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Finance & Markets

The Fed Fears a Bond Meltdown

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The money supply (M2) has bounced to March 2023 levels and has been rising almost every month since October last year. Furthermore, US government deficit spending has more than offset the decline in the Federal Reserve balance sheet. While the Fed’s balance sheet has shrunk by $1.5 trillion from its peak, the US government deficit remains above $1.5 trillion per year.

The money supply (M2) in the United States has bounced above March 2023 levels, while deficit spending offsets any Fed balance sheet reduction.

It is no surprise to read that the Federal Reserve has kept rates unchanged. Mr. Powell indicated that there are no rate hikes on the horizon, which was received with relief by market participants, but he also cast doubt about the expectations of rate cuts. However, the single most surprising message came when the Federal Reserve chairman announced that they would delay the quantitative tightening process.

In its statement, the Fed explained that “beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.” The FOMC statement presents an otherwise optimistic economic outlook, which is at odds with this message. Why would the Fed need to slow down the pace of balance sheet reduction in a strong economy with solid unemployment, consumption, and growth figures?

The answer may lie in the Treasury yield curve. The FOMC issued this statement in a week in which the two-year Treasury yield touched the dangerous 5% level. On previous occasions, such a rise in government debt yields led to a significant market correction. However, the Fed is not as concerned about a market correction as it is about maintaining some calm in the bond market amidst an unsustainable increase in government deficit and public debt.

The Fed is choosing to keep the sovereign debt bubble alive as a priority over reducing inflation.

It is impossible to reduce inflation to the 2% target when the government deficit, which is printing new currency, remains out of control. It is even more difficult when the Federal Reserve delays normalization of the balance sheet, bringing the monthly redemptions to less than half the previous figure.

With this move, it is no surprise that the two-year yield fell to 4.8% and the ten-year slumped to 4.5% from 4.7% at the end of April.

The Federal Reserve is reluctant to admit two things: the Treasury’s debt supply is significantly higher than private sector demand, and the Fed is more concerned about a bond market meltdown than elevated inflation.

A bond market meltdown would be exceedingly dangerous for the Federal Reserve because it would arrive at a moment when the US and European bond indices have not recovered from the 2022 slump. Furthermore, a bond price collapse would trigger further problems at the U.S. regional banks, just as we learned that Republic Bank required a bailout and corporate profits in the banking sector dropped by 44% in the fourth quarter of 2023, according to Reuters.

If the two-year bond yield rises above 5% and the 10-year yield soars, we could see a dramatic correction in a market that continues to build elevated risks under the expectation that the Fed will bail everyone out.

A bond market slump would bring down the entire deck of cards in a complacent market.

The decision of the Fed comes when the global demand for Treasuries is under question. Foreign holdings of Treasuries have risen to an all-time high, but the figure is misleading. Demand has weakened relative to the supply of new bonds. In fact, an expected surge in new issuances by the Treasury creates a headache for the Federal Reserve. Borrowing will be significantly more expensive when public debt interest payments have reached $1 trillion, and investor demand remains robust but not enough to keep pace with an out-of-control deficit. China’s holdings of US Treasury bonds have fallen for two consecutive months to $775 billion, according to the US Department of the Treasury, and Japan’s weak yen may need a Bank of Japan intervention to sell US reserves, which means disposing of Treasury bonds.

If the Federal Reserve’s economic outlook was as solid as stated and the solvency of the public accounts was robust, they would not be announcing a drastic reduction in the path of normalization. They would have accelerated it, given the high and persistent inflation.

The message that the FOMC statement sends to the world is that the US public finances are completely uncontrolled and that there is not enough demand for the insane increase in supply of new government bonds.

When the Fed keeps rates on hold and delays balance sheet normalization, it achieves two negatives. The full negative impact of rate hikes falls on the shoulders of the private sector, families, and businesses, and the balance sheet management keeps the public debt bubble artificially inflated, leading to more persistent inflation.

