Addicts and Pushers

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Most residents
in the United States are addicts. They are addicted to debt.

This year,
the U.S. economy is facing a $500 billion balance of payments
deficit with the rest of the world, but mainly with East Asia.
This annual deficit keeps getting larger.

The government
of the United States is also an addict. It will run about a $500
billion deficit this fiscal year, and that doesn’t count Social
Security/Medicare, whose "trust funds’" surplus revenues
are used to reduce the official debt. This deficit keeps getting
larger.

To supply
the drug of choice — dollars — the loan pushers in the international
capital markets dig into their wallets and hand out the money.
Why? Because they expect the addicts to pay back dollars or sell
them their capital assets. The pushers who want payback in the
form of money buy bonds. The pushers who want payback in terms
of ownership buy stocks.

To supply
the drug of choice — dollars — the loan pushers to the U.S. government
dig into their wallets and hand out the money. Why? Because they
have been assured by the U.S. government and by economists, most
of whom have been trained at government expense, that governments
never default. Well, anyway, North American governments never
default. "A U.S. government bond is as sound as the dollar."
This is true because a U.S. government bond is denominated in
dollars. "You can trust the government to repay its debt,"
we are assured. While it is true that this debt is always growing,
it is equally true that, year after year, so is the U.S. money
supply. And prices are always rising.

Why do foreign
investors buy U.S. government debt? Because they believe what
they have been told by U.S. economists. The best and the brightest
of the Asians have attended U.S. universities, and they have taken
courses in economics.

Why do foreign
central banks buy U.S. government debt? Because their banks copied
the Federal Reserve System after World War II, and the FED buys
U.S. government debt. But why don’t central banks buy their own
governments’ debt instead of dollars? Because they seek diversification
of asset holdings. The dollar is the world’s reserve currency,
and the U.S. government always pays interest on its debt.

But, you
may ask, what happens if the Federal Reserve System pumps in money
to keep U.S. interest rates low? Won’t that push down the value
of the dollar internationally? Of course it will. Then won’t foreign
investors and foreign central banks lose? Eventually, yes, but
not immediately. The international value — comparative —
of the dollar will not collapse whenever foreign central banks
create new fiat money to buy U.S. government debt. This is what
China’s central bank is doing.

But won’t
this policy reduce the value of the foreign nation’s currency,
or at least keep it from rising? Of course it will, and that’s
exactly what exporters in those nations want. The exporters are
pushers of goods. The central banks are pushers of loans. They
act as a team.

Americans
are the addicts. For the process to continue, foreigners must
feed the voracious appetites of Americans for more low-price goodies.
America is Wal-Mart Nation. In America, it’s Christmas all year
round.

Deck the
halls with bows of money. Fa, la, la, la, la… la, la, la,
la!
Even when the money’s funny. Fa, la, la, la, la … la, la,
la, la!
Put it on our cards of plastic. Fa, la, la… la, la, la…
la, la, la!
Isn’t endless debt fantastic? Fa, la, la, la, la… la, la,
la, la!

DOPE
PUSHERS AND DOPEY PUSHERS

You may look
at this arrangement and conclude that the pushers are dopes. Dope
pushers push dope, which produces an inflow of money for the pushers.
Dopey pushers push money, which produces an inflow of IOUs to
pay money "one of these days, Real Soon Now."

If you addict
someone to an addictive drug, he will pay you money today. If
you addict him to loans, he will pay you IOUs today. The drug
addict eventually either runs out of money or else dies. The loan
addict never runs out of IOUs. He will sign those IOUs for as
long as there are money pushers willing to lend him the money.
He just can’t stop signing them. He is addicted.

The drug
pusher’s business would die if he could ever addict everyone.
There would be no more productivity available to extract by means
of drug sales. He knows that he operates in a niche market.

The loan
pusher’s business would also eventually die if he could ever addict
everyone. There would be no more productivity available to extract
by means of loans. He knows that he operates in a niche market.

The goal
of the drug pusher is to extract everything he can from his existing
clients, while locating new clients to replace his existing ones.

The goal
of the loan pusher is to keep from having his existing clients
lose their credit rating, because then their IOUs would fall in
value. The problem is, the clients are absorbing ever more of
the pusher’s assets. The loan pusher’s capital is more and more
filled with IOUs of his clients.

In the case
of the drug market, the addict eventually runs out of money. The
pusher consumes the addict’s wealth and then moves on.

In the case
of the capital market, the pusher eventually runs out of money
to lend. The addict consumes the pusher’s wealth and then moves
on.

The drug
pusher doesn’t extend credit. The money pusher extends only credit.
The drug pusher winds up with the addict’s money. The money pusher
winds up with the addict’s IOUs.

To survive,
the dope addict has to conclude at some point, "These drugs
are killing me. I have to quit."

To survive,
the loan addict has to conclude at some point, "These loans
are killing me. I have to quit. I have to get back on my feet
before my pusher quits."

