Too much money chasing too few goods
Why policies got us here, and how removing them would work out well
In this prior Substack, I gave the following ‘30,000-foot view’ of how economic interventionism (lost economic freedom; culminating in corporate-state fascism) destroys nations:
But here is how fascism actually works (in practice):
Dictator tries to direct resources to friends and punish enemies.
Having just one or a few people deciding where everything goes “fails horribly.”
Inflation of the currency is required in order to fund huge government programs.
Countering inflation by raising interest rates is needed to limit “pricing pains.”
Therefore, debt servicing costs “break your bank.”
After losing economic freedom due to anti-capitalist public policy, and therefore having government allocating a greater proportion of scarce resources, it becomes a requirement that the ratio of ‘immediately-spendable cash’ (hard currency + checking accounts) to the ‘private sector GDP’ (GDP-government) rises above the natural rate.
This leads into Step 3 of the government-initiated and government-propagated demise of nations spelled out above. It’s inescapable. If you can’t fund lavish government programs which cronies had concocted and from which they personally benefit — because the people do not want to pay for those programs — then you must print money.
Here is the history of the ratio of spendable cash to private GDP:
[click to enlarge]
The year of 1984 is highlighted as the first year when spendable cash normalized after the ratio had fully adjusted to the use of new credit instruments such as credit cards. It remained at its natural rate of 15 cents per dollar of private GDP for the rest of the century.
But then the US government grew more fascist. “Public-private partnerships” became more common. The line between where free enterprise ends and collusion-with-government begins became blurred.
The first effect was to drive the ratio of spendable cash to private GDP down even further, due in part to quasi-private sectors growing while simultaneously using unconventional credit instruments with ominous names such as Collateralized Debt Obligation and Credit Default Swap.
But that was contrived and artificial, and it led directly to the required use of inflationary measures just to remain in the same place, economically. Here is the same graph with notes in it:
[click to enlarge]
As said before, there is no future in fascism. You cannot sustain any real growth when the ratio of spendable cash to private sector GDP is three times its natural rate for advanced economies. It’s a stop-gap measure to inflate the money like that.
In an analogy to a row boat, if you have to bail water because of a hole in the hull, then you cannot row the boat forward.
A permanent fix of this hole in the hull — the one which will sink us, given enough time — would restore free market capitalism by removing government interventionism, and dismantling all ‘public-private partnerships.”
References
U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP
U.S. Bureau of Economic Analysis, State and Local Government Current Expenditures [SLEXPND], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SLEXPND
U.S. Bureau of Economic Analysis, Federal Government: Current Expenditures [FGEXPND], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FGEXPND
Board of Governors of the Federal Reserve System (US), Currency Component of M1 Plus Demand Deposits [CURRDD], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CURRDD