In summary, the Fed’s decision could be seen as a dangerous way to keep the government’s misguided fiscal policy alive at the expense of making families and small businesses poorer with elevated inflation and higher-for-longer-rates. Powell tries to be prudent and rigorous about inflation when the government fuels the fire. Powell is like a fireman trying to stop a fire with a bucket of water, while the owner of the building, the government, throws gallons of gasoline over the ceiling.

Governments Could Stop Inflating If They Wanted. But They Won’t.

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Price inflation is no coincidence. It is a policy. Governments, along with their so-called experts, attempt to persuade you that price inflation stems from anything other than the consistent, albeit slower, rise in aggregate prices year after year. Issuing more currency than the private sector demands, thus eroding its purchasing power and creating a constant annual transfer of wealth from real wages and deposit savings to the government.

Oil prices are not a cause of inflation but a consequence. Prices increase as more units of the currency used to denominate the commodity shift to relatively scarce assets. Therefore, oil prices do not cause inflation; they are one of the signals of currency debasement. Furthermore, if oil prices caused inflation, we would go from inflation to deflation quickly, not from elevated inflation to slower price increases.

The same goes for all the causes that governments and their agents try to use as an excuse for rising prices. Most are just manifestations, not causes of inflation. Even if the global economy were dominated by three evil and stupid oligopolistic businesses, they would not be able to increase aggregate prices and maintain an annual increase if the quantity of currency in the system were to remain equal. Why? Two things would happen. First, those three monopolistic evil corporations would see their working capital soar because citizens would not have enough units of currency to pay for all they produce. Two, the rest of the prices would decline as there would be a significantly lower number of units of currency to purchase other goods and services.

Even a group of quasi-monopolistic corporations cannot make all prices rise in unison and consolidate the annual level, only to continue rising. However, the monopolistic issuer of the currency, the government, can make all prices rise while at the same time diminishing the purchasing power of the units of state debt that they issue.

It is surprising to see how some so-called experts say that a few large corporations make all prices rise but deny that the state that monopolizes the creation of money is the cause of price inflation.

Governments are at the root of rising prices. While banks can generate money—credit—through lending, they rely on projects and investments to support these loans. Banks cannot create money to bail themselves out. No financial entity would go bankrupt then. In fact, banks’ largest asset imbalance comes from lending at rates below the cost of risk and having government loans and bonds as “no-risk” investments, two things that are imposed by regulation, law, and central bank planning. Meanwhile, the state does issue more currency to disguise its fiscal imbalances and bail itself out, using regulation, legislation, and coercion to impose the use of its own form of money.

Monopolies cannot simply drive up prices unless they are able to force consumers to use their products without any decline in demand. We also must understand that destructive and inefficient monopolies can only exist if the state imposes them. In any other situation, those monopolies disappear due to competition, technology, and cheaper imports from other nations. So, which is the only monopoly that can force consumers to use their product regardless of the real demand for it? Government fiat money.

The government is the largest economic agent and therefore the most important driver of aggregate demand, as well as the issuer of currency. The government can end today’s high price-inflation rates any time by eliminating the unnecessary spending that causes the deficit, which is the same as money printing. Taxing the private sector to cut price inflation is like starving the children to make the fat parent lose weight.

If Senator Warren and President Biden were right and corporations were to blame for rising inflation, competition, cheaper imports, and a decline in demand, they would have taken care of their unjustified prices. Only the government can cause and perpetuate inflation, using the central bank as its financial arm and regulation as the imposition of the state’s IOU (currency) as the “lowest-risk asset” in banks’ assets. The government creates the currency and imposes it, and when its purchasing power declines, it blames the economic agents that are forced to use its form of money.

MMT defenders and neo-Keynesians say that the government can issue all the currency that they need and that their limit is not fiscal (deficit and debt) but price inflation. It makes no sense because price inflation is the manifestation of an unsustainable fiscal problem, reflected in the vanishing confidence in the currency issuer. It is, literally, like a giant corporation issuing debt endlessly and thinking nothing matters. It is a subterfuge to implement the constant increase in size of government in the economy, knowing that once it controls a large part, it is virtually impossible to stop the state.

