The ruling class has a penchant for spending, particularly when it involves your funds rather than their own.
Among the many economic beliefs held by those in power, one of the most cherished is that government spending can stimulate economic growth through debt. While it is true that government spending can channel growth into favored sectors, it does not inherently generate economic development.
How could it? The government, bogged down by regulations, taxes, and fees, produces nothing tangible. Instead, it siphons off capital and reallocates it in ways that individuals and businesses typically would not choose. This often leads to funding projects of questionable value—like California’s Central Valley bullet train, with costs reaching $105 billion and climbing.
The recent economic fallout due to government lockdowns has resulted in significant financial giveaways orchestrated by the Federal Reserve and the U.S. Treasury. Unfortunately, these measures have led to consumer price inflation surging to levels not seen in four decades.
The mechanics behind these financial giveaways were quite straightforward. In March 2020, the Treasury issued $3 trillion in new debt, which the Federal Reserve purchased by generating $3 trillion in reserves from nothing. This newly printed money was then distributed through stimulus checks to citizens and businesses.
This cycle repeated itself with an additional $2 trillion in printed money. Consequently, the U.S. national debt soared more than 30 percent in under two years, exceeding $30 trillion. Should we really be surprised that inflation is spiraling out of control?
The Federal Reserve certainly seemed caught off guard. Its predictive models failed to foresee these developments. However, with slightly adjusted parameters, even Fed Chair Jay Powell could have anticipated the situation.
No Clue
The primary distinction between the 2008-09 bailout of Wall Street via AIG and the 2020-21 stimulus is that the latter was both monetary and fiscal.
This distinction is vital. Monetary stimulus inflates stock and real estate prices, while fiscal stimulus drives consumer price inflation.
Thus, merely raising interest rates will not curb consumer price inflation. Tapering the balance sheet might depress financial markets and stifle the economy, but it won’t effectively address the rise in consumer prices.
To successfully reduce consumer price inflation, Congress would need to undertake measures it has largely avoided for over a century—specifically, implementing fiscal discipline through austerity and balanced budgets. Major reforms in entitlement programs and tax policies would also be necessary.
If not, inflation will persist relentlessly, inflicting harm on lives and livelihoods.
Unfortunately, Washington currently lacks the political will to rectify its fiscal irresponsibility. Members of Congress seem more inclined to push the Federal Reserve to tackle inflation by tightening the money supply, demonstrating a clear misunderstanding of the situation and why increasing interest rates are not the solution.
While Fed interest rate hikes could serve as a supportive measure against inflation, the real solution lies in fiscal policy.
In truth, many in Congress appear oblivious to the long-term damage their short-sighted policies have created. They fail to grasp the difficulties the public will face in overcoming these issues.
For these reasons, consumer price inflation is likely to continue its upward trend. Tragically, this occurs at a particularly inopportune time. Here’s why…
Would Putin Have Attacked if Oil was $50 per Barrel?
Significant consumer price inflation does not emerge in fundamentally sound economies. It occurs in nations burdened with high debts and fiscal irresponsibility.
Inflation typically arises in countries facing economic turmoil, where massive government spending financed through the printing of money becomes the norm.
The U.S. national debt-to-GDP ratio currently stands at approximately 125 percent, surpassing the previous high of 119 percent recorded at the conclusion of World War II.
During wartime, fiscal restraint tends to dissipate, and funding the war effort supersedes all other considerations, explaining the spike in the debt-to-GDP ratio during WWII.
However, after the war, that ratio was successfully reduced to 31 percent by 1981. From this low, however, it has gradually risen to the current 125 percent without just cause.
The national debt has surged over the past four decades as government spending has sought to combat perceived threats—poverty, drugs, terrorism, unemployment, recessions, and pandemics.
The approach has remained unchanged: boost the deficit and finance it through printed money, leading to a chaotic financial landscape.
Do you care about the situation in Ukraine or emerging tensions in Taiwan? Should you?
The U.S. government’s history of wasteful and harmful policies has left the nation vulnerable.
Would Vladimir Putin have initiated an attack if oil prices had remained below $50 per barrel?
It’s hard to say. However, had he done so, he would not hold the severe leverage over Europe that he does now amidst a cold winter.
President Biden has stated that U.S. forces are not set to engage in Ukraine. This may evolve, or it may not.
Nevertheless, Washington has exhausted its fiscal options… and for little reason.
Putin holds substantial leverage. There is no feasible way for the U.S. to engage in warfare while simultaneously managing inflation.
…And Vladimir Putin is acutely aware of this fact. Even Winnie the Pooh would understand the implications.
[Editor’s note: With leaders like Biden and America’s erratic foreign policy decision-makers at the helm, the probability of unforeseen events occurring is alarmingly high. It might be prudent to position oneself in anticipation of such scenarios. Recent subscribers to Wealth Prism Letter have discovered how. But it’s not too late. If you would like to explore this opportunity as well, take action and subscribe today!]
Sincerely,
MN Gordon
for Economic Prism
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