Self-deception and evil are the two main characteristics of Shakespeare’s tragedy Othello. Like Otello (in Verdi’s opera) who defended Cyprus against the Ottomans (a pre-incarnation to Lawrence of Arabia) Othello nowadays – allegorically speaking – represents those who ascribe and defend the hallmarks of truth, empowerment, the rule of law, and liberal order. But who is nowadays Desdemona, Othello’s blameless wife? None other than integrity and sound judgment. So, is it Othello and Desdemona who are the influencers? We wish! The cheapening of our standards (thanks to the degradation of the educational dogma and to social media) has made Iago the protagonist in our political, economic, and financial theaters.

Our national debt exceeds $34 trillion and is projected to expand by nearly $2 trillion annually for the next ten years, as shown below. At the end of 2022, national debt held by the public stood at 97% of GDP. By 2053, it is projected to reach 181% of GDP. Is this sustainable?

Iago, the ever-sycophant/influencer whispers to our ears, “Yes, of course, prosperity bought on a credit card is real and sustainable prosperity. Buy now, pay later. Haven’t you heard of that?”

Overspending during Covid-19 made things worse. However, the main driver of this unsustainable path is the structural mismatch between federal expenditures and revenues, with non-discretionary spending (like Social Security, interest on the debt, and Medicare) playing a major role in it. So, where is the Fed fitting in this picture?

By dropping the ball in 2021 (failures in execution of the price stability mandate, its foresight, and mainly its judgment about price pressures), the Fed accommodated inflationary pressures by allowing the money supply to grow out of control (see graph below). No wonder then that by the time the Fed woke up from its transitory illusion, prices were out of control. Now, disinflation is finally happening, coinciding with the removal of monetary accommodation and the shrinking of the Fed’s balance sheet. 

The foresight and judgment failures forced the hand of the Fed to impose tighter monetary conditions, including higher rates, than it should have had to impose, with the result being the interest on debt skyrocketing, as shown below. The trajectory of those interest payments – which themselves represent nondiscretionary federal expense – make the deficit picture (the annual federal income shortfall) even worse, and of course the debt picture even more unsustainable. 

In Act I of Verdi’s opera, Iago is determined to ruin Otello (the beloved governor) simply because the only thing that Iago cares about is Iago himself (any reading into today’s American political climate is purely coincidental). Those who hate truth, law and order, and a liberal world where human freedom reigns, all they want is to ruin – with whatever means they can – those values, virtues, and standards that in the last three centuries have made all the difference in terms of progress, growth, and understanding.

In Act II and III, Iago’s diabolical plan is put into place by playing into Otello’s jealousy. Iago invents a conspiracy of unfaithfulness by implying that Otello’s wife is having an affair with Cassio (who had been promoted by Otello instead of Iago). “Drill baby, drill, and spend like there is no limit. We only live twice and have such an opportunity to overdo it.” The financial crisis and Covid-19 were those chances. However, during the first crisis, the Fed didn’t permit the high-powered money – a.k.a. the monetary base – to become money supply, while in the C-19 crisis it was caught asleep at the wheel, hence the need to invent a new crisis that could ruin Otello.

In the final Act IV, as the crowd outside praises Otello as the “Lion of Venice”, Otello kills his wife Desdemona. Iago’s plot is revealed but Desdemona is already dead. Otello’s only way out is to commit suicide. Democracy, freedom, prosperity, and liberal order die in conspiracies, stupidity, and in the midst of a climate where lack of judgment reigns supreme.

By 2053, the interest on debt – as shown below – will account for 35% of federal revenues, and that paranoia needs to be stopped ASAP, otherwise a shock (expected much earlier than 2053) will change the geopolitical order and the sycophant Iago’s plan will have achieved its purpose. 

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