Trillions of dollars slosh around to pay for social justice priorities with no increased taxes and a relatively small price to pay in inflation—so far. Since 2008, the debt has grown to over 125 percent of GDP and only now are we talking about spending a few billion on roads and infrastructure. Otherwise, the money has washed over this nation, with few things of value returning to the taxpayers. With approximately 40 percent of the federal budget coming from newly printed money, Congress exercises budget discipline the way Hunter might during a weekend bender in Vegas.
There’s no reason to be spending so much money right now. The justifications for “temporary” surges in federal spending have been forgotten as the money gushes on. Only one force remains to block an endless welfare state: math.
The Federal Reserve, gatekeeper of the money supply, has finally acknowledged that there is no longer any justification to continue buying government bonds with newly printed dollars. It has now promised to begin “tapering” the gusher this November. Inflation, which the Fed laughably calls “transitory,” has begun a pincer squeeze on the economy. On one side, we have rising prices obvious to everyone. Less obvious from the other side are the shortages resulting from underpricing goods and services. Labor, chip, shipping, and manufactured goods shortages are all squeezing the purchasing power of the consumer.
Numerical reality says you can’t run a debt that’s 125 percent of GDP and expect nothing to happen. When math awakens from her slumber, she will correct the imbalances to terrifying effect.
The Federal Reserve has kept interest rates low for the U.S. debt by buying treasuries. When the Fed stops buying treasuries, the government will get less money for its IOUs. When it gets less money for its IOUs, it has to print more IOUs. When more IOUs flood the auctions, the supply outstrips the demand resulting in even less money for each IOU. More debt for less money means that at some point, the interest payments start to become more than the money raised on taxes. The government will reach a black hole, at which point no amount of budget cutting can free up enough revenue to keep up with the climbing interest payments.
Rather than cut its bloated spending the government will first seek new revenue sources from taxation or even confiscation of wealth. Wealth will flee to safe havens and businesses fold under the rising tax burden. Tax revenue from higher rates will be offset by the shrinking tax basis. So taxes then go up even more.
It’s called an “Austerity trap,” and it’s a cycle of doom that can take years or even decades to overcome. Countries stuck in an austerity trap can become politically unstable. Revolutions are highly correlated with fiscal austerity.
When the budget cuts come, expect streets to become clogged with protesters dependent on government largess. Today in the United States, there are more people receiving a check from the federal government than paying taxes to the federal government. Oh yes, it’s going to be really bad.
It’s hard to know how to prepare for the coming austerity trap. Cash and savings can be wiped out with inflation. The stock market and real estate values might implode. Gold is great but it, too, could easily crash in the midst of austerity.
Low interest rates, high taxes, and high government spending caused this. Low interest rates encourage rent-seeking behavior. It keeps alive non-viable businesses that can borrow for years instead of turning a profit. Taxes are always highest in America for those getting rich, the “HENRYs” of America who haven’t yet positioned themselves into the capital gains/depreciation shell game that shields the “already rich.” And government spending distorts all economic activity, making the politically powerful into a financial elite.
The solution is actually quite straightforward. Throw all three in reverse and we can emerge from this nightmare. Raise lending rates to clear away the deadwood businesses. Lower taxes to make the ladder of success more accessible. And cut all of that social justice spending that encourages the professionally outraged to make their livings as grievance whores.
In the coming years, the government will squeal for a higher tax burden on its subjects. The opposite should happen: savage and deep federal budget cuts. A smaller government liberates greater economic activity and meddles less in domestic politics. But most importantly, when both sides covet the terrifying power of the federal government, elections become a high stakes game of survival.
If the federal government shrinks to an appropriate size, however, elections could become boring again. People might talk about something other than politics. It’s not a coincidence that the rising size and importance of the federal government has coincided with a decline in freedom and election integrity. Big government creates a parasitic class of influence-for-cash peddlers. Families become rich when one of them gets political power. When austerity does come, we should see it as an opportunity to devolve money and power back to the people.