Fiscal irresponsibility is rampant and discussed at length in previous blog posts, but I thought it prudent to bring it up again as the timing of the debt ceiling and Federal Fiscal Year end approach. Yes, both sides are certainly to blame. Republicans have long abandoned conservative fiscal policies and Democrats never had them. The American People are left holding the bill. It is shameful, but we continue to elect people on both sides of the aisle, who refuse to fix the problem. There are many reasons for this, but the short answer is, its easier to give away money than it is to establish a realistic budget. Ask the average American, they know it since they have to do it.
As the country continues down this road of increasing the number, volume and quality of “free stuff”, the debt continues to explode. Instead of demanding reductions, belt tightening or any other euphemism one might care to apply, the Legislature continues to fund more free stuff. I have said for many years (probably decades) that we can’t keep it up, but each year I am proved wrong. The debt is increased without any repercussions. What is fascinating, if not frightening, is how this massive debt increase has not, up to this point, resulted in skyrocketing inflation. While I don’t agree inflation has been nominal, if not nonexistent, like the Federal Reserve would have us believe, I am surprised at its moderate pace.
It appears this is all coming to an end.
Is it Covid or some culmination of events that has caused the inflation spike? Is it a one off event, as some have suggested, or is it some other monetary policy, or other policy decisions that influence the market? Will inflation continue as spending and debt increase, even if, or when the supply chain is back to normal? If so, the cost of paying this debt will also increase, something we have not had to deal with as interest rates have remained close to zero as “free stuff” spending has ballooned. Debt service is a painful payment when interests rates are low, but imagine if interest rates doubled or tripled? Don’t think it can happen, look at rates in the 1970’s.
Inflation also hits the lowest incomes hardest. Those individuals who are working and trying their very best to stay off the dole. For those supported by the government, free stuff will get a cost of living adjustment and while it is always applied after the fact, the increases will satiate them in the short term. So, free stuff will get more expensive to maintain. The rich will pay a bit more and deeper, more complicated, tax shelters will be established. Corporate taxes will be increased and these increases will be passed on to consumers as price increases, adding to inflation issues. Once again, those in the middle, trying hard to get ahead, will pay more. The debt will continue to increase as tax increases will fall short of spending, again.
The US Dollar is the world’s reserve currency, for now. If this changes, and it could, it would happen quickly and without warning. As an example, in simple terms and without getting into too many ifs and buts, the Chinese government could back its currency with gold. While it may appear a bit far fetched and many have questioned money supply tracking in China (and other fiscal accountability actions), it is possible. China is as close to debt free as any large country and is unafraid to make draconian cuts to achieve policy (or fiscal) goals. Losing this reserve currency status, which based on our current fiscal situation is tenuous at best, would result in crippling inflation for the US. So, not only is free stuff damaging to the working man, but the debt it creates is a useful extortion tool. Policy decisions have far reaching implications.