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The Coming Financial Train Wreck
(A Tale of Peters and Pauls)
I
am not an economist. Thus I tend to leave economic matters to those
who are and avoid weighing in on such issues as (for example) the
"outsourcing" of jobs. But the truth is, large parts of
economics are not hard to figure out – to a logical mind, that is.
This is because economics is a real world application of a more
basic and very powerful subject: deductive logic. As Mises showed,
you may begin with a single axiom – man acts – and deduce all
the fundamental truths of economic science. That these truths may
be grasped a priori by the human mind and still apply to
the world as general truths – not to this or that economy but to all
economies – was the great discovery of the Austrian school.
In
this case, one may deduce further that a mental fog of illogic prevails
in the centers of power in America today. Occasional rays of light
break through. Unfortunately, it is never enough, and it seems to
me that the full revelation of our current situation and what it
calls for would never be supported either by those with power or
by much of today’s electorate. Perhaps I’m feeling a bit cynical
today. Following a primary season will do that to you. But it seems
to me we are (as my girlfriend would so eloquently put it) "in
deep dew."
Federal
Reserve chair Alan Greenspan recently
announced the need to address the long-term problems faced by
Social Security and Medicare "as soon as possible." He
was thinking of the looming wave of future retirees: the baby boomers.
He used terms such as "daunting" and "enormous"
to describe the challenges to the federal government, and called
for "a thorough review of our spending commitments – and
at least some adjustment in those commitments …" He offered
a few more euphemisms to suggest that we are rapidly approaching
"difficult choices and that the future performance of the economy
will depend on those choices."
Greenspan,
whatever his role in helping bring about the mess we are in, is
not stupid. He doubtless knows the truth. We need more than a few
cosmetic adjustments. Otherwise we are on our way to an economic
/ financial train wreck that could make the Great Depression look
like a bad day at the races by comparison. He doubtless also knows,
though, that if he rocks the boat he can be replaced. That’s how
our present political order works.
This
has been long in the making. Let’s rehearse a little of the history.
The Federal Reserve central banking system was created in 1913,
ostensibly "to provide the nation with a safer, more flexible,
and more stable monetary and financial system." The national
debt was $2.9 billion. By 1919, with the Wilson (House) Administration
having maneuvered the U.S. into what became World War I, the debt
had risen to almost $27.4 billion. During the 1920s the debt actually
dropped back to between $16 and $17 billion. The Fed had engaged
in massive credit expansion, however. In 1929 the stock market crashed.
(Recommended reading: Murray Rothbard’s America’s
Great Depression.) In the 1930s, Franklin Delano Roosevelt
initiated entitlements such as Social Security that soon became
permanent fixtures. We saw the beginnings of "safety nets"
and the intergenerational redistribution of wealth we’ve been stuck
with ever since, and of the expansionist government necessary to
administer the whole shebang. We also saw the beginning of the end
of the gold standard and sound money. By 1935 the debt was up to
a new high: $28.7 billion. During World War II it soared, and never
looked back. More entitlement programs (e.g., Medicare) came about
later and have continued to grow – as have their constituencies.
No government program that gives people things ever shrinks.
As the saying goes, any program that robs Peter to pay Paul can
always count on the support of Paul. The welfare state’s dilemma:
the population of Pauls grows steadily, while the population of
Peters eventually shrinks.
To
continue the history: in August, 1971, President Nixon took the
country completely off the gold standard. "We are all Keynesians
now," he told us. (John Maynard Keynes’s best-known pseudo-profundity:
"In the long run, we are all dead.") This allowed the
printing of fiat money to help government pay its mounting bills.
Fiat money is currency drawing its value exclusively from its use
as a medium of exchange. Backed by nothing but the smiling faces
of the Arthur Burnses and Paul Volckers and Alan Greenspans, it
is otherwise worthless.
The
national debt at the end of that year was approximately $424 billion.
Shortly
after Reagan went into office, it hit $1 trillion. When Bush the
Elder was elected, it was over $2.6 trillion despite Reagan’s appeal
to those who wanted smaller and less intrusive government. The situation
had gotten out of control, however. The debt continued to soar through
the 1990s. Republicans had always blamed Democrats for out-of-control
federal spending. However, when they became the majority party in
Congress in 1994, nothing changed. While the Clintonistas crowed
about "surpluses" that didn’t really exist, even under
the Republican-controlled Congress the federal government continued
to pile on the debt, which stood at around $5.7 trillion when Clinton
went out of office.
Approximately
one month ago, the debt finally topped $7 trillion. Bush the Younger
and Congress appear to have dropped all pretenses of trying to control
federal spending. With huge new expenditures on everything from
Medicare to boondoggles like No Child Left Behind to their foreign
war in Iraq, the spending habits of the gang presently in control
of Rome on the Potomac make the Clintonistas look like rank amateurs
by comparison!
It
isn’t just the feds. Just about everyone else is also swimming in
red ink. During the 1990s we were told how "prosperous"
we were. The truth is, it was a false prosperity powered by consumer
and household debt, not productivity. Ron Paul (R-Tx) recently
called this brand of prosperity "a temporary illusion based
on smoke and mirrors." He added that "[t]rue wealth cannot
be created simply by printing money; families and businesses cannot
prosper by getting deeper in debt." Genuine prosperity, that
is, is achieved through productivity, not borrowing against the
future. Congressman Paul cited the recent
article by economist Frank Shostak, who provided a scary account
of where household debt stands. The measurement of genuine prosperity
is one’s permanent assets and savings. Today’s rates of personal
savings are at Great Depression levels. Yet consumers spend, spend,
spend. We are told by the pundits of the mainstream media and all
the mainstream economists that this "helps the economy."
