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Viscous Economic Cycle Politicians Will Not Fix (Vol. 111)

Most Politicians get it, but are just being Politicians


Looking from 10,000 feet, it seems as if the American economy has fallen prey to a government that has lost its way. We have let our populist/progressive view distort the management of government economics, and we have fallen into a vicious cycle that no one in DC has the will to fix. Or perhaps the politicians just don’t see it as I do. They should, it is a black and white issue in my view. Let me explain.


In their zeal to please people, help people or just win votes, Congress has let our spending go totally out of control. With the exception of the period following the Global Financial Crises in 2009-2011, US government spending as a percentage of GDP hovered between 18-21%. Today it has soared to nearly 25% of GDP. Has something fundamental happened to the US economy that has required the size of the government to get that much bigger? No. I am not talking about COVID expenditures, this is ongoing post-COVID. When government spending explodes as it has, you have 3 choices on how to pay for it, none of which is good for the economy, economic growth or our well-being:


  1. Print money. ‘Printing’ money is not physically printing, but is a result of the Fed buying Treasury debt, as opposed to the public, which creates new money electronically. This just leads to extraordinary inflation. As we have discussed before, when money supply grows faster than output, you get an insidious tax on everyone called inflation.

  2. Increase taxes. If done enough to cover increased government expenses, there would be no deficit, but this takes away incentives to invest and grow and takes private capital away from the productive sector, giving it to the non-productive sector, government, to spend or redistribute. Removing capital from producers slows growth, which is needed if we are to grow output and improve our standard of living.

  3. Borrow from private sources. This has the same adverse effect as increasing taxes as we take funds from the productive sector, reducing growth. In addition, it adds to the debt of the nation, and the interest costs, which adds to government spending which means borrowing or taxing required to pay for this (the most recent 3 months have averaged $74 billion in interest expense per month or an annualized $888 billion interest per year).


Growth has taken the world from 90% poverty to 9% poverty over the last 250 years. Growth will sustain and improve our standard of living and continue to decrease poverty. Government giveaways have never, and will never, promote growth and increased wealth for all people. Growth is good for all of us and we are allowing our government to stifle it severely. That is why our growth rates have been so anemic.


Recently, we have been in the 1 and 3 situations listed above - printing and borrowing money. Our government printed money excessively for the last few years starting back in the Trump administration and continuing into the Biden administrations which has led to the inflation we now have. In addition, both administrations have borrowed prodigiously as well, leading to unsustainable debt levels and enormous interest expense noted above, which continues to grow with more borrowing and higher interest rates. We will soon be over a Trillion dollars per year in interest expense and this will keep growing unless we do something about it. In 10 years if we stay on the current trajectory, it will be 2 Trillion per year of interest expense. For more information about our interest expense, see this data from the government.


We are now entering the Doom Loop. See Facts, No Spin #75 for an explanation of this cycle where increasing debt leads to increasing interest expense which leads to larger deficits and more debt, more interest, etc.. It is ugly and if we continue down this path, the Debt Bomb will explode in time.


It is no longer a question as to IF the Debt Bomb will explode, it is a question of WHEN.


BOTTOM LINE


The Voters elect the politicians. We put them in office. It is up to us, the ‘voting public’ to understand the dire consequences of what the folks in DC are doing to this country and demand that they fix it.


If they don’t fix it, then vote for someone that will fix this outrageous dereliction of duty.


Join the Main Street Lobby by clicking the link below to Contact Congress. Don't just sit there, send them the message, DO IT NOW.


LEARN ECONOMICS, THEN VOTE SMART

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