The Smoking Ruins Solution

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by David Galland: Gold
Confiscation: Straws in the Wind

 

 
 

Just last
week, it was reported that the turnout for the Democratic primary
was the lowest in 80 years. While the Republicans are clearly energized
by their concerns about the direction the Democrats are taking the
country in, the Democrats themselves seem to have decided to forgo
the voting process, perhaps in favor of a refreshing nap.

No question
about it, the president is in the hot seat.

While I am
sure that back in 2008 Barack Obama was one happy camper about having
taken the presidential prize, today one has to wonder if that victory
has led him to certain bitter regrets.

His problem,
the problem bedeviling the government at its highest level, is that
there is actually no palatable solution to the persistent debt crisis
now gripping the U.S. economy by the throat.

In fact, the
only tangible solution might be best termed the “Smoking Ruins
Solution.” Allow me to elucidate.

The Keynesians
would take great umbrage at the idea that the government is left
with no viable options at this point. The solution is clear to them
– more stimulus. And this time around, no skimping! A paltry
$800 billion isn’t even going to begin to get the job done.
Rather, if two trillion dollars of freshly minted money is what
it takes to kick the U.S. economy out of its swoon, then so be it.
Hell, make it three if that’s what it takes – we can worry
about the (inflationary) consequences later.

Economists
who look to someone other than Keynes for guidance, have other ideas
– but not many. And, as per my comments above, none that would
be even remotely palatable to the man on the street. That goes double
for the politicians (of both parties), who rely on the proletariat
to provide them with the votes that keep them in power and in porridge.

While I don’t
have the time to scratch even a square inch of the surface of all
the goofy solutions economists might trot out if asked, I will attempt
to briefly address, in the broadest terms, a solution that might
be considered acceptable to those who skew toward the Austrian school
of economic thought.

For those
of you unfamiliar with the Austrian perspective, it puts a large
amount of faith in the unfettered free market, and almost none at
all in the ability of governments to do much more than run economies
headlong into solid walls.

I have to
warn you, however, that the solution I am about to propose involves
no quick fix or linking hands around the fire, accompanied by happy
singing. Rather, it is more akin to treating a dread disease with
a very strong medicine – so strong, in fact, that should the
patient survive, they would (at least for some period of time) suffer
a steep degradation in the quality of life.

I say that
because the only real solutions available to the country are certain
to result in financial carnage and social upheaval of a most extraordinary
sort. For starters…

  • A dime-on-the-dollar
    forced renegotiation with U.S. Treasury/agency debt holders.

    Sorry, China, Japan, et al. – push has come to shove, and
    it’s over the side with you.

  • Letting
    the banks that should fail, fail.
    Sorry, shareholders and
    bond holders, which now include taxpayers, but you made a bad
    bet. And sorry, anyone with more in your failed bank than is
    covered by the FDIC, you’re out of luck on the excess.
    Given that the FDIC is also broke, we’re not even sure
    about the money you thought was covered.

  • Turning
    the lights out on the U.S. empire.
    The U.S. spends more
    on maintaining overseas government operations than all the rest
    of the world’s nations combined. While the cost of ending
    our involvement in perma-wars, turning off the lights at military
    installations, canceling aid and subsidies to foreign governments
    will cause widespread pain and misery – both at home for
    the dismissed soldiers and overseas for our allies – doing
    so is likely to improve our security by dramatically reducing
    our boot print on the face of the globe.

    We’ve
    got more than enough in the way of nukes to deal with any large-scale
    threats, and with a more streamlined national security apparatus,
    we’d be certain to get a lot better at spotting the odd
    terrorist threat before the malcontents make it to U.S. shores.

  • Goodbye,
    big government, and thanks for all the chicken.
    It’s
    been a wonderful run, with promises of fat chickens in every pot,
    affordable homes for all, safety nets under safety nets, universal
    healthcare, and an almost infinite number of regulations to make
    sure we’re safe in every conceivable circumstance. We hate
    to see you go, but go you must, because even though U.S. business
    labors under the second highest corporate tax rate in the world
    and the individuals who do pay taxes pay over half of their income,
    the shortfall between revenue and government expenses is at historic
    levels with no end in sight. And that’s just impossible to
    continue.

Under my solution,
the size and scope of government will have to be seriously reduced,
a process best started by severely limiting the ability of politicians
to make new regulations and pass new taxes or mandates. With relatively
little to do – as opposed to the situation today, when literally
nothing is beyond the interest and reach of the federal government
– a wholesale purge of the bureaucracy can be undertaken.

Yes, that
would mean hundreds of thousands of freshly dismissed bureaucrats,
many of them possessing no real marketable skills, hitting the employment
market. But look at the bright side, the oversupply of labor willing
to work for subsistence pay will cause “guest” workers
to throw up their hands and head to greener pastures, leaving the
former bureaucrats to clean the sewers, collect the garbage, and
pick the tobacco.

