While fiscal imbalances persist, driven by coercive measures and the artificial creation of money, the middle class is faced with the erosion and reduction of purchasing power. But as the world heads toward an eventual reckoning, the lingering question remains: Can this precarious balance last, or are we faltering on the edge of a cataclysmic economic change?
THE next article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.
In a recent tweet, a talented financial analyst and investor said: “The narrative that 'debt is unsustainable' has been around for over 40 years. What amazes me is that those who defend this discourse never ask themselves: “Why has this been sustainable for so long?” “.
There is a widely held view that fiscal imbalances in a global reserve currency issuer would result in Argentina-style bankruptcy. However, the manifestation of unsustainability has not even appeared so drastically in Argentina itself. Hey, Argentina still exists, right?
Excessive public debt is unsustainable when it becomes a burden on productive growth and leads the economy to ever-increasing taxes, lower productivity growth, and lower real wage growth. However, the level of unsustainable debt accumulation could continue to rise because the state itself imposes public debt on bank balance sheets and forces the financial sector to view all of its debt as “l 'least risky asset'. However, the law and regulations have only imposed and forced this construction. Rising debt inflates the size of the state in the economy and erodes its growth and productivity potential.
Many people with diabetes and obesity continue to eat too much unhealthy food, thinking that nothing has happened so far. This does not mean that their eating habits are sustainable.
Those who ignore the accumulation of public debt tend to do so in the belief that nothing has happened yet. This is a reckless way of looking at economics, a sort of “we haven’t committed suicide yet; let's accelerate the mentality.
An ever-weakening private sector, low real wages, declining productivity growth and a decline in the purchasing power of money are all indications that debt levels are unsustainable. It is becoming increasingly difficult for families and small businesses to make ends meet and pay for essential goods and services, while those who already have access to debt and the public sector smile contentedly. For what? Because the accumulation of public debt consists of artificially printing money.
When money is created in the private sector through the financial system, there is a process of wealth creation and productive money creation. The financial system creates money for projects that generate a real economic return. Some fail, others fly away. It is the process of productive economic growth and progress. Only when the central bank manipulates interest rates, hides the cost of risk, and increases the money supply to monetize unproductive deficit spending can it distort this process.
When the central bank wants to hide the deteriorating solvency of fiscally reckless governments, it does so by changing interest rates (making it cheaper for fiscally irresponsible governments to borrow) and artificially increasing the quantity of money in the system , by monetizing public debt – a destructive process. of monetary creation as opposed to the savings-investment function of the banking sector.
When the fiscal situation is unsustainable, the only way for the state to force acceptance of its debt – a newly created currency – is through coercion and repression.
A government's debt is only an asset when the private sector leverages its solvency and uses it as a reserve. When the State imposes its insolvency on the economy, its bankruptcy manifests itself in the destruction of the purchasing power of money through inflation and the weakening of the purchasing capacity of real wages.
The state is essentially leading a slow process of defaulting the economy by raising taxes and weakening the purchasing power of the currency, leading to lower growth and the erosion of the middle class, the hostages captives of the issuer of the currency.
Of course, as a currency issuer, the state never recognizes its imbalances and always blames inflation and low growth on the private sector, exporters, other nations and markets. Independent institutions must impose fiscal prudence to prevent a state from destroying the real economy. The state, through the monopoly of currency issuance and the imposition of laws and regulations, will always pass on its imbalances to consumers and businesses, thinking it is for their own good.
The public deficit does not create savings for the private economy. Savings in the real economy accept public debt as an asset when they believe that the solvency of the issuer of the currency is reliable. When the government imposes it and ignores the functioning of the productive economy, positioning itself as a source of wealth, it undermines the very foundation it claims to protect: the standard of living of the average citizen.
Governments do not create reserves; their debt only becomes a reserve when the productive private sector economy within their political boundaries thrives and public finances remain under control. The State shows its insolvency, like any issuer, in the price of the IOUs it distributes, that is to say in the purchasing power of the currency. Public debt is an artificial monetary creation because the State does not create anything; it only administers the money it collects from the same productive private sector that it stifles with taxes and inflation.
The United States' debt began to become unsustainable when the Federal Reserve moved from defending the currency and paying attention to monetary aggregates to implementing policies designed to hide the rising cost of debt under a runaway deficit.
The artificial creation of money is never neutral. This disproportionately benefits the first beneficiary of the new currency, the government, and massively harms the last beneficiaries, real wages and deposit savings. This is a massive transfer of wealth from the productive economy and savers to the bureaucratic administration.
More units of public debt mean lower productive growth, higher taxes and higher inflation in the future. All three are manifestations of a slow burn defect.
So, if the State can impose its fiscal imbalances on us, how can we know if the debt it issues is unsustainable? First, due to the units of GDP created, the addition of new units of public debt declines rapidly. Second, the erosion of the purchasing power of money persists and accelerates. Third, due to the decline in productive investment and capital spending, employment may remain acceptable today, but real wages, productivity, and the ability of workers to make ends meet are deteriorating rapidly.
Today's story tries to tell us that nothing happened when a lot of things happened. The destruction of the middle class and the deterioration of the fabric of small and medium-sized businesses for the benefit of a growing bureaucratic administration that consumes higher taxes but generates ever more debt and deficits. It ends badly. And all empires end the same way, assuming nothing will happen. Acceptance of currency as a reserve effectively ends. The persistent erosion of purchasing power and the decline in confidence in the legally mandated “least risky asset” are some of the warning signs that some are willing to ignore, perhaps because they live off other people's taxes or because they profit from the destruction of currency through assets. inflation. Either way, it is profoundly antisocial and destructive, even if it is a slow detonation.
The fact that there are informed and intelligent investors who happily ignore the warning signs related to the weakening of the middle class, the decline in the purchasing power of money and the deterioration of solvency and productivity shows why it is so dangerous to allow governments to maintain fiscal recklessness. The reason government money creation is so dangerous is because the government is always happy to increase its power over citizens and blame them for the problems created by its policies, presenting itself as the solution.
Can the debt continue to rise? Of course. The gradual process of impoverishment and serfdom is relatively comfortable when the state can enforce the use of currency and impose its debt on your pension through law and regulation. Thinking that this will last forever and nothing will happen is not just a reckless “speed up, we haven’t crashed yet” mentality. This is ignoring the reality of money. Independent money, gold and others solve this problem.
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