gross domestic product. This translates to debt surpassing 100% of GDP.
The reason for this review of deficits and debt is the recent article by Ryan Cooper in The Week, which we found to contain misguided logic and glaring inaccuracies that warrant clarification. Below is an excerpt reflecting his flawed reasoning. The first two sentences hold some truth, but the argument quickly diverges…
An Absolute Disaster?
“Ever since 2009, when the recession and the stimulus package pushed the annual budget deficit to nearly $1.5 trillion, it has been consistently declining. Last year it settled at $680 billion; this year it is projected to reach $492 billion.”
“This is an absolute disaster,” devolves Cooper into a misguided critique. “It is President Obama’s single greatest failure, illustrating that he and the broader American government failed to adequately respond to the Great Recession. It signifies that millions of Americans remained unemployed and that trillions in potential economic output were lost without reason, inflicting lasting damage on the American economy.”
While there are several valid criticisms regarding the Obama presidency, the reduction of the budget deficit from nearly $1.5 trillion to $492 billion is not among them—except for the view that it should have decreased further for a balanced budget. Spending in Washington remains alarmingly unchecked. Emulating Cooper’s recommendations could speed up the withdrawal of U.S. creditors, resulting in soaring interest rates, a devaluation of the dollar, and potentially cataclysmic economic repercussions.
Cooper wraps up his argument with a tired, clichéd metaphor comparing the relationship between deficit spending and austerity to drug addiction. Moreover, he gets the analogy entirely reversed…
“Visualize austerity as a glittering bag of crystal meth, with D.C. elites acting as jittery speed freaks in desperate need of a hit.”
“Despite the utter disintegration of austerity as an economic strategy, it retains a cultural stronghold among much of the American elite. Like meth, the immediate and staggering impact leaves lasting damage, yet the addiction persists. It’s high time Democrats ceased prioritizing deficit reduction as their principal policy objective.”
For the record, neither the President nor Congress, regardless of party affiliation, is addicted to austerity; they are ensnared by deficit spending. Additionally, austerity is not an economic strategy; it is the result of eliminating deficit spending.
The U.S. government has the capability to make conscious choices regarding the reduction of deficit spending. Alternatively, it may continue its spendthrift habits and allow creditors to impose fiscal discipline. In any case, the financial decisions over the past fifty years have crafted a considerable mess for all citizens, one we will inevitably pay for with our resources, time, and efforts.
Sincerely,
MN Gordon
for Economic Prism