Stephanie Kelton and others say the government should spend all it wants and, if price inflation rises, tax the excessive money away. This is funny. So, the government increases size on the way in, spending and diluting the purchasing power of the private sector’s earnings and savings, and then taxes the private sector, thus increasing the size of government on the way out. Furthermore, there is no government that would recognize that price inflation comes from spending too much, so the destruction of the private sector continues and the diminishing confidence in the currency extends, as history has proven numerous times.

Governments cannot tax away the price inflation they have created by bloating spending. They can only weaken the private productive sector further and worsen the economic situation and the price inflation outlook.

There is no such thing as perennial monetary sovereignty. Like any form of debt, currency demand disappears with the government’s solvency and the economic weakness of the private sector consumed by taxes. Once the government destroys confidence in the currency as a reserve of value, the private sector will find some other way to make transactions outside of the imposition of a state-issued currency.

When governments present themselves as the solution to price inflation with large spending programs and subsidies, they are only printing more money, like putting out a fire with gasoline.

Biden says the government has a plan to cut price inflation, but all they have done is perpetuate it, making citizens poorer and the productive sector weaker.

If Biden wants to cut price inflation, all he must do is eliminate the deficit by cutting expenditures. The reason why governments should never oversee monetary policy and be allowed to monetize all deficits is because no administration will cut its size to defend citizens’ wages because nationalization by monetary inflation and taxes is the goal of interventionism: to create a dependent and hostage economy.

Image Credit: Federal Reserve System

Why the U.S. Public Debt Is Unsustainable and It Is Destroying The Middle Class

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In a recent tweet, a talented financial analyst and investor stated: “The “debt is unsustainable” narrative has been around for 40 years plus. What’s astonishing to me is how the people who push this narrative never ask themselves, “Why has it been sustainable for so long?”.

There is a widespread idea that the fiscal imbalances of a world reserve currency issuer would end in an Argentina-style bankruptcy. However, the manifestation of unsustainability did not even appear as drastic in Argentina itself. Hey, Argentina continues to exist, doesn’t it?

Excessive public debt is unsustainable when it becomes a burden on productive growth and leads the economy to constantly rising taxes, weaker productivity growth, and weaker real wage growth. However, the level of unsustainable accumulation of debt may continue to rise because the state itself imposes public debt on banks’ balance sheets and the state forces the financial sector to take all its debt as the “lowest risk asset.” However, law and regulation have merely imposed and forced this construct. Rising debt bloats the government’s size in the economy and erodes its growth and productivity potential.

Many diabetic and obese people continue to eat too much unhealthy food, thinking nothing has happened so far. That does not mean their eating habits are sustainable.

Those who ignore the accumulation of public debt tend to do so under the idea that nothing has happened yet. This is a reckless way of looking at the economy, a sort of “we have not killed ourselves yet; let us accelerate” mentality.

An ever-weaker private sector, weak real wages, declining productivity growth, and the currency’s diminishing purchasing power all indicate the unsustainability of debt levels. It becomes increasingly difficult for families and small businesses to make ends meet and pay for essential goods and services, while those who already have access to debt and the public sector smile in contentment. Why? Because the accumulation of public debt is printing money artificially

When money is created in the private sector through the financial system, there is a process of wealth creation and productive money creation. The financial system creates money for projects that yield a genuine economic return. Some fail, others soar. That is the process of productive economic growth and progress. Only when the central bank manipulates interest rates, disguises the cost of risk, and increases the money supply to monetize unproductive deficit spending can it distort this process.

Private banks in an open economy create money to accelerate progress and free-floating interest rates limit the accumulation of unproductive and dangerous risk. When the central bank wants to disguise the worsening solvency of fiscally imprudent governments, it does so by tampering with interest rates—making fiscally irresponsible governments’ borrowing cheaper—and artificially increasing the amount of currency in the system, monetizing public debt—a destructive process of money creation as opposed to the saving-investment function of banking.

When the fiscal position is unsustainable, the only way for the state to force the acceptance of its debt—newly created currency—is through coercion and repression.

