The Economic Gamble of the United States
Trust The Plan!
Trump has dismayed the world this week by announcing tariffs on the trading partners of the United States worldwide. Economists and investors around the world are shocked and appalled in equal measure as global stock markets take a tumble. At the same time, those who support Trump reiterate the now familiar refrain – ‘Trust The Plan!’
Clearly, Trump has a plan, but is it one we should trust? That is the question.
Since the 2020 pandemic, governments have felt they must overspend to counteract that unforeseen emergency. Overspending was already a problem, and signs of a financial disaster to come were already apparent, as I discuss in my book Truth Decay – How Bitcoin Fixes This.
Overspending
However, the pandemic took the spending of governments around the world to a whole new level, and the usual critics of government spending looked the other way as everyone became focused on the immediate health emergency.
By 2021, surging inflation was becoming an increasing problem and was noticed by everyday people, especially in the United States.
This inflation resulted from the money supply expansion during the health crisis, and the low interest rates allowed to proliferate during the preceding years. People in the US received cheques to stay at home, and in the UK, the government made cheap loans accessible to businesses to help them stay afloat. New companies, particularly experts in PPE equipment, grew overnight. It was a very strange time.
Monetary Inflation vs Price Inflation
The resulting price inflation, however, became a big problem, causing many in the general population to freak out.
The government had to step in. You see, they can get away with as much monetary inflation (easing of the money supply) as they want behind the scenes, as long as they can control the price inflation (increase in the price of goods and services) that people experience daily.
Monetary inflation has been a valuable economic tool of governments since the outbreak of the First World War, as I explain in my previous newsletters. Still, this money supply expansion is usually carefully managed and generally hidden from unsophisticated eyes. The recent pandemic, however, appears to have been the proverbial’ straw that broke the camel’s back,’ meaning that the attempts of the financial system to control price inflation as a disguise of monetary inflation are starting to fail.
Once monetary inflation becomes apparent through uncontrolled price inflation, all hell will likely break loose, and hyperinflation will take hold, as has been seen many times before in history.
Interest Rates
Something needed to change, so this was when the central banks began raising their interest rates.
However, due to the amount of debt already in the financial system, they can only take this so far before the entire system begins to break down. The excess loans already issued at low interest rates become a big problem when renewed at higher rates.
Interest rates are one way to control inflation because they prevent individuals and businesses from taking out more cheap loans, which add to the money available in the economy (monetary inflation). However, this does not address the excess cash already in the system, contributing to price inflation.
Removing the effects of the excess liquidity caused by monetary inflation was always going to be painful; there is no doubt about it. It has been attempted many times in history and always precedes a financial crisis. It happened in 1820, in 1929, and in 2008, to name just a few examples. As I demonstrate in my newsletter – Bitcoin & Inflation – people love it when their assets go up, and they hate it when they go down. The financial industry typically throws a hissy fit in these circumstances, as we are starting to see right now.
Taxation
One strategy to protect the financial system and remove excess liquidity is to increase taxes, which siphon the excess liquidity back to the government. People hate excessive taxation, though, and most of the population is already taxed close to their limit. So, another solution is required so that individuals already suffering will find the answer less threatening. Finding a palatable answer is an ongoing political battle.
A tried and tested way around this is to find a victim and establish them as an enemy. The best enemy is usually the rich. That story never gets old, but unfortunately, people aren’t seeing targeting the rich as changing anything anymore, and as Trump is rich himself and needs the rich to keep him in power, he needs a whole new enemy.