The US federal government has a long history of intervening in voluntary human action, frequently tilting the scales to favor some over others. This is perhaps more apparent when vital resources, like water and marginally productive land, are involved. The US West, and in particular the southwestern US, provide great examples, some of which have been documented at mises.org over the years (see here and here). Politicians and interest groups go out of their way to prop up their sides and support their interests, even if at least some of those interests would not exist at all without state support. After all, no politician wants to be accused of betting against America (whatever that means). But eventually government benefits have unintended consequences.

Arizona is not often thought of as an agricultural paradise. Plants can’t be intensively grown in dry, sandy soils—the desert was simply not designed for this purpose. Water is a precious commodity here. And yet acres and acres of cotton, alfalfa, and sorghum (as well as other crops) are produced here. The reason for this apparent abundance is that massive federal spending has created numerous diversion and dam projects that allow water to be used for agriculture at prices that would not be supported in a free-market situation. So, agriculture and other users of this precious commodity are incentivized to expand production. The problem, of course, is that you can’t magically make more water appear below the desert just by spending money and building irrigation projects. There are natural limits at work here. The US Southwest really is running out of water due to the artificial situations set up by the state.

Of course, one could make the argument that these grains, oilseeds, and forage crops are putting the water and the nutrients from the soil to better use by helping local farmers and feeding local animals. And most of these precious resources remain close to where they came from. But, as was made clear in a recent article, this is an oversimplification of the situation.

A large amount of farmland in Arizona, about ten thousand acres, is now owned by an agricultural company in Saudi Arabia. The company produces crops in Arizona and ships them to Saudi Arabia, where they have their own issues with water and nutrient-rich soil, to feed large dairies. And this appears to be a growing trend—foreign-owned farmland in the West totaled about three million acres in 2020.

The result has been that limited local resources in Arizona are further stressed. Production at the farms has increased, using more water and nutrients. Local officials have had to repair roads due to increased agricultural traffic. And perhaps most apparent to those who live there is the deterioration of houses and town roads in the area. One local shop has sunk a few inches into the ground. More common now is the “dirt wall” of soil and dust that blows in from vast fields. And flooding and water runoff on town roads are more pronounced.

But, long term, the effects will be more devastating. Local officials are concerned by recent evidence that water within deep aquifers, thousands of feet below ground, is starting to move because of water pumping for crop production. After all, in the desert, when deep reservoirs are being pumped to the surface and sold at rock-bottom prices, it shouldn’t be surprising that more shallow sources of water have begun to dry up.

All of this is the natural progression of state-sponsored projects. Gifts from the state (handouts for some at the expense of others) often set in motion a complex series of consequences that cannot be stopped once started. If you don’t manage resources through a free-market process, others will take notice of these new and artificial (and often guaranteed) business opportunities. If resource use is not limited through free-market mechanisms, there will eventually be shortages, plain and simple. No amount of investment, new technology, or painful local experiences will change this.

The International Monetary Fund (IMF) has warned about the optimistic estimates for 2023, stating that it will likely be a much more difficult year than 2022.

Why would that be? Most strategists and commentators are cheering the recent decline in price inflation as a good signal of recovery. However, there is much more to the outlook than just a moderate decline in price inflation rates.

Price inflation is accumulative, and the estimates for 2023 and 2024 still show a very elevated level of core and headline inflation in most economies. The longer it remains this way, the worse the economic outcome. Citizens have been living on savings and borrowing to maintain current levels of real spending. But this cannot last for many years.

Politicians all over the world are trying to convince us that an annual inflation rate of 5 percent is a success, when it is a calamity.

In the current estimates, US citizens will continue to lose purchasing power. According to the Bureau of Labor Statistics, from November 2021 to November 2022, real average hourly earnings decreased 1.2 percent, seasonally adjusted. However, these bad figures are nowhere as bad as those of the euro area. In the euro area, wages and salaries per hour worked increased by 2.1 percent in nominal terms in the third quarter of 2022, which means a staggering decline in real terms of 7.1 percent.

The outlook for 2023 is widespread impoverishment while governments continue to spend and raise taxes, which means an even worse destruction of real disposable income.

What is happening in the so-called recovery from the pandemic is nothing else but a global destruction of the middle class at an unprecedented speed.

The worst policies have been implemented and all have decimated real savings and wages. Money printing and tax hikes have not made the rich poorer and they have certainly not damaged the wealthy. The entire negative impact of the widespread increase in taxes has fallen, yet again, on the shoulders of the middle class.

Politicians always sell their interventionist measures with the promise that they will only hurt the rich, but it is you who pays. They know that the middle class is the one that depends on a wage and tries to save for the future. The ultrarich are also highly indebted and can navigate a period of rising taxes moving capital and looking for options to preserve wealth. Those that rely on a salary and a bank account are the ones that cannot escape the global policy of impoverishment.

We must remind of the obvious: Artificial money creation is never neutral. It negatively affects wages and savings in deposits and only benefits deficit-spending governments and the highly indebted. Rising taxes always hurts the middle class and makes it more difficult for those that are starting to make a better living through hard work to invest and save for the future.