A state’s debt is only an asset when the private sector values its solvency and uses it as a reserve. When the state imposes its insolvency on the economy, its bankruptcy manifests in the destruction of the purchasing power of the currency through inflation and the weakening of real wage purchasing capacity.

The state basically conducts a process of slow default on the economy through rising taxes and weakening the purchasing power of the currency, which leads to weaker growth and erosion of the middle class, the captive hostages of the currency issuer.

Of course, as the currency issuer, the state never acknowledges its imbalances and always blames inflation and weak growth on the private sector, exporters, other nations, and markets. Independent institutions must impose fiscal prudence to prevent a state from destroying the real economy. The state, through the monopoly of currency issuance and the imposition of law and regulation, will always pass on its imbalances to consumers and businesses, thinking it is for their own good.

The government deficit is not creating savings for the private economy. Savings in the real economy accept public debt as an asset when they perceive the currency issuer’s solvency to be reliable. When the government imposes it and disregards the functioning of the productive economy, positioning itself as the source of wealth, it undermines the very foundation it purports to protect: the standard of living for the average citizen.

Governments do not create reserves; their debt becomes a reserve only when the productive private sector economy within their political boundaries thrives and the public finances remain under control. The state does show its insolvency, like any issuer, in the price of the I.O.U. it distributes, i.e., in the purchasing power of the currency. Public debt is artificial currency creation because the state does not create anything; it only administers the money it collects from the same productive private sector it is choking via taxes and inflation.

The United States debt started to become unsustainable when the Federal Reserve stopped defending the currency and paying attention to monetary aggregates to implement policies designed to disguise the rising cost of indebtedness from unbridled deficit spending.

Artificial currency creation is never neutral. It disproportionately benefits the first recipient of new currency, the government, and massively hurts the last recipients, real wages and deposit savings. It is a massive transfer of wealth from the productive economy and savers to the bureaucratic administration.

More units of public debt mean weaker productive growth, higher taxes, and more inflation in the future. All three are manifestations of a slow burn default.

So, if the state can impose its fiscal imbalances on us, how do we know if the debt it issues is unsustainable? First, because of the units of GDP created, adding new units of public debt diminishes rapidly. Second, the erosion of the currency’s purchasing power persists and accelerates. Third, because productive investment and capital expenditure decline, employment may remain acceptable in the headlines, but real wages, productivity, and the ability of workers to make ends meet deteriorate rapidly.

Today’s narrative tries to tell us that nothing has happened when a lot has. The destruction of the middle class and the deterioration of the small and medium enterprise fabric in favor of a rising bureaucratic administration that consumes higher taxes but still generates more debt and deficits It does end badly. And all empires end the same way, with the assumption that nothing will happen. The currency’s acceptance as a reserve does come to an end. The persistent erosion of purchasing power and declining confidence in the legally imposed “lowest risk asset” are some of the red flags some are willing to ignore, maybe because they live off other people’s taxes or because they benefit from the destruction of the currency through asset inflation. Either way, it is profoundly anti-social and destructive, even if it is a slow detonation.

The fact that there are informed and intelligent investors who willingly ignore the red flags of weakening the middle class, declining purchasing power of the currency and deteriorating solvency and productivity shows why it is so dangerous to allow governments to maintain fiscal imprudence. The reason why government money creation is so dangerous is because the government is always happy to increase its power over citizens and blame them for the problems its policies create, presenting itself as the solution.

Can debt continue to rise? Of course. The gradual process of impoverishment and serfdom is relatively comfortable when the state can impose the use of the currency and force its debt into your pension by law and regulation. To think that it will last forever, and nothing will happen is not just reckless “accelerate, we have not crashed yet” mentality. It is ignoring the reality of money. Independent money, gold, and similar, solve this.

 

Easing In The Middle Of Persistent Inflation May Worsen Stagflation Risk

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Thirty major central banks are expected to cut rates in the second half of 2024, a year when more than seventy nations will have elections, which often means massive increases in government spending. Additionally, the latest inflation figures show stubbornly persistent consumer price annualized growth.

