In a recent discussion with Darcy Ungaro of The Everyday Investor, Peter challenged the widespread narratives surrounding government spending, the Fed’s 2% inflation target, and the policies that perpetuate these problems. Peter and Darcy highlight the underlying structural issues that plague the economy—massive government debt, intentional inflation, and a citizenry oblivious of the true cost of inflation.
Peter begins by pointing to the fundamental problem: profligate politicians have borrowed freely, relying on the reserve currency status of the US dollar and eager lenders worldwide. That global willingness to lend paved the way for politicians to promise generous programs without raising enough revenue to cover them:
The world was dumb enough to loan us the money. But it goes back to the days where the dollar became the reserve currency. And so the world is looking to accumulate dollars and not to just hold them in cash, but to lend them out to generate a return...
These large deficits enable politicians to promise something for nothing, which is how politicians win elections...
And so if you deliver government programs but you don’t raise taxes, commensurate with the cost of those programs, then you get votes.
This $34 trillion figure barely scratches the surface of America’s true liabilities. Unfunded promises, hidden from official tallies, only compound the country’s dire financial position:
But that’s just the tip of the iceberg because politicians didn’t just borrow money and spend it. They actually promised voters all sorts of benefits that have never been funded. So that’s still a debt that’s still a liability. Social Security, Medicare, guaranteed student loans, guaranteed mortgages, guaranteed brokerage accounts, guaranteed pensions – the US government gave all these benefits to Americans but never funded them. … So the government is hopelessly insolvent.
With the debt ballooning, the Federal Reserve faces immense pressure. Peter suggests that while the market expects interest rate cuts, economic reality demands hikes instead:
Well, the markets expect a cut, but a cut is not warranted. In fact, the Fed should continue to hike....
[The debt] is currently financed at very low rates and it would have to be rolled over at much, much higher rates. In addition, we’re adding about a trillion dollars a quarter to the national debt. So that’s another $4 trillion that the government’s going to need to borrow. In addition to the $9 trillion, it’s going to need to refinance. So you’re looking at $13 trillion of debt. I mean, I just don’t think the appetite is there around the world.
Peter recounts the history of the Fed’s 2% inflation target, noting that it was originally intended to be a limit, not a target:
Central banks eventually perverted this whole concept to making a target of inflation. Like you need 2%, that 1% isn’t enough. But that was never part of what New Zealand did. They never said that we needed 2% inflation. They just said if we get 2%, that’s too much. It needs to be, it needs to be less. 2% was the upper end of what they would tolerate for inflation. But it became the target and now it’s really a floor.
Inflation is a subtle but malicious tax. It benefits those in power by allowing them to appear generous without overtly raising taxes:
It’s in the government’s best interest to have inflation. And so they have to convince the public that it’s good for them... because that’s how they give you something for nothing.
But inflation is a tax. It’s just a tax that the public doesn’t realize they’re paying. And they actually expect us to believe it.
Contrary to what the mainstream says, falling prices benefit consumers. Falling prices don’t destroy commerce any more than rising prices:
Nobody wants health care to be more expensive, education to be more expensive, their insurance to be more expensive. Everybody wants stuff to get cheaper and it’s better.
Now, the other thing they say as well, if prices go down, businesses can’t make any money. Sure, they can. They make more money because their costs are also coming down.
Unfortunately, the Fed is poised only to continue these problems, not fix them. As Peter explains in his most recent podcast, Fed chair Jerome Powell is distracted from the real issues.