  • Farewell,
    Fannie and Freddie.
    Nationalizing the mortgage industry
    was a horrible idea… an idea whose time has now expired.
    The loans these zombie institutions hold should be pumped out
    into the market at whatever the free market will pay, which
    won’t be much, then the doors shut.

  • Institute
    a flat tax at a level that everyone will happily pay.
    But
    that’s not fair, shout the progressives. To which I might
    respond, look at the facts. One of the biggest differences between
    America in its youth and the lands whence the citizenry came
    was that, in America, there were none of the entrenched classes
    that dog so many countries even to this day.

I can’t
begin to count how many rich people I know who have lost essentially
all their money due to bad investments or business decisions. Likewise,
I know any number of wealthy people who started with little or nothing,
but through hard work and enterprise made their mark and their money.
The key to a robust economy is to make it as easy as possible for
anyone to earn, and keep, the benefits of their efforts… and
a reasonable flat tax goes a long way in that direction. As an added
advantage, a flat tax would result in a wholesale shedding of accountants,
lawyers, IRS employees, and more.

“But
that will only add to unemployment,” you might fret (well,
not you, but the person next to you). To which I would answer, rhetorically,
by asking the question, “Is the desire to avoid such downsizing
reason enough to keep the wasteful, counterproductive, and impossibly
complex current tax system in place?” Hardly.

What the country
needs now more than anything is transparency and the fostering of
a solid foundation that allows businesses, and the entrepreneurs
that start them, to do what they do best – create wealth.

  • Link
    the money to something that limits the ability of government to
    print the stuff up at will.
    While some sort of a gold standard
    seems logical to me, anything that anchors the currency in such
    a way that the Fed – or the Treasury (in the absence of the
    Fed… one can only hope) – is unable to grow the money
    supply at a faster clip than, say, population growth, or the rate
    at which gold can be pulled out of the ground, would do just fine.

I could give
you other examples of the sort of steps and attendant mayhem that
would result from slashing government and letting the free market
run its course. But I’ll stop there, if for no other reason
than that by now, I suspect, many readers are recoiling in horror
at the inanity of the ideas just presented.

No question,
these solutions would leave the economy in smoking ruins –
in worse shape, even, than at the height of the Great Depression.
While the devil is invariably in the details, the argument for pulling
the proverbial trigger on the smoking ruin solution is understandable
– at least to me – by getting back to the positive outcomes
that would result.

  • The
    overhang of unpayable government debt would be gone.
    Sure,
    the Chinese, Japanese, and Middle Eastern oil sheiks (along
    with anyone else who got stuck with a lot of bad debt) would
    be really, really unhappy with us. Again, sorry – but we’re
    bankrupt and pretending we’re not is just going to make
    things worse in the long run. Besides, in relatively short order,
    I suspect our trading partners would get over their losses on
    defaulted government bonds because…

  • Business
    would be booming.
    Unshackled from high taxes and excessive
    regulation – and freed from the fear that at any moment
    some change in the regulations, or even the whim of a minor
    bureaucrat, can knock the pins out from under a business –
    the U.S. would once again become the world’s preferred
    place to do business.

  • The
    debt bubble would deflate.
    As it now stands, we can’t
    even begin to tally all the outstanding bad loans, let alone
    who ultimately owns that debt. Each new bank that fails, each
    new equity and bond holder that goes bankrupt, and each new
    financial institution that folds reduces the toxic debt that
    will otherwise plague the economy and create uncertainty until
    it’s ultimately resolved. Under the scenario painted above,
    the deleveraging and destruction of debt would come fast and
    furious, allowing the nation to understand the true value of
    everything and to move forward from there.

  • Housing
    prices would fall to a market-clearing level.
    People who
    were forced to sell their houses would be forced to sell them
    at a price someone is willing to pay – and that price would
    likely be a lot less than the current market. Tough break, and
    it could lead to a bankruptcy that takes down yet another bank
    – but so be it. It’s time to let the chips fall where
    they might.

  • The
    U.S. dollar would once again become trustworthy, and therefore
    in demand.
    It might even be able to retain its reserve status.

Such strong
medicine would make the patient sick – and likely even cause
reduced quality of life for some extended period of time. But I
have to believe returning America to a foundation built on the principles
of self-reliance and an individual’s right to the fruits of
their labor would lead to a breathtaking groundswell of optimism
and enterprise. Further, just as was the case in 1776, the U.S.
would again provide a model for the rest of the world to follow,
so the benefits would be global.

Of course,
everything I just wrote would be considered almost criminally outrageous
by most of the citizenry – and written off as the ravings of
a madman by the politicians.

Which is why,
in time, it will be the Keynesians’ arguments that win the
day, and the next leg down will be met by a wave of newly printed
funny money – a veritable flood of the stuff. Certainly not
before the November elections, and certainly not before the threat
of a deflationary collapse provides the cover the government needs
to act – but it’s coming.

Gold still
seems a safe bet to this observer.

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David Galland
is the managing editor of Casey
Research
.

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