Welcome to an Age of Politics without Limits
The world changed in an extraordinary way in the 1970s. But it took the pandemic of 2020 to finally expose this to voters around the world. And now that they’ve realised what’s possible, we need to explore the extreme way in which politics is about to change so radically that you won’t be able to recognise it. A new age has begun.
To realise what’s about to happen, put yourself in a central banker’s shoes. You have been appointed by the prime minister or president of your nation. The government is experiencing financial trouble because it spent and borrowed too much in the past, largely due to the pandemic emergency.
But now, inflation has emerged. Lenders to the government are threatening to stop funding government spending by no longer buying government bonds or demanding higher interest rates to compensate for inflation.
It just so happens that, as part of your activities as a central banker, you manage interest rates and buy government bonds (thereby indirectly financing the government). Your official goal is to use interest rates to manage inflation, and Quantitative Easing (QE) to help unclog financial markets during times of crisis.
Now, there is no crisis worse than a sovereign debt crisis — when the government itself could go broke. And that’s just what lenders to the government are threatening by way of charging higher interest rates first, and then, when those rates become untenable, a full-blown sovereign debt crisis during which the government could go broke altogether.
a) tighten monetary policy to keep inflation under control and trigger a sovereign debt crisis, or…
b) fund the government by buying their bonds under questionable pretexts and keep interest rates low, inflation be damned?
That is the choice central bankers face today.
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In fact, they faced it in the 60s and 70s too, especially in the US and UK.
Initially, the politicians and central bankers focused on government spending. There were plenty of good causes at the time, after all. And some not so good ones…
But eventually, the voters got so sick of inflation that it became a political priority, and they were willing to take the hit of a severe recession to get it back under control. Interest rates were hiked to levels unimaginable today.
The thing is, these days, debt levels are far, far higher. Interest rates are far, far lower. And real interest rates are already far more out of control, thanks to surging inflation. Meanwhile, those good causes I mentioned include nothing short of saving the planet.
So I ask you again, what do you think central bankers will choose? What would you choose?
Not that you would be chosen to become a central banker in the first place if you’re unsure of the ‘correct’ answer to that question. The politicians choose their central bankers, so it would be quite a surprise if those central bankers prioritised inflation over keeping the government solvent…
Now, put yourself in a politician’s shoes. You know that central bankers are going to back your government’s finances, as long as they’re in such a bad state that it’s considered an emergency situation.
What do you do? Do you…
a) run a campaign on fiscal prudence and letting the planet burn to a crisp? Or…
b) promise world peace, zero emissions, and the end of poverty, knowing that the money printers will pay for it, as long as the bill is dangerously large enough to put the entire government at risk of going bust?
And who do you think the voters will elect?
Do you see how the incentives that govern our political system have changed in a way we used to think was impossible?
Even though the present conditions of limitless central bank financing of governments go back to the end of the Bretton Woods system in the 70s, governments haven’t been in a bad enough financial situation to really expose just how cornered central bankers are.
The pandemic has exposed this state of affairs by forcing central banks around the world to finance governments in an emergency. But that was a Pandora’s box. There’s no shortage of emergencies, as far as politicians are concerned anyway.
And — failing a good cause to spend limitless amounts of money on — at this point, government debt is so high in so many places because of the pandemic that a sovereign debt crisis itself is enough of an emergency to force central bankers’ hands. If they don’t finance governments, they’ll unleash a debt crisis so deflationary that it makes 2008 look boring.
Do you see where this is going?
If not, consider another angle…
Have you ever wondered how hyperinflation happens at all?
It seems like a stupid and nonsensical thing to do, doesn’t it? How can central bankers be foolish enough to finance governments in the face of exploding prices? Don’t they understand basic economic theory? Why don’t they stop before things get out of control?
The answer is that they do understand economic theory perfectly well. But you don’t understand the political incentives that civil servants face when governments are at the end of their fiscal rope.
Life, and economic policy especially, is about choosing between alternatives. And that means central bankers choose what they perceive as the lessor of two evils: to finance governments.
Compared to being blamed for your government going broke, being blamed for causing inflation is negligible. Especially when letting your government go broke causes severe deflation anyway — you’re damned if you do and damned if you don’t. But at least you keep your job if you finance those who employ you with your limitless printing press.
There’s something so arrogant about the idea that people didn’t know basic economics in the past, and that they may have made bad political decisions out of economic ignorance.
I mean, do you think policymakers didn’t understand inflation in the 70s? The 20s were within living memory!
No, the phenomenon by which inflation gets completely out of control is understood, predictable, logical, and playing out right now — once again.
Editor, The Daily Reckoning Australia Weekend
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