In the United States, headline PCE inflation in February will likely grow by 0.4%, compared with a 0.3% rise in January, and consensus expects a 2.5% annualized rate, up from 2.4% in January. This is on top of the already 20% accumulated inflation of the past four years. Core inflation will likely show a 0.3% gain, according to Bloomberg Economics, which means an annualized 2.8%, building on top of the price increases of the past years

Thirty central banks easing and seventy national governments increasing spending in an election year means more fuel for the inflation fire in a year in which money supply growth has bounced significantly from its 2023 lows.

Central banks ignored monetary aggregates when they shrugged off the risk of inflation in 2020, and now they are, again, easing way too fast when the battle against inflation has not finished. Furthermore, the only real tool that central banks have used is hiking rates, because different parallel measures of money growth, including reverse repo liquidity injections, have kept money supply growth at an elevated rate even when the balance of the G7 central banks was moderating, albeit at a slower pace than announced.

Cutting rates may come too late because, by the time it is implemented, it will cause a double negative. Government deficits will be cheaper to refinance, bloating an already record-high public debt yet again, but those cuts may have little impact on small and medium enterprises and families because they suffer significantly more from the accumulated effects of inflation, which means weaker margins, more difficulties to make ends meet, and impoverishment.

We must also remember that these persistent levels of official inflation come after relevant tweaks in the calculation of the consumer price index.

We certainly know one thing: consumers do not pay attention to the annualized rate of growth in prices, but to the accumulated level of destruction of their purchasing power, and everyone, from Europeans to Americans, knows that they have become artificially poorer by the insane fiscal and monetary policies implemented in 2020.

Nobody who takes inflation seriously would even consider easing in an election year, adding trillions of dollars of deficit spending to the fire of inflation. Furthermore, the history of inflation warns us about giving up easily and too fast.

The Fed is making a big mistake by cheering the headline economic figures that come from disguising a private sector recession with a massive increase in public debt and weakening employment figures embellished by temporary jobs and public sector hiring. Additionally, it is making a mistake by giving dovish signals that make market participants take more risk. There has been no relevant reduction in the money supply if we include the different layers of liquidity injections. Announcing forthcoming rate cuts will certainly make speculative debt rise but will hardly change the credit demand from the backbone of the economy, small businesses, and families. Since the US government has rejected any calls for normalization and instead added more deficits and debt as if rising bond yields were not a problem, citizens and businesses have already suffered greatly from ongoing inflation and rate increases. As such, the rate cuts will help an already bloated government spending and the zombie corporations that keep access to capital markets. Everyone else will be hurt both ways, with inflation and lower access to credit.

You may think all the above problems are policy mistakes, but they are not. This is a slow process of nationalizing resources. Inflation and artificial money creation through deficits and monetization are a gradual transfer of wealth from real salaries and deposit savings to the government. You are basically becoming poorer to sustain an ever-increasing government size. The next time you read that massive deficits and monetary easing are good policies for the middle class, ask yourself why you find it harder each year to pay for goods and services. The mistakes made in 2020–2024 will cost the middle class many more taxes, even if the government promises it will only be “taxes on the rich,” the oldest gimmick to raise your taxes.

More taxes, persistent inflation, the hidden tax, and the loss of value of your wages. That is “easing” for you. A private sector recession with headline economic figures bloated by government debt. The recipe for stagflation.

 

Massive Money Printing Will Accelerate as Debt Soars

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The U.S. federal government published a December deficit of $129 billion, up 52% from the previous year. The private sector recession is clear as expenses continue to rise while tax receipts decline. If we look at the period between October and December 2023, the deficit ballooned to a staggering $510 billion.

You may remember that the Biden administration expected a significant deficit reduction from its tax increases and the expected benefits of its Inflation Reduction Act.

What Americans got was a massive deficit and persistent inflation. According to Moody’s chief economist, Mark Zandi, the entire disinflation process seen in the past years comes from exogenous factors such as “fading fallout from the global pandemic on global supply chains and labor markets, and the Russian War in Ukraine and the impact on oil, food, and other commodity prices.” The complete disinflation trend follows the slump in money supply (M2), but the Consumer Price Index (CPI) should have fallen faster if deficit spending, which means more consumption of newly created currency, would have been under control. December was disappointing and higher than it should have been.

