The most fundamental law of economics is that supply and demand must be in at least approximate equilibrium or there will either be a huge depression or gigantic inflation.
Now, Biden and the Democrats are testing whether that theory is true.
After their $1.9 trillion economic stimulus package they are now pushing a $3 trillion package of infrastructure, climate change, welfare, education, and God knows what else. At the same time, they are proposing $1 trillion of taxes that are specifically aimed at companies and individuals who can manufacture goods and provide services to soak up this demand. By raising their taxes he is ensuring that they will not be able to produce adequate supply to meet the mammoth demand he is creating.
And, he is imposing new environmental and labor regulations on them that will bring their productivity to a standstill.
When corporate taxes go up, companies have less money to produce products or provide services. When capital gains taxes go up, there is less money to invest in new plant and equipment. When taxes on high bracket individuals go up there is less money for small businesses or individual entrepreneurships to create jobs.
When all three go up — as supply surges — you cannot avoid massive inflation.
When too much money chases too few goods and services, the result is always huge inflation and a boom and bust cycle that dominates the economy for at least a decade. This was the experience in the 1960s and 70s when spending on the Vietnam War and the Great Society grew so large that they caused huge deficits. This reckless spending triggered an alternation of bloom and bust cycles throughout the 1970s. We had three recessions within 10 years. After that, we experienced double digit inflation which could only be checked by a huge recession deliberately induced by the Federal Reserve Board to save the economy.
Apparently we must go through the same cycle again before the Democrats learn their lesson.
But now, we face a second peril: the undermining of confidence in the dollar itself. Let’s get our terminology right. We are not borrowing money from willing lenders. We are printing it. We are fabricating dollars with nothing to back them up except the full faith and credit of the American government. At what point do people begin to understand how transparently fraudulent this equation is? Economists say that as long as every other currency is as irresponsibly expanding as ours is, there will be no alternative to the dollar and everybody will have no choice but to have faith in it.
But the dollar has lost 11% of its value last year already. The growth of bitcoins and other computer-generated currencies to say nothing of barter is vividly demonstrating the lack of faith by the market in all currencies and all governments. China is poised to try to replace the dollar as the global currency and our fiscal irresponsibility is feeding their efforts.
In the meantime the national debt increases by leaps and bounds. Right now this is basically a theoretical problem because interest rates are at zero so it costs little to pay the annual service on this massive debt. But the Fed cannot hold interest rates at zero forever and when they start to rise the national debt service with consume our federal budget and force us into dire straits.
This economic suicide is being justified as a response to the coronavirus but the virus is receding and vaccinations are increasing.
The likelihood is that inflation, not the virus, will kill us.
Politically the Democrats are determined to user the razor thin majorities in the House and Senate to pass the most radical and bold legislation in history with no Republican support or even input.
When the administration says it seeks a bipartisan consensus it means: “We will cut our Republican friends in on the pork barrel goodies of our spending and fund their favorite projects too, but we won’t let them shift the focus of our tax increases or scale them back, nor will we let them reduce our total spending.
Is Biden right? Has the law of supply and demand been repealed? Will the world countenance endless, profligate, faithless printing of currency? Nobody knows. This is totally uncharted territory. But Biden is certainly gambling with our future big time.
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