The Reason the Fed’s Math Doesn’t Add Up

As I grew up through the 1960s and 1970s, my libertarian accountant father collected doom-and-gloom books.

I still have them. From Lyndon Johnson’s war on poverty and Richard Nixon’s Environmental Protection Agency to Jimmy Carter’s petroleum manipulation, economists had plenty of reason to predict collapse.

How to survive the coming apocalypse – the financial meltdown – has seemed to be a favorite theme during most of my lifetime. It continued into the Reagan years, the Clinton years, the Bush years and the Obama years.

No Consequences

If you’re a baby boomer, you know how many times experts have told us that deficit spending is catching up to us.

Those of us who believe people should pay their bills scratch our heads at the mounting federal deficit and the soaring stock market… and wonder how it can all be.

How is it that the rules of bankruptcy and economic failure don’t seem to hold true? Even the revered The Economist magazine now admits that all of its modeling seems untrue.

Those of us who grew up on Milton Friedman, Friedrich Hayek and Edward Freeman ponder how our country seems to continue escaping its day of reckoning. How can we as a civilization engage in such irresponsible spending without suffering any consequences?

 

Balancing the budget and deficit spending scarcely merit political discussion anymore… from anyone.

A maverick investment outfit recently helped me through this head-scratching conundrum, and it seems to make sense, at least to me. I see this principle all the time among wealthy people who buy farms.

I’m a true farmer – no off-farm wealth, no Swiss bank accounts. We live or die by our farming savvy. Our success here at Polyface Farm attracts attention globally. People want to know: How can a small farm on a dirt road make a debt-free living?

In response to the attention, I’ve written several books explaining how we do things here.

Hiding in Plain Sight

Invariably, rich people looking across at green pastures yearn to join the landed gentry. My mentor, Allan Nation, who founded and edited The Stockman Grass Farmer magazine (which I now edit after his passing three years ago), always lamented that highly successful people always seemed to throw away financial common sense when they bought a farm.

I always thought he was too hard on these folks, but now that I’m as old as he was when he opined this to me, I agree with him. Give me a poor peasant any day. Hunger stimulates creativity.

The point is that alternative sources of income can cover up what would otherwise be financial ruin. With a steady source of non-farm wealth coming in, a farmer can appear successful with equipment, buildings and stock, when actually the business on its own merits is hemorrhaging cash out the wazoo. The farmer shows off his newly acquired assets and swaggers around the community as landed gentry, a new agrarian aristocrat.

What does that have to do with federal deficits and the failure of simple addition and subtraction?

Simply this: New wealth masks a multitude of ineptitude. That was the point of this investment maverick. If you had a business bleeding money and suddenly found a seam of gold in your backyard, you could bleed a lot of money and nobody would know.

In fact, you could pump a lot of money into your business and get on the front pages of business magazines.

Two basic sources of new wealth are technology and energy. Either or both of these inject wealth into an economy that can float substantial deficits.

Coming out of the Great Depression in the 1930s, the orthodox narrative was that FDR saved the day with massive federal government spending. History books applaud him as the great savior.

Many of us look at the massive federal deficits and programs he implemented, wondering how the country could withstand such a drain on its economy.

How, indeed? The great oil gushers in Texas, according to this analysis, really saved the day.

This cheap energy, coupled with mechanical technology, allowed the millions of draft horses, oxen and mules to be replaced with food-producing livestock. It freed up one-third of every farm, which had been devoted to growing pasture to feed the farm’s energy source (draft power) to be converted into fencerow-to-fencerow commodity production.

This economic bonanza masked the otherwise bankrupting FDR policies and saved his bacon, as it were. If he had done his massive federal overreach at any other time in history, it would have destroyed the country’s economy.

But because we found black gold in the backyard and cast off the shackles of draft power, our economy could withstand – easily – FDR’s massive federal spending programs.

Today’s Hero

Fast-forward to today. The accelerating spending under recent presidents – especially Obama – should have tripped up the economy. Instead, the economy purred right along, bringing us to unprecedented stock market valuations and beyond full employment. Official full employment today is in the low 3%.

How can this be with massive deficits?

Enter fracking and the Internet of Things. Again, a similar combination like during FDR’s era has come along to save the day.

Who would have guessed just a decade ago that the U.S. would be the world’s No. 1 exporter of energy? Remember not that long ago when our complete dependence on foreign oil was something we just had to live with and get used to?

Who’d have thunk that within a few short years we’d find oceans of natural gas and, thanks to Al Gore, develop the game-changing internet?

We’ve found gold bars in the backyard. It all leads me to wonder what the next turn of the wheel will be. Hydrogen? Imagine if all the hype about energy and climate change were solved in the next decade with an efficient and economical way to break H off O2 and power the planet on water. The exhaust, of course, would be water.

I don’t want to be naive. I’ll keep my garden, my pantry, my stock of food and my firewood.

But as one who grew up waiting for the sky to fall, I must confess a certain mischievous optimism that maybe dire predictions do in fact yield unexpected answers.

And that’s a good thing.

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