the slumping economy will prove every bit as challenging to Congress
as fighting terrorism.
No one challenges
the need to protect American citizens from further terrorist attacks,
but there is much debate throughout the country as to how it should
be done and whether personal liberty here at home must be sacrificed.
Many are convinced that our efforts overseas might escalate the
crisis and actually precipitate more violence. A growing number
of Americans are becoming concerned that our efforts to preserve
our freedoms and security will result in the unnecessary sacrifice
of that which we've pledge to protect- our constitutionally protected
conflict also exists once government attempts to legislate an
end to a recession. In the 1970s, wage and price controls were
used to suppress price inflation and to help the economy, without
realizing the futility of such a policy. Not only did it not work,
the economy was greatly harmed. Legislation, per se, is not necessarily
harmful, but if it reflects bad policy, it is. The policy of wage
and price controls makes things worse and represents a serious
violation of people's rights.
hear from strong advocates of higher taxation, increased spending,
higher budget deficits, tougher regulations, bailouts and all
kinds of subsidies and support programs as tools to restore economic
growth. The Federal Reserve recognized early on the severity of
the problems and, over the past year, lowered short-term interest
rates an unprecedented 11 times, dropping the Fed funds rate from
62 % to 1: %. This has not helped, and none of these other suggestions
can solve the economic problems we face either. Some may temporarily
help a part of the economy, but the solution to restoring growth
lies not in more government but less. It is precisely too much
government, and especially manipulation of credit by the Federal
Reserve, that precipitated the economic downturn in the first
place. Increasing that which caused the recession can't possibly,
at the same time, be the solution.
of the distortions of the 1990s brought on by artificially low
interest rates orchestrated by the Fed, on top of 30 years of
operating with a fiat currency worldwide, suggests that this slowdown
will not abort quickly.
economy has been in a slump for over 10 years and shows no signs
of recovery. The world economies are more integrated than ever
before. When they are growing, it is a benefit to all, but in
a contraction, globalism based on fiat money and international
government assures that most economies will be dragged down together.
Evidence is abundant that most countries of the world are feeling
the pressure of a weakening economy.
Many of our
political and economic leaders have been preaching that more consumer
spending can revitalize the economy. This admonition, of course,
fails to address the reality of a record-high $7.5 trillion-and
rising consumer debt. "Today, a party- tomorrow an economic hangover"
has essentially been our philosophy for decades. But there's always
a limit to deficit spending, whether it's private or governmental,
and the short-term benefits must always be paid for in one form
or another later on.
felt and acted wealthy in holding the dot-com and Enron stocks
were brought back to earth with a shattering correction. There's
a lot more of this type of correction yet to come in the financial
to remain solvent, consumers ought to tighten their belts, pay
off debt, and save. In a free market, this would lower market
interest rates to once again make investments attractive. The
confusing aspect of today's economy is that consumers and even
businesses continue profligate borrowing, in spite of problems
on the horizon. Interest rates, instead of rising, are pushed
dramatically downward by the Federal Reserve, creating massive
amounts of new credit.
credit, according to economic law, must in time push the value
of the dollar down and general prices up. When this happens and
the dollar is threatened on exchange markets, the cost of living
is pushed sharply upward. The central bank is then forced to raise
interest rates, as they did in 1979 when the rates hit 21%.
before any need to tighten, interest rates may rise or not fall
as expected. This has just happened in 2001. Even with Fed fund
rates at 40-year lows, the 10 and 30-year rates have not fallen
accordingly. Many corporate-bond rates have stayed high, and credit-card
rates have stayed in double digits. This happens because the market
discounts for debt quality and future depreciation of the dollar.
The Fed can't
control these rates, and they can't control where the new credit
they create goes. This means that resorting to, or trusting in,
the Fed to bail out the economy and accommodate congressional
spending is foolhardy and dangerous. This policy has led to a
record default for U.S. corporate bonds. Worldwide, $110 billion
of bonds were defaulted on last year.
inflation is the chief cause of recessions. Therefore, we must
never expect that this same policy will reverse the economic dislocations
it has caused.
a year, the Fed has been massively inflating the money supply,
and there is no evidence that it has done much good. This continuous
influx of new credit instead delays the correction that must eventually
come- the liquidation of bad debt, and the reduction of overcapacity.
