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Building Your Financial Storm Shelterby Gary North Recently by Gary North: Time to Get Rich
Sometimes we need a hole to crawl into. I recently 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. The family 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. Another family 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. The 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 prevent them.
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. This strategy 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? Our problem 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. There comes a time to start looking for a storm shelter. DUCK AND COVER 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. Rather than 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 it here.
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. A disaster 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. AN ANNUAL DISASTER DRILL 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: 1. An admission that it is real, but not imminent This week, 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. Congress's 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.
Speaker 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." Of course, 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. They promise. 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." DEFAULT IS COMING
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. The problem 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. The government 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. The problem 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. The battle 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.
The problem 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. Each political 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. An interviewer who wants to sink a candidate asks him to identify what programs he recommends cutting. The candidate mumbles. Boehner said 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. Boehner said 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. This never 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. YOUR FAMILY'S STORM SHELTER A tornado is like specific budget cuts. No one knows in advance whose house will be blown away. Some families buy houses with storm shelters. But hardly anyone ever builds a home. Most families 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"? Yes. Are you actively building your financial storm shelter? Congressmen talk about the need to reduce the deficit. Talk is cheap. Voters talk about the need to clean house in Congress. But it never happens. Remember Arnold 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. May 18, 2011 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 © 2011 Gary North
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