We don’t know how far back it became accepted wisdom, but it wasn’t a recent discovery that man exists in economic scarcity. “In the sweat of thy face shalt thou eat bread” is too old to be dated and political promises aside, has yet to be refuted. (For any readers publicly educated in the U.S, it’s from the Jewish Bible.) It is also from Economics 101, though a bit differently stated. In all the millennia of human civilization it has not been effectively refuted. Politicians are very disturbed by this.
The more succinct if less explanatory version today says that we cannot get something for nothing. This also upsets politicians as they assure their elections by offering exactly that. Not of course in those rather stark terms, camouflaged instead with some soothing syrup of fantasy to promote swallowing without chewing too much. It is the basic building block of politics.
In the late 1920’s they promised a chicken in every pot and a car in every garage and delivered the Great Depression, which was stark enough to get attention. But that attention was successfully diverted from the economic facts and today we are repeating the policies of those times in the expectation of an opposite result.
Simply, government can accomplish only two ends by, as it was derisively termed back then, “spending us rich.” First, by extracting capital from the economy in order to spend it, government weakens the productivity of that economy. Second, by spending in furtherance of necessarily political goals, government allocates that capital in uneconomic fashion, which further degrades productivity. Letting politicians into economic decision making is inevitably a lose-lose proposition. We invite any excitable types now frothing at the mouth to refute this to kindly provide their real-world examples from history. We know of none whatever, if one wishes to be honest.
Against this collection of verities, a morality play is approaching its inevitable climax. The President is budgeting his eternal deficits, the GOP anti-deficit preachers are scrambling for ways to oppose deficits without being deprived of them and at the Federal Reserve, Mother Yellin is writing as the enormous political pressure for deficits compresses under the financial pressure of a rising dollar and an allegedly recovering economy.
The Federal Treasury must borrow to fund its deficits; to do so, it must pay interest. The Federal Reserve has kindly squashed interest rates to nearly nothing as a way to ease that borrowing. But under that umbrella, many others have borrowed too, many who if interest had been at real market rates, could not have afforded to borrow at all. And much of such borrowing is money wasted, e.g. the long list of failed and failing investments in “green energy” now dying or dead.
Accumulating losses such as these eventually force lenders to demand more interest in recognition of real risk, never mind the Fed. The government then can’t borrow so cheaply; the spending on social and military endeavors becomes foreclosed by required spending upon higher interest payments on existing debt as it is rolled over instead. (Existing debt is too much to repay, it must be continually rolled over.) Politicians become unpopular both with suffering citizens whose benefits must be cut and with donors whose production is no longer affordable by government.
To avoid some of this, Mother Yellin may raise interest rates at the Fed. Lenders will then continue lending to government, receiving payment for the higher risk. But all those who have been borrowing at low interest but can’t afford higher rates will have to stop rolling over their debts and pay them. Those who have been suffering losses will often be unable to do that and will collapse. Banks and others holding their debts will have to write off those now bad debts and a lot of those will collapse. For Mother Yellin, that’s a hard place to be.
If she elects to ignore reality and continue cheap lending to government as the real economy disagrees, she will see the value of the dollar she is proliferating, decline against a rock called “reality. ”
Mother Yellin and behind her the U.S. government, is between a rock and a hard place and this time, without access to phony bailouts. The unfortunate thing is, we are attached to her apron strings without means for escape. After all these years of history and with all our technology, we still can’t get something for nothing.