Your Financial Storm Shelter
by Gary North: Time
to Get Rich
we need a hole to crawl into.
spoke at a conference sponsored by a small rural church in Alabama.
Several of the families had been in the path of one of the tornadoes
that swept through the state. One of the families had a storm shelter/basement.
Several nearby families did not. So, they ran for the house of the
family that did.
When they all
emerged, the house above them was gone. Yet
the houses of the other families were still standing.
with the shelter has nine children. Their shelter had provided a
safety zone for other families. Yet, after the tornado had moved
on, the family with the shelter turned out to be the primary victim.
in a different part of the county was also hit by a tornado. The
family had 13 children. They had no storm shelter. The walls of
the house collapsed. The father was lying on top of a child. Some
of the falling debris killed him. No
one else died.
church immediately set up a fund for the victims. The members
pulled together. They did not seek FEMA aid.
One of the
members wants to build a new home across the street from the church.
The property has a high water table. It is not feasible to construct
a basement shelter. So, he will have a safety room constructed,
one reinforced with re-bar.
We take precautions,
but we cannot know how events will sort out winners from losers,
survivors from the dead. The best we can do is to recognize that
disasters can hit, and that precautions taken in advance are wise.
Precautions can reduce the impact of disasters, but they cannot
When we see
a crisis coming, we spend extra money to make preparations. We reallocate
our budgets. The more likely the crisis and the more devastating
its results, the more we should allocate.
is not what the U.S. government adopts. It spends enormous sums
on preparing for crises that are unlikely to occur. Think of our
fleet of aircraft carriers. What nation is likely to go to war with
us by means of aircraft carriers?
today is that the most obvious source of a major crisis today is
the debt structure of Western governments, central banks, and commercial
banks. Because governments are the problem, there will not be a
solution provided by politicians. The same is true of central banks.
a time to start looking for a storm shelter.
When I grew
up in Southern California in the 1950s, public elementary schools
had an occasional drill for an atomic attack. It was called duck
and cover. The drills would have been useless in an atomic attack.
First, the infrastructure of society would have been blown away:
power lines, highways, food-delivery systems, water lines. Second,
the vertical protection of a school desk would have done little
to protect us against the horizontal destruction of imploding windows.
Glass shards would have sliced through us like knives.
construct a blast shelter system, the government spent $13,000 on
a civil defense film, "Duck and Cover," starring Bert the Turtle.
I have posted
This film is
a symbol of crisis and response management at the Federal level.
The government sees a crisis coming and, rather than dealing with
it in the early stages, when something might actually forestall
it, resorts to public relations. It talks about the crisis. It appoints
committees to write reports on it. There may even be a task force
created to solve it. A task force is a committee filled with nationally
respected figures, who hire a staff, meet a few times, and issues
a report. No one pays any attention. No one is expected to pay any
attention. All of this is a kind of kabuki dance.
Only when a
threat is manufactured by the government as a way to create a massive
new bureaucratic structure does Congress implement expensive solutions.
If the public does not respond to the announced crisis by way of
support for major expenditures, the crisis gets shelved.
drill is a substitute for solving the problem. As long as the voters
will accept the drill as a legitimate substitute for a solution,
the drills will continue.
The worst crisis
from the government's point of view is the national debt crisis.
It leads to calls for reduced government spending. For this crisis,
the government has this well-orchestrated response:
An admission that it is real, but not imminent
2. A promise to deal with it later
3. A call to spend more now to spend less later
4. Kabuki theater
the issue of the U.S. government's debt ceiling comes up for discussion
in Congress. The Secretary of the Treasury has offered a dire forecast.
There will be a double-dip recession unless Congress votes to raise
the debt ceiling once again. Congress does this every year, but
this year there is pressure from new House members not to raise
the ceiling. Meanwhile, the government is in the middle of a $1.65
trillion on-budget deficit. Like a tornado, the deficit will hit
the political will of Congress. There is no basement storm shelter.
There is no safe room.
will to resist will be flattened, as it is every year. Usually,
this vote has been pro forma. The media may mention it, but not
as a prime-time story. It is always assumed that Congress will rubber
stamp the proposed increase, in order to avoid a partial shutdown
of the government maybe 10% of operations. For Congress,
this is regarded as a level-5 tornado, not a squall.
The debt limit
will be reached this week. Geithner says that he can juggle accounts
until August, but at that point, the government will have to default
the big D.
of the House Boehner has said that there will be a hike in the
debt ceiling, but it will be a very special kind of increase. He
said on the CBS Sunday morning news show, "Face the Nation," that
"we're going to do it in a way that addresses America's long-term
fiscal challenges." (Whenever I see a reference to "Face the Nation,"
I think of the "Grin and Bear It" cartoon strip, which frequently
has Senator Snort appearing on "Faze the Nation.")
