As we came out of Covid during which the government was obligated to pass several multi-trillion-dollar spending bills to protect laid-off workers and rescue failing companies who had been thrown into dire straits by the government-imposed lockdowns, the only prudent fiscal approach at that point was austerity by our legislature and President. Since we were forced to overspend during Covid to keep our economy from completely imploding because of the lockdowns, we had to do everything possible to bring some level of fiscal sanity back to the country. But the exact opposite happened. In 2021, the Democrats who now controlled both houses of Congress and the White House, decided to go on a spending spree. The Democrats motto is “never let a crisis go to waste” and they were sure as hell not going to allow the Covid crisis to go to waste without exploiting it for their own purposes, so they passed two unnecessary multi-trillion-dollar spending bills in the first year of the Biden administration which were essentially paybacks to their wealthy political donors who handed Joe Biden the White House.
When that much money is spent in such a short period of time by the government, the fed is forced to print an inordinate amount of dollars to help limit the explosion of the national debt. Printing as much money as we have over the last three years caused inflation to spike to over 9%. So, in response to this government spending induced hyper-inflation, the fed drove up interest rates in 2022, hoping to bring inflation under control. Printing money out of thin air like we have done in 2021 and 2022 devalues our currency, making each dollar is worth less and less, so driving up interest rates increases the cost to borrow money which brings value back to the dollar which helps tame inflation. But this strategy is not without real life consequences as we are witnessing with the collapse of the Silicon Valley Bank (SVB), the largest bank failure since the Great Recession and second largest bank failure in history.
SVB had much of its holdings in bonds and treasuries which they had purchased when interest rates were at historic lows. The reason why interest rates were that low was because the government has been engaging in massive deficit spending for years, so driving the interest rates down was an attempt to reduce the servicing on the ballooning national debt to as low as possible which means the government could borrow more money with less consequence. Treasury Secretary Janet Yellen has indicated that the Government may be willing bail out the SVB depositors who are losing millions and millions of dollars in bank’s collapse. She said, “We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound. We are concerned about depositors and are focused on trying to meet their needs.” Meeting the depositors' needs will require a massive amount of government spending which is the root cause of many of the financial problems which helped tank SVB in the first place. So, the short-term solution is to engage in the monetary practice which is the root cause of the problem that they are trying to fix.
All these problems stem from the massive deficit spending that the government engages in. And the different attempts to rob from Peter to pay Paul to fix the problems artificially shifts the market which creates ancillary problems that forces us to borrow from Billy to bail out Bob to fix. The key to thriving in this environment of government fiscal and monetary tinkering is to anticipate the consequences of governments action. SVB failed because of the government fiscal policy, but also because it did not anticipate the consequences of government’s actions and policies. So, SVB which had bought billions of dollars-worth of government debt at the low interest rate, saw the value their portfolios drop dramatically because bonds and treasuries lose their value when interest rates increase, and their value bottoms out when the fed increases rates as dramatically as they have over the last 12 months. For example, if you own a bond with a 2% rate, and the fed increase rates to 4%, the value of your 2% bond is cut in half.
Low interest rates were designed to keep the government’s payments on their debt as low as possible which reduces the impact of deficit spending, but when government engages in deficit spending to the point that they must print new money that increases inflation, it triggers the fed to increase interest rates which then increases the payment the government owes on its original debt, so we are back to square one. All these little economic and monetary “fixes” ease the current problem in the short term but create new problems in the long term which will require another short-term fix that creates a new long-term problem. It’s a never-ending game of financial Whack-A-Mole. In the arcade game, Whack-A-Mole, the object is to whack down the moles who pop up on the board with a mallet, but every mole that gets whacked causes another mole to pop up that needs to be whacked down, and you spend the entire game whacking down moles that pop up, but never get to a point that all the moles are whacked down into place.
The government meddlers never offer permanent solutions. And that is what deficit spending is, a short-term solution creating long-term problems. Kevin McCarthy announced that the interest payment on our national debt has reached $1 trillion per year. If we had been fiscally responsible in the past, we would have an extra trillion dollars to spend every year, but our payment on the debt is essentially throwing us a trillion dollars further into to debt every year. We are like a married couple who have maxed out all their credit cards and have $100,000 of revolving debt and are only able to make the minimum payment on each card every month. That is not a financial strategy to create long term sustainable wealth; it is a strategy for permanent financial disaster. And that is where we are headed.
All of these government geniuses who think they can fix our financial problems better than the natural will of the marketplace fail because they are unable to see the spider web of ramifications that their tinkering creates. The main problem with this massive government meddling into the economy is that nothing is real, everything becomes fake. There is no inherent value independent of government policy. So, the fundamentals of the markets are not fundamental, because they are held hostage by government policy. They are not valuable on their own, independent of government intervention. So, value arises in the ability to influence government policy. The government becomes the value because the government dictates value, not the market which is the sign of bad times to come. This is why Wall Street and big business invests hundreds of millions of dollars every election cycle. Campaign contributions are not donations, they are investments. They are buying the politicians that bring artificial value to their part of the financial industries through the policies they enact, and that creates new problems which require a new fix which creates another set of new problems requiring a new fix, and so on and so on until there is no such thing as authentic value anymore, just more and more government intervention. I have seen our future and it’s the Weimar Republic.
Judd Garrett is a graduate from Princeton University, and a former NFL player, coach, and executive. He has been a contributor to the website Real Clear Politics. He has recently published his first novel, No Wind.