Uncontrolled government spending leads to currency crisis
Those who study both the physical and behavioral sciences should have learned that there are consequences to every action – some good and some not so good – often referred to as Stage II.
Good chess players are able to “see” the consequences of various moves several steps in advance. The same goes for strong environmental scientists, military and diplomatic strategic thinkers, as well as investors and economists. Unfortunately, sane thinkers have too often been ignored by members of the media and politicians who seek sensationalism rather than rational thinking. For years, many of us warned that rampant government spending would eventually lead to a cash crash. This day has arrived.
When an individual, family or business goes into debt faster than their income, judgment day arrives and the only way out is bankruptcy. With interest rates now rising rapidly due to inflation, many people and institutions will increasingly find that they are unable to repay the debts they have incurred – so large increases in the number Bankruptcies Will Happen – Starting Now!
When sovereign governments take on more debt than they can repay, they have two choices: raise taxes or depreciate the currency (known as inflation). There is a limit to how much the government can raise taxes because of the natural tendency of taxpayers to find legal and illegal ways to avoid taxes – which increases as the tax burden increases.
Due to the increased tax burden, economic growth slows down and approaches or even falls below zero – so any increase in tax rates or new taxes does not result in any new income or even negative income. Many of the major countries are now at this stage, including much of Europe and the United States.
As noted, to reduce the debt burden, governments “inflate” it, which is happening. The situation will not improve until government spending is reduced to the point where the debt burden no longer increases relative to income. The same people who first told you that there would be no rise in inflation and then that inflation would only be transitory are now saying that it would come back to around 2% – this is not not true – in the absence of a major reduction in public or private spending (i.e. a deep recession).
Individuals and institutions can partially protect themselves by acquiring real estate assets that will retain their value over the long term. Those without the ability to acquire such assets will only become poorer. Members of the media and others who profit from the ignorance of their fellow citizens will demand that the government increase payments to low-income people (as was done during the COVID-19 lockdown). Such payments will give a little temporary relief but, if not properly funded, will make the situation worse over time by further depreciating the currency. The gap between the haves and the have-nots will increase, leading to a reduction in social cohesion. Not a bright future.
Much of the increase in government spending is the result of the environmental lobby demanding “green energy” because of the “existential” (whatever that means) threat of climate change. Everyone wants a cleaner environment and is willing to pay for it up to a point where Phase II kicks in. As science writer Robert Bryce recently noted: “Despite over $2 trillion in spending on renewable energy over the past three decades, there is little evidence that an energy transition is underway.
Last year, according to data from the BP Statistical Review of World Energy, in the United States and around the world, the growth of hydrocarbons – oil, natural gas and coal – “far exceeded the growth of wind and solar by huge margins”. .” The fact is, opposition to wind and solar is growing as people say “not in my backyard”, in part because it’s unsightly and noisy. Wind and solar also require many rare materials that are potentially harmful and expensive to manufacture.
For most people, “saving the planet” doesn’t mean kids going to bed hungry and cold. A number of European countries may well run out of energy to heat people’s homes this winter, and gas and food prices are much higher than in the United States, largely because governments have shut down coal, oil, natural gas and nuclear power plants. As ‘good’ Europeans freeze and suffer, they are increasingly aware that China and India are building more and more coal-fired power stations, whose C02 emissions dwarf Europe’s attempts to reduce them. Much of this calamity could have been avoided if more attention had been paid to “Phase II”.
And finally, there is the Russian-Ukrainian war. And as in most wars, too little attention has been paid to the consequences of a “victory” or a “defeat”, both for Ukraine and the West, and for Russia. What does victory or defeat look like for both parties? Is Russian President Vladimir Putin just stopping at Ukraine or, like Adolf Hitler and Napoleon Bonaparte, is this whetting his appetite for more? If Mr. Putin loses, who will take over in Russia – and will they be “better” or “worse” than with Mr. Putin?
The inability of political leaders to adequately consider Phase II with growing government spending, environmental policy and the Russian-Ukrainian war has put billions of people at risk.
• Richard W. Rahn is President of the Institute for Global Economic Growth and of MCon LLC.