The United States annual CPI (+3.4%) came above estimates, proving that the recent bounce in money supply and rising deficit spending continue to erode the purchasing power of the currency and that the base effect generated too much optimism in the past two prints. Most prices rose in December, and only four items fell. In fact, despite a large decline in energy prices, annual services (+5.3%), shelter (+6.2%), and transportation services (+9.7%) continue to show the extent of the inflation problem.

The massive deficit means more taxes, more inflation, and lower growth in the future.

The Congressional Budget Office (CBO) expects an unsustainable path that still leaves a 5.0% deficit by 2027, growing every year to reach a massive 10.0% of GDP in 2053 due to a much faster growth in spending than in revenues. The enormous increase in debt will also lead to extremely poor growth, with real GDP rising much slower throughout the 2023–2053 period than it has, on average, “over the past 30 years.”

Deficits are not a tool for growth; they are tools for stagnation.

Deficits mean that the currency’s purchasing power will continue to vanish with money printing and that the real disposable income of Americans will be demolished with a combination of higher taxes and a weaker real value of their wages and deposit savings.

We must remember that, in Biden’s administration’s own estimates, the accumulated deficit will reach $14 trillion in the period to 2032.

This unsustainable level of fiscal irresponsibility will also lead to more massive money printing. The Federal Reserve will have to lead with larger federal fiscal imbalances than seen in crisis times, even considering estimates that assume no recession or crisis. So, if a crisis hits, the situation will simply explode.

Considering all these elements, it is not difficult to think of a Fed balance sheet that rockets from an already elevated 29% of GDP to fifty percent, and it will still be lower than the ECB’s balance sheet!

Readers may think that monetization of debt will be an uncomfortable but necessary measure to reduce indebtedness. However, we should have learned by now that Federal Reserve monetization only makes governments more fiscally imprudent. Public debt continues to reach new record highs both in periods of monetary expansion and in periods of alleged contraction.

2023 proved that central banks’ policy was only restrictive in name, as net liquidity injections and anti-fragmentation programs continued. Policy was restrictive for the private sector, especially small and medium enterprises, and families, not for governments.

2024 will be even worse because the government will not count on rising receipts and a doped economic recovery. Therefore, deficits are likely to surprise negatively again, which means more taxes and lower potential growth disguised with a new set of liquidity injections.

What does this mean for savers? Your US dollars will be worth less, real wages will continue to show poor growth, and, after tax, disposable income will decline. The only way to protect yourself is to find alternative real reserves of value, from gold to bitcoin, which will offset the monetary destruction that is about to accelerate.

Taxing Billionaires Won’t Reduce Taxes For The Middle Class

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Article published in ZeroHedge

In a world of populist policies, the notion of taxing billionaires to alleviate the financial burdens of the middle class stands as a tempting narrative. Advocates tout it as the quintessential solution to income inequality, promising a redistribution of wealth that lifts the masses from their fiscal woes. However, this narrative, so alluring in its simplicity, crumbles upon closer examination, revealing a multitude of complexities and pitfalls that belie its benefits

Central to the fallacy of taxing billionaires lies a fundamental misunderstanding of the dynamics of government spending and deficits. Proponents of this approach often overlook the inconvenient truth that as most governments increase spending even when tax receipts rise, deficits soar to unprecedented heights, burdening future generations with a mountain of debt and always increasing taxes for the middle class.

Taxing the rich is the door that leads to more taxes for all of us. The case of the United States is evident. No tax revenue measure is going to wipe out an annual two trillion dollar deficit. Therefore, the government announces a large tax hike for the wealthy and disguises it with more taxes for everybody and higher inflation, which is a hidden tax.

The notion that taxing billionaires will miraculously alleviate this fiscal strain is akin to applying plaster to a gaping wound—it does not even provide temporary relief, and it fails to address the underlying malaise.

