“Fiscal Folly and Money Mischief”

• “Are fiscal folly and money mischief our new normal?”…
• Don’t expect the Fed to make the right choice…
• The PASSIVE STREAM of income that could MAKE your retirement…

Dear Reader,

Alexander William Salter professes economics at Texas Tech University. He is likewise a fellow with the American Institute for Economic Research.

In a fresh Washington Examiner article, he asks this question:

“Are fiscal folly and money mischief our new normal?”

I shall spare you the needless suspense. The answer is yes.

Fiscal folly and money mischief are indeed our new normal.

This new normal had been normalizing for years and years… inexorably… yet gradually.

Yet fiscal policy and money mischief combined powerfully, during the plague, in seismic collision.

Monetary policy, the province of the Federal Reserve, yielded abruptly to fiscal policy.

The Emergence of Fiscal Dominance

And when fiscal policy assumes the superior position, monetary policy assumes the very junior position.

Professor Salter:

• It’s not easy to conduct monetary policy when fiscal policy is perpetually reckless… While the Fed is not totally independent… fiscal policymakers should not pressure monetary policymakers to make borrowing easier. 
• But it’s hard to see how we can avoid this given our fiscal trajectory. Economists call this sad state of affairs “fiscal dominance”: Monetary policy can’t achieve stable prices and moderate interest rates when it’s subordinate to fiscal policy demands for cheaper financing. 

Please, good sir, explain the subordination of monetary policy under fiscal dominance:

• Central banks can lower government borrowing costs in the short run by purchasing government debt. This raises bond prices and lowers yields. The inevitable result is inflation… If the central bank purchases the debt with newly circulating money, inflation will follow as surely as night follows day.

Night has in fact followed day. And inflation has followed fiscal dominance.

Monetary Accommodation of Fiscal Profligacy

I have referred to the plague and the development of this new, abnormal normal. About which:

• COVID-19 created an awful precedent with which we have not fully grappled.
• Government spending skyrocketed during the pandemic. So did borrowing. What matters is how the Fed supported it: 
• Between 2020 and 2022, the Fed’s balance sheet grew from $4.2 trillion to $8.9 trillion. Approximately $3.1 trillion was from government bond purchases, two-thirds of the total…
• Economist John Cochrane… noted that the Fed “immediately bought new Treasury debt with newly created money,” essentially as a program to finance spending…
• This was monetary accommodation of fiscal profligacy, plain and simple.

So it was, Professor Salter. So it was.

Where’s the Crisis?

The crisis has passed. Yet the budget of the United States does not indicate it.

Federal spending remains far above pre-plague settings.

I learn from the United States Treasury Department that Uncle Samuel has ladled out $4.16 trillion to date this fiscal year… “to ensure the well-being of the people of the United States.”

The fiscal year does not conclude until Sept. 30.

Thus the United States government has nearly three months to spend additional money on the well-being of the people of the United States.

That is, nearly three months to squander money the United States government does not in fact possess on the well-being of the people of the United States.

That is, nearly three months to plunge the people of the United States ever deeper into debt.

If this be “well-being,” the people of the United States might best be served by government neglect of their well-being.

The Ratchet Effect

What we observe is a sort of ratchet effect.

Once federal spending attains a certain level, it cannot regress to the previous notch.

The trajectory must remain in the upward direction.

There may be slight slippage, it is true. Yet the slippage is measured in millimeters, not centimeters — much less inches.

In fiscal year 2019, the United States government spent some $4.4 trillion.

The lowest amount it has since spent was $6.13 trillion — in 2023.

In 2024 it spent $6.94 trillion. When fiscal year 2025 ends it will have likely spent $7 trillion.

Spending projections increase each subsequent year to the farthest horizon.

It is true, we must factor for such variables as inflation and population increases.

Yet again, where is the crisis? And why cannot the budget of the United States revert to something approaching pre-plague levels?

Again, I point my bony index finger to the ratchet effect.

It’s All About the Next Election

Politicians grow accustomed to a particular spending level. And they will not do with less.

To do so would be “extreme”… or “austere” or “heartless.”

Few politicians possess the spinal steel to withstand the barbs. After all, there is the next election to consider.

And so up goes the ratchet, notch by perilous notch.

Here Professor Salter lowers his axe upon the problem’s root:

• Politicians care about the short run. Anything beyond the next election is a luxury they can’t afford. Spending is popular, but taxes are not, so they turn to printing-press finance. Politicians will paper over chronic deficits if it helps them postpone the pain.

And the Federal Reserve is their facilitators… as the drug pusher is the addict’s facilitator:

• There is no escaping the government’s basic budgetary reality. To spend, it must tax, borrow, or print. Option one gets politicians thrown out of office. Option two remains attractive only if lenders are willing to play ball. That leaves option three, and the Fed has already proven it’s not repulsed by the idea. So much the worse for all of us. The Fed can help Uncle Sam pay its bills, or it can promote economic stability. It cannot do both. When push comes to shove, I’m increasingly skeptical it will make the right choice.

Just so. Yet I am not merely skeptical the Federal Reserve will make the right choice.

I am very nearly certain the Federal Reserve will make the wrong choice.

I base my claim entirely upon the historical evidence before me.

Why would you believe the Federal Reserve will suddenly get it right?

Brian Maher

for Freedom Financial News