The Independent recently published an excellent editorial comment regarding the Federal deficit.
The writer was right on about out of control federal spending and I would like to add my own observations regarding this most important issue.
Inflation is created when governments print money without corresponding increases in productivity in the economy. Inflation is not caused by price gouging, corporate greed or any failing except that of the government.
An example of recent government spending that contributes nothing but debt to the economy is the $7.5 billion spent on EV charging stations by the Federal government that resulted in only eight EV charging stations to be constructed. Five hundred thousand EV charging stations were supposed to be constructed by 2030 per the Biden Administration. I would hazard a guess that there is not enough money in the entire world to construct the remaining 499,992 EV charging stations at about one billion federal dollars per unit.
At present, the federal deficit will be some 2 trillion dollars this year much of which is “Green New Deal,” spending thinly disguised as the “Inflation Reduction Act,” “American Rescue Plan” and other unnecessary spending.
The current administration believes in an economic theory referred to as “Modern Monetary Theory” (MMT). The main tenant of MMT is that deficit spending, issuance of new debt and printing money does not matter as markets will fund all the debt that is offered until issuance of debt creates inflation. MMT also argues that inflation can be controlled by increasing taxes on everyone, to reduce the spending capacity of the private sector.
After the 1st World War, Germany tried to pay war reparations by printing money. By 1923, the German Deutschmark traded with the US dollar at the rate of 1.24 trillion Deutschmarks per dollar. In more recent history, the US experienced high inflation and high unemployment (stagflation) between the early 1970’s and 1984 that was particularly harmful between 1978 and 1984.
These conditions were caused by the government printing money for “Great Society” programs, the Vietnam war, and discarding the “gold standard” for our currency in August 1971. These unfortunate actions created the aforementioned “black swan” series of events that resulted in “stagflation” for over 10 years.
During the nearly four years of the current federal administration, the general level of prices (inflation) for consumer goods has increased by about 20%.
Contrast the current economic situation with the prior four years (2016-2020), a period when interest rates were low, employment was at or near all-time highs, poverty was declining, and real incomes were rising.
Total increase in prices for that period of time was about 7%. During this time, the supply of money and supply of goods and services (economic productivity) was in balance.
Presently, the US is borrowing money to pay interest on money that has been borrowed previously. Soon, interest payments alone on the national debt will be 25% of all taxes collected or about $1 trillion per year, more than all spending for the military and defense. The current administration’s solution to this problem is to raise taxes.
Make no mistake, if this happens, everyone will pay more taxes and a secondary result will be “stagflation” as it occurred in the 1970’s and early 1980’s.
When government officials say otherwise, they are not speaking the truth or they are demonstrating an egregious misunderstanding of economics.
