Volume 10, Issue 39
Equity and bond markets around the world are experiencing gyrations as inflation impacts the price of goods and services. This non-traditional unpredictability does not appear to be grounded in normal economic indicators. Therefore, something else is amiss. The Economist concludes that “a definitive end to the age of economic placidity in the 2010s” may be upon us.
Analysis by leading financial and economic experts includes numerous topics of cause and effect such as Covid relief fund spending, supply chain disruption, lingering effects of quantitative easing from the 2007-2009 world financial crisis, continued governments’ deficit spending, flight of capital to the United States as a safe harbor, and the Russian invasion of Ukraine. What is strangely absent from this analysis is the effect of accumulated debt issued by sovereign nations and the collective world debt as a percent of world Gross Domestic Product (GDP).
Debt is an anchor to sustainable economic growth. Why? Because it never goes away until paid and, as it increases, it generates an increased cost of doing business whether in the private sector or government. When the cost of government borrowing exceeds an amount that productivity or innovation cannot surmount, the economy falls into recession or defaults into depression.
Compare this statement to private business. Company A makes a widget. It has debt. The free market sets the demand and price for the product. The market does not take into consideration or distinguish the business’s debt in deterring the retail price. Company B is in competition with Company A. It has no debt. Therefore, there is no interest cost that Company B must include in the price of its widget. If Company A’s debt is too large, it cannot effectively compete against Company B because of the ongoing interest cost the debt adds to Company A's overhead.
Nation-states are generally bound by the same economic axioms.
Governments are different from individuals in that they can tax and print money. Raising taxes reduces the amount of money available for private investment. Undisciplined printing of money destroys the currency. Overreach by both government actions weakens the economy and impedes the private sector’s ability to pay the taxes the government requires to pay down the federal debt. In other words, the government cannot increase taxes, spending, and borrowing without limits. Such action results in killing the proverbial golden goose.
How bad is the federal debt?
The question is asked, is the playing field level between nations if all sovereigns are equally burdened by debt? The answer is no. In previous centuries, more than one currency competed for international transactions. Today the dollar is the world’s only primary currency. President Biden is being criticized by our closest trading partners for implementing unfair subsidies in reference to certain high-tech industries to relocate in the United States. These programs are offered through the Inflation Reduction Act. This act has very little to do with inflation, but a lot to do with luring industries that the Administration feels will address climate change. It is important to remember that the national debt of most countries is denominated in dollars. They have to earn dollars to pay off their debt. The strength of the dollar gives the United States the advantage.
China operates under its own banking system. The communist command economy is failing to meet national objectives. China’s only hope is to capture enough of the world’s commerce into the shadow of their banking system to be able to control prices for trade.
The United States, as the leader of the world economically through free enterprise, still holds the hope for freedom and prosperity for the Western world. The problem now is the power of the U.S. dollar. Inflation is a worldwide problem partly caused by Covid disruption, but also by the reckless deficit spending by the United States. Countries with GDPs of less than $1 trillion struggle to convert their local currencies into dollars as needed to buy strategic materials. China offers these dependent countries goods and infrastructure priced in yuans as a loan to be repaid in dollars. This does not help the developing country. The debtor country puts up raw resources as collateral on which the Chinese government forecloses. This is reminiscent of 18th century mercantilism wherein the dominant country, at times through colonialism, obtained natural resources at reduced prices. In the case of the Chinese, they then wash out yuans for dollars that they also need.
History may be repeating itself.
A restructuring and reset of the world economic order is fated.
The critical issue for determination of the economic restructuring of the world in the coming Great Reset will be the focus of America's decision in the 2024 Presidential election cycle.
In summary, the United States must manage its debt and spending to address the debt anchor. Controlling inflation by stabilizing the dollar is not only important to America, but to every nation in the world.
We as Americans must be vigilant in demanding that the next President of the United States is committed to defend this proposition of our ordained economic rights.
My name is Marc Nuttle and this is what I believe.
What do you believe?