Federal Spending

Reckless Fiscal, Monetary Policies Undermine U.S.

While it made some headlines in the financial press, neither policymakers nor the two presumptive presidential nominees have paid much attention to the fact that the United States is adding a mindboggling $1 trillion to the national debt every 100 days.

This amounts to around $3.65 trillion annually.   As legislators remain willfully ignorant of the financial gorilla in the room, it is most likely that the only way that the debt will be addressed is through a monetary crisis that will involve the status of the dollar as the world’s reserve currency.

Such a scenario would then force authorities to take action. As if there needed to be more evidence of how impervious Congress and the Biden administration are to the burgeoning debt spiral, the House and Senate passed two stop-gap funding packages to avoid a government shut down on March 22, 2024. One senator called it “a pork fest of epic proportions,” according to CNBC. Despite the ominous prognostications of a dollar collapse by financial doomsayers, the greenback has remained the best of all competing currencies.  Yet, this time it could be different since interest rates—which have been artificially suppressed by the Federal Reserve (Fed)—have risen, making servicing of the national debt more expensive.

Moody’s Investors Service noted: “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that U.S. fiscal deficits will remain very large, significantly weakening debt affordability.”   While “King Dollar” has continued its financial hegemony, the running of a staggering national debt— which now stands at over $34 trillion—has had baneful repercussions for the average American. 

The funding of the debt has led to a resurgence in 1970s-style stagflation with a decline in productive job growth such as manufacturing and near double-digit price inflation.  This, of course, has had a deleterious effect on the standard of living of the middle and lower classes since rising prices disproportionately affect these groups harder than the more affluent. Of course, the simplest approach (although politically unpalatable) to the problem would be to dramatically cut government spending by eliminating agencies and programs. 

With the Uniparty in charge, however, there is virtually no chance of budget cuts, especially in an election year.  Whatever happened to the “deficit hawks” and those calling for a balanced budget amendment to the Constitution? The funding of the debt is the primary factor for the rise in consumer and producer prices.

Since federal spending is beyond what the government receives in revenues, it must borrow through the issuance of debt/bond instruments to make up the shortfall.   The principal buyer of government debt has been the Fed, which pays for the bonds by the creation of money, “out of thin air.”

The printing of money (now done through the stroke of a computer key) bids up prices in the market. Fed officials have innocuously called this scam “quantitative easing” (QE), which is in realty a monetization of the debt.   Since the Fed has begun hiking interest rates, it has been doing “quantitative tightening” (QT) where it ostensibly has not been buying U.S. debt, but selling it. 

This would lead to a contraction of the money supply and a fall in prices. The central bank has not been aggressive enough in its tightening nor has it raised interest rates enough to have any real effect on soaring prices. 

It is highly doubtful that the United States will escape the fate of other republics that have pursued reckless fiscal and monetary policies.  It is almost a mathematical certainty that the nation will default on its debt by either hyperinflating the currency or discounting bonds with massive trimming of premiums. 

The most likely path is hyperinflation. Then the dollar will once again fulfill Voltaire’s dictum that all “paper money eventually returns to its intrinsic value—zero.”  While there will be massive social misery from a dollar collapse, the one bright spot from its demise is that it will mean an end to the U.S. empire in its current form.  Hopefully, if there is an economic collapse, a new monetary order will emerge, devoid of central banking and national debt, but one based on a morally and economically sound decentralized system of “hard money”—gold and silver.
By: Jewel Staite

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