Here Is Why Stagflation Is Here Now
The Congressional Budget Office has released their report on the current federal budget. It shows why stagflation is back in the US.
I’ll have much more to say in my forthcoming book, How To Profit From Stagflation, but here is a perfect example of some of the lessons.
Economies grow rapidly when people and businesses make decisions that increase their wealth and happiness. Businesses invest money and move more resources into those areas that consumer and other businesses want more of. In other words, they respond to changes in deman by increase supply into that area.
Government expenditures are different. Nobody demands more Abrams tanks except in the most general sense of demanding border security. Nobody demands that we study the effect of cocaine on moths except, well, scientists who study the effect of cocaine on moths.
But here is the big difference.
When I go to the store to buy rutabagas, I take my earned money and exchange it voluntarily to the store for rutabagas. I am happy and the store is happy. It is a win-win transaction.
But governments don’t do that. I don’t want to pay taxes but they take it anyway. So there is a loser, me, and a winner, the government. Now, some of that money taken from me may go back to me directly, through, Social Security, for example, but some will go to things I don’t want at all, such as moth studies. So it is a lose-win relationship.
The net effect of government spending is to reduce economic growth because governments do not allocate resources rationally but, instead, allocate them politically. So waste is increased which reduces economic growth.
On top of this, governments are poor at managing their income so they have to borrow money to cover their politically motivated expenditures. Right now, the Federal government alone owes $31 trillion.
That is $31 trillion that could have at least partially gone to productive uses rather than wasted or consumed foolishly. So reducing productive investment means that the economy becomes more stagnant.
Then there is the interest on the debt. Debt taken by governments crowds out debt that could have been taken by the private sector which is more efficient at allocating debt to productive purposes. Once again, causing a more stagnant economy than would be if the government was more sensible with its management of debt.
The problem with debt at these levels is that we are fast approaching levels where people will demand higher interest rates or simply stop lending money to the Federal government. Moody’s has already reduced the credit rating of the US government because of the extreme levels of debt.
I’m not a doom and gloomer so this extreme level of debt can continue for decades. Look at Japan for example. But the threat increases with each day.
I bring this up because we are coming close to running out of room under the Debt Ceiling to borrow more money.
One way to counteract stagflation would be to leave the debt ceiling in place and force the Federal government to stop borrowing money and instead to cut expenses.
Ha Ha, just joking! That will never happen!