Those who study both the physical and behavioral sciences should have learned that there are consequences to every action — some good and some not so good — often referred to as stage II.
Good chess players are able to “see” the consequences of various moves several steps ahead. The same is true of solid environmental scientists, military and diplomatic strategic thinkers, as well as investors and economists. Unfortunately, the sound thinkers have too often been ignored by members of the media and politicians seeking sensationalism over rational thought. For years, many of us have been warning that unrestrained government spending would eventually result in money meltdown. That day has arrived.
When an individual, family or business increases their debt faster than their income, eventually a day of reckoning comes, and the only way out is bankruptcy. With interest rates now rising rapidly because of inflation, many people and institutions will increasingly find that they are unable to service the debts they have incurred — so large increases in the number of bankruptcies will be occurring — starting now!
When sovereign governments incur more debt than they can service, they have two choices: increase taxes or debase the currency (which is called inflation). There is a limit to how much government can increase taxes because of the natural inclination of taxpayers to find legal and illegal ways to avoid taxes — which surges as the tax burden rises.
Because of the increased tax burden, economic growth slows and approaches or even drops below zero — thus any increases in tax rates or new taxes result in no new revenue or even negative revenue. Many of the major countries are now at that point, including much of Europe and the U.S.
As noted, to reduce the debt burden, governments “inflate” it away, which is now occurring. The situation will not get better until government spending is reduced to the point where the debt burden is no longer rising relative to income. The same people who told you first that there would be no rise in inflation and then that the inflation would only be transitory are now saying it will go back to 2% or so — this is not true — in the absence of a major reduction in government or private spending (i.e., a deep recession).
Individuals and institutions can partially protect themselves by acquiring real assets that will maintain their long-term value. Those without the ability to acquire such assets will only get poorer. Members of the media and others who prey on the ignorance of their fellow citizens will demand that government increase payments to lower-income people (as was done during the COVID-19 lockdown). Such payments will give a little temporary relief but, if not properly funded, will make the situation worse over time by further debasing the currency. The gap between the haves and have-nots will grow, causing a reduction in social cohesion. Not a pretty future.
Much of the increase in government spending came about as result of the environmental lobby demanding “green energy” because of the “existential” (whatever that may mean) threat of climate change. Everyone wants a cleaner environment and are willing to pay for it up to a point where stage II kicks in. As science writer Robert Bryce recently noted: “Despite more than $2 trillion in spending on renewables over the past three decades, there is scant evidence that an energy transition is underway.
Last year, according to data from the BP Statistical Review of World Energy, in both the U.S. and the world as a whole, the growth in hydrocarbons — oil, natural gas and coal — “far exceeded the growth in wind and solar by huge margins.” The fact is the opposition to wind and solar is growing as people say “not in my backyard,” in part because of its being unsightly and noisy. Wind and solar also require many rare, potentially harmful and costly materials to make.
“Saving the planet” for most people does not include having one’s children go to bed hungry and cold. A number of European countries may well run out of energy to heat people’s homes this winter, and gas and food prices are far higher than in the U.S., much of this driven by governments having shut down coal, oil, natural gas and nuclear plants. As the “good” Europeans are freezing and suffering, they are increasingly aware that China and India are building more and more coal plants, whose C02 emissions dwarf Europe’s attempted reductions. Much of this calamity could have been avoided if more attention had been paid to “Stage II.”
And finally, there is the Russian-Ukrainian war. And as with most wars, too little attention has been paid to the consequences of a “win” or a “loss,” both to Ukraine and the West, and to Russia. What does a win or loss look like to both parties? Does Russian President Vladimir Putin just stop with Ukraine or, like Adolf Hitler and Napoleon Bonaparte, does it whet his appetite for more? If Mr. Putin loses, who takes over in Russia — and will they be “better” or “worse” than with Mr. Putin?
The failure of political leaders to adequately consider stage II with government spending growth, environmental policy, and the Russian-Ukrainian war has put billions of people in peril.
Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.
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