One of the foundational principles of economics is that there is no such thing as a free lunch. This simple truth highlights that everything comes with a cost.
For instance, if someone treats you to lunch, it still isn’t free. The concept of opportunity cost implies that your time spent eating could have been used for something else. Even if you don’t account for your time, someone else has covered the cost of that meal. Thus, it is far from free.
Yet, despite this undeniable fact, politicians often promise free lunches to the many, funded by the few. This trend is particularly evident during presidential primary elections. Campaigns promise free education, free medications, free housing, and free food.
In this election season, there’s hardly a “lunch” that hasn’t been advertised in hopes of securing votes. Such tactics are the norm in democratic politics.
While many might disagree with these promises, public sentiment doesn’t change the fact that, for over eight decades, voters have consistently supported candidates who offer the most enticing giveaways.
Nothing for Something
Politicians are aware that free lunches do not truly exist. They also recognize that modern economic policies rely heavily on financing government programs through increasingly massive debt. Eventually, this means that someone—possibly you—will have to pick up the tab.
The Federal Reserve plays a crucial role in this scheme by generating large amounts of central bank credit for the government. This process leads to the depreciation of the currency’s value, which the Treasury eagerly accepts. This ongoing dilution helps reduce the burden of past debts, allowing the government to meet previous commitments with currency that has diminished in value over time.
For a while, this strategy might appear to be effective. Politicians who embrace this approach get elected, and citizens seem to enjoy their ‘entitlements,’ making it look like lunches are free.
When the economy is young and flourishing, the cost of these “lunches” seems minimal. The illusion that something can come without a price feels attainable. However, as the economy matures and growth slows, the weight of debt becomes untenable.
Eventually, the reckoning arrives, and those free lunches must be accounted for. Rather than getting something for nothing, citizens are left with nothing for something.
This phenomenon reflects the limits of credit expansion, which reaches its breaking point when the economy can no longer sustain the debt. At that juncture, a crisis—whether in the form of government default or a depression—becomes necessary to cleanse the system of its accumulated debt. Prices, assets, and wages then recalibrate to align with the economic reality, leading to the disappearance of unproductive activities and the emergence of new, impactful ventures.
No Free Lunches Be Damned
For the last decade, the United States and much of the developed world have been nearing these natural limits. Furthermore, the ruling elites are intent on obstructing any form of economic purge.
Their solution has primarily involved addressing the debt issue by issuing even more debt, a strategy akin to serving spoiled potato salad for free while trying to manage the aftermath with adhesive tape. It’s ineffective and incredibly messy.
Yet this has not deterred policymakers. On the contrary, it has bolstered their resolve. Around the globe, major economies are handing out free lunches while simultaneously attempting to patch the ailing economy with temporary fixes.
Recently, for instance, European Central Bank President Mario Draghi unveiled an unsatisfactory five-course buffet.
- First, the ECB lowered its main lending rate to zero.
- Second, banks are subject to a negative interest rate of 0.4% for holding cash at the ECB.
- Third, Draghi expanded Europe’s quantitative easing program from €60 billion to €80 billion ($86.86 billion) monthly.
- Fourth, this influx of cash will now include purchases of European corporate bonds, in addition to the existing government bonds.
- Finally, the ECB is introducing ultra-cheap four-year loans to banks, effectively incentivizing them to loan out money at rates near zero.
What does this add up to?
From a purely mathematical perspective, the sum of these measures represents sheer madness. What distortions will arise from this? What disfigurements will this provoke?
The answers are beyond our wildest imagination. Still, it’s likely that some small village somewhere will utilize this credit for misguided projects, like digging enormous holes with their bare hands. While this is merely speculation, we can be certain that the absurdities resulting from these policies will soon become apparent.
Of course, the ECB is just one agent in this monetary drama. Next week, it will be Fed Chair Janet Yellen’s turn. Following Draghi’s lead, she might implement bold new strategies.
No free lunches be damned.
Sincerely,
MN Gordon
for Economic Prism