It Was a Shallow Surface

How the Partisan Pursuit of Political Favor has Negatively Affected Our Economy

At the start of 1961, President Dwight D. Eisenhower delivered his farewell speech as he left office. Those who expected the military leader and hero of World War II to depart his Presidency with a nostalgic "old soldier" speech like Gen. Douglas MacArthur's, were surprised at his strong warnings about the dangers of the "military-industrial complex."

Personally, this is one of the last authentic speeches delivered by a US president warning of greater spheres of influence internally within the US.

A vital element in keeping the peace is our military establishment. Our arms must be might, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction. . . . American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. . . . This conjunction of an immense military establishment and a large arms industry is new in the American experience. . . .Yet we must not fail to comprehend its grave implications. . . . In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

And this is essentially how the world has operated since the 1960’s till 2020: multiple industries lobbying and vying for power to influence consumers, with the US government acting as their personal legislative arm. In doing so, our leaders (I’m referring to those in developed nations) have stolen what is not rightfully theirs to lift themselves and these industries to unnatural heights. Through monetary and fiscal policies that have propelled growth and productivity to present levels, they have not only stolen wealth and prosperity from our children and our children’s children, but they have also created a political dynamic that has grown weary of the Constitution and its attendant political norms.

So how did we get here?

Source: Epsilon Theory

In a ‘reasonable’ world, (assuming a closed-economy) you would expect a group’s GDP to increase in line with the wealth of its people.

As a people, you can’t be a lot richer than your economy grows without stealing that wealth from someone else.

How’d we steal?

We did this by ‘stealing’ wealth both externally through trade in favor of the developed nation, and internally from future people in our own country through artificially low interest rates, monetized debt-driven stimulus, and an increasingly levered financial system supporting investments into industries that don’t necessarily drive productivity. And while the US has been doing this for some time now, I wanted to focus on the accelerating separation between net worth and GDP that has been occurring since 2008.

In 2008 the world faced its largest financial crisis since the great depression leading to the introduction of quantitative easing (QE) to provide liquidity for banks in a time of crisis. While the introduction of QE was justified, for me the real issue that stemmed from this was that QE never really stopped, and just like a drug you begin building a tolerance and asking for more.

We continuously transform emergency government intervention policy into permanent government policy. 

1. Interest Rates

2. Balance Sheet Control

3. Central Bank Communication aka Faith

These are the three main ‘tools’ which the US central bank has been using to play its game since 2008. The third being perhaps the most underrated tool and least mentioned because of its simplicity. The reason we still trudge along as resemblance of a society, Faith, which the central bank has provided exactly just that with its verbal promises in press releases and meetings, always giving the public the benefit of time ahead of its decision to maintain its “extraordinary accommodation” far into the future.

So we went along for another decade with the three ‘tools’.

Then came COVID-19.

Then came low interest rates.

Then came more QE.

Then came stimulus checks and PPP loans.

Source: Epsilon Theory

Now, we are looking at the widest ever gap between individual wealth and GDP.

Even with all the news of recession and inflation, is that it is no longer possible to inflate wealth without sparking inflation in the real economy.

So the lines must converge, and if they do, it would be a wealth destruction bigger than 2008. I hate saying this, but I believe the alternative is worse. The politicians that run our government recognize this problem, but the result of parties’ inability to cooperate towards common ideals is the continuation of public policy that patches cracks rather than fixing the material, such as the latest student loan forgiveness package that seeks to relieve college graduates from debt, but does so by handing out money rather than addressing the systemic drivers of increasing tuition costs to students. As I mentioned earlier, it is difficult to put the genie back in the bottle. Once new measures are taken for emergency purposes, in the hopes of gaining political favor, the government is then able to leverage these measures for non-emergencies when they do not restore economies to equilibrium, but instead exacerbate long-term drivers of poor economic health. The long-term implications of these short-sighted choices do not prevent the politicians that made these choices from being re-elected, so the dynamic is unlikely to change.