In a previously
recorded segment of the show, President Obama invoked what has become
a familiar refrain: the recurrence of the 2008 crisis. If investors
ever "thought the full faith and credit of the U.S. was not being
backed up, if they thought we might renege on our IOUs, it could
unravel the entire financial system. We could have a worse recession
than we've already had."
neither Boehner nor Obama mentioned the possibility of cutting Federal
spending in order to balance the budget this year and thereby avoid
having to raise the debt ceiling ever again. Such a strategy is
too radical. The proposed official solution is to raise the ceiling
again, and to promise that this will not always be necessary, because
economic growth will raise tax revenues One of These Days, Real
Soon Now. The budget will be balanced. The recession will not arrive.
This year is
different. The discussion is front-page, prime-time news. This is
because a handful of first-term Congressional Republicans in the
House are making noises about cutting spending in order to reduce
the size of the increase. They don't have the votes, as we will
see. These Congressmen say publicly that they see what is economically
necessary, but economics has little influence in Congress. The majority
of the members think they can kick the can down the road for another
year. In 2012, they will all campaign on responsible spending. The
operational definition of "responsible spending" never changes:
"kick the can again."
In his interview
in front of an audience, President Obama warned about the consequences
of a default by the U.S. government. It could unravel the worldwide
economic recovery. You
can see the video here.
He is correct.
If the Federal government ever stops paying interest on its debt,
the repercussions in the financial markets would be severe. It would
be worse than the crisis in the fall of 2008.
we face is this: with every increase in the Federal debt ceiling,
the likelihood of default increases. The politicians' solution to
the threat of default is to delay the default.
is trapped. It really does face the prospects of default if the
debt ceiling is not raised. The alternative is to cut spending drastically
before August. But that would be a form of default. Certain groups
that have been promised largesse from the Federal government would
find that the promises were not binding.
is now selective default. The Congress and the White House always
agree to defer any form of default. This is why we can be sure that
selective default is inevitable. The deficit numbers do not allow
the government to escape the increase in the debt ceiling.
We know from
decades of experience that selective defaults are not politically
acceptable. So, the deficit keeps growing. The debt ceiling keeps
getting raised. This is done in the name of default-avoidance.
over the debt ceiling is a sham. If Congress cannot legislate spending
cuts that will balance the budget, then there is no possibility
that it will put a cap on total expenditures by means of a debt
ceiling. There was no significant reduction in the deficit earlier
this year. The deficit in fact rose compared to last year's forecast.
This is why
the debate over the deficit is American kabuki theater. It is a
way to score debate points for next year's elections. Candidates
will be looking for published statements of incumbents' opinion
on the debt ceiling. Everyone in Congress wants to position himself
or herself as taking the responsible path to national prosperity.
they face is this: to cut the deficit specifically is to alienate
voting blocs that are dependent on transfer payments from the Federal
government. They refuse to make specific cuts for this reason.
party is more afraid of the alienation of specific voting blocs
than it is with the general threat of the debt ceiling as a political
issue. So, they do not specify what must be cut. Therefore, nothing
will be cut.
who wants to sink a candidate asks him to identify what programs
he recommends cutting. The candidate mumbles.
that everything should be on the table except raising taxes. This
plays well to conservative voters. But where is this table? Whenever
the debate over the annual budget gets laid on the table, the specific
cuts are not made.
we must now look at "the big picture." Indeed, we should. But Congress
never does. Congressmen look at the small picture: the swing voters
in their districts. These voters can usually make or break a re-election
campaign. So, the Congressman seeks to retain the swing voters who
elected him two years earlier while not losing his core constituency.
He does not want voters to defect to his rival. So, he dares not
propose specific cuts. Specific cuts alienate specific swing voters.
He said that
Congress must not kick the can. But he announced that it must kick
the can on the debt ceiling this time. When a politician says that
Congress must not kick the can, but then says it must kick the can
this time, so that it won't have to kick it next time, he is saying
that Congress will kick the can.
changes. Politicians can call for deficit cuts in general. But there
are never cuts in general. There are only cuts in particular. These
do not get made.
FAMILY'S STORM SHELTER
A tornado is
like specific budget cuts. No one knows in advance whose house will
be blown away.
buy houses with storm shelters. But hardly anyone ever builds a
are barely getting buy. They spend as much as they bring in after
taxes and mortgage. They do not make specific cuts in spending deep
enough to build up a reserve.
So, they do
not prepare storm shelters. They kick the can. They imitate Congress.
Do you need
gold coins? Yes. Do you need a back-up plan if you lose your job?
Yes. Do you need a network of people who might be able to find you
a job? Yes. Do you need a side business? Probably. Do you need skills
that can be transferred to a new line of work? Yes. Do you need
a plan to make sure you stay on the short list of "must not fire"?
Are you actively
building your financial storm shelter?
talk about the need to reduce the deficit. Talk is cheap.
about the need to clean house in Congress. But it never happens.
Schwarzenegger and his broom? He has departed. I don't know
where the broom is. The fiscal Augean stables remain.
When the tornado
of selective default comes, you need to be in your storm shelter.
Maybe your house will be blown away. Maybe not. But don't be inside
it when you find out.
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.
2011 Gary North
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