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Tags: easing | fiscal | quantitative

Need for Structural Change in Western Economies Is Desperate

Need for Structural Change in Western Economies Is Desperate


Nikola Kedhi By Tuesday, 08 August 2023 04:07 PM EDT Current | Bio | Archive

Gov. Ron DeSantis, R-Fla., Has It Right About the Fed

Gov. Ron DeSantis, Fla., recently presented his Declaration of Economic Independence, with a mix of supply side proposals and hard but necessary propositions driven by geopolitical realities, such as the China decoupling notion.

However, there was one point about the Federal Reserve receiving little attention.

The Sunshine State's governor, months ago, became the first high-level politician to point out one fundamental truth that politicians and officials on both parties seem to forget: the Federal Reserve has contributed to inflation by printing trillions of dollars.

This has occurred as a result of its program of Quantitative Easing (QE).

While Republicans mainly mention President Biden’s disastrous fiscal policies, Democrats put the blame solely on the conflict in Ukraine, and the main reason is conveniently left out.

As someone who devotes a great deal of his time to studying the economy, this writer hopes this starts a much-needed debate about monetary policy on both sides of the Atlantic.

Let's not forget, the massive printing of money is the primary cause of inflation.

As Milton Friedman once said, "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

For most of the past decade, the Fed has continued its Quantitative Easing program, albeit less aggressively than its European counterpart, with a short interruption in the middle of the past decade.

This has caused huge imbalances that directly impact taxpayers, and an immense pressure on interest rates to remain at record low levels, to the great convenience of successive governments which could take on further debt at low cost and engage in massive deficit spending.

While it may look politically beneficial, this causes considerable distortions in markets, as the Silicon Valley Bank bankruptcy showed, ultimately harming taxpayers. Yet, no one is held accountable.

The United States dollar, being the world’s reserve currency, could withstand, up to a point, the massive printing due to the demand for it, differently from the Euro.

For example, at the end of 2019, there was a $17 trillion shortage for the dollar.

Emerging markets issued their debts in dollars, due to the safety of the currency compared to their own.

This meant that they needed to purchase dollars to pay the maturing debt.

Demand for the dollar was higher than its supply until 2020.

That's the reason why inflation did not appear until after the pandemic, even though money was being printed massively to finance government spending.

The economy on the other hand was helped by those tax cuts and deregulations occurring under and during the Trump administration.

Concurrnetly, record low unemployment numbers and considerable economic growth were attained; thanks to these supply side policies which somewhat neutered the impact of unnecessary spending and the economic cold war with China.

However, when the economy was shut down by the government, at the start of the COVID-19 pandemic, production and economic activity were greatly reduced, while money printing continued at a high pace.

The money supply growth reached an all-time high of 27.1%in February of 2021, compared to an average of around 6% in the previous years.

For comparison, the demand for dollars had been growing at about 8% on average.

Money was created out of thin air, unbacked by actual physical goods, as production was falling. It went to households in the form of helicopter money and unemployment benefits which had little to no positive effects on the real economy.

The dollar’s value was substantially lowered, giving rise to inflation, which actually impoverished individuals and families.

After the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) just as the economy was showing signs of improvement, President Joe Biden and the Democratic-run Congress approved trillions of dollars more in spending, much of which was channeled toward zombie companies or unproductive programs.

This could be paid either with higher taxes for all individuals or considerable debt increases, and certainly with higher inflation, as the Fed continued its money printing to finance government deficits, all while strongly and repeatedly denying the evident inflationary signs until it was too late.

In Europe the situation was even worse, as Quantitative Easing was uninterrupted, more aggressive, with less competitive economies due to high taxation, inflexible labor markets, higher regulations, and a lower demand for the common currency.

The only thing that saved the American economy were the tax cuts and deregulation, making the economy more competitive, liberating businesses from the strangling red tape and improving the employment rate.

In the 27th state, where Gov. DeSantis is its chief executive, supply side economics have gone even further, reducing debt and unnecessary government spending and making it one of the most competitive and attractive states in the U.S.

Certainly it serves as a model for Europe as well.

It should become apparent to all that the artificially low interest rates, high unproductive government spending and massive deficits are not sustainable in the long term.

They result in a decline in the country’s competitiveness and the erosion of the currency.

Argentina is one of the countries that should serve as a warning to all Western societies that have fallen into complacency during the past decade and temporarily benefit from a system that is all but sustainable.

A desperate need for deep structural changes in Western economies toward higher economic liberty, free and fair markets, more limited government, and fiscal responsibility is evident, and Gov. DeSantis’ warnings should be a welcomed wake up call for all who want strong nations, prosperous economies and social harmony.

Nikola Kedhi is a senior financial adviser and a contributor to several media outlets in the U.S. and Europe, including Fox News, The European Conservative, The American Conservative, The American Mind, The Federalist, CapX, the Mises Institute, il Giornale and others. Following several years in the consulting and media industries, he has gained considerable expertise in economic, financial and political matters. Mr. Kedhi's articles reflect his own views solely. Read Reports by Nikola Kedhi — More Here.

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It should become apparent to all that the artificially low interest rates, high unproductive government spending and massive deficits are not sustainable in the long term.
easing, fiscal, quantitative
Tuesday, 08 August 2023 04:07 PM
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