No Magic Money Tree

For years I have been patiently explaining how unbelievable it is that people go through life putting their faith in some magic money tree to take care of their problems. They spend instead of save, then stress about the cost of education and retirement. They expect a lifeline to bail them out – money off some magic tree. Buy now, pay later, and don’t worry about the consequences, just continue to borrow and play the lottery.

As the government increases spending, it makes no impression on them except to feel good that some people are getting more goods and services for free. If a big business is fined or sued, people assume there is some invisible bank account to cover the expenses. (Maybe the CEO will take a pay cut.) Americans fail to see the unbreakable link, either direct or indirect, between these expenditures and their own wallets.

Here are the facts. There is NO magic money tree! The money always comes from somewhere, and that always has ramifications for every single citizen: higher prices, higher taxes, a sluggish economy or a bigger share of the National Debt. The poor are usually disproportionately hurt.

When the business gets an unexpected expense, they raise prices and pass it along to their customers. This is easy when it’s due to a new government regulation that affects the entire industry. No one has an advantage, and everyone’s prices go up to cover the added cost. If it affects only one company and raising prices makes them non-competitive, they risk going out of business or downsizing, and people lose jobs.

When the government increases spending, it comes from taxes and debt. For many years lawmakers seem to have more interest in using some combination of lower taxes and increased spending to buy votes than in acting responsibly. (In fact, they characterize a lower than expected increase as a “cut.”) This has pushed the National Debt to unimaginable levels, currently over $26 trillion. Now Congress is fighting with the President over whether to spend $3 trillion or only $1 trillion on another emergency COVID package! Where do they think that money is coming from? 

The debt, in the form of government bonds is interest-only. Payments do not lower what is owed. Growing debt leads to more interest, which holds back economic growth. Fiscal irresponsibility can lead to inflation, which also affects everyone.

Many economists tell us not to worry, despite what happened to Greece in the recent past when their debt got out of hand. In 2017, years after the initial crisis, its economy grew by only 1.4% with unemployment around 22% and one-third of the population living below the poverty line. The EU bailed them out to some degree, but there is no entity big enough to bail out the US.

It’s a simple matter of critical thinking to understand that this issue is going to become a crisis some day, but as the problem grows, no one seems concerned. Behavior has not changed. Politicians still win elections by promising more spending and programs. Even numbers in the trillions get a ho-hum response. 

Everyone must assume there is some magic money tree somewhere; but there isn’t.