There is a lot of ruin in a country, especially this one

There isn’t enough bad news in the world, so let’s toss another stack of troubles on the table, shall we.

At American Greatness, Adam Mill outlines the financial ruin headed our way.

The coming reckoning for Washington’s insanely irresponsible monetary policy may dwarf the troubles from all recent recessions and periods of inflation.

The Federal Reserve has created a doom loop between the housing market and inflation. For years it has printed tens of billions of dollars each month to buy sketchy securities meant to subsidize the housing market and favor bond traders. This continues even now, in spite of inflation and a red-hot housing market. But the housing market has become dependent on unearned, newly printed money, and stopping the flow might cause a catastrophic correction. If it doesn’t stop, however, inflation will explode.

Let me walk you through some of the math.

Inflation closes the gap between money earned and money spent. Since the financial crisis of 2008, the Federal Reserve expanded M2 money supply from just under $8 trillion to around $22 trillion today. During that time GDP has increased from around $14.6 trillion to around $24.5 trillion today. We’ve gone from a ratio of one dollar chasing $2.20 in goods in services to an almost 1 to 1 ratio today. Inflation during the same period, according to the government, has eroded the dollar by a mere 33 percent.

You think 8 percent inflation is high? Prices need to double to restore any semblance of balance between currency and the things you can buy with currency. We have a long way to go.

Fortunately, his conclusion is even worse. Enjoy your holiday weekend!

To fight inflation, interest rates need to exceed the inflation rate. That means a dollar saved loses purchasing power unless savings interest rates climb from less than 1 percent to something over current inflation (now around 8 percent). One rule of thumb provides that savings interest rates should reach 150 percent of inflation in order to reverse the trend. The theory holds that high interest rates encourage saving cash thus slowing down the speed at which money chases assets. If interest rates are less than inflation, it makes holding cash a losing proposition.

But in this environment, raising interest rates will cause a cascade of problems. The higher interest rates will slow the economy and cause unemployment. It will also swallow up tax revenue as the government has to pay interest on its massive debt. But more critically, it will increase the rate of default on home mortgages. Those defaults will make mortgage-backed securities less valuable and more unpredictable. That’s how the 2008 housing market seized up.

Thus, the doom loop.

Alternatively, the Fed could just let inflation rip as it continues to pour gasoline on the fire. At this point, the latter scenario appears more likely as the Fed engages in half-hearted symbolic inflation-fighting measures. Not surprisingly, the inflation numbers get scarier and scarier. At some point, runaway inflation will force the Fed to take real action. One thing is certain: the longer it waits, the more it will hurt.

Closing the gap between money earned and money spent means cutting government spending, raising interest rates, reducing regulation, and lowering taxes. Government can and should facilitate increases in productivity by reducing its interference in every private transaction. More Americans get a check from the government than pay taxes. The labor participation rate is dangerously low. There just aren’t enough people pulling their weight to make the things needed to sop up all of this excess money.

11 thoughts on “There is a lot of ruin in a country, especially this one

  1. I don’t see the problem, Jeff. Fed will just print more money. See, problem solved.

    In the meantime, I have seen reports that more and more countries are opening ruble accounts to pay Russia for energy. What can go wrong? I doubt Mill’s analysis takes into account petrodollar crashing on the world stage.

  2. Damn it…if *someone*, anyone out there would have just said something about it being good time to change fiat into hard currency (precious metals)!

  3. jpa, just wait until the Yen replaces the petro-dollar, and Russia refuses to sell oil to the EU at any price. Wheeee!

  4. ^ Putin’s keyboard artillery laying down the usual ill-directed barrage this today.

  5. The price of a gallon of regular gas at the station closest to me went by seventeen cents over last night.
    All those suburbanites who couldn’t bring themselves to pull the lever for Trump in 2020 are finding out that elections have consequences. Apparently they believed that things could only get better under Biden.
    I am going to continue reminding people, because the media won’t, that if you don’t have the disastrous US withdrawal from Afghanistan in August 2021, you don’t have Putin invading Ukraine in February of 2022.

  6. MP;
    Apparently, there are a lot of people here in Minnesota that aren’t phased by the cost of gas, because they are driving like bats outta hell. Yesterday, I happened to be pulling into the same parking lot as a middle aged woman, driving a Subaru. She had a Pedo Joe/San Fran Hoe (Biden-Harris) bumper sticker on her car. I told her that she was a hypocrite. When she asked why I said that, I replied “Well you voted for brain dead Biden and apparently, you don’t believe in that global warming bullshit either.” She just stood there with her mouth open.

  7. First Quarter just revised. Negative 1.5%. One more to officially recognize the Putin Recession.

    Of course, the only reason it wasn’t recognized last year is government spending, which makes the numbers appear as if the economy is prospering when in reality, they’re just pouring gasoline on the fire. And Putin hadn’t invaded yet, despite Lesko Brandon giving permission for a limited incursion. Would have been the Trump Recession.

    Can’t wait for the second quarter figures. I suspect they’ll be released just about exactly three days AFTER the polls close.

  8. You’re remiss in not remarking on 8 straight weeks of losses on the market, JD.

    That hasn’t happened since 1934. We’re on the cusp here friends.

    I’m waiting for rAT to tell us he’s once again taken his GAInz and liquidated his pOSitIon…just in the nick of time!

    🤣

  9. Pingback: In The Mailbox: 05.26.22 (Evening Edition) : The Other McCain

  10. The people behind the real MMT were not total idiots. They did recognize that flooding the economy with more $ than there were goods and services of an equal worth would cause inflation. Like Keyensian economics, MMT requires politicians, who serve at the will of the voters, to deny the voters what they want.
    The real purpose of MMT was remove the consumer as the active agent in a modern economy. In an MMT economy, the people who actually make decisions about how the economy should be managed are not hundreds of millions of consumers making decisions about what provides the best value for their money, but a handful of government bureaucrats who will regulate the proper amount of supply and demand in various sectors of the economy using taxes, tax credits, and being really, really, really smart. The best people, really. The kind of people, for example, who were appointed to run the CDC and the FDA.

  11. Swift wrote: “You’re remiss in not remarking on 8 straight weeks of losses on the market, JD.”

    The S&P 500 is 6.5% higher and the Nasdaq is up 6.8% and the Dow finished up 6.2% for the week.

    Buy crypto Tom or beanie babies or pet rocks. Then stock up on MREs and expand your bunker, ammo reserves and firearms too (inflation you know).

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