“There ain’t no such thing as a free lunch,” is one of the essential axioms of economics. No doubt about it, there’s no getting around this simple truth. Everything has a price.
For example, even if someone buys you lunch the lunch still isn’t free. The opportunity cost, your time to eat the lunch when you could’ve been doing something else, has a price. In addition, even if you don’t consider your time a cost, there’s no denying the fact that someone paid for the lunch. Hence, it wasn’t free.
Nonetheless, despite this simple fact, politicians promise free lunches for the many at the expense of the few. This offense is especially on display during a presidential primary election. Free college. Free drugs. Free housing. Free food.
You name it, there’s hardly a lunch out there this season’s crop of presidential candidates haven’t already laid claim to. This is what they must do to get elected. This is how presidential politics works in a democracy.
We don’t like it. We don’t agree with it. But what we think really doesn’t matter. The facts are lucidly clear. On the national level, the populace has shown for the last 80 years – or more – that they’ll vote for whatever candidate promises the most stuff for free.
Nothing for Something
The politicians know there’s no such thing as a free lunch. But they also know that modern day economic policy is predicated on financing government programs through ever expanding debt. This means someone else, perhaps you, will have to pick the tab.
The Federal Reserve makes it all possible by creating enormous amounts of central bank credit, which is then loaned to the government. This also has the secondary effect of debasing the currency. Obviously, the Treasury welcomes this ongoing dilution of value. Over time it lightens the debt burden and allows them to make good on yesterday’s promises with a currency of diminishing value.
For extended periods this may seem to work remarkably well, on the surface. Spendthrift politicians get elected. The populace collects their ‘entitlements.’ Lunches appear to be free.
When an economy’s demographics are young, and growth is strong, the price of lunches looks minimal. The miracle of getting something for nothing seems possible. But as the economy ages, and growth peters out, debt levels become unsustainable.
Eventually, the bill comes due. The lunches must be paid for. Instead of something for nothing, the populace now gets nothing for something.
In other words, the credit expansion reaches its natural limits when the economy can no longer service the debt. That’s when a breakdown, government default, and depression, must occur to purge the debt – the rot – from the system. Prices, assets, and wages are readjusted so they are in line with the economy. Unproductive activities vanish. New, useful, undertakings rise from the ashes.
No Free Lunches Be Damned
The United States, and much of the developed world, has been pushing up against these natural limits for the past decade. What’s more, the ruling elites are hell-bent on preventing a purge.
Their efforts, to date, have consisted of attempting to solve the debt problem with greater and greater issuances of debt. But this is like serving free lunches of spoiled potato salad and then attempting to control the subsequent diarrhea using adhesive tape. It’s ineffective and extraordinarily messy.
Yet this hasn’t deterred policy makers. To the contrary it has emboldened them. Across the planet, the world’s largest economies are doling out free lunches and then applying vast quantities of adhesive tape to the sick economy.
Just yesterday, for instance, European Central Bank President Mario Draghi rolled out a tainted five course all you can eat buffet lunch.
- First, the ECB dropped its key lending rate to zero.
- Second, banks must now pay the negative interest rate of 0.4 percent for storing cash at the ECB.
- Third, Draghi increased Europe’s quantitative easing program from €60 billion per month to €80 billion ($86.86 billion) per month.
- Fourth, this additional funny money will not just be limited to purchases of European government bonds; it will now be extended to buying European corporate bonds.
- Lastly, the ECB is now offering, ultra-cheap four-year loans to banks. So as rates push below zero, this will amount to the ECB effectively paying banks to loan out money.
What to make of it?
From a strictly mathematical standpoint, the sum total of these measures adds up to a solution of pure madness. What distortions will they engender? What disfigurements will they stimulate?
The answers to these questions are beyond the limits of our imagination. But we suspect some poor village, in some poor corner of the planet, will use this credit to put its people to work digging a giant hole in the ground with their bare hands before this is over. Albeit, this is merely conjecture. We are certain the many absurdities that come out of it will be revealed soon enough.
Of course, the ECB is just one monetary agent provocateur. Next week it’s Fed Chair Janet Yellen’s turn. After Draghi’s goading, she may try just about anything.
No free lunches be damned.
Sincerely,
MN Gordon
for Economic Prism
