US $1.7T spending bill suggests more inflation?

The United States government just passed a $1.7 trillion spending bill after it passed the House and the Senate, and President Biden signed it into law. Biden signed it while on holiday in the Caribbean on the island of St. Croix. I've long advocated for politicians to take vacations. In fact, I believe any country would be much better off if politicians were only paid to do nothing because they wouldn't be able to continually screw things up. But I didn't consider that they could do both at the same time. While on holiday in the Caribbean, they could sign a massive spending package into law. So, what exactly is in this $1.7 trillion bill? And the answer is that no one knows. This bill is over 4000 pages long. None of those who voted for or against it had a chance to read it to see what they were voting for. But I'm here for you, and I've read through each and every one of these pages so that I can explain exactly what's in this bill. I'm kidding. Of course, I did not read all 4000 pages. Nobody should be forced to read these 4000 pages. Unless, of course, you're voting on it on behalf of the entire country. I do, however, have some highlights. We know by now where the vast majority of this money will be spent.

First and foremost, the US has allocated approximately $45B in additional aid for Ukraine. This includes training, weapons, logistics support, and salaries. And approximately $12B will be used to replenish the US equipment stocks. In addition to the funds being sent to Ukraine, some funds will be used for emergency disaster relief. Approximately $38B to assist farmers and people affected by tornadoes, hurricanes, flooding, fires, money to fund January 6th prosecutions, a prohibition on using TikTok on federal devices, and protections for pregnant workers such as extra bathroom breaks, stools to sit on, or relief from lifting heavy objects. They've included a provision that makes it more difficult to overturn a certified election.

"It's just really great to see the United States government spending all of this money in a way that will help the economy, growth, and the American people rather than being a burden on American households' backs." :)))

Overall, this budget represents a massive increase in federal government spending above and beyond what was projected for 2023. In fact, it was $58B higher, with defence spending accounting for more than 75% of the increase. The increase is greater than the necessary inflation adjustment and represents a real increase of about 3%. The question many people are asking, and on which many are already disagreeing, is whether this spending will be inflationary, deflationary, or somewhere in between. And the solution is to follow the money. It is always determined by the availability of money.

Consider the following example. If I borrow $100 from you, you no longer have that $100 to spend. So when I spend the $100 I received from you, there is no increase in the money supply. I simply take the money you could have spent and spend it instead. And then, when I pay you back, I have to take money from my income and give it to you. And now I don't have $100 to spend because I'm returning it to you.

So, when the government spends money that is solely funded by taxes and borrowing, the net effect is neither inflationary nor deflationary. It's simply spending on transfers. It takes money from lenders, people who buy US Treasury bonds, and taxpayers and spends it in ways that those people would not have spent the money themselves. Now we'll go over all the details, but remember that whenever I mention any minor aspect of this, it is "Ceteris Paribus" which implies that everything else is equal. So, if everything else remains equal, transfer spending is neither inflationary nor deflationary. It is taking money from one person's purchasing ability and spending it elsewhere. You're probably thinking right now: "A government's only legal sources of income are taxes and borrowing, so how could it ever be inflationary?" If that's the case, and the answer isn't directly but indirectly, that borrowing could come from the Federal Reserve, and that borrowing could result in an increase in the money supply.

That is what happened in 2000, 2021, and 2022: the Federal Reserve created money out of thin air and loaned it to the government. As a result, there was a significant increase in the total supply of money circulating. They weren't simply taking a dollar from here and spending it there. They were bringing in new money and injecting it into the system. This new money drove up prices and caused inflation. So whether this spending will be inflationary or deflationary is determined by how long the Federal Reserve maintains quantitative tightening. They are not creating new money out of thin air to give to the government for spending purposes. They are reducing the money supply. They allow assets to bleed off their balance sheet. As a result, when we look at M2, a measure of the money supply, we can see that the money supply has been slowly decreasing for over a year.

The money supply was $21.38 trillion in November 2021, now $21.37 trillion. And it's been falling since it peaked in April 2022. As a result, spending is neither inflationary nor deflationary. It is determined by the source of the funds. If it only comes from borrowers and taxpayers, as it appears to be doing right now, it would not be inflationary or deflationary on its own. It will only become inflationary if it is funded by the Federal Reserve via money printing. But now we must discuss the second component of this while all else being equal, because we know that the size of the economy affects both inflation and deflation.

