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A Brief Interlude
Okay, It’s a Rant
I planned to write how Bitcoin might spare us from economic Armageddon (no Bruce Willis required). But I recalled that I failed to express the ticking-clock scenario we face by maintaining the status quo.
Much like climate change, our current monetary policies may lead to disastrous outcomes without serious intervention.
Now, I’m not exactly right about everything written below; some stems from speculation, hearsay, and down-right ignorance. But I believe the underlying story brims with truth. And I believe it will resonate with you as well.
If you find glaring flaws in my logic or facts, let’s discuss — this is about education and awareness.
If consumer spending is the yardstick by which we gauge the health of our economy, then there is one sure-fire way to stimulate it: give people cash to spend. If people have more cash, they spend it.
That money circulates into businesses and revs the economic engine. And ultimately, the Government taxes the gas in that engine and rakes plenty back in for the proceeding year’s budget. Republicans give cash to the rich, and Democrats give to the poor, but both agree on the core premise: spending equals prosperity, and a prosperous economy gets Dempublicans re-elected.
If free money were a sound policy, why not just hand out cash indefinitely? Universal Basic Income (UBI) is already underway in some countries, and it may be coming to a Government near you!
The spending-equals-growing belief stems from Keynesian economics, and John-Maynard Keynes believed that when you spur spending, the economy gallops.
But if the health of a system is primarily determined by its ability to consume, then ever-increasing rates of consumption must represent peak fitness. So just like your diet program taught you, step one is to eat everything in sight.
Despite Keynes’ obvious flaws, many of us, myself included, believe his falsehood outright. From youth, we accept it as gospel. And why not? The media panics when consumer confidence drops, and rejoices when spending sees an uptick. Society encourages and rewards consumption. 0% APR. No-money down and no credit check required.
100-years ago, people paid for college in cash. Today they finance it. And now college is the second-greatest source of household debt in the United States.
But how did we get here? I believe the answer lies in a number, and that number is 2.
The Federal Reserve sets an inflation target of 2% annually. Meaning, they aim for 2%. Not 0%, which is the amount of inflation that guarantees your money retains its purchasing power, but the amount that reduces your money’s value by 2% every year.
I believe inflation is primarily the side-effect of injecting cash into the economy to spur a ‘growing’ demand for goods and services; remember, that’s the barometer by which we gauge the health of our economy.
But too much injection, and the dollar inflates beyond what the Federal Reserve deems tolerable. 10% hits hard, but 2% feels small enough to neglect; it’s a pinch so minor it goes unnoticed by the average American. However, as the Fed manipulates the short-term interest rate to control the money supply, and thereby inflation, they also limit the rate at which your savings account can accrue.
As your money sits in your savings earning you 0.5% annually, top-down policies wish it to shrink in purchasing power at a rate of 2% — you’ve bandaged the wound, but you’re still bleeding, friend. People aware of this phenomenon naturally choose to spend their cash at peak value, rather than save it and lose.
And as inflation steadily compounds year-over-year, prices precipitously increase; prices that ultimately impact the cost of everything. For example, the humble cheeseburger.
Back in 1971, a McDonalds burger cost 30-cents. Assuming we maintained a 2% annual inflation rate since we went off the gold standard, those 30-cents would lose 63% of their value by 2021. Which means that same burger would now cost about 82-cents 50-years later.
However, the cheapest burger you can get at the ‘Donald’s today is off the dollar menu for $0.99, which represents a 69% loss in spending power — great, we’re ahead of schedule!
But Stanley, I hear you ask, who cares if the money supply grows every year and the dollar loses value? As long as wages grow at a commensurate pace, prices can grow without raising concerns.
That argument holds up… kind of. The average salary grew ahead of this 2% benchmark, that’s true. The inflationary target meant that businesses had to squeeze more value out of the same number of employees each year to meet their revenue targets and overcome future cost increases due to prescribed inflation.
To meet those goals, they placed increased burdens on white-collar workers: more hours, more responsibilities, more output, and less PTO. And luckily for the inflation-pressured corporation, they also managed to discover crushingly novel ways to cut costs at the bottom of the labor spectrum as well.
Beginning in the late 1980s, automation, robotics, and the digital age began replacing low-skilled labor. And with China ramping up its low-cost workforce, American companies knew just what to do to save cash on those pesky blue-collar jobs that began to unionize and demand ever-increasing payrates: move ‘em overseas!
This trend largely continues today with artificial intelligence and ever-smarter workplace technologies removing the burden of manual labor from people, and thereby reducing available jobs for under-educated Americans.
So, modern nations believe spending maintains their economies. As a consequence, prices grow due to systematic inflation, the cost-of-living for millions inches ever-upward, and blue-collar jobs migrate to developing countries where a large population of undereducated and impoverished labor remains cheap… for now.
For the modern nation, this puts immense pressure on the remaining consumption-oriented knowledge-workers. With more of them and fewer jobs between them, they require ever-higher levels of education to compete. And that pressure further separates the haves and have nots — those with access to credit and education, and those without.
The developed middle-class trades sideways as they claw after a shrinking slice of a bloated pie.
As I see it, the end-game of these policies is a generation of young people infused with debt. A generation that faces insurmountably high costs, redder balance sheets, and limited financial means to enjoy their your or raise children. We’re already seeing new and innovative debt vehicles entering our lives every day: you can now finance your wedding or take out a micro-loan during online checkout.
And due to the waning birth rate, the population will grow older. This adds pressure to the economy as an educated workforce becomes more difficult to come by and fewer young consumers exist within the country’s borders, consumers required to keep the spend-toward-prosperity engine revving. Japan is already there.
Worst-case-scenario, the impoverished generation collapses under the weight of its debt and terminates in a massive bankruptcy event. This triggers a spontaneous implosion of the financial system; like the deep-sea crushing a submarine as if it were an empty beer can.
That is the big-picture problem I worry about. That’s why I write about Bitcoin, and why so many look to Bitcoin as a light at the end of this tunnel. And that’s why you should read my next, and final post in the series. Stay tuned.