The Case for Failure of the U.S.

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"…for all they that take the sword shall perish with the sword." (Matt. 26:52)

A number of major events in the past few years reinforce the notion that the U.S. is on a path of failure, not success. "Major" means an event that involves near a trillion dollars or into the multi-trillions.

A key variable in the success or failure of a nation and government like ours is the production of wealth. We the People produce this wealth. When our government selects strategies that impair the production of wealth and that destroy wealth, it causes failure.

Let’s look at six major government strategies that are causing major failure. There are many more. In each case, there is a pattern of persistence. The government failures do not deter it from continuing the failed strategy. The government enlarges them. The end result of such behavior is the ruination of the country.

The first of these strategies is the dysfunctional response of the U.S. to terrorism. The U.S. chose the most costly possible means: warfare. It started wars in Iraq and Afghanistan. Once having chosen the worst possible method of combating terror threats, it proceeded to conduct these wars badly, thereby incurring even greater costs.

Barack Obama and the Congress continue to pursue this approach. Obama is ramping up the U.S. commitments in Afghanistan. The costs of these wars far exceed any conceivable benefits to the average American. These wars are actually a continuation of U.S. foreign policies and wars that reach back many decades.

The second such strategy is government subsidization of home ownership via its own involvement in mortgage loans. This dates back to about 1938. Pursuit of this has now led to the national government’s absorption of Fannie Mae and Freddie Mac, instead of terminating these bankrupt concerns. They are now being run by the Federal Housing Finance Agency. They own or guarantee about $6 trillion of mortgages. The national debt soared as a result of this strategy.

What is more, the Congress has expanded their operations and is replicating their errors via FHA and Ginnie Mae. Congress ignores the reality of a real estate price debacle and trillions worth of mortgage loans gone bad. Congress perpetuates and enlarges the failed strategy of government involvement in mortgage loans. That is its typical modus operandi. That has to count as a separate negative factor.

The third strategy involving trillions is the central bank’s policies. These go back to its creation in 1913. The basic strategy here is central control over the money system and currency. Recently, these policies include an expansion in its credit of over one trillion dollars. It has recently made loans to selected bankrupt financial institutions, commercial enterprises, overseas central banks, the U.S. government, and Fannie Mae and Freddie Mac, among others. This continues a longstanding policy of debasing the currency. It is the very marked acceleration in that policy and the much broader reach of the credits into the economy that are notable.

The FED strategy has been dysfunctional for Americans at large (while benefitting bankers) from the start. The currency has lost at least 95 percent of its worth. The FED has placed the country on a roller coaster of booms and busts. Lately it has fostered notable bubbles in the stock, real estate, and commodity markets. We are in the midst of the current bust. This and the last administration have supported the FED. They are working toward giving it greater regulatory powers. This shows that the government is not abandoning this failed strategy.

The fourth recent trillion and over debacle is the prescription drug benefit program or Medicare D, passed in 2003. This too is part of a continuing dysfunctional national strategy, this one being a substantial government role in health care industries. The major move into this strategy was the passage of Medicare in 1965. Barack Obama seeks the further major extension of government control of health care. We don’t know what will or will not be enacted. But the fact that he seeks this extension and regards it as an urgent priority tells us that this fourth failed strategy is being pursued vigorously and is certainly not being reversed.

The fifth notable event is the American Recovery and Reinvestment Act of 2009, an initiative of Obama. This bill continues several failed and dysfunctional strategies. It attempts to stimulate economic recovery via government debt and spending, that is, it embodies Keynesian economics. But the latter already has failed, in that Bush’s stimulative policies have led to a deep recession. It substantially raises the budgets of federal departments and programs that are already dysfunctional. It continues the government policy of selective tax manipulations and subsidies as opposed to permanent reductions in tax rates.

The sixth failed U.S. policy is its encouragement of debt use by Americans and its own debt explosion. The national debt of the U.S. has risen by over $500 billion a year each year since 2003. It was up by $1 trillion in 2008. It is rising even faster in 2009. Obama’s budgets project trillion dollar increases for years to come. The unfunded liabilities of the U.S. government in Medicare and Social Security are about $59 trillion. This does not include potential payments to the FDIC when its funds run out. The U.S. is headed for bankruptcy.

This failed debt policy is the financial side of big government policies. It shows that they too are failures.

All of this has happened for a basic reason. The U.S. has used the "sword" where it should not have. It has used force — power — where it should not have. It has liberally used force — via taxes, subsidies, regulations, takings, and wars — in ways it should not have. This discourages and undermines the production of wealth and builds up debt burdens that the population’s production cannot service. That is why failure under the current system and strategies becomes inevitable.

The key variable is wealth production. The U.S. imposes useless taxes that it wastes on counterproductive wars and programs that undermine production. It imposes onerous regulations that typically serve no useful purposes and impede Americans. (State and local actions are usually just as counterproductive.)

The kinds of strategies discussed above impair the accumulation of capital, which is another term for the production of wealth. They are the most recent government actions in a continuing saga of failure that is leading to government failure altogether. They are very large actions, which is why they are worth noting now.

Under these kinds of strategies, economic growth, which depends on wealth production (capital accumulation) slows down. Capital goes into hiding. Capital consumption is encouraged. Capital flees from America. The government’s strategies impair the country. They impair the government too. Bush’s programs had the effect of slowing the growth of and destroying capital. Now Obama’s programs are doing the same and promise even a higher degree of the same.

The end occurs when the U.S. hits the financial wall. To avoid that outcome, the government may reform itself. That path requires that it commit itself to abandoning the sword and promoting free markets. Without constitutional or legal commitment, it will have no credibility, because of its long history of using force. There are no signs whatsoever of the U.S. going in that direction. It is doing the very opposite. Failing that, as the day approaches when the U.S. slams into the financial wall, it can take increasingly stringent measures to defer the date. These will be very unpleasant for Americans, should they occur. The government can impose an array of measures: higher taxes, price and wage controls, controls on the movement of Americans and of capital, seizure of assets and wealth accumulations, and rationing. The government can replace old dollars with new ones with reduced purchasing power. It can control jobs and employment. It can impose forced labor. Or perhaps none of these measures will be adopted. Perhaps there will be a national bankruptcy in which there is a mad scramble to see who is going to absorb the losses.

The end game is unpredictable because the reactions of ordinary Americans count too.

The timing of the end game is unpredictable. It could happen tomorrow, or within 10 years, or it might take 50—100 years, depending on what the government does. At the rate it is going, a shorter horizon is more likely than a very long horizon. The Roman Empire began in 44 BC. By 250 AD the coinage was in notable debasement and decline, and a severe and precipitous drop in silver content occurred in mid-century. The empire hit a financial wall. It took about 300 years. The U.S. international empire began in 1898. Here we are 111 years later looking at very substantial failed strategies and a severely depreciated dollar. Our silver coinage ended in 1965. Gold was abandoned for international settlements in 1971. Debasement has accelerated since these dates. The ambitions of our "emperors" have not abated. They are not abandoning the sword, either domestically or internationally. America may be speeding more quickly to the financial wall than did the Romans.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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