In normal times, when governments or their central banks make new and more money available, businesses respond by increasing production, assuming that consumers will want to spend that money on new or more products. But right now, a combination of factors like supply-chain disruptions, the global shipping backlog, factory closures abroad, labour shortages, among others, have businesses struggling, often unsuccessfully, to keep up with current demand. So, instead of producing more, they raise prices. That’s what happens when you get more money chasing the same supply of goods or even a smaller supply.
And then there’s the debt. Just as inflation can cause more inflation, one of the biggest drivers of today’s budget deficits are yesterday’s budget deficits. The US federal government is currently spending more than half a trillion dollars a year on interest payments for money borrowed in the past. Money that already has been spent and is not available anymore.
But nobody wants to take responsibility for this. The annual cost of interest payments grew by $100 billion over the course of Donald Trump’s 4 years presidency! The self-proclaimed “King of Debt” was, to just put it mildly, a different kind of Republican. He had no interest whatsoever in balancing the budget, and he was adamantly opposed to reforming Social Security and other popular middle-class entitlements, in spite of their ruinous cost. He lead a never-seen-before spending orgy, without considering consequences. But Biden and his chums are “working very hard” to do even out-do the “King” himself. Both, Republicans and Democrats have to be blamed here. The result is that there is at present no one in Washington with a mind set to put fiscal affairs in order.
As economist Herbert Stein said once: “If something cannot go on forever, it will stop.”
So, when do we realise that this can not go on forever? And even more interesting is, what happens then?
Sven Franssen