A seminal paper by Alesina, Favero, and Giavazzi (2015) delves into the implications of government deficits on economic growth. The authors argue that persistent deficits not only crowd out private investment but also lead to higher interest rates, reduced confidence, and ultimately diminished economic growth. This underscores the importance of fiscal prudence in addressing long-term fiscal challenges and the evidence that tax hikes are not neutral.

Billionaires mostly hold their wealth in shares of their own companies. This is what is called “paper wealth.” However, they cannot sell those shares and if they lost them, their value would decline immediately.

The redistribution fallacy comes from three false ideas:

  • The first is the notion that billionaires do not pay taxes to begin with. The top one percent of income earners in the United States earned 22 percent of all income and paid 42 percent of all federal income.
  • The second error is believing that wealth is static—like a pie—and can be redistributed at will. Wealth is either created or destroyed. Confiscating the wealth of billionaires does not make the middle class or the poor richer. We should have learned that lesson from the numerous examples in history, from the French Revolution to the Soviet Union.
  • The third mistake is to believe that the economy is a sum-zero game where the wealth of one person is the loss of another. That is simply false because wealth is not “there.” It must be created through an exercise where all parties win in exchange for cooperation.

The world must strive to create more wealth, not limit those who generate it.

Consider the recent clamour for increased government intervention and spending, particularly in the wake of global crises. For instance, the COVID-19 pandemic prompted governments all over the world to enact a flurry of fiscal stimuli, ostensibly intended to soften the blow of the economic fallout. Yet, as the dust settles, we find ourselves grappling not only with the immediate ramifications of increased government spending but also with the long-term consequences of ballooning deficits as well as persistent inflation.

Who came out as the loser of the redistribution and stimulus frenzy of the past decade? The middle class. It has been destroyed by persistent inflation created by printing money without control, rising debt and deficits and constantly bloating government size in the economy, which in turn creates two taxes for the middle class and the poor: inflation and rising indirect taxes.

Critics of this approach have long warned of the dangers of irresponsible government spending. Taxing billionaires will not stop this trend of excessive bureaucracy and irresponsible administration of public services; in fact, it may accelerate it, as we have seen in so many countries, and certainly will not reduce the tax wedge on ordinary citizens.

History is replete with cautionary tales of nations brought to their knees by unchecked fiscal excesses. From hyperinflation to sovereign debt crises, the ramifications of fiscal irresponsibility are manifold and far-reaching. And yet, in the face of mounting pressure to “tax the rich,” policymakers seem intent on repeating the mistakes of the past, heedless of the inevitable consequences.

But the fallacy of taxing billionaires extends beyond the realm of fiscal policy—it strikes at the very heart of economic prosperity. At its core, capitalism depends on investment, entrepreneurship, and innovation—all of which are at risk from excessive taxation. The narrative that vilifies billionaires as greedy hoarders of wealth overlooks their crucial role in driving economic growth and prosperity.

By focusing solely on redistributive measures, policymakers risk undermining the very foundations of prosperity upon which our economic system rests

Moreover, the notion that taxing billionaires will somehow level the playing field and uplift the middle class is predicated on a flawed understanding of economic reality. In truth, the global mobility of capital renders such measures largely ineffective, as the ultra-wealthy can easily relocate to jurisdictions with more favourable tax regimes. This not only undermines the efficacy of taxing billionaires as a revenue-generating mechanism but also exacerbates the very inequalities it seeks to redress.

Indeed, the unintended consequences of excessively taxing the rich are manifold and far-reaching. From reduced investment and job creation to economic stagnation and decline, the repercussions of such policies are felt across society. And while the rhetoric of wealth redistribution may sound appealing in theory, the reality is far more sobering—a stagnant economy, diminished opportunities, and a dwindling standard of living for all.

So, where does this leave us? If taxing billionaires is not the panacea it purports to be, what alternatives exist to address income inequality and alleviate the burdens of the middle class? The answer lies not in punitive taxation but in prudent fiscal policy, targeted policies, and a renewed focus on fostering economic growth and prosperity for all.

