The dynamics of postmodern economics defies the logic of times past. Everyone used to know that there is no such thing as a free lunch and that flawed financial actions always have consequences. Common sense dictates that national economies should function like home economies. People should not spend more than they make or take unreasonable risks, and everyone should always save for a rainy day.
However, these simple rules no longer seem to apply. Suddenly in these times of the COVID-19 crisis, everything is “free”: stimulus checks, benefits, paycheck loans, and medical care. The government can spend with reckless abandon. Trillions of dollars of debt are rubber-stamped with little fanfare. Meanwhile, the business world maintains its dependence on cheap money and government largess.
All these trends impact personal finances. Many people have embraced debt and entitlements as a way of life. When things get rough, people turn to the government to rescue them from disaster.
Perhaps the worst of it is that there seem to be no consequences. Things seem to keep on functioning as if nothing drastic has happened. People seem to keep living happily ever after – until the next crisis strikes.
On the surface, postmodern economics seems as bizarre and irrational as the philosophy of postmodernity. However, the constant recourse to the government for stimuli, aid, and monetary inflation has consequences. As things worsen under the strain of multiple crises, the frayed edges of a defective financial system are showing.
The rescues still work, but there are signs of trouble. The gradual consequences of a bailout economy are beginning to manifest in the form of low growth and productivity. It now takes more “kick” to kick-start the economy. Government rescues depress markets and discourage entrepreneurship. Indeed, massive government interventions of any kind are dangerous and necessarily habituate the people to accept socialism.
Massive government intervention is dangerous, because it is habit-forming. Once a government indulges in printing money to deal with disasters and crashes, there is no crisis too big or too small to serve as a pretext for inflating the money supply. Indeed, the inflationary reflex becomes almost automatic, and the amount of money grows exponentially with each new round.
These automatic bailouts create habits of dependency that are hard to break. These habits, accustom citizens to a distorted vision of the economy. Business leaders, gorged with cheap money, are tempted with moral hazard and become insensitive to risk-taking, since they are not expected to pay for the consequences of their bad decisions. Consumers come to expect the comfort of generous, taxpayer-funded rescues that soften the impact of financial failures and crashes. People live in the shadow of a cruise-ship-like economy where everything seems to be provided upon request.
The resulting malady creates a fragile and vulnerable economic system that must constantly be rescued with easy credit, tax benefits, and bailout funds.
What makes these interventions dangerous is a vast arsenal of money-extending weapons deployed by the Federal Reserve. The arsenal funds the array of extremely generous unemployment benefits, forgivable paycheck loans, and direct cash payments that have cushioned the fall from financial stability.
The Federal Reserve is cutting interest rates to almost nothing to get money running through the economy. It is expanding the money supply and incurring new debt. For the first time, the regulatory body is buying corporate bonds directly to calm markets. It is acquiring these assets at twice the rate of the 2008-era practice of “quantitative easing,” which allowed the Fed to purchase tens of billions of dollars of troubled assets a day for the same purpose.
Indeed, the government battle plan has all-but made money free to borrowers, at near-zero interest rates. What makes matters worse is that other nations are following our lead. Worldwide, the notion of free money allows governments and businesses to borrow their way out of old problems … and create new ones.
Massive government bailouts and free money creates three harmful distortions within America’s business culture. The first is that it inherently favors gigantic companies. Large firms are best positioned to navigate the countless government regulations tied to free money. They profit from the government recovery programs that require the services and resources of giant firms. If they are deemed “too big to fail,” troubled giants can count on even more direct government aid, fueling their next round of unsupported expansion.
Second, rescues benefit inefficient, heavily indebted small firms, which use taxpayer money to stay alive artificially. Economists call them “zombie” firms, since they use credit resources at the expense of hyper-efficient startups that normally make economies dynamic through innovation. These zombies make no profits yet absorb productive workers, crowd out resources, and drive up costs.
Third, clogging up the economy with deadwood makes the nation less productive. The inefficient use of free money may juice the market artificially and inflate the value of stocks, bonds, and other assets, but the goods produced lack consumer demand. Thus, they sit on shelves or are purchased by the government to no purpose.
The result of a government-rescue culture is not the flowering of capitalism but very much the opposite. As Ruchir Sharma writes in the Wall Street Journal, “the irony is that the rising culture of government dependence is, in fact, a form of socialism – for the rich and powerful.”
In other words, Western economies may be outwardly capitalist but now run on socialist models engineered by powerful technocrats. They protect gigantic companies and keep inefficient firms alive. And they drain the pockets of taxpayers to produce these results.
The long-term consequence of this faulty model is the ballooning of global debt. Free money may be free to borrow, but the principal must always be paid back. Borrowing against the future may soften the damages caused by economic crises, but it produces new ones. Increasing the number of unproductive borrowers means it takes more debt to impact ever longer and weaker economic recoveries. Hyperinflation and endless bailouts produce a certain “cash resistance” within the economy.
The coronavirus crisis, race riots, and economic shutdowns created a perfect storm that hampers a return to order and normality. Economists realize that it will take successive relief packages, measured in trillions of dollars, to fix the harm done to the world economic system. Thus, governments are intervening and borrowing on a scale never seen before.
This raises the question no one dares to ask: What will happen when the bailouts no longer work? With everything in a state of emergency, everyone feels dispensed from asking this inconvenient question. However, people do not realize that the arsenal is emptying itself of weapons. There will be nothing with which to restart the economic engine. Each counterproductive bailout raises the risk that the West’s financial system will come crashing down.
When the coronavirus crisis ends, many suggest that there will be time for governments to move out of rescue mode and return to sound economics. However, this is easier said than done. Such logical advice does not seem to apply to a bizarre postmodern world that has embraced the absurd.
The way out of this mess is not found in a policy change. This is no longer a financial or economic problem. It is a moral problem buried deep in the hearts of postmodern citizens. In the frenetic intemperance of unbridled passions, people have adopted vices and lifestyles that know no restraint. They resent any sufferings or hardships that come their way. They push off until the distant future all obligations, responsibilities, and duties that should be taken care of now.
The present state of the economy reflects these grave moral disorders. Morality and economics are now so intertwined that one cannot be considered without the other. To think otherwise is an illusion. A return to order is possible, but only when there is a return to moral law and to God, with Whom all things are possible.
(Photo credit: Jim Fenton. This photo has been cropped. CC BY 2.0.)