It’s no secret that the current economic landscape is far from favorable. Anyone seeking employment will likely tell you that job opportunities are scarce. Despite the National Bureau of Economic Research’s announcement that the Great Recession ended in June 2009, many individuals, particularly those living outside major metropolitan areas, continue to face significant financial struggles.
For the middle class, their most significant asset—their homes—has turned into a substantial liability. Meanwhile, those in lower income brackets find themselves caught in a relentless current, unable to make any significant progress, no matter their efforts.
College graduates now enter an increasingly bleak job market burdened by crippling student debt and limited career prospects. The Labor Department reports that the unemployment rate for individuals aged 16 to 24 exceeds 17 percent. What’s the reason for this dire situation?
Indeed, the recovery has been unusual. Economic growth has not stemmed from the spending of savings accumulated during the recession, nor has it been driven by capital investments.
Instead, this growth appears to be backed by deficit spending. However, this isn’t the usual type of deficit spending; it’s a far more insidious form with potentially severe ramifications. Let’s take a closer look.
Money for Nothing
Every fiscal year, the government sets a budget that determines whether it achieves a surplus, a balanced budget, or a deficit based on tax revenues and expenditures. In the U.S., like many countries, running a budget deficit is the norm.
When the financial markets froze in late 2008, the Federal Reserve began to spend recklessly, using funds that weren’t theirs. While this behavior isn’t entirely new, the scale and intensity with which they acted are unprecedented. Moreover, they employed strategies that would have even startled someone as experienced as Alan Greenspan.
There’s a distinction between honest and dishonest deficit spending. Honest deficit spending occurs when willing lenders lend money to the government at a specified interest rate, which is how the U.S. Treasury has traditionally acquired loans.
However, since 2008, the U.S. Treasury and the Federal Reserve have adopted tactics that resemble those of petty thieves. You may have heard of it—it’s called quantitative easing, and it functions as follows:
The Federal Reserve lends money to major banks at nearly zero interest rates, and those banks subsequently lend that money to the U.S. Treasury at market rates. This arrangement has created lucrative opportunities for those in the financial sector. The Federal Reserve essentially supplies the banks with money, which they then loan to the government, pocketing a tidy profit in the process.
Currently, the 10-Year Treasury Note yields around 3 percent. This means the banks profit from a nearly 3 percent markup when they lend taxpayer-funded money to the U.S. Treasury. But a crucial question arises: where does the Federal Reserve find the money to lend to these banks?
Making Obese Debt Levels Possible
The answer is alarmingly straightforward. The Federal Reserve does not produce tangible goods to generate money; it merely fabricates entries in its ledger, conjuring money out of thin air to reshape the financial landscape.
This week, numerous financial matters warrant attention, including the ongoing impasse regarding the debt ceiling. However, what likely won’t make the evening news is how the Federal Reserve’s nearly 100 years of continuous monetary expansion has enabled these colossal debt levels. Nor will you hear how Congress consistently opts to spend taxpayers’ money on promised benefits—a mere distraction from the core issues.
The real economic developments lie within various reports scheduled for release this week. For example, we can expect updates on new home sales for June and insights into consumer confidence. Later in the week, there will be data on durable goods orders and jobless claims. Most significantly, Friday will bring the much-anticipated report on second-quarter GDP. Gut feelings suggest the results will be disappointing.
It’s worth remembering that the debt accumulated over recent years was intended to stimulate the economy, achieve full employment, and even embark on ambitious projects. The Federal Reserve creates the money while the government spends it. But what has this monetary policy yielded?
Despite accumulating significant debt, the Federal Reserve has failed to create jobs, stimulate economic growth, or promote commerce. While we might not hold the government to high expectations, there is a genuine concern that if current trends continue, the economy could stagnate for another decade or longer.
Sincerely,
MN Gordon
for Economic Prism
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