Just because we forget that all wealth must be generated from true productive activity, doesn’t mean that stops being the case.
Around the world, money printers have been in overdrive.
For nearly a year, central banks across the globe have been pumping out money (or more accurately, creating it on computers), in an effort to stave of a serious economic crisis.
For example, in the United States, roughly 1/3rd of all dollars ever created were created in the past 12 months.
And in Canada, on a proportional basis, our central bank balance sheet has grown 2.5 times more than the US Federal Reserve.
As noted in a Financial Post article, even without an official budget, it is clear that spending is at historic levels:
“Nevertheless, it is clear that spending has skyrocketed. When the provinces are factored in, Canadian budget deficits are expected to end the year at about 20 per cent of GDP, which will be the fourth-highest level in the world, according to a recent IMF report cited by Bloomberg.”
For a while, I had been talking about how running a deficit to build up the military or cut taxes wouldn’t be the worst idea. But that was when a ‘big deficit’ was seen as something around $20-40 billion. Unfortunately, once deficits are normalized, they just keep getting bigger, and we see the results of that today.
Now, it is understandable that budget deficits resulted from the COVID-19 crisis. Politicians told people to stay home, and locked down the economy, so giving money to people had to happen.
However, the trend over the past decade or so shows a disturbing move away from real economic fundamentals, and towards a kind of magical-thinking that will result in disaster if we don’t change course.
All wealth is generated from real productivity. While some consider investment to be just ‘numbers on a computer,’ it represents real financial resources going towards a business that will be employing real resources – either directly or indirectly.
Even investment in things like gold and cryptocurrency wouldn’t be possible if those investing didn’t have financial resources.
To get a sense of this, consider what would happen if the world suddenly ran out of food. Every other sector of the economy would collapse. Without the basic physical resources we need to survive and thrive, there is no economy. In that situation, creating all the money in the world out of thin air would be pointless, since it would have no value if there was nothing to buy and nobody alive to use it.
Yet, the economy has become so complex that many people – and many politicians – have lost sight of the fact that wealth can’t be generated by creating money out of thin air.
Hence, we see the rise of things like Modern Monetary Theory, which is really just a repackaging of hyperinflationary endless money printing, as if we can somehow generate real prosperity by just handing out money.
And at the same time, many banks and big corporations have been getting nearly unlimited lines of credit from central banks, making it tough to argue against giving out money to everyone when those at the top are already getting it.
What we need is a return to a more non-interventionist, laissez-faire policy, where the government steps back and lets economic reality take hold.
We simply cannot afford to keep pretending that endless deficits and endless money printing will work, and the longer we put off this reality the worse the reckoning will be.
Reality cannot be evaded for ever.
Photo – YouTube