Will the Market Do What Western Leaders Cannot?

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It’s a sign
of the times. President Barack Obama’s ballyhooed fiscal commission
on Friday failed to come up with a plan to curb the US budget deficit.
For close to a year, the panel has been laboring on US$4 trillion
in cuts that would take place, approximately, over the next decade
to pare the federal deficit to 40 percent of gross domestic product
by 2035.

The deal was
that the plan would be brought to the floors of the House and Senate
if the proposal had the support of 14 members. But the vote was
three shy of what was necessary. No deal. No vote. One more nail
in the coffin of American fiscal solvency. What will happen now?
Well, there have been pledges from various House budgetary authorities
that some of the recommendations will be put in place anyway. But
here is a question: Is US$4 trillion enough to put America back
on a firm fiscal footing. The answer in fact may be "no."

Here at TheDailyBell.com,
we tend to be libertarian-conservative in our outlook: government
is the problem, not the solution. To rely on government to clean
up the mess that has been made is a little like relying on an out-of-control
bully to bring harmony and discipline to the classroom. It’s not
likely to happen. America’s financial house is in disarray. Its
unconstitutional progressive tax structure has been crying out for
reform since World War II. Even the nation’s Treasury Secretary
Timothy Geithner is a tax cheat. Meanwhile, thanks to the Federal
Reserve, the dollar has lost between 95 and 99 percent of its value
in the past 100 years. So much for the idea that the Fed is an "inflation
fighter." Inflation "maker" is more to the point.

Various states
(large ones like California) are starting to "formally"
go broke. Other states and municipalities, facing tremendous budgetary
problems, are beginning to cut what have been considered vital public
services such as public education and police and firefighting services.
Even the most sacred of cows – the municipal pension –
may be in danger. What happens if municipalities simply cannot pay?
If the till is empty, promises cannot be kept.

Here’s a number
to startle you: America’s debt may not be US$13 trillion (the normally
quoted figure) or even US$50 or US$100 trillion – figures that
emerge when some unfunded liabilities are added in. According to
U.S. economist, Laurence Kotlikoff, America’s national debt is $200
trillion, when Baby Boomer demographic demands are calculated –
including Social Security, public union, pension and health-care
demands on the public purse. That’s a mighty big figure. America,
in fact, is destitute.

It’s no surprise
to us. At the Bell, we’ve been predicting a monetary and fiscal
meltdown for years. We’ve also predicted the return to some sort
of commodity-money standard, and that seems to be taking place,
given the many countries that are dissatisfied with the way America
is handling its financial affairs. It’s hard to believe that only
ten years ago, America’s financial house was a good deal tidier
than today. But that was before the advent of the George Bush administration.
Two wars and one economic crisis later, America’s budget is in ruins.
Now it’s the Democrats turn. But everything the Obama administration
has done to "fix" the problem has in fact made things
worse.

The Obama administration
relies on what has been called "Keynesian economics" after
the quasi-socialist 20th-century economist John Maynard Keynes.
Keynes was certainly (and unfortunately) the most influential economist
of his generation, and the main thrust of Keynes’ theories was that
government itself could smooth out the bumps in the business cycle
using monetary and budgetary tools. Basically what Keynesianism
has come to mean is that the government can print money (using the
power of a central bank) and spend money (borrow money and raise
taxes) to create "make work" projects that keep people
employed until a given economic crisis eases. The idea, to put it
bluntly, is to maintain the current system and pay people just enough
to survive (and eat) so that the system itself doesn’t collapse
from bankruptcy or into popular rebellion.

But this time
around it’s not working. The fiat-money, central banking system
has been around for 100 years and has reached the end of its manipulative
life. Central banks around the world delinked from gold some 40
years ago and this has gradually ruined the credibility and value
of the world’s reserve currency, the dollar. Now Russia, China and
even South American countries are trying to remove themselves from
dollar dependency. There is much talk of relinking paper money to
some sort of underlying commodity so that governments (like the
US) cannot spend themselves into oblivion.

The trouble
is that there is one dirty little secret that no one talks about:
almost every country in the world has a central bank and because
of dollar reserve policy all these countries are delinked from money
metals as well. This has never before happened in the history of
the world. The ramifications are substantial. China’s price inflation
is running nearly out-of-control because that country’s communist
leaders have printed so much paper money that the currency is steadily
losing value. India is in the same boat and so are a number of countries
in South America. The European currency has not necessarily been
overprinted – but as a result EU countries are going broke
because they cannot debase their currencies as they have in the
past.

