Shredding Your Safety Nets

by Gary North
by Gary North
Recently by Gary North: The Myth of the Kondratieff Wave

Modern man believes in government-funded safety nets. He thinks that other taxpayers can and should be taxed to bail out those taxpayers who make bad economic decisions, so long as those taxpayers being bailed out are people like themselves. They don't want bailouts for bankers, and they don't want bailouts for people who got into no-money-down mortgages to buy in neighborhoods "above their station."

Politicians feed this faith in government safety nets. They promise to bail out the poor man who fell into trouble through no fault of his own. Then they bail out bankers and the financial industry. Those are the people who screen who gets nominated. They have controlled American politics from behind the scenes since 1914. Franklin Roosevelt targeted them in his first inaugural address, but that was purely for public consumption. He was one of them in terms of his family origins, and he had worked for them selling corporate bonds from his defeat as Vice President in 1920 until his victory as governor of New York in 1928. This is covered in detail by Antony Sutton's long-neglected masterpiece of a monograph, Wall Street and FDR.

This faith in safety nets has sustained men's faith in the expansion of central governments all over the world. Voters have called for guaranteed retirement and guaranteed medical care for the aged. Now this is about to be extended in America to the poor through a system of national health insurance. The voters are supportive.

For two thousand years, Western man had faith in God, in private charities, in local churches, and above all the family to provide safety nets. But he has steadily surrendered his faith in all of these in favor of the state. The state is seen as a healer. It is seen as the provider of reliable safety nets. The state uses coercion to construct these nets. It consumes capital.

These nets are now stretched thin. Why? Because the largest banks needed the money. They got use of the safety nets while there was still capital to confiscate in the name of the People. Meanwhile, actual voters overwhelmingly opposed the big bank bailouts. They were ignored by the politicians.

Betrayed by civil government. Again.

THE WORST RECESSION

This recession is consuming the private capital necessary to provide the economic safety nets for an entire civilization. National governments are tapping private capital that is needed to fund the recovery.

We need economic growth to replenish these capital reserves. But the magnitude of this capital-siphoning operation is greater than anything seen since World War II.

This recession is the worst global recession since the Great Depression. It is showing no green shoots. Some European countries are in free-fall, especially France and Italy. The rest are suffering the worst declines on record since 1946.

Trade has collapsed. This indicates a dramatic worldwide contraction of the division of labor. This is not due to tariffs or quotas – not yet, anyway.

Three economists with the International Monetary Fund have described this recession in terms of a baseball analogy: "Out of the Ballpark." There is nothing in the post-war experience to match it. There have been only four global recessions since 1945: 1975, 1982, 1991, and 2009. This is by far the worst in every major category: unemployment, industrial production, trade, and capital flows.

Unemployment is especially troubling. This is because it has previously continued to rise for a year after the recession's trough. So, when green shoots really do appear, the unemployment rate will continue onward and upward.

This means that what happens in the United States is heavily influenced by the rest of the world. American economists say that the United States will recover first. But how far and how fast can it recover if the rest of the world is continuing a slide into even greater recession? The authors conclude:

The 2009 forecasts of a 2.5 percent decline in world real per capita GDP, if realized, would qualify this year as the most severe global recession of the postwar period. Almost all indicators of economic activity are expected to register sharper declines than in previous episodes of global recession. In addition to its severity, this global recession also qualifies as the most synchronized – all the advanced economies are in recession, and many emerging and developing economies are as well. (IMF, "Finance and Development" [June 2009])

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July 1, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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