Central planners have jeopardized our future, leading us down a path of their own self-destruction…
Initially, the fiscal and monetary strategies aimed at alleviating the consequences of government-imposed lockdowns were intended to ignite a sustainable economic resurgence. However, these aggressive interventions have instead birthed disorder and decay.
The official inflation rate, as indicated by the government’s Consumer Price Index (CPI), has surged to an annualized rate of 5.4 percent. Yet, this figure is hardly reflective of the true economic landscape. Alternative inflation metrics, which more accurately depict consumer experiences, show inflation rates that are double or even triple the official CPI.
Simultaneously, indicators suggest a slowdown in economic growth…
The Atlanta Fed’s GDPNow model indicates that, as of October 19, real Gross Domestic Product (GDP) growth for the third quarter of 2021 is projected at a mere 0.5 percent. This estimate has dropped from 1.2 percent on October 15, 6 percent in late August, and 14 percent in May.
If the trajectory continues, upcoming updates to GDPNow, scheduled for October 27, may unveil negative growth estimates. Factoring in inflation-adjusted figures, the economy is already contracting at an alarming rate of 4.9 percent annually. In essence, the U.S. is grappling with an inflationary recession.
How is this possible?
The simultaneous rise in inflation paired with declining growth is an unnatural phenomenon. We contend that such a scenario would be virtually impossible under conditions of balanced budgets and a stable money supply. Thus, the current state of stagflation stems from excessive fiscal deficits and monetary stimulation.
Now, as hardship presses upon us, fiscal and monetary strategies seem increasingly misaligned. Democrats in Congress are advocating for a $2.2 trillion social spending bill—reduced from a $3.5 trillion proposal—even amidst rising inflation. Meanwhile, the Federal Reserve seeks to scale back its asset purchases while economic growth decelerates.
This disjunction means fiscal and monetary policies will soon work at cross-purposes, contributing to rising inflation while hindering growth. What does this mean for the future…?
No Free Lunch
The era of stimulus checks and affordable consumer goods was enjoyable while it lasted. Like a free lunch, it always seems more satisfying. The aroma is delightful, each bite tastes exquisite, and most importantly, we leave the table feeling fulfilled.
But is any lunch truly free?
“It is an immutable economic fact,” stated WWI Brigadier General Leonard P. Ayres long ago, “that there is no such thing as a free lunch.” This assertion succinctly encapsulates one of the fundamental truths of economics. Much like gravity or the Golden Rule, it cannot be contested.
Fred Brooks, instrumental in transforming the IBM 360 series from a 6-bit to an 8-bit byte—allowing for lowercase letters—further elaborated this idea: “You can only get something for nothing if you have previously gotten nothing for something.”
Similarly, when one individual or group receives something at no cost, another must ultimately foot the bill. This is precisely why fiscal and monetary stimulus often proves to be a colossal illusion.
Individuals with substantial assets benefit from increased stock portfolios and real estate values. Meanwhile, wage earners receive mere crumbs, and the unemployed collect stimulus checks. Ultimately, the cost falls on everyone in the form of rising prices and a soaring debt burden, leaving future generations disadvantaged.
In summary, one segment of society enjoys a free lunch at the expense of another. Wealthy individuals and the impoverished seemingly gain something for nothing, while the average wage earner receives nothing in return for their contributions.
This fundamental truth dooms entitlement programs. There’s no escaping it…free lunches simply don’t exist. Yet, this undeniable reality doesn’t prevent policymakers from making such promises; after all, offering something for nothing is politically advantageous.
Just this past week, for instance, the monetary officials at the Federal Reserve proclaimed their intention to continue providing the public with something for nothing…albeit in a reduced capacity. Here’s what Fed Governor Christopher Waller had to say:
“While there is still room for improvement regarding unemployment, I believe we have made sufficient progress for tapering our asset purchases to begin following our next FOMC meeting in two weeks.”
Walking the Path of Self-Destruction
Recall that the Fed has been generating credit out of thin air to purchase $120 billion monthly in U.S. Treasuries and mortgage-backed securities since early 2020. These interventions have suppressed interest rates and provided the allure of low borrowing costs. Consequently, both government debt and housing prices have ballooned to staggering levels.
What will the initial tapering entail? We will likely find out after the upcoming FOMC meeting. However, consider if the Fed begins tapering its asset purchases by 20 percent. What implications would this have?
A reduction in asset purchases from $120 billion to $96 billion monthly is akin to a heavy smoker cutting back from 40 to 32 cigarettes a day—it is hardly significant. The Federal Reserve, much like the smoker, has already signed its own doom.
Unless the Fed completely ceases asset purchases and starts unwinding its balance sheet, its policies remain inflationary. Until it meaningfully raises the federal funds rate, it can’t be seen as genuinely committed to addressing monetary stability.
The Fed’s balance sheet has skyrocketed to over $8.4 trillion—a sharp increase from about $800 billion just 15 years ago.
Furthermore, this $8.4 trillion was created from virtually nothing; this means that something was manufactured from nothing on a grand scale.
Who bears the cost?
According to the no-free-lunch principle, we must attain nothing in exchange for something to counterbalance the Fed’s monetary maneuvers. This is how we end up with something from nothing—but at a heavy price.
We will bear this cost through lost time, diminished talent, and the erosion of our dignity. We will toil for a declining standard of living.
Moreover, the chaos unleashed will manifest in unexpected ways: rising food prices in North Africa—potentially incited with the help of the CIA—could trigger further upheaval. Wage inflation in China might jeopardize its economic ascent, leading to widespread civil unrest. Meanwhile, in the U.S., the dollar could plummet in global currency markets, resulting in widespread turmoil.
There are profound repercussions for chasing something for nothing. In doing so, one inevitably walks the path of self-destruction—the very route paved by central planners. Dodging this fate will undoubtedly be the ultimate challenge.
Sincerely,
MN Gordon
for Economic Prism
Return from Walking the Path of Self Destruction to Economic Prism