This is something Japan has not accomplished in 12 years of interest
rates around 1%. The market must be left to eliminate the misdirected
investments and allow the sound investments to survive.
other policies that will assist in a recovery that the Congress
could implement. All taxes ought to be lowered, government spending
should be reduced, controls on labor costs should be removed,
and onerous regulations should be reduced or eliminated.
not expect any of this to happen unless the people and the Congress
decide that free-market capitalism and sound money are preferable
to a welfare state and fiat money. Whether this downturn is the
one that will force that major decision upon us is not known,
but eventually we will have to make it. Welfarism and our expanding
growing foreign commitments, financed seductively through credit
creation by the Fed, are not viable options.
wealth to achieve a modicum of economic equality and assuming
the role of world policeman, while ignoring economic laws regarding
money and credit, must lead to economic distortions and a lower
standard of living for most citizens. In the process, dependency
on the government develops and Congress attempts to solve all
the problems with a much more visible hand than Adam Smith recommended.
The police efforts overseas and the effort to solve the social
and economic problems here at home cannot be carried out without
undermining the freedoms that we all profess to care about.
in the Congress is a conviction that free markets- that is truly
free markets- and sound money can provide the highest standard
of living for the greatest number of people. Instead, we operate
with a system that compromises free markets and causes economic
injury to a growing number of people, while rewarding special
interests and steadily undermining the principles of liberty.
Unfortunately, the policy of monetary inflation is most harmful
to the poor and the middle class, especially in the early stages.
the current system and endorsing economic freedom diminishes the
power and influence of politicians, it's difficult to get political
support for such a program. The necessary changes will only come
when the American people wake up to the reality and insist that
the Congress pursues only those goals permitted under the Constitution.
moving in that direction of freer markets, the more problems the
western countries face, the more government programs are demanded.
If one looks at Europe, the United States, or even Japan as their
economies weaken, government involvement in the economy increases.
But in China and Russia, the horrible conditions that communism
causes, ironically, made these two countries move toward freer
markets when they encountered serious troubles. Even the central
banks of these two countries today are accumulating gold, while
western central banks are selling.
for this is that the conventional wisdom of the west=s political
and economic leaders is that there's a third way that is best,
or an alternative to the extremes of too much freedom- laissez
faire capitalism- and too little freedom- authoritarianism, socialism
is a myth. One can only justify intervention in the market on
principle or argue against it. There's always the hope that government
will be prudent and limit its intrusion in the economy with low
taxes, minimal regulations, a little inflation, and only a few
special interest favors. Yet the record is clear. Any sign of
distress prompts government action for any and every conceivable
problem. Since each action by the government not only fails in
its attempt to solve the problem it addresses, it creates several
new problems in addition while prompting even more government
Here in the
United States we have seen the process at work for several decades
with steady growth in the size and scope of the federal bureaucracy
and the corresponding reduction in our personal freedoms. This
principle also applies to overseas intervention. One episode of
meddling in the affairs of other nations leads to several new
problems requiring even more of our attention and funding.
leads to a huge bureaucratic government, manipulated by politicians,
and generates an army of special interests that flood the system
with money and demands. To achieve and maintain political power
in Washington, these powerful special interests must be satisfied.
This is a
well-known problem and prompts some serious-minded and well-intentioned
Members to want to legislate campaign finance reforms. But the
reforms proposed would actually make the whole mess worse. They
would regulate access to the members of Congress, and dictate
how private money is spent in campaigns. This merely curtails
liberty, while ignoring the real problem- a government that ignores
the Constitution naturally passes out largesse. Even under today's
conditions, where money talks in Washington, if enough members
would refuse either to accept or be influenced by the special
interests, government favors would no longer be up for sale. Since
politicians are far from perfect, the solution is having a government
of limited size acting strictly within the framework of the Constitution.