Primarily, we must recognize that fiscal responsibility is not a luxury but a necessity. Governments must exercise restraint in their spending, prioritize efficiency and accountability, and resist the temptation to paper over fiscal deficits with ill-conceived tax hikes and money printing. Only through disciplined fiscal management can we hope to secure a prosperous future for generations to come.

Second, we must recognize the vital role that entrepreneurship and investment play in driving economic growth and prosperity. Rather than demonizing billionaires as the root of all evil, we should celebrate their contributions to society and create an environment that fosters innovation, entrepreneurship, and wealth creation. This means reducing regulatory barriers, incentivizing investment, and empowering individuals to pursue their entrepreneurial ambitions.

Finally, we must understand that opportunities provided to citizens, not the size of the government, are what define true progress. Rather than relying on the state to solve all our problems, we should empower individuals and communities to chart their own course to prosperity. This means investing in education, healthcare, and infrastructure, providing a safety net for those in need, and fostering a culture of self-reliance and personal responsibility.

In conclusion, the fallacy of taxing billionaires lies not in its intentions but in its execution. While the notion of redistributing wealth may sound appealing in theory, the reality is far more complex. By succumbing to the allure of punitive taxation, we risk stifling economic growth, undermining prosperity, and perpetuating the very inequalities we seek to redress. Only through prudent fiscal management, targeted interventions, and a renewed focus on fostering economic growth can we hope to build a future that is truly prosperous for all.

Socialism does not redistribute from the rich to the poor, but from the middle class to politicians.

The fallacy of massively taxing billionaires is another trick to promote socialism, which has never been about the redistribution of wealth from the rich to the poor, but the redistribution of wealth from the middle class to politicians.

 

Massive Money Printing Will Accelerate as Debt Soars

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The U.S. federal government published a December deficit of $129 billion, up 52% from the previous year. The private sector recession is clear as expenses continue to rise while tax receipts decline. If we look at the period between October and December 2023, the deficit ballooned to a staggering $510 billion.

You may remember that the Biden administration expected a significant deficit reduction from its tax increases and the expected benefits of its Inflation Reduction Act.

What Americans got was a massive deficit and persistent inflation. According to Moody’s chief economist, Mark Zendi, the entire disinflation process seen in the past years comes from exogenous factors such as “fading fallout from the global pandemic on global supply chains and labor markets, and the Russian War in Ukraine and the impact on oil, food, and other commodity prices.” The complete disinflation trend follows the slump in money supply (M2), but the Consumer Price Index (CPI) should have fallen faster if deficit spending, which means more consumption of newly created currency, would have been under control. December was disappointing and higher than it should have been.

The United States annual CPI (+3.4%) came above estimates, proving that the recent bounce in money supply and rising deficit spending continue to erode the purchasing power of the currency and that the base effect generated too much optimism in the past two prints. Most prices rose in December, and only four items fell. In fact, despite a large decline in energy prices, annual services (+5.3%), shelter (+6.2%), and transportation services (+9.7%) continue to show the extent of the inflation problem

The massive deficit means more taxes, more inflation, and lower growth in the future.

The Congressional Budget Office (CBO) expects an unsustainable path that still leaves a 5.0% deficit by 2027, growing every year to reach a massive 10.0% of GDP in 2053 due to a much faster growth in spending than in revenues. The enormous increase in debt will also lead to extremely poor growth, with real GDP rising much slower throughout the 2023–2053 period than it has, on average, “over the past 30 years.”

Deficits are not a tool for growth; they are tools for stagnation.

Deficits mean that the currency’s purchasing power will continue to vanish with money printing and that the real disposable income of Americans will be demolished with a combination of higher taxes and a weaker real value of their wages and deposit savings.

We must remember that, in Biden’s administration’s own estimates, the accumulated deficit will reach $14 trillion in the period to 2032.

This unsustainable level of fiscal irresponsibility will also lead to more massive money printing. The Federal Reserve will have to lead with larger federal fiscal imbalances than seen in crisis times, even considering estimates that assume no recession or crisis. So, if a crisis hits, the situation will simply explode.