Interventionism always says that every unit of government spending goes back to society and therefore it is positive. The concept makes no sense. Bloating bureaucracy and entitlement spending does not strengthen growth or productivity and becomes a massive transfer of wealth from the productive to the unproductive. One thing is to have a portion of the productive sector aimed at social issues and a completely different one is to put the “social” banner on any government spending and make the productive sector a cash machine for governments to tap into at any and every time.

When you buy the narrative that the government will give you free stuff by making the rich pay more you are opening the door for the government to consider you rich and take more from you.

When you demand more government, this is what you get. An extractive and confiscatory view that always blames those who invest and create jobs for the problems yet creates a larger bureaucracy to administer the so-called benefits you never get.

The interventionist narrative is to try to tell you that everything and anything is to blame for inflation except the only thing that makes all prices rise in unison: Printing money well above demand.

Inflation at an annual rate of 5 percent is not a positive and certainly not falling prices. Inflation is accumulative, and what it means is we are becoming poorer faster.

[Reprinted with permission of the authors.]

The year 2023 is shaping up to be a challenging one for the Federal Reserve System. 

The Fed is on track to post its first annual operating loss since 1915. Per our estimates, the loss will be large, perhaps $100 billion or more, and this cash loss does not count the unrealized mark-to-market losses on the Fed’s massive securities portfolio. An operating loss of $100 billion would, if properly accounted for, leave the Fed with negative capital of $58 billion at year-end 2023. 

At current interest rates, the Fed’s operating losses will impact the federal budget for years, requiring new tax revenues to offset the continuing loss of billions of dollars in the Fed’s former remittances to the U.S. Treasury.

The Federal Reserve has already confirmed a substantial operating loss for the fourth quarter of 2022. Audited figures must wait for the Fed’s annual financial statements, but a preliminary Fed report for 2022 shows a fourth-quarter operating loss of over $18 billion. The weekly Fed H.4.1 reports suggest that after December’s 50 basis point rate hike, the Fed is losing at a rate of about $2 billion a week. This weekly loss rate when annualized totals a $100 billion or more loss in 2023. If short-term interest rates increase further, operating losses will increase. Again, these are cash losses and do not include the Fed’s unrealized, mark-to-market loss, which it reported as $1.1 trillion on Sept. 30. 

The Fed obviously understood its risk of loss when it financed about $5 trillion in long-term, fixed-rate, low-yielding mortgage and Treasury securities with floating-rate liabilities. These are the net investments of non-interest-bearing liabilities—currency in circulation and Treasury deposits—thus investments financed by floating rate liabilities.

These quantitative easing purchases were a Fed gamble. With interest rates suppressed to historically minimal levels, the short-funded investments made the Fed a profit. But these investments, so funded, created a massive Fed interest rate risk exposure that could generate mind-boggling losses if interest rates rose—as they now have.

The return of high inflation required the Fed to increase short-term interest rates, which pushed the cost of the Fed’s floating-rate liabilities much higher than the yield the Fed earns on its fixed-rate investments. Given the Fed’s 200-to-1 leverage ratio, higher short-term rates quickly turned the Fed’s previous profits into very large losses. The financial dynamics are exactly those of a giant 1980s savings and loan.

To cover its current operating losses, the Fed prints new dollars as needed. In the longer run, the Fed plans to recover its accumulated operating losses by retaining its seigniorage profits (the dollars the Fed earns managing the money supply) in the future once its massive interest rate mismatch has rolled off. This may take a while since the Fed reports $4 trillion in assets with more than 10 years to maturity. During this time, future seigniorage earnings that otherwise would have been remitted to the U.S. Treasury, reducing the need for Federal tax revenues, will not be remitted. 

While not widely discussed at the time, the Fed’s quantitative easing gamble put taxpayers at risk should interest rates rise from historic lows. The gamble has now turned into a buy-now-pay-later policy—costing taxpayers billions in 2023, 2024 and perhaps additional years as new tax revenues will be required to replace the revenue losses generated by quantitative easing purchases. 

The Fed’s 2023 messaging problem is to justify spending tens of billions of taxpayer dollars without getting congressional pre-approval for the costly gamble. Did Congress understand the risk of the gamble? The Fed tries to downplay this embarrassing predicament by arguing that it can use non-standard accounting to call its growing losses something else: a “deferred asset.” The accumulated losses are assuredly not an asset but properly considered are a reduction in capital. The political fallout from these losses will be magnified by the fact that most of the Fed’s exploding interest expense is paid to banks and other regulated financial institutions.

When Congress passed legislation in 2006 authorizing the Fed to pay interest on bank reserve balances, Congress was under the impression that the Fed would pay interest on required reserves, and a much lower rate of interest—if anything at all—on bank excess reserve balances. Besides, at the time, excess reserve balances were very small, so if Fed did pay interest on excess reserves, the expense would have been negligible.