Assume that every single smart phone magically transformed into ten smart phones. So, whatever type of the smart phone it was, whether Android, iPhone, or something else, there were suddenly ten of them. The sudden influx of phones would cause their prices to fall because there are so many more of them that you might want one or two extra, but you might not need all ten. So you might want to sell them along with many other people who are also looking to make a quick buck. However, because there are so many of them, it becomes much easier to obtain new smart phones. As a result, demand for them is much lower. As a result, instead of being able to sell them at their original price of, say, $500 you can now only sell them for around $100. This is an example of how abundance or supply affects the price of something. The fundamental laws of supply and demand.

When we have more cars, houses, food, clothing, and shelter, those things become less expensive because they are more plentiful and easily accessible. So, if the economy grows rapidly, we will see a massive increase in real goods and services of all kinds, not just smart phones, and everything will become cheaper. So, hypothetically, if all of the $1.7 trillion that the government is spending is spent on things that will increase productivity, wealth, the amount of stuff in the economy, availability, and abundance of things for people to buy the natural result would be deflation. It would imply that prices would fall.

However, we also know that this is rarely the case with government spending. In fact, only a very small portion of this military spending is not destructive. You're diverting resources into things like bullets and ammunition, missiles, and tanks and then sending them overseas to be destroyed. So you're taking already scarce resources and removing their ability to be used for other purposes, not to mention all the other funding for things that have nothing to do with the increasing production output. Then we can speculate that this would have the effect of raising prices because it wastes resources. It makes things less plentiful and scarce.

So, once again, keep in mind that the explanation of the mechanics of how these things work is "Cetera's Paribus", all else being equal. So, the net effects of just spending are because of the destructive aspects of resource misallocation and capital destruction that go into a lot of government spending. You must also consider what private actors are doing on their own. And will that be enough to compensate for what everyone else does, which is simply ignoring the government? So, while it's impossible to say with certainty whether the $1.7 trillion they're spending will cause inflation to rise or fall, one thing is certain: we're headed in the wrong direction. More government spending benefits no one except the people who receive government funds, which is why they vote for it in the first place.

Now if you are like me from the UK and think that whatever the US decides will not affect me, then think again. According to the data from the Bank of England, as of September 2021, the UK held approximately $465.8 billion in US government bonds. This data reflects the holdings of the Bank of England, which manages the UK's foreign exchange and gold reserves, as well as the UK's official sector holdings, which include the government's own debt management office. That's a fairly large exposure. So how will an expansion in the monetary supply of US dollars through the monetization of debt (US Tresury Bonds) could potentially affect the UK? Well, if the US decides to print more dollars through the monetization of debt, it could have a few different impacts on the UK. For example, exchange rate fluctuations could lead to a decline in the dollar value relative to the British pound, making imported goods more expensive for the UK and contributing to higher inflation. Capital flows may also play a role; if the increased supply of dollars decreases the demand for US government bonds, it could lead to capital outflows from the UK and potentially put downward pressure on the pound's value. In addition, increased demand for UK goods and services from US consumers could lead to higher prices and contribute to higher inflation in the UK.

In times of increased government spending, it may be wise for individuals to consider moving a portion of their assets into safe, sound investments like gold, silver, and bitcoin. These assets have a long history of retaining their value, even in times of economic uncertainty. Furthermore, it is important to note that one does not necessarily need to purchase physical gold or silver to benefit from their value. Instead, individuals can also invest in stocks of gold and silver mining companies, which can provide exposure to these assets while also potentially offering additional growth opportunities through the success of the mining company. By diversifying one's portfolio with a mix of traditional and alternative assets, individuals can protect their wealth and potentially mitigate the potential negative effects of inflation resulting from increased government spending.

In terms of divisibility, transportability, verifiability, resistance to confiscation, and adaptability to new technology, bitcoin may be considered a superior asset to gold. While gold can be divided into smaller units, it is not as easily divisible as bitcoin, which can be divided into extremely small units. Additionally, while gold is a physical asset that can be difficult to transport and store, bitcoin can be easily stored and transferred digitally. The authenticity of gold can also be difficult to verify, while bitcoin's authenticity can be easily verified through its decentralized blockchain ledger. Governments and other authorities have been known to confiscate gold in times of economic uncertainty or political upheaval, while bitcoin, as a decentralized asset, is more resistant to seizure. Furthermore, as a digital asset, bitcoin is well-suited to take advantage of new technologies such as smart contracts and decentralized finance, while gold's value is largely derived from its inherent properties and is not as easily adaptable to new technological developments.