A Collective "Kick the Can Down the Road" Mindset

The Federal Reserve serves as the great enabler. As I put it in a recent article, it is the engine that drives the most powerful government in the history of the world. The Fed’s ability to print money out of thin air backstops borrowing spending and removes any meaningful limits on the US government’s actions. It also creates the illusion that there are no consequences to the government’s actions.

We’re seeing that in spades in the central bank and federal government’s response to the coronavirus pandemic. The government is borrowing trillions of dollars and the Fed is monetizing that debt. On top of that, the central bank is propping up the stock market through its easy-money policy and corporate bond-buying programs.

Money is power and the Federal Reserve serves as an unlimited spigot pumping dollars into the system, enabling the biggest government in the history of the world to keep running.

As economist Mark Thornton put it in a Q&A published at the Mises Wire, we now have a generation in power that has no concept of monetary restraint. As a result, there is no need for government restraint. Thornton called it a collective “kick the can down the road” mindset.

It is truly remarkable. In the past, we had the gold standard restraint on fiscal and monetary policy (until 1971). That restraint had a lingering effect for a long time. However, the current group of voters and politicians no longer recognize that restraint or the consequences of ignoring a balanced budget restraint. The average American has no memory of the gold standard or even the stagflation of the 1970s. The current generation does not even recognize the idea of a government budget! The collective mindset is the classic ‘kick the can down the road.’ Obviously, the idea of a national debt limit is now rightly regarded as a joke.”

The federal budget deficit in June was nearly as big as the entire 2019 deficit and bigger than the budget shortfall in 2018. But people have been warning about budget deficits and the national debt for years. Most people don’t even care anymore. Thornton says we should.

Spending is out of control and tax revenues will probably miss the initial estimates. The millions of unemployed will likely have a hard time making tax payments. Expenditures for things like unemployment insurance and welfare payments will likely remain high. I think I am most concerned about interest paid on the national debt, as an uptick in rates could cause such payments and the deficit to balloon.

“Why should we care? The simple reason is that all this spending eats up real resources. The government buys something and the resources are not available for productive use. GNP (gross national product) goes up, but what are the real benefits? The government writes welfare payments or unemployment insurance checks and potential workers stay unemployed. It also raises future taxes. Good economic policy is about increasing private production and free trade. Bad economic policy is about living beyond your means and protectionism.”

We have been saying that the economy was already in bad shape before the coronavirus pandemic. The economy was a great, big, fat, ugly bubble that was doomed to pop. COVID-19 simply sped up this process. Thornton agrees with this assessment….[   ]

What do you think?

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Posted by Cynical

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