Surprise! Since 2008, in response to events unanticipated by Congress and the Fed, the Fed vastly expanded its balance sheet, funding Treasury and mortgage securities purchases using bank reserves and reverse repurchase agreements. The Fed now pays interest on $3.1 trillion in bank reserves and interest on $2.5 trillion in repo borrowings, both of which are paid at interest rates that now far exceed the yields the Fed earns on its fixed-rate securities holdings. The Fed’s interest payments accrue to banks, primary dealers, mutual funds and other financial institutions while a significant share of the resulting losses will now be paid by current and future taxpayers.

It was long assumed that the Fed would always make profits and contribute to Federal revenues. In 2023 and going forward, the Fed will negatively impact fiscal policy—something Congress never intended. Once Congress understands the current and potential future negative fiscal impact of the Fed’s monetary policy gamble, will it agree that the looming Fed losses are no big deal? 

[Reprinted with permission of the authors.]

Here we go again. Every few years in Congress there is a purely political battle over the debt ceiling. We’re supposed to be horrified and worried that the US might default on some of its debt. Some commentators will insist the US has never defaulted, and that default be a disaster. (That’s wrong, by the way. The US has defaulted before.) 

But these debt ceiling debates always end the same way. Congress ends up increasing the debt ceiling and the US’s national debt continues to spiral upward. 

During all the theatrics over the debt ceiling, however, many strange ideas are put forward as a supposed means to avoiding a shutdown. One of these is the “trillion-dollar coin” idea. The general premise is that the government can do an end run around the debt ceiling altogether if it can find a way to raise revenue without borrowing. Thus, the scheme goes more or less like this, as explained by Yale law professor Jack Balkin back in 2011: 

Are there other ways for the president to raise money besides borrowing?

Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds….

The “jumbo coin” [strategy works] because modern central banks don’t have to print bills or float debt to create new money; they just add money to their customers’ checking accounts.

Put another way, by minting a trillion-dollar coin, Congress could simply deposit the coin at its bank account at the Federal Reserve and then start spending money from the account which now has a trillion-dollar (or even larger) credit. 

But here’s the rub: in no version of this scheme is the trillion-dollar coin actually made with a trillion-dollars-worth of platinum. Were that the case, the “coin” would be huge and weigh millions of pounds. Rather, the coin we’re talking about in this scheme would just have a face value of $1 trillion. It would be a commemorative or numismatic coin. The coin would be nothing more than a kind of legal fiction that’s used to credit the Treasury with a trillion dollars without going deeper into debt. 

So, there’s really no reason for there to be any platinum in the coin at all, except for the legal (and perhaps political) advantages of calling it a platinum coin. From an economic standpoint, the coin might as well be a paperclip, as explained by Robert Murphy: 

The Federal Reserve has the power to buy whatever assets it wants at whatever price it wants. In principle, [the Treasury Secretary] could sell a paperclip to the Fed for $2 trillion. The Fed would simply write a check made out to the Treasury, drawn on the Fed itself.

When the Treasury deposited this check with its own bank — which just so happens to be the Fed — then its own “checking account” balance would go up by $2 trillion. This money wouldn’t come from anywhere in the sense that some other account would need to be debited $2 trillion. On the contrary, the system’s total reserves (and what is called the “monetary base”) would have swelled by $2 trillion. The Treasury would be free to start paying bills by writing checks on the $2 trillion in its account.

The only kink in the plan would be the state of the Fed’s balance sheet. Initially it could value the paperclip at $2 trillion — what the Fed paid for it — and list the paperclip among its other assets such as Treasury bonds and mortgage-backed securities.

It seems absurd, but the difference between the paperclip idea and the trillion-dollar coin scheme is one merely of degree. Both are ways of depositing something of relatively small value into a bank account and then withdrawing sums of money far exceeding the value of what was deposited.

Two Ways of Taxing the Public

But what is the difference between the usual raise-the-debt-ceiling option and the paperclip/coin idea? Perhaps the most meaningful difference between them is the way in which the taxpayers are exploited to pay for more government spending. Were the government to simply go more deeply into debt, the government would sell bonds and get cash in return. The bonds would be added to the national debt, formally increasing both the future and present obligations of the taxpayers. Taxpayers would be on the hook for paying off the bonds at the maturity date at some point in the future, but would also be on the hook in the near term for paying interest on the new debt. 

In the case of the trillion-dollar coin, however, the taxpayer is exploited via the inflation tax. The coin scheme essentially forces the Federal Reverse to credit the Treasury with money and resources that doesn’t exist. The scheme ends, as Murphy notes above, by expanding the money supply—i.e., “printing” money. 

The result of this inflating the money supply is either rising asset prices or rising consumer prices, or both. For example, we’re already living with 40-year highs in price inflation which is the consequence of the massive amounts of monetary inflation that occurred since 2008—and especially since 2020. 

Admittedly, the trillion-dollar coin idea is good for the government itself. It provides the regime with yet another option for quickly accessing and spending even more money. But for taxpayers, there’s nothing beneficial or special about the coin scheme. It’s just a different way of ripping us off.