I’ve encountered more than one statistic on America’s total indebtedness – the
combined statistic for federal, state and local governments along
with corporations and consumers. One source places our total indebtedness
at $34 trillion – and rising rapidly. Another places it at $45 trillion – and
rising rapidly. I wonder if anyone knows the exact figure!
You
don’t need a Ph.D. in economics to see that our present course is
not sustainable. In fact, with entitlement programs the single biggest
federal expenditure, assuming no fundamental, structural changes,
Social Security and Medicare alone will break the bank. As 77 million
baby boomers retire in increasing numbers, the stress on the country’s
financial system will increase each year. Eventually it will implode,
possibly the same time the fiat money time bomb goes off: as Congressman
Paul concluded, "The end may come when foreign central banks
realize the dollars they receive are worthless, or when they find
other places to turn for income. When that day comes, interest rates
will rise, perhaps dramatically. At that point not even Mr. Greenspan
will be able to save the economy from the painful correction necessitated
by his easy credit, easy money policies." We can probably expect
this to occur during the 2010 decade, although if a new national
emergency comes along (e.g., another catastrophic terrorist attack
on U.S. soil, possibly in retaliation for our government’s ill-advised
invasion of Iraq) it could come sooner.
Neither
Democrats nor Republicans have the will to fix this mess. That much
is clear. Democrats are having a field day blaming Bush the Younger
for job losses these past three years – something that isn’t his doing,
except in the extended sense that like all recent chief executives
he has done nothing to cut the size and reach of the federal government.
(Critics of "outsourcing" say that the "exporting"
of jobs overseas is liable to turn the U.S. into a third world nation
before it runs its course. But could it be that one reason jobs
are being "outsourced" to countries such as India is that
our false prosperity – which doesn’t exist in those places – conceals
our already having become a third world nation, measured
in terms of real wealth as opposed to false prosperity based on
borrowing?)
Now
remember the increasing population of Pauls. With so many Pauls
now dependent in one way or another on the present system and flocking
to the polls to ensure the continuation of their freebies, advocates
of the deep cuts in spending needed are simply not going to be elected
(rare cases like Ron Paul excepted). The Pauls will not vote
for them, and are beginning to outnumber the Peters. Remember our
adage above. Recipients of freebies are not going to vote to abolish
the federal agencies ensuring the continuance of their freebies.
We’re not talking about people exactly motivated to bite the hand
that is feeding them.
The
Peters, meanwhile, are often too busy working feeding their families
(and paying their taxes) to see the big picture. They do not see
that they are rapidly becoming outgunned.
It’s
time to face an unpleasant reality: our so-called democracy – which
was never intended by its founders to be such (remember Mr. Franklin’s
"[a] republic, if you can keep it"?) – is broken. Late 18th
century historian and jurist Alexander Fraser Tytler put it best,
in the statement he is best remembered for:
"A
democracy cannot exist as a permanent form of government. It can
only exist until the voters discover that they can vote themselves
largess from the public treasury. From that time on the majority
always votes for the candidates promising the most benefits from
the public treasury, with the results that a democracy always collapses
over loose fiscal policy, always followed by a dictatorship.
Tytler
went on: "The average age of the world’s great civilizations
has been 200 years. These nations have progressed through this sequence:
from bondage to spiritual faith; from spiritual faith to great courage;
from courage to liberty; from liberty to abundance; from abundance
to selfishness; from selfishness to complacency; from complacency
to apathy; from apathy to dependency; from dependency back again
to bondage."
I
doubt Tytler would be surprised by our present situation. Our system,
focused on the next election, is structurally flawed. It encourages
quick-fixes and makes strategic, long-term thinking extremely difficult
for anyone on the inside. Most potentially decent politicians – making
the admittedly tall assumption that that’s not a contradiction in
terms – are quickly corrupted by the culture in Rome on the Potomac.
Is
the situation hopeless? With the resources available via the Internet,
the truth is getting out to the remnant.
The Austrian school of economics has never been stronger, or its
members more numerous. There are a lot of Libertarians out there,
including – one hopes! – a lot of Peters who don’t realize they are
latent Libertarians – but someday might. There is also the growing
Constitution Party.
What I would personally like is to see these two realize the potential
for eventual collaboration – maybe not this year but surely by 2008,
which will probably be the crucial year. Those seeking change don’t
need to reach the majority. It was not a majority of the population
that favored seceding from the British Empire in 1776, then fought
a war for independence. All it was, was a critical mass. That is
what we need now, and within the next four years: a critical mass
of people who are both able and willing to break with the Demopublicans,
with the prevailing economic philosophy of consumption and debt
(and, of course, also with the mainstream media and the prevailing
system of government-sponsored education), and steer themselves
towards intellectual and financial independence.
And
then they will need to brace themselves for a very rough
ride – because the illogic and irresponsibility of the past several
decades will exact a price. It’s not a matter of if but
when. The longer it takes, the worse the train wreck will
be. Not to mention the possibility of a day, once the emergency
sets in or possibly sooner, when dissent may simply be made illegal
in the interests of "homeland security."
Maybe,
in addition to Austrian economics, we should be learning how to
grow our own food.
March 6, 2004
 Steven
Yates [send him mail]
has a
Ph.D. in philosophy and is the author of Civil
Wrongs: What Went Wrong With Affirmative Action
(1994). He is an adjunct scholar with the Ludwig von Mises Institute,
and is at work on a philosophical tract entitled In
Defense of Logic
and a science fiction novel entitled Skywatcher’s
World,
both scheduled for completion this year. He lives in Columbia, South
Carolina.
Copyright
© 2004 LewRockwell.com
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