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March
31
2023

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Brian Maher

Here you have the central defect of the monetary and fiscal authorities who presently afflict us:

The problem is that the Federal Reserve and the Government fail to grasp that monetary and fiscal policy is “deflationary” when “debt” is required to fund it.

There we cite Mr. Lance Roberts of Real Financial Advice. More from whom:

How do we know this? Monetary velocity tells the story… With each monetary policy intervention, the velocity of money has slowed along with the breadth and strength of economic activity. While, in theory, “printing money” should lead to increased economic activity and inflation, such has not been the case.

Beginning in 2000, the “money supply” as a percentage of GDP exploded higher. The “surge” in economic activity is due to “reopening” from an artificial “shutdown.” Therefore, the growth is only returning to the long-term downtrend. The attendant trendlines show that increasing the money supply has not led to more sustainable economic growth. It has been quite the opposite…

In 2000, the Fed “crossed the Rubicon,” whereby lowering interest rates did not stimulate economic activity. Therefore, the continued increase in the “debt burden” detracted from it.

The conclusion is clear as gin: The Federal Reserve and the United States government constitute active monetary and fiscal menaces.

That is, their botchwork is not merely a passive negligence, passive incompetence. It is an active negligence, an active incompetence.

With this bunch running the show… whence will growth originate?

The Broken Keynesian Multiplier

Since the Great Financial Crisis the monetary and fiscal authorities have conjured over $43 trillion from the great void of nothingness.

Within 24 pandemic months alone, the Federal Reserve plucked — from the same vast void — 50% more dollars than all dollars that ever existed in 256 previous years of American history.

Each of these dollars are representations of debt… as are all dollars under the present monetary arrangement… such as it is.

Since the aforesaid Great Financial Crisis the United States economy has expanded a cumulative $4.05 trillion.

That is: The economy can boast merely $4.05 trillion of growth for the $43 trillion of debt it has taken aboard.

That is: Each dollar of growth required nearly $11 of debt-financed stimulation.

As we have argued in multiple instances, the Keynesian “multiplier” — the promised miracle of water into wine — is reduced to a sad, sad jest.

It has been proven the false magic of a false prophet.

Thus the miracle of water into wine yields vinegar. How did the nation arrive at such a dismal pass?

The Long, Twisting Path to Insolvency

The long and meandering roadway stretches to the Great Depression. The way became clearer in 1971 — when old Nixon scissored the dollar’s remaining gold tetherings.

But after 2008 all obstacles were cleared away…

Anti-inflationists yelled that the trillions and trillions of quantitative easing would yield a terrible inflation.

It did not — the anti-inflationists were yelling wolf— and disinflation prevailed for the following decade.

Meantime, doomsdayers shrieked that ballooning deficits would reduce the economy to wreckage.

Yet doomsday never dawned. The economy pegged along at a languishing gait, yet it did peg along. It did not wreck.

And so the inflationists and the spenders took tremendous heart. Why stop now, they bellowed? The doomsdayers have been wrong in every particular.

A Dream Come True

They believed they could fabricate a near infinity of dollars without inflationary evils and tally fantastic deficits without economic destruction.

With all seeming checks removed, they carried on with staggering and predictable abandon.

Turn a child loose in the candy store. Turn a drunkard loose in a liquor store. Turn a thief loose in a bank vault.

Now you have the taste of it.

When the pandemic flattened the economy in 2020 the federal government proceeded on a scale truly stupendous.

The previous decade’s experience instructed policymakers that inflation was a phantom menace and that interest rates would remain caged — regardless.

Mr. Brian Riedl, senior fellow with the Manhattan Institute:

When the 2020 pandemic necessitated a major federal response, both parties eagerly passed a $3 trillion bill that would have been unfathomable even a year earlier.

Up to this point, the most expensive recent federal expansions had been implemented during recessions, with the goal of sustaining demand. But progressive lawmakers, economists and commentators saw the lack of negative macroeconomic consequences as proof that monetary and fiscal expansions had become a free lunch that could be greatly expanded — even during non-recessionary times.

After all, if rising inflation and interest rates have been permanently defeated, then why listen to those paranoid deficit scolds stopping us from ending poverty and building a comfortable social democracy?

No Free Lunch

But the iron laws of economics will reimpose themselves in time. The child’s candy is not free. The drunkard’s liquor is not free.

The diner’s lunch is famously not free.

Soon or late the bill comes slamming upon the table. And that time may be now. That is, the era of “free-lunch economics” may be through. Riedl:

We may soon look back on the 2009–2021 period as the era of “free-lunch economics,” when hubristic politicians and economists declared that traditional fiscal and monetary trade-offs no longer existed in any meaningful form. Advocates portrayed a new economy liberated from restraints, one in which money-supply expansions and congressional deficit spending could finance benefits that would make even Western Europeans envious, with no economic drawbacks. As in foreign policy, this utopian vision proved to be an illusion. Reality has intruded… The “free-lunch” experiment has collapsed. 

For more than a decade, progressive lawmakers, economists and activists sold Americans a fantasy in which the printing press and ambitious deficit spending could buy a European-style welfare state without incurring costs. With Washington already facing $112 trillion in baseline deficits over the next three decades, adding trillions more in unfinanced benefits was never realistic. Congress must come back to reality: There is no free lunch.

Nor was there ever.

Little Reason for Hope

Will Congress return to reality… and accept the honest costs of lunching?

We harbor very little confidence that it will. And why should we? Where is the evidence?

Prior even to the pandemic, the Congressional Budget Office estimated Congress would need to hack the budget 10% per year.

The hackings, twinned with tax hikes, were the only route back to fiscal health.

Can you imagine Congress spending 10% less money each year?

As we have written before: The pig in his sty will first sprout wings and take to the aerial ways.

Nor will Congress raise the necessary funds to keep the show going.

Thus debt — already a millstone heavy upon the neck — will weigh more and more.

It will form an impossible drag upon growth.

A Grim Lesson

Average annual growth of 3% or more was common before the great gale of 2008 blew on through.

Growth averaged a mere 1.7% from 2008–2021. Meantime, CBO currently projects American economic growth to gutter along at an average 1.8% per annum for the next decade.

As we have maintained before: A slight falling off from one year to the next may not appear dramatic — and it is not dramatic.

But multiply the business by five years, 10 years, 20 years or more.

You will acquire a grim lesson in the meaning of compounding interest — negative compounding interest.

If America does not lick its debt, it is a lesson it will learn plenty good… and plenty hard.

Alas, its monetary and fiscal authorities labor under the fiction that the solution is even more debt…

 

 

Brian Maher is the Daily Reckoning’s Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master’s degree in Defense & Strategic Studies.

 

 

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