Milton Friedman - There is no unbalanced federal budget

There is no such thing as an unbalanced federal budget. You are paying for it. If you're not paying for it in the form of explicit taxes, you're paying for it indirectly in the form of inflation or in the form of borrowing.

---

Our take on this quote:

The hidden cost of government spending: Milton Friedman's warning

Milton Friedman, one of the most influential economists of the 20th century, was a vocal critic of government overspending. In this quote, he highlights a fundamental truth: there is no such thing as free money. If a government runs a budget deficit, the cost will always be paid by the public - either through higher taxes, inflation, or debt.

Governments often justify deficit spending by claiming it is necessary for economic growth, social programs, or crisis management. However, Friedman’s insight warns us that there is no escaping the financial burden of government spending. In this article, we will break down the meaning of his quote, explore real-world examples, and discuss the implications for investors, policymakers, and the general public.

Breaking down the quote

Friedman’s statement can be understood in three key parts:

1. There is no such thing as an "unbalanced" budget

   • Governments may not balance their budgets on paper, but the costs of deficits always fall on the people in some form. Deficits are not magical voids - they create financial obligations that must eventually be met.
      

2. Three ways the public pays for deficits

   • Taxes: The most direct way to pay for government spending is through higher taxes. However, politicians avoid this option because it is unpopular.
   • Inflation: If the government prints money to cover its deficit, the result is inflation. This acts as a hidden tax, reducing the purchasing power of wages and savings.
   • Borrowing: Governments often finance deficits by issuing debt. This leads to higher future taxes or more money printing, both of which hurt the economy.
      

3. There is no free lunch

   • Some people believe deficit spending creates wealth, but Friedman warns that all government spending must eventually be paid for by the people. If the cost is not obvious today, it will emerge in the form of inflation or debt crises in the future.
      

Real-world examples of deficit consequences

1. The United States: Inflation and Debt (2020s)

• What happened?
  During the COVID-19 pandemic, the U.S. government spent trillions of dollars in stimulus packages while the Federal Reserve kept interest rates low. While this helped in the short term, it also led to the highest inflation in 40 years and a national debt exceeding $30 trillion.
   

• Lesson Learned:
  Deficit spending might feel good initially, but it leads to higher prices and future financial burdens.

2. Argentina: hyperinflation and collapse

• What happened?
  Argentina has repeatedly relied on money printing and deficit spending to cover government costs. This has resulted in hyperinflation exceeding 100% per year, destroying savings and forcing the country into financial crises.
   

• Lesson learned:
  Printing money does not create wealth - it destroys it.
   

3. Greece: The Debt Crisis (2010s)

• What happened?
  For years, Greece borrowed excessively to fund generous social programs. Eventually, the country could not repay its debt, leading to severe austerity measures, economic contraction, and a decline in living standards.
   

• Lesson learned:
  Borrowing to finance deficits is not a sustainable solution. The bill eventually comes due.
   

Lessons for investors

Friedman’s insight has crucial implications for investors who want to protect their wealth from the effects of government overspending.

1. Inflation protection is essential

   • Since inflation is a common consequence of deficit spending, holding hard assets like gold, Bitcoin, and real estate can preserve purchasing power.
      

2. Government debt levels matter

   • Countries with high deficits and rising debt-to-GDP ratios are riskier for investment. Investors should be cautious about holding bonds from heavily indebted governments.
      

3. Interest rates are not always reliable

   • Central banks manipulate interest rates to manage government debt. Low rates may encourage borrowing, but they also distort markets and create asset bubbles.
      

4. Diversification is key

   • Holding assets in multiple currencies and regions can protect against currency depreciation caused by inflationary government policies.
      

Implications for politicians

Friedman’s warning also carries significant lessons for policymakers.

1. Deficit spending is not free

   • Politicians often promise social benefits without explaining the long-term costs. Deficits may boost short-term popularity, but they damage economic stability in the long run.
      

2. Inflation is a hidden tax on the poor

   • When governments print money, the wealthy can protect their assets, but the poor suffer the most as their wages lose value. Sound money policies are crucial for protecting the middle and lower classes.
      

3. Borrowing has limits

   • Countries cannot accumulate infinite debt without consequences. When investors lose confidence, borrowing costs rise, leading to financial crises.
      

4. Long-term stability over short-term gains

   • Responsible fiscal policies - balanced budgets, low inflation, and sustainable debt - lead to stronger economies over time.
      

Key takeaways

Milton Friedman’s quote remains highly relevant today. Here are the main lessons:

1. Government deficits are always paid for - either through taxes, inflation, or borrowing.
2. Inflation is a hidden tax that reduces purchasing power and hurts ordinary citizens.
3. Borrowing to finance government spending leads to future financial crises.
4. Investors should hedge against inflation and government mismanagement by holding hard assets and diversifying globally.
5. Politicians must recognize that unsustainable deficit spending ultimately leads to economic decline.

Final thoughts

Friedman’s insight serves as a warning against the illusion of free government spending. Every deficit must be financed, and the cost will always fall on the people. Whether through taxes, inflation, or debt, society pays for every dollar the government spends.

For investors, the lesson is clear: do not rely on government promises. Prepare for inflation, diversify investments, and protect your purchasing power.

For policymakers, the message is urgent: fiscal discipline is necessary for long-term stability. If governments fail to control deficits, they risk economic collapse and financial hardship for future generations.

Friedman was right in his time, and his warning is even more relevant today. The question remains - will we learn before it’s too late?

Stay connected with us on social media

Instagram: quotesonfinance
Facebook: quotesonfinance
X: QuotesOnFinance

---