The Far Side of Stimulus

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Do you feel uneasy about the economy being just “not right.” Despite what you hear on the national news or from our elected leaders, “the economy is just fine” doesn’t add up. In our real world, prices continue to accelerate, the cost of living climbs, and it’s becoming harder to make ends meet. Far from looking better and better, the economy, from our perspective, is looking worse and worse. Why do we have those feelings?

Understanding what’s happening to our economy will entail reviewing some history. We must return to the Great Depression when America was in deep trouble. Back then, the old rules of economic growth weren’t working. Since the time of Adam Smith, who wrote his magnum opus (and began the study of economics), On the Wealth Of Nations, in 1776, economists and the politicians who ran our country assumed that the way to prosperity lies in increasing the country’s production of goods and services.

This approach, increasing the country’s production, worked brilliantly throughout the 19th century, the time of the Industrial Revolution. America was the economic wonder of the world, becoming the wealthiest, most prosperous country on earth. Our production increased, generating more wealth and creating a higher standard of living. Adam Smith’s economic formula exceeded everyone’s expectations.

However, Smith’s formula of greater and greater production, leading to greater and greater prosperity, seemed to fall apart in 1930s America. Most of the country was caught off guard, as the stock market crashed first, then the farmers were mired in the great “Dust Bowl,” and people’s incomes dropped like a rock. Companies tried to make more (increase production), but no one had the money to purchase those additional goods and services. Then those same companies laid off workers, which in turn led to fewer and fewer customers. A vicious cycle caught hold of the country as prices plunged (deflation), but no customers appeared.

It was becoming evident that something needed to be done. The old “rule book” was not working.

Across the Atlantic, a young economist, John Maynard Keynes, proposed a different approach. He saw the issue as this lack of customers (lack of demand). If the government could step in and promote demand by pumping money into the economy, it would kick-start a positive economic cycle.

This concept of economic stimulus appealed to the Franklin Roosevelt Administration, which immediately began implementing Keynes’ stimulus. It was a long, hard slog, but slowly, the economy turned the corner. After a decade of hardship, America regained its footing, and the economy began a new growth cycle.

It was a watershed moment in American history. Henceforth, the US Government would focus on Keynes’ view of the importance of a consumption-based economy, replacing the old production-based economy of Adam Smith. A couple of other forces at work would make this consumption instead of production basis for the economy the road for America.

Keynes had given Washington’s political class a method to control the economic fortunes of the average American. Now, politicians could stand before the people and claim they were responsible for the “economic good times,” as every President does annually at the State of the Union Address.

Additionally, the environmental movement began in the 1960s to target major industrial plants as a chief source of pollution. Thus, a push to eliminate “Smoke Stack America” began. At around the same time, China presented an opportunity for America to “offshore” its industrial production and move those smelly plants across the Pacific.

Today, the consumer generates roughly 70% of US domestic commerce. It’s a dream come true for our political class. Now, whenever an economic crisis appears, Washington can “stimulate” the economy by putting money in the hands of the average American consumer.

In fairness to Keynes, Washington had taken a policy that Keynes proposed to be temporary and used in only the most dire of situations into an everyday policy for the government. For over 80 years, Washington has managed our economy through continuous “stimulus” and all those deficits that it creates.

However, since the COVID-19 pandemic, Washington has taken this unending stimulus policy to the next level. More than a decade ago, former Fed Chairman and Depression Era Scholar Ben Bernanke suggested, in a closely followed speech, that if things got really tough, we should get money in the hands of Americans in any way possible—even “throwing it out of a helicopter” if needed. Helicopter Ben was on a roll.

Little did we know that Ben’s radical proposal would be implemented during the worst Pandemic of the 21st Century. COVID-19 presented Washington with an opportunity to dominate the economy like never before. During that fateful economic lockdown in Q2 2020, the economy plunged by over 30% (on an annual basis), a decline that exceeded even the worst times of the Great Depression. And Bernanke’s “helicopter money” became those Stimulus Checks issued during the economic crash in 2020.

Once again, Keynes’s concept of putting money in the hands of the consumer brought the economy out of free fall.

Unfortunately, President Joe Biden and the rest of his Administration failed to read the rest of Keynes’ book (The General Theory of Employment, Interest, and Money). Keynes clarified that any such stimulus program should only be temporary and that the government deficits created by such stimulus should be reversed (government surplus) and paid off during better times.

But for free-spending President Biden, it must have seemed that he had found political nirvana. Simply having the government spend more money would, in his eyes, boost the economy and help him with the voters.

Unfortunately, for Biden and the American people, stimulus only works on the way up the mountain when the dollars spent by the government increase, adding to the nation’s income.

But there comes the point of diminishing returns when spending falls short and expenses rise. As all that stimulus debt mounts, the interest expense eventually exceeds that “free” stimulus income. That’s where we are today.

America’s stimulus-powered economic growth peaked in 2021. Powered principally by stimulus “income,” the economy “grew” at a remarkable 5.8%. But this was achieved by increasing the Government Deficit by nearly 10%, a mountain of debt, the interest of which must now be paid.

The mountain of Government debt continues to grow. The interest on our $34 trillion in government debt is now nearing a trillion dollars per year. We’ve reached the point where additional stimulus fails to promote extra growth because our debt burden and interest outweigh it.

Additionally, there is a natural tendency for investors to purchase higher-rated securities over lower-rated securities. They will buy Government Debt (US Treasury Bonds, Notes, And Bills) before investing in lower-rated debt (such as Corporate or personal debt). This process is “Crowding Out.” In effect, the Government’s debt crowds out the private sector. Consequentially, the private sector, the real engine of economic growth, is deprived of capital. Growth slows, and eventually, the weight of Government debt becomes so burdensome that the economy falls into recession.

It’s a process that Keynes anticipated years ago. When a stimulus is first applied, it can be very beneficial, boosting the economy, as it did during the Great Depression of the 1930s and now again as we emerged after the COVID-19 Pandemic of this century. But then comes this critical moment when all that debt created by Government Stimulus begins to drag down the economy. It’s what I call the “far side of the mountain.”

That’s where we are today. The sheer magnitude of Government Debt is increasingly depressing this economy as more and more our financial reserves are used to pay its interest and principal. Clearly the economy is slowing, from 2021’s rebound economic growth of nearly 6%, to this year’s first quarter growth of a tepid 1.6% rate.

Today, we’re at the far side of Stimulus Mountain; the very policy that promoted growth during the COVID-19 pandemic has become today’s economic drag, just as John Maynard Keynes warned nearly a century ago.


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