Economic Growth Myth & Why Socialism Is Rising

I was recently asked about the seemingly strong “economic growth” rate as the Federal Reserve prepares to start cutting rates.

“If economic growth is so strong, as noted by the recent GDP report, then why would the Federal Reserve cut rates?”

It’s a good question that got me thinking about the trend of economic growth, the debt, and where we will likely be.

Since the end of the financial crisis, economists, analysts, and the Federal Reserve have continued to predict a return to higher levels of economic growth. The hope remains that the Trillions of dollars spent during the pandemic-driven economic shutdown will turn into lasting organic economic growth. However, the problem is that while the artificial stimulus created a surge in inflationary pressures, it did little to spark organic economic activity that would outlive the stimulus-related spending.

Pulling Forward Growth

Pulling forward growth over the last decade remains the Federal Reserve’s primary tool for stabilizing financial markets while economic growth rates and inflation remain weak. From repeated rounds of monetary and fiscal interventions, asset markets surged, increasing investor wealth and confidence, which, as Ben Bernanke stated in 2010, would support economic growth. To wit:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.” – Ben Bernanke

That certainly seemed to be the case as Federal Reserve interventions kept the financial markets and economy stable each time the economy stumbled. However, there is sufficient evidence that “monetary policy” leads to other problems, most notably a surge in wealth inequality without a corresponding increase in economic growth.

real household

The inherent problem of pulling forward consumption is that while it may solve short-term economic concerns, it leaves an ever-larger “void” in the future that must be filled. The problem, unsurprisingly, is that “monetary policy” is not expansionary. As shown, since 2008, the total cumulative growth of the economy has been just $6.1 trillion. In other words, each dollar of economic growth since 2008 required nearly $6.7 of monetary stimulus. Such sounds okay until you realize it came solely from debt issuance.

government interventions

Of course, the apparent problem is that sustaining this amount of debt-driven monetary policy is not realistic. But therein lies the issue of the “strong economic growth” narrative.