{"id":2042,"date":"2024-04-25T17:11:35","date_gmt":"2024-04-25T17:11:35","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=2042"},"modified":"2024-04-25T17:11:35","modified_gmt":"2024-04-25T17:11:35","slug":"excessive-public-debt-is-killing-the-middle-income-class-the-lifeblood-of-consumption","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2024\/04\/25\/excessive-public-debt-is-killing-the-middle-income-class-the-lifeblood-of-consumption\/","title":{"rendered":"Excessive Public Debt is killing the Middle Income class – the “lifeblood” of Consumption"},"content":{"rendered":"\r\n

Every promise by politicians to increase public spending \u2013 and especially those concerning social transfers \u2013 resonates positively with voters. These promises may win elections, but what voters themselves should be asking is: Who pays the bill?<\/p>\r\n\r\n\r\n\r\n

The common narrative in the US that the debt is unsustainable which has a life of 40 years must be supplemented by the question: How has the debt remained sustainable for so long? There is a widespread view that the fiscal imbalances of a global reserve currency issuer such as the US would naturally result in an Argentina-style default. However, the manifestation of unsustainability did not even appear in Argentina itself in such a dramatic way.<\/p>\r\n\r\n\r\n\r\n

How does debt lose its sustainability?<\/strong><\/p>\r\n\r\n\r\n\r\n

Excessive public debt is unsustainable when it becomes a burden on productive growth and drives the economy into ever-increasing tax burdens, weaker productivity growth and real wages. However, the level of unsustainable debt accumulation may continue to rise because the government itself is forcing the purchase of public debt onto bank balance sheets and forcing the financial sector to take all debt as a “lower risk asset”.<\/p>\r\n\r\n\r\n\r\n

However, the law and regulations merely imposed this artificial situation. Rising debt inflates the size of government in the economy and erodes its potential for growth and productivity. Many diabetics and obese people continue to eat too much unhealthy food, thinking that nothing has happened so far. This does not mean that their eating habits are sustainable.<\/p>\r\n\r\n\r\n\r\n

Those who ignore the build-up of public debt tend to do so with the idea that nothing has happened yet. \u00a0<\/p>\r\n\r\n\r\n\r\n

\"This \u00a0<\/p>\r\n\r\n

The indications in the economy<\/strong><\/p>\r\n\r\n\r\n\r\n

This is a reckless way of looking at the economy, a “we haven’t killed ourselves yet, let’s accelerate” kind of mentality. An increasingly weak private sector, weak real wages, declining productivity growth and the declining purchasing power of the currency all point to the unsustainability of debt levels.<\/p>\r\n\r\n\r\n\r\n

It is becoming increasingly difficult for families and small businesses to make ends meet and pay for basic goods and services, while those who already have access to debt and the public sector smile contentedly. Why; Because the accumulation of public debt leads to the printing of artificial money.<\/p>\r\n\r\n\r\n\r\n

The productive money<\/strong><\/p>\r\n\r\n\r\n\r\n

When money is created in the private sector through the financial system, there is a process of wealth creation and money supply. The financial system creates money for projects that generate real economic return.<\/p>\r\n\r\n\r\n\r\n

Some fail, others soar. This is the process of productive economic growth and progress. Only when the central bank manipulates interest rates, hides the cost of risk, and increases the money supply to monetize unproductive deficit spending can it distort this normal economic process.<\/p>\r\n\r\n\r\n\r\n

When the central bank wants to mask the deterioration of the solvency and financial soundness of fiscally reckless governments, it does so by manipulating interest rates \u2013 making it cheaper for fiscally irresponsible governments to borrow \u2013 and artificially increasing the supply of currency in the system, making money from the public debt \u2013 a destructive process of money creation as opposed to the savings-investment function of banks.<\/p>\r\n\r\n\r\n\r\n

Coercion and repression<\/strong><\/p>\r\n\r\n\r\n\r\n

When the fiscal position is unsustainable, the only way for the state to force acceptance of its debt\u2014the newly created currency\u2014is through coercion and repression. A government’s debt is an asset only when the private sector assesses its solvency and uses it as a reserve.<\/p>\r\n\r\n\r\n\r\n

When the government imposes its insolvency on the economy, its bankruptcy is manifested by the destruction of the purchasing power of the currency through inflation and the weakening of the purchasing power of real wages.<\/p>\r\n\r\n\r\n\r\n

The state is essentially implementing a process of selective (slow) bankruptcy in the economy by raising taxes and weakening the purchasing power of the currency, leading to weaker growth and erosion of the middle class, the\u2026 hostages of the currency issuer.<\/p>\r\n\r\n\r\n\r\n

Of course, as a currency issuer, the state never acknowledges its imbalances and always blames inflation and weak growth on the private sector, exporters, but states and markets. Independent institutions must enforce fiscal prudence to prevent a state from destroying the real economy.<\/p>\r\n\r\n\r\n\r\n

The state, through its monopoly of currency issuance and legislative and regulatory power, will always pass on its imbalances to consumers and businesses, thinking it is for their own good.<\/p>\r\n\r\n\r\n\r\n

The public deficit does not create economies of scale for the private sector<\/strong><\/p>\r\n\r\n\r\n\r\n

Savings in the real economy accept government debt as an asset when they perceive the solvency of the currency issuer to be reliable. When government imposes it and ignores the workings of the productive economy, positioning itself as the source of wealth, it undermines the very foundation it seeks to protect: the standard of living for the average citizen.<\/p>\r\n\r\n\r\n\r\n

Governments do not create reserves. Their debt becomes a reserve only when the productive private sector economy within their political boundaries thrives and public finances remain under control. The state shows its insolvency, like any issuer, in the price it allocates to the purchasing power of the currency.<\/p>\r\n\r\n\r\n\r\n

Public debt is an artificial creation of currency because the government does not produce anything. It only manages the money it collects from the same productive private sector it is suffocating through taxes and inflation.<\/p>\r\n\r\n\r\n\r\n

The manipulation by the Federal Reserve<\/strong><\/p>\r\n\r\n\r\n\r\n

The United States’ debt began to become unsustainable when the Federal Reserve stopped defending the currency and paying attention to monetary figures to implement policies designed to mask the rising cost of debt from the rampant spending that ran up the budget deficit.<\/p>\r\n\r\n\r\n\r\n

Creating artificial currency is never a neutral process. It disproportionately benefits the first recipient of new currency, the government, and massively hurts the last recipients, real wages and deposit savings.<\/p>\r\n\r\n\r\n\r\n

It is a massive transfer of wealth from the productive economy and savers to the bureaucratic administration. More units of government debt means weaker productive growth, higher taxes and higher inflation in the future.<\/p>\r\n\r\n\r\n\r\n

So how do we know, if the government can impose its fiscal imbalances on us, how do we know if the debt it issues is unsustainable?<\/p>\r\n\r\n\r\n\r\n