What happens when the government sends out a stimulus payment? Politicians can print money, but they cannot wish all the goods and services that money buys into existence. They would like you to think that their money causes factories to hire workers and put idle production lines to work. But that’s not what happens.
Tens of millions of employees and warehouses full of raw materials are not waiting around for stimulus money to put them to use. What were those people, factories, and raw materials doing before the stimulus?
Absent government intervention, they were putting their time and capital into the most profitable ventures they knew.
Stimulus money can boost consumer spending in the short-term, but it cannot command the resources needed to produce goods and services into existence. The short-term boost in consumer spending comes at the expense of long-term economic destruction.
Here is what most people (and economists) don’t understand: When the government creates new money, it can only create a short-term boost in consumer production at the expense of eroding the capital needed to produce those goods. “Capital” is all the things that make consumer goods and services possible: factories, farms, bridges, trucks, trains, and cargo ships, sewers, mines, warehouses, and so on. By printing money or lowering interest rates, the government steals from savers to pay spenders. Those savings are what pays for capital maintenance and expansion. Without savings, factories can’t maintain or expand production.
Worse yet: the new money is not distributed evenly but goes mostly to those with political connections rather than successful or innovative businesses. Taxpayers get a shiny check, while trillions more go to cronies.
The result of long term monetary manipulation is infrastructure rot: factories, bridges, buildings that crumble, and an inability to invest in research and capital expansion. The government makes money available to consumers and investors, but it cannot dictate new people and machines into existence. The stimulus causes new big-screen televisions to show up in department stores, but the VR headsets that the stolen capital would have produced never come to exist.
Printing money is addictive: once one politician sends a stimulus payment, they raise the bar for everyone else. Unless voters revolt at having their savings stolen, the game keeps escalating: print just enough money to win votes without collapsing the economy.
For nearly 100 years, the U.S. government has been running all sorts of welfare programs for the rich and poor alike. It has been able to sustain those programs because technological progress and capital accumulation expanded productivity just enough to keep up with the increased burden of the welfare state. It’s a dangerous game of brinkmanship: steal just enough from producers to win the next election, without causing an economic recession that causes voters to change sides. The game keeps escalating as politicians find more and more ways to steal savings and redistribute the loot.
For example, using the COVID-19 pandemic as an excuse, the government started buying corporate bonds, running huge permanent deficits, reducing the bank’s reserve requirement to 0%, and now, sending increasing large checks directly to the public.
How does this game end? All monetary manipulation creates economic destruction, but as long as the world’s major central banks move roughly in tandem (as they have been), the destruction goes unnoticed. However, the heavier the government burden, and the more reckless and inflationary policy, the more fragile the economy becomes. 9/11, the 2008 financial crisis, and the 2020 pandemic were all used to justify massive expansions in government programs. Now that voters have gotten a taste of direct cash payments, we’re entering a dangerous new phase. The coming escalation of fiscal irresponsibility is predictable and inevitable.
So is the economic correction that will follow when capital is looted to such an extent that economic production collapses, and the government can no longer pay for welfare programs or maintain its debt. Whether it’s a terrorist attack, another pandemic, or something else entirely, the next “emergency” could push the economy beyond recovery.
The only question is what happens then: a return to sanity or the end of the U.S. as a superpower?