Since the pandemic-related bazooka of fiscal stimulus, the outstanding Federal debt has risen appreciably. In nominal dollar terms, the recent debt surge is mindboggling. However, the increase is on par with the government’s negligent ways over the last fifty years.
That said, the repercussions of relying on stimulus for economic growth and growing debt faster than the ability to pay for it have significant economic consequences. The recent surge in debt will only further handicap our economy and prosperity in the future.Growing debt faster than one’s income is a Ponzi scheme. No matter how politicians sugarcoat fiscal stimulus, there are no two ways around such a characterization.
Regardless of what should happen in an economics classroom, the Fed has forced a negative real rate regime upon lenders and investors for the better part of the last 20+ years. The graph below shows the real Fed Funds rate . This is Fed Funds less CPI. The gray area shows the percentage of time over running five-year periods in which real Fed Funds were negative. Negative real Fed Funds have become the rule, not the exception.
Like the Fed’s negative real rate interest rate policy, QE also reduces interest rates, allowing for more unproductive federal and private sector debt.As we note, debt increasing faster than economic growth proves that borrowing and spending are unproductive. Unproductive government debt or private sector debt also results in a negative economic multiplier. Essentially, the ultimate expense of the debt outstrips its benefits over the long run.
With that relationship in mind, government spending is a key component of the economic freedom index. Massive government stimulus spending reduces our index score. Further, while not a part of the score, manipulation of free market interest rates also detracts from the benefits of capitalism.Nothing is free, it’s just a question of how it’s paid for.
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