No matter how strictly campaign finance laws are written, they
will do only harm if the rule of law is not restored and if Congress
refuses to stop being manipulated by the special interests.
recognize the horrible mess that Washington is and how campaign
money and lobbyists influence the system. But the reforms proposed
only deal with the symptoms and not the root cause. There is sharp
disagreement in what to do about it, but no one denies the existence
of the problem. It=s just hard for most to acknowledge that the
welfare state is out of control and shouldn't be in existence
anyway. Therefore, they misdirect our attention toward campaign-finance
reform rather than deal with the real problem.
in Washington, however, recognize the dire consequences to economic
prosperity that welfarism, warfarism, and inflationism cause.
Most believe that the occasional recession can be easily handled
by government programs and a Federal Reserve policy designed to
stimulate growth. It's happened many times already, and almost
everyone believes that in a few months our economy and stock market
will be roaring once again.
This is where
in the last 30 years, since the dollar became a purely fiat currency,
has ended after a significant correction and resumption of all
the bad policies that caused the recession in the first place.
Each rebound required more spending, debt and easy credit than
the previous recovery did. And with each cycle, the government
got bigger and more intrusive.
with more monetary debasement and deficit spending means a steady
erosion of the free market and personal freedoms. This is not
tolerated, because the people enjoy or even endorse higher taxes,
more regulations and fewer freedoms. It's tolerated because most
people believe that their financial and economic security is the
responsibility of the government. They believe they are better
off with government assistance in facilitating the free market,
having been taught for decades that it is necessary for government
to put a human face on capitalism. Extreme capitalism, i.e. freedom,
we have been told is just as dangerous as extreme socialism. As
long as this belief prevails, our system will continue in its
inexorable march toward fascist-type socialism.
support for today's policies is built on the fallacy that material
wealth and general prosperity are best achieved with this third
way- interventionism- while avoiding the dangers of communism
and socialism. This is coupled with the firm conviction that the
sacrifice of freedom will be minimal and limited and that the
very rich can be adequately taxed and regulated to help the poor.
This is a
fallacy because more freedom will be lost than is expected, and
the productivity of the market will suffer more than anticipated.
Once this realization occurs, it will suddenly be discovered that
the apparent wealth of the nation is a lot less than calculated.
that depends on ever-increasing rates of monetary inflation will
appear much healthier and the people much richer than is the actual
case. Owners of the dot-com companies or Enron stocks know what
it's like to feel rich one day and very poor the next. This is
not a unique experience but one that should be expected and is
that inflate their currencies must adjust their values periodically
with sudden devaluations, which destroy the pseudo-wealth of the
middle class and poor. The wealthy, more often than not, can protect
themselves from the sudden shocks to the monetary system. However,
they can't protect from the insidious loss of liberty that accompanies
these adjustments, and eventually everyone suffers.
system is quite similar to the Argentine and Mexican peso systems
that periodically make sudden and painful adjustments. But ours
is different in one respect, because the dollar is accepted as
the reserve currency of the world- the paper gold of the world
financial system. This gives us license to inflate- that is, steal-
for longer periods of time, and we can avoid sudden and sharp
devaluations since the world's currencies are "defined" by our
dollar. But this doesn't permit the ultimate devaluation that
will bring a significant increase in the cost of living to all
Americans, but hurt the poor and the middle class the most.
status of the dollar only makes the problem of the illusion of
wealth much worse. Since our bubble can last longer due to our
perceived military and economic strength, it appears that our
wealth is much greater than it actually is. Because of our unique
position as the economic powerhouse of the world, we're able to
borrow more than anyone else. Foreigners loan us exorbitant sums,
as our current account deficit soars out of sight. The U.S. now
has a foreign debt of over $2 trillion. Perceptions and illusions
and easy credit allow our consumers to spend, even in recessions,
by rolling up even more debt in a time when market forces are
saying that borrowing should decrease and the debt burden lessen.
Our corporations follow the same pattern, keeping afloat with
the national debt have been transformed. Presidents Jefferson
and Jackson despised government debt and warned against it. Likewise,
both detested central banking, which they knew inevitably, would
be used to liquidate the real debt through the mischievous process
of monetary debasement.
decry the debt, except for the purpose of political demagoguery
when convenient. The concern about deficits expressed by liberal
big spenders does not merit credibility, but even conservative
spenders now are less likely to decry deficits and some actually
the conservative Institute for Policy Innovation (IPI) announced
in a national press release: "National debt can lead to a growing
economy," claiming government borrowing, "produces steady long-term
growth, greater security, and a higher standard of living."
be so bad if it came from a typically Keynesian think tank. But
this is the growing conventional wisdom of many conservatives
whose goal is to generate government revenues, painlessly of course,
not to drastically shrink the size of government and restore personal
fail to recognize, once they lose interest in shrinking the size
of government, is that government borrowing always takes money
from productive enterprises, while placing these funds in the
hands of politicians whose prime job is to serve special interests.