To survive,
the loan pusher has to conclude at some time, "These IOUs
are killing me. I have to quit. I have to find new addicts before
this one’s credit rating dies."

There are
known cases — few — in which drug addicts voluntarily quit. On the
whole, however, drug addicts either die as addicts or run out
of willing pushers.

There known
cases — few — in which loan addicts voluntarily quit. On the whole,
however, loan addicts either die as addicts or run out of willing
pushers.

BETTER
A LENDER THAN A BORROWER BE . . . SOMETIMES

Approximately
3,500 years ago, Moses wrote these words of warning to the Israelites:

The stranger
that is within thee shall get up above thee very high; and thou
shalt come down very low. He shall lend to thee, and thou shalt
not lend to him: he shall be the head, and thou shalt be the
tail. Moreover all these curses shall come upon thee, and shall
pursue thee, and overtake thee, till thou be destroyed; because
thou hearkenest not unto the voice of the LORD thy God, to keep
his commandments and his statutes which he commanded thee (Deuteronomy
28:43—45).

This is a
section of a lengthy passage in the fifth book of Moses, which
records his words to the sons of the exodus generation, which
had all died in the wilderness. Deuteronomy 28 lists blessings
for obedience and curses for disobedience, but the section on
the curses is four times longer than the section on blessings.
I have
written a chapter on this passage in my economic commentary on
Deuteronomy, which is on-line for free
.

In Moses’
day, as in our day, most people expect blessings. "We’re
the good guys." To get their attention, a leader must remind
them of curses. "Don’t become the bad guys."

By "leader,"
I don’t mean politician. I mean something like "statesman."
Statesmen are always in short supply in a democracy. There is
not much of a constituency for statesmen. The word "statesman"
is applied by politicians to former high-level office holders
in their party who are no longer expected to run for office. Jimmy
Carter is regarded as a statesman by Democrats because he isn’t
going to run and could not be elected if he did. They are statesmen
only for as long as they don’t say anything controversial that
might cost their party votes at the next election.

Moses was
not a politician. He was not running for office. On the contrary,
he was about to die. So, he did not worry about laying down the
law, which is what "Deuteronomy" means: the Greek words
for the "second" (deutero) and "law" (nomos).
(In the original Hebrew, the book is called simply "words,"
based on the first line, "These are the words.")

Moses was
speaking of lenders inside national Israel. The people who exercise
political control are the people who supply the capital. They
are the money-lenders. Half a millennium later, King Solomon commented,
"The rich ruleth over the poor, and the borrower is servant
to the lender" (Proverbs 22:7).

What Moses
said of domestic economic power applies to international economic
power. The difference is this: there is no common civil government.
There is no common enforcer of contracts. So, the lender had better
pay close attention to the solvency and ethics of the borrower.
If the borrower gets too deeply in debt to the lender, the lender’s
own credit rating is at risk. If the borrower defaults, he may
take the creditor with him.

The problem
is, central banks are in control of their nations’ money supply,
nation by nation. Central banks are government-created monopolies,
not private, profit-seeking, competitive, risk-assessing companies
whose owners have their own capital at risk. Central bankers,
who have no ownership in the organizations they run, can buy IOUs
merely by creating new money. So, because central bankers are
in charge of their nations’ money supply, the average domestic
investor is at the mercy of the good judgment of his nation’s
central bankers.

When the
government that ultimately controls the central bank favors a
special interest group that wants to export goods to debtor nations,
central bankers will adopt policies of money expansion in order
to keep the international value of their nations’ currencies low.
They will buy the IOUs of the debtor nations, i.e., goods-importing
nations.

For a time,
both parties seem to win. The pusher accumulates IOUs that are
denominated in the currency of the addict. The addict accumulates
consumer goods that depreciate over time. It’s the story of the
grasshopper and the ants, with this variation: the ants sells
their summer’s excess crop in exchange for IOUs from the grasshopper,
who promises to pay next winter. The grasshopper and the ants
are all likely to have a hungry winter. This would make a depressing
Disney cartoon.

When a person,
a bank, or a nation lends money to an economic grasshopper, he
is taking a risk. When the grasshopper becomes the lender’s main
client, the borrower is no longer servant to the lender. It’s
the other way around. "Cut off the funds, and I’ll declare
bankruptcy," threatens the borrower. "Then where will
you be?"

At some point,
the loan pusher has to go cold turkey on IOUs, which forces the
debtor to go cold turkey on the goodies. This event is called
worldwide depression. It’s not a happy event — like winter in the
revised ants/grasshopper story.

CONCLUSION

I keep thinking
of Philip Ahn’s final role. Like Richard Loo ("You are surprised
I speak your ranguage. You see, I was educated at UCRA"),
Ahn did well during World War II playing ruthless but wily Japanese
Army officers. Postwar B-rated movies about World War II also
kept him out of the unemployment lines. He ended his career playing
the monk who trained David Carradine in the art of kung-fu. The
old master called his disciple "Grasshopper." Now, that’s
prophetic!

December
23, 2003

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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