• The Establishment Is in Despair

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    by Gary North: Lincoln’s
    Gettysburg Address, If He Had Been More Honest

     

     
     

    Austrian School
    economists and analysts who have warned that we are facing a Federal
    debt cataclysm have now received grudging confirmation from a most
    unlikely source: the Council on Foreign Relations.

    The Council
    on Foreign Relations is the single most influential discussion forum
    in the United States. Its quarterly journal, Foreign Affairs,
    is therefore the most influential publication in the country and
    therefore the world.

    This is not
    to say that every article is influential. Most of them are not.
    They are often written by academic specialists in narrow fields.
    Their opinions are rarely translated into government policy. Equally
    rare is any Foreign Affairs article that winds up being quoted
    five years later. The journal is a kind of sounding board. The relative
    handful of key decision-makers in the organization want access to
    what “the best and the brightest” are thinking. This includes lots
    of academic busy-bