ECONOMICS IS NOT INFINITE
Tuesday, November 1, 2022
The financial aftermath of Hurricane Ian combined with the current carpet-bombing of political ads has led me to think about math — specifically the concept of infinity and the dismal science of economics, the allocation of scarce monetary resources.
Let me start with a bit of economics: In the early colonial days and through the constitutional period there have been various times when currency was either in silver, gold coin or paper script. In response to the wild arbitrage of gold, silver and the 13 colonies issuing script, the founding fathers created the Constitution's Article 1 Sections 8 through 10, which established a single national currency amongst the states backed by silver and gold. Over time and on several occasions, Congress or the president abandoned and reinstated the gold standard but not bimetallism. I cannot decide whether those decisions were based on partisan political views or factors like war, depression or currency arbitrage. In 1933, Franklin Roosevelt issued an executive order that allowed money to be issued without regard to the gold in reserve. In 1971, Richard Nixon abolished the gold standard. Our faith in the credit of our government is the only security we have backing the dollar.
Recently, the executive and legislative branches of government have spent billions on aid in Ukraine; on various emergency situations like the Covid-19 pandemic; Hurricane Ian; fighting fires in the West; and the disasters in Flint, Michigan and Jackson, Mississippi. This outflow of money seems to suggest that the expenditure and printing of money is infinite. You should periodically check the website the USdebtclock.org to see in real time over 30 measurements of the country's debt status. We are currently in debt to the tune of $31 trillion dollars or $94,000 per person. Warning: studying this website may give you a bit of anxiety.
Infinity has always been a curiosity to my non-mathematical mind. It is always at least one more than the largest number in existence or maybe in our imagination. If the government is not bothered by the allocation of resources, then the ability to print money, spend money and extend credit is indeed infinite.
Thinking back to World War II: Franklin Roosevelt had just come out of the depression only to face the European war horrors. Once the decision was made to enter the war, he did not hesitate to spend what was necessary, and Congress ultimately approved.
War has always been a costly endeavor, and WWII was the most expensive war in human history. The economic cost of WWII greatly changed the world by altering the global power structure and by making the dollar the world's currency standard. The US participation in WWII lasted less than four years. If you adjust for inflation, in today's dollars that war cost America more than $4 trillion. Again, adjusted for today's dollars participation in the Gulf war cost $61.1 billion, the war in Afghanistan $2 trillion, and the war in Ukraine has cost us $13.5 billion so far. The damages in Florida from Hurricane Ian are estimated to cost $50 billion, and the various Covid-19 relief efforts were approximately $8 billion.
Compare these costs to recent corporate acquisitions: Elon Musk is spending $44 Billion on Twitter, Kroeger is spending $24 Billion on Albertson's and Microsoft is spending $70 Billion on Activision Blizzard.
Corporate spending does not cost lives, and it benefits a few people. Disaster relief, in theory, rebuilds lives for many people, while war expenditures may preserve world order but costs lives.
Getting back to economics, are American dollars spent by the government a scarce resource to be managed more conservatively than they have been for the past half century? How much can the government spend if they can spend money to a dollar shy of infinity?
It is popular to throw about terms such as inflation, deflation, recession and stagflation. These 19th and 20th century economic terms seem outdated and do not capture what is going on in the economy. I think a more accurate picture would be that today's economy has all of the above-mentioned characteristics. We clearly have inflation, with recessionary aspects trending to stagflation. The chief governmental watchdog, the Federal Reserve, has the challenge of taming inflationary tendencies without causing recessionary shifts. Not an easy challenge.
In addition to inflation, we also have the major issue of budget deficit. As of the latest figures the budget deficit is $1.38 trillion. How do we reconcile budget deficits with extraordinary expenditures? It is beyond my comprehension.
In modern times the US government has never defaulted on its debt service. After the Colonial War, the federal government was in default on foreign debt as well as to American soldiers. Similarly, the Civil War also brought the federal government close to default on its debt. Those were times when the currency was based on the gold standard. Today we don't seem to worry about whether the full faith and credit standard is in jeopardy, I believe that if we were on the gold or bimetal standard we would clearly be in default.
So if we have a trillion dollar deficit, but credit worthiness is not in question, is it true that we are putting future generations in an untenable position? If full faith and credit evaporates, then what? The Kabuki theater of Congressional budgeting seems to be nothing more than performance art and crude partisan haggling, and for my way of thinking, a waste of time. It is highly unlikely that we will ever go back to a gold standard and recent alternatives like petro-dollars and crypto currency have not taken hold. So maybe we can all sleep more soundly tonight knowing that:
The US dollar holds fast!