Deficits are a political expedience that also forces the Federal
Reserve to inflate the currency while reducing in real terms the
debt owed by the government by depreciating the value of the currency.
would belittle the critics of the deficit and national debt are
merely supporting a system of big government, whether it's welfare
or warfare, or both.
se, is not the only issue. It's also because debt always encourages
the growth in the size of government. Allowing it to be seductively
financed through inflation or borrowing is what makes it so bad.
Just because it's less painful at first and payment is delayed,
we should not be tempted to endorse this process.
is our goal and minimal government a benefit to a sound economy,
we must always reject debt and deficits as a legitimate tool for
improving the economy and the welfare of the greatest number of
people. The principle of authoritarian government is endorsed
whenever deficits are legitimatised. All those who love liberty
must reject the notion that deficits and debt perform a useful
this recession may end in a few months as the optimists predict,
but if it does, our problems are only delayed. The fundamental
correction will still be necessary to preserve the productivity
of a market economy. If we do not change our ways, the financial
bubble will just go back to inflating again. The big correction,
like that which Argentina is now experiencing with rapid disappearance
of paper wealth, will eventually hit our economy. The longer the
delay, the bigger will be the bust and greater the threat to our
freedoms and institutions.
moving toward the big correction, we're going to see a lot more
wealth removed from our balance sheets and our retirement accounts.
The rampant price inflation that results will erode the purchasing
power of all fixed-income retirement funds like Social Security
and mean a lower standard living for most people. The routine
government response of increasing benefits for living expenses
and medical care will never keep up with the needs or demands.
Eventually we will have to give up, and a new economic system
will have to be devised, as occurred in the Soviet system after
product of labor, investment and savings- can never be substituted
by government spending or by a central bank that creates new money
out of thin air. Governments can only give things they first take
away from someone else. Printing money only diminishes the value
of each monetary unit. Neither can create wealth; both can destroy
is that early on, and sometimes for many years as we have experienced,
transferring wealth and printing money seem to help more than
it hurts. That's because the wealth is not real, and the trust
funds, like Social Security hold no actual wealth. A pension fund
with dot-com and Enron stock held no wealth either. Unfortunately,
the stocks and bonds remaining are worth a lot less than most
Security system depends on the value of the dollar and on future
taxation. The Fed can create unlimited amounts of money that Congress
needs, and Congress can raise taxes as it wants. But this policy
guarantees that the dollar cannot maintain its purchasing power
and that there won't be enough young people to tax in the future.
Increasing benefits under these circumstances can only be done
at the expense of the dollar. Catching up with the current system
of money and transfer payments is equivalent to a person on a
treadmill who expects to get to the next town. It tragically doesn't
loss is bad enough, but whether it's fighting the war on terrorism,
acting as the world's policeman, or solving the problems of vanishing
wealth, the real insult will come from the freedoms we lose. These
freedoms, vital to production and wealth formation, are necessary
and represent what the American dream is all about. They are what
made us the richest nation in all of history, but this we will
lose if Congress is not careful with what it does in the coming
else, the knowledge that we are now vulnerable from outside attack
is shared by all Americans. The danger is clear and present and
everyone wants something done about it.
however, no unanimity as to the cause of the attacks, who is responsible,
and what exactly has to be done. The President has been given
congressional authority to use force "against those responsible
for the recent attacks launched against the United States." A
large majority of Americans are quite satisfied that his efforts
have been carried out with due diligence.
But a growing
number of Americans are becoming aware that anti-terrorist efforts,
both at home and abroad, will have unintended consequences that
few anticipated and that, in time, will not be beneficial to U.S.
security and will undermine our liberties here at home.
Let me name
a few potential dangers we face.