FALL 2023 | ISSUE NO. 12
government spending in excess of collected tax revenues, which led to price instability and an eventual increase in interest rates by the Federal Reserve.
By Brian K. Strow, Ph.D. Dean, Professor of Economics Marshall E. Rinker Sr. School of Business
When the U.S. House of Representatives passed the balanced budget amendment to the U.S. Constitution on January 26, 1995, the national debt stood at $4.8 trillion. The measure went on to fail in the U.S. Senate, falling one vote shy of the needed two-thirds majority. By May 15, 2023, the national debt had risen to $31.5 trillion. In the last twenty years alone, the U.S. debt has increased by $25 trillion. Rarely has one vote been so significant. In April 2002, the U.S. money supply, measured by M1, stood at $1.2 trillion. Thanks to quantitative easing, the money supply (M1) rose to $18.9 trillion by April 2023. That’s over a 1,500% increase in the money supply! The result? Inflation—an increase in the average price level of goods and services. The average yearly inflation rate for 2022 was 8% compared to 1.6% in 2002. The Federal Reserve increased the money supply to help pay for new
Fiscal and monetary indiscipline comes with a cost. Government borrowing to fund current consumption expenditures leads to a combination of higher taxes and lower future consumption spending. Following through on the urge to increase the supply of money faster than the economy grows results in inflation, relative price distortions, higher long-term interest rates and a shortening of an economy’s investment horizon. Taken together, a country’s debt can spiral as interest rates are forced to rise to combat inflation, thereby making the debt more costly to service. The only thing less popular than paying for today’s spending is having to cut today’s budget in order to service yesterday’s excesses.
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The last twenty years have not been kind to the U.S. balance sheet. Merely twenty years ago, the U.S. was among the top 50%