In today’s Issue:
- Human wants are infinite. Resources are finite.
- Regulations accumulate, but are only debated at the margin
- Fake savings sabotage the economy
The first thing my high school economics teacher ever taught us was a simple truth: human wants are infinite, but our means of satisfying those wants are finite.
Economics is about how we decide to solve this problem. Capitalism, communism, socialism, monarchy, democracy, agrarianism and all the rest of them are really just different answers to that one big question.
Politicians and activists are specialists in being aware of human’s infinite wants. But they don’t seem to be aware of the constraint of finite resources at all.
They think that laws, regulations, targets and tariffs don’t have trade-offs. Somehow, political policies don’t cost us anything and only provide benefits.
Politicians don’t realise that any allocation of resources must, by definition, remove resources from some other use. Economists call what we lose the Opportunity Cost.
What my economics teacher failed to mention is that politicians’ delusional way of thinking works surprisingly well for a surprisingly long time. Especially if voters are willing to believe in your free lunch.
The lack of taxes to cover spending can just be borrowed. So why limit spending? And why bother taxing enough to cover it?
Who really notices an additional rule or regulation? Few of us are aware of them, at the margin. It’s only when you try and set up a business or fix a fence that you realise it’s damn nigh impossible to do much of anything legally anymore.
Why not send foreign aid to places like India? And funding for medical research to places like China? It’s the right thing to do.
Why not make university education free? Heck, we can declare it a human right!
Why not protect bats, voles, terrapins, tuna, eagles and polar bears? And if we’re going to protect them, why not all the other animals? We must treat them equally.
Why not try to change the climate? A bad climate would be catastrophic.
Every cause sounds good. Unfortunately, it all adds up over time.
The costs that nobody ever considered accumulate. Ever more resources are taken away from where the free market allocated them – their most productive use. The dynamism of the economy is killed off by regulation. And the debt grows.
Because we weren’t in the habit of considering the costs of policies, we don’t understand the negative consequences when they emerge and smack us in the face.
Admitting that borrowing money costs money, that regulation makes us less productive and that welfare disincentivises work would make us think twice about everything the state has achieved so far.
The government’s entire existence is reliant on continuing to pretend what we’ve been doing was a good idea all along.
If we stop now because the costs of more borrowing, regulation and government control are too high, the obvious conclusion is to unwind most of what the government does.
Easier to go on pretending.
But a reckoning will occur, whether we like it or not…
Paying the price can be deferred, at an additional cost
The first thing my finance lecturer told me at university is that interest rates are the time value of money. That is, the price you’re willing to pay to defer the cost of something into the future.
Or the return you’re willing to accept to defer your own consumption and allow someone else to use your savings in the meantime. That’s why borrowers pay interest and savers receive it.
High interest rates mean an economy is impatient. People want to consume and invest money they don’t yet have today. They’re willing to pay a high price to get their hands on someone else’s money to do so.
Low interest rates signal a patient economy. People are willing to lend their money in the belief they will want to spend that money in the future.
But what happens when the interest rate is artificially suppressed by printing money? If nobody forgoes consumption into the future, but the market is fooled by low interest rates into believing that someone did?
Then too much is spent and invested in the present. And a lack of consumption pops up in the future as the fake savings just cause inflation instead of consumption. That moment is something we call a recession.
For decades, we’ve had artificially low interest rates in Western economies. Central bankers ploughing fresh money into the economy like there’s no tomorrow.
At some point, there’s going to be a reckoning. The world will discover that printed money is not the same as saved money. It creates inflation instead of future consumption.
That’s what began to happen in 2022, when inflation surged while economic growth lagged. Something economists considered so impossible that they refused to believe their own statistics when it began. They didn’t tighten monetary policy until it was far too late.
The two reckonings are coming
What we face today is the realisation that both monetary policy and government policy are nearing their endpoint.
At some point, an economy is so overindebted that it ceases to function. Regulations drown out economic activity to the point where GDP cannot grow. The priority given to emissions, animals and foreign aid begins to dominate the productive economy. Borrowing crashes and inflation replaces real GDP growth. Cutting interest rates just stimulates inflation, not the economy.
The parasites kill the host. And nobody can deny it any longer.
Argentina is emerging from decades of this. Europe is going into this period, although some places like Italy have been stuck there for a long time already.
The UK and US are on the precipice and headed in different directions.
But the reckoning we managed to ignore for so very long is finally catching up with us. The politics and monetary policy that has worked for so long will begin to fail.
How will politics deal with these two reckonings?
The problem with deferring the consequences of your actions is the incentives it creates. If you can get away with something, you tend to do more of it.
We seem to have reached the point where acknowledging the costs we’ve deferred would be too painful to bear.
Debt, regulation and rogue monetary policy is dramatically more of a problem than it was going into Thatcher and Reagan’s revolutions in the 80s.
Can you imagine just how much of the US government Elon Musk and the new DOGE would have to dismantle to get back to a sound fiscal footing?
A primary fiscal balance would be an extraordinary achievement. But there would still be vast amount of government debt to atone for…
Demographics make growing the economy incredibly difficult compared to historical examples. Only productivity can achieve it now. And that’s precisely what governments prevent.
Environmentalism may have peaked. But it’s still the dominant force in our economy.
We are too far gone for a familiar political shift to save us.
Prepare for a very different ride.
Until next time,
Nick Hubble
Editor, Fortune & Freedom
