The Little Engine That Could

And so, we have gazed into Oracle’s ball and we have seen the future. However, for those of you out there still in disbelief, we will answer the following question, just for you.

Is it inevitable that governments fall into this ultimate self-destructive Interest Rate cycle?

The answer is yes!

It is indeed inevitable. If the past teaches us anything it is that politicians’ ways are as unchanging as human beings are. The Romans knew this and all the other empires before them and after them.  Bread and circus. It is what politicians need to succeed as politicians.

The only problem is, they cost money. Real money.

And people get used to them. Real fast.

We have mentioned in many other articles that human beings are differential machines. As such, we can only detect differences from one state to another. We constantly compare yesterday with today. However, we always fail to compare last year with this year, or last decade with this one. We are blind to long term trends.

Because of this build-in property of human beings, politicians are force to do two things

1. Provide more  bread and circus all the time, so that we don’t forget
2. Increase the amount of bread and circus at every step, so that the the difference does not comes out zero.

Politicians are in the business of staying in power. In order to do so and due to our differential nature, they need to keep reminding us day after day of all the “benefits” they provide, but also those “benefits” must increase from one day to the next one so that we notice them. This, they cannot change.

Therefore they are forced to spend larger and larger amounts of money every time.

In the beginning, small incremental improvements were all it took. Therefore the system seemed to work just fine. However, bit by bit, there increments were insufficient. First they raised taxes until they could not rise them anymore. Then they borrowed and borrowed, until they could borrow no more. Then they printed and printed until they entered into the inevitable Interest Rate cycle.

This is a process that took time to develop. There are two reasons for it:

1. In the beginning, it wasn’t necessary and the tools that would enable politicians to do this didn’t exist.
2. Towards the end, increasingly higher and higher amounts of money were necessary, and so politicians  adapted, overcame and improvised new ways of creating money out of thin air.

This is the little engine driving politicians who in turn drive CBs. This is the inescapable process that politicians must follow if they want to stay in power.

 

About growth

If you take a look at the history of spending in any country, you will notice that spending always overruns population growth and it does so in a geometric growth pattern.

 

 

This geometric growth pattern has a noticeable characteristic. In the beginning looks like linear, this is, slow to grow. It looks sustainable. It looks appropriate. However, eventually, it begins to accelerate and with every passing day, it accelerates more and more until it becomes almost vertical, this is, unsustainable.

 

 

And so, in the beginning politicians can spend because they don’t have too much money to spend and also because small expenditures have the desired effect. Eventually, over time, just like a drug addict, politicians have no choice but to keep increasing expenditures year over year towards oblivion.

The question that any reasonable person would ask is this:

But isn’t it reasonable that politicians increase expenditures considering that science and technology brings new, more expensive, goods and services that “society” needs?

The answer is no.

Although it is true that in general terms economic growth is exponential, this only applies to entire economies. If we look at different components of “social” spending, the history is quite different.

Let’s take education. The higher public expense in education is by far Primary  (Elementary) and Secondary (High School). Yes, universities are more expensive but many are privately funded in whole or in part. If we take a look at a typical school, it is composed of three elements: a building, educational material and people (teachers and administrators). Buildings and educational materials are mostly one time expenditures with maintenance costs attached to them. These don’t grow exponentially. Teacher’s salaries are more or less adjusted by inflation, therefore they don’t grow exponentially either. Their growth is “Linear”.  So, there is no need to expand expenditures exponentially in this area.

Let’s take roads. Roads are built more or less on demand. Where there is a population growth, new roads are built. But population growth is mildly geometrical at best. So, the initial expenditure of roads may be geometrical, but this is a one-time expenditure only. The remaining is just maintenance costs which are fixed. There is no need for exponential spending here either.

Let’s take health. This item seems to justify exponential expenditure. Medications are expensive. New treatments are expensive. Doctors’ salaries are expensive, and so on. Let’s take one issue at the time. Health care is directly related to population growth (population aging is cyclical at best and we are only concerned with very long trends). Population growth is mildly geometrical and in many countries in the world (such as most of Europe) population numbers are shrinking. Medications are coming off-patent all the time and so becoming cheaper. New and expensive medications are either not so much effective than the old ones or have a small patient market. Technologies are getting better, smaller and cheaper; besides, technologies have a very long usable life. The cost of training doctors is more or less a fixed cost plus inflation. Hospitals are a one-time expenditure plus maintenance, which do not have exponential growth. So, in summary, there is no reason for Health Care to require exponential expenditures.

Actually, we could analyze every single “social” expenditure of any government, and we would find the same linear need but a geometric expenditure. How is this possible?

Simple. Waste. The primary law of any government is that money creation or borrowing always rises to the level of expenditures. Politicians must spend and therefore they do. Sourcing of funds comes second, a far, far second.

And so, it is absolutely inevitable that CBs eventually drive countries into the Interest Rate cycle of destruction. It is a property of the Democratic system. It cannot remove this property any more than it cannot remove politicians.

We are not big supporters of the idea that there is a destiny. We believe the destiny ultimately lies in our hand. However, when it comes to this cycle of destruction, and for this brief period of time, we are believers. This cycle is here. It will only get worse, enormously worse until things get better.

Now you know. You have been warned. You have been read the future that lies in the crystal ball of Central Banking. The cycle is coming for you whether you are ready or not. You can be a casualty of this cycle or a survivor. Your choice.

Note: please see the Glossary if you are unfamiliar with certain words.