The difference between a good and a bad economist, explained Frederic Bastiat long ago, is that one sees only the immediate visible effects of a policy or law. The other sees not only the initial impact, which often appears favorable, but also the ultimate consequences that are so often destructive.
That is why the monetary authorities print and spread free money around to the banks and Wall Street. They see the immediate results: a drug-like high from free money sloshing around the economy. But they don’t anticipate the relapse, the destructive inflation that is the inevitable accompaniment.
And so, once again, the Consumer Price Index report through August shows prices roaring ahead at an 8.3% annual rate, despite gas prices having slipped from their all-time highs of June and July. To the surprise of no shoppers at all, food prices rose 11.4%, the largest annual climb since May 1979.
Rising prices like these mean the U.S. dollar is losing purchasing power at an alarming rate. So let us back up to the “seen and unseen consequences” Bastiat warned of.
The following graph depicts the U.S. debt explosion as the Fed printed money to drive interest rates down.
This alarming growth of federal debt, seen in red, must be put in historical context. The U.S. won its independence from the British, expanded to the Pacific Ocean, making the Louisiana Purchase and buying Alaska along the way, fought a civil war, World Wars I and II, as well as the Korean and Vietnam Wars, and sent a man named Armstrong to walk on the moon – all without running up a trillion-dollar national debt.
In fact, the national debt didn’t reach $1 trillion until 1982. That was the same time the Fed embarked upon a decades-long policy of printing money aggressively to drive interest rates down, as shown by the black line.
Along the way, the Fed always saw the immediate consequences of its addiction to money printing. There are loud constituencies and specific beneficiaries for every proposed new spending plan. As for the longer-term consequences, the destruction of the dollar’s purchasing power and the systemic capital destruction we are experiencing today weren’t on the central bank’s radar screen.
The unseen consequences are not few. There are many. They include a fraying of the social order domestically as well as a growing global distrust of the U.S. dollar as the world’s standard of commerce and reserve currency. But there is an even more troubling, unseen consequence of the Fed’s policies. As it drove interest rates down close to zero, it didn’t escape the notice of the nation’s lawmakers. The old coalitions of Democratic and Republican deficit hawks that tried to keep a lid on government debt simply disappeared. And why not? Washington could borrow money at rates so low — the lowest in history — that the cost of borrowing was like an inconsequential rounding error.
But now interest rates are rising. As an opinion piece in the Wall Street Journal said simply, “Rising Interest Rates Will Crush the Federal Budget.” The author, Townsend Group President Red Jahncke writes, “Total federal gross interest cost over the 12 months ending on May 31 was $666 billion. If we include the impending extra interest [reflecting rising rates] on Treasury bills and the maturing notes, that figure rises to $863 billion. This is a staggering cost…. With the federal government in perpetual deficit, where will the Treasury find money to make extra interest payments? New taxes? Lower spending? Fat chance.”
But there is more to be seen than rising rates. The Committee for a Responsible Federal Budget estimates that between executive action and legislation, the Biden administration will add more than $4.8 trillion to federal deficits between 2021 and 2031.
With other countries reluctant to fund shaky U.S. debt at today’s levels, we suggest that Washington will find the money to fund its perpetual deficits in the same place incontinent governments always get it. They will devalue the currency. Which explains why you need gold and silver for wealth preservation.
One more thing. Uncle Sam will probably put those 87,000 new armed IRS agents to work. You may want to have some wealth off the grid along the way. History has repeatedly seen aggressive and even militant tax collection regimes, indifferent to any actual laws, responding only to the revenue quotas they get from above, in places of high inflation. In countries like Weimar Republic Germany, Zimbabwe, and Venezuela, to name but a few.
Gold and silver were the best havens of safety in each, as they always are.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.