The only solution
is to return to some sort of commodity money. Gold and silver have
served faithfully as such money in the past. At the Bell, we’ve
long predicted the return of some sort of tangible monetary standard,
perhaps even a gold and silver standard (called bimetalism). With
current electronic facilities the supply of gold and silver in the
world can be digitalized and circulation anomalies can be smoothed
out. The criticism that there is not "enough" gold and
silver is actually a moot point. There is always enough, especially
if "free banking" polices are employed. Before the Civil
War, the US was on a quasi-free banking standard and such standards
have succeeded, on and off, throughout history.

The Internet
itself is a "game changer" – as we often remark at
the Daily Bell. The information about alternative monetary systems
as well as the ability to create and market news kinds of money
have spread far and wide throughout the world thanks to this new
form of electronic communication. No longer do thinking people –
the two percenters who matter – believe that only government
solutions are the answer to economic and social problems. In fact,
every law – every regulation and mandate – is a price
fix, placed upon the larger society by force and distortive to the
larger community. Inevitably, price fixing is inefficient and creates
queues, scarcities and even rationing of some goods and services.

Central banking
is a massive kind of price fixing of money – as central bankers
"set" interest rates, distorting economies and causing
terrible booms and busts over time. Western regulatory democracies
fix prices (and create queues and shortages) every time a law is
passed or a regulation is introduced. Over time, the distortive
effects add up until economies have trouble functioning, unemployment
becomes the rule rather than the exception and peoples’ standard-of-living
plummets to rudimentary levels. This certainly seems to be happening
now.

Government
has caused these problems. The useless laws, absurd environmental
regulations, fiscal deprivation and monetary dysfunction are not
apt to be cured by the same "bullies" that proposed, implemented
and enforced them. So what will happen? Over time, Western societies
may gradually collapse, not all at once and not in a manner much
remarked upon, certainly not in the mainstream press. But slowly,
the market itself may reassert its dormant power.

While government
leaders meet in Geneva or Cancun, normal people will begin to use
gold and silver – or even barter – instead of increasingly
worthless paper. People will gradually withdraw their paper savings
from banks and purchase goods and services of some significant value.
People will work off the books to avoid taxes that are squandered
on inflated municipal pensions; they will create communities that
function away from – beyond increasing government dysfunction.
It is already happening – no matter whether one approves or
not – and the Internet is providing considerable support.

There is ample
historical precedent for this sort of change. The Gutenberg press
– the Internet of its epoch – helped spawn a whole wave
of free market thinking: the Renaissance, the Reformation, even
the Enlightenment. It survived attempts at censorship, licensing,
etc. But there are other examples, too, even earlier, including
those of great, ancient South American civilizations that collapsed
mysteriously, much to the History Channel’s puzzlement. We are told
that the Mayans and others abandoned their fabulous cities because
of drought and other environmental factors. But it is just as likely
that the sophisticated tribes that provided the labor finally tired
of the incessant warfare and bloodletting of the day. Each city
was, at times, a mini-nation, battling with all the others.

After a point,
perhaps, "civilization" became too much; the tributes
became too much; the regulations became oppressive. Were the cities,
then, simply abandoned … their inhabitants refusing to support
societies that demanded so much but gave so little in return? And
where are the descendents of these tribes today? In fact, they still
exist throughout South America, farming and worshipping as they
always have; the vibrant survivors of great, but oppressive cultures.
Yes, they have survived and life goes on. The markets work; people
prosper. Only the cities have crumbled.

Reprinted
with permission from The
Daily Bell
.

December
11, 2010

Anthony
Wile is an author, columnist and entrepreneur focused on developing
projects that promote the general advancement of free-market thinking
concepts. He is the Chairman and CEO of the Swiss-based publishing
firm Appenzeller Business Press AG (ARBP). He is a senior editor
of ARBP’s flagship news site, TheDailyBell.com.
In 2010, ARBP founded and appointed Mr. Wile as the Executive Director
of The Foundation for the Advancement of Free-Market Thinking —
a non-profit Liechtenstein-based foundation. His most popular book,
High
Alert
, is now in its third edition and available in several
languages. Other notable books written by Mr. Wile include The
Liberation of Flockhead (2002) and The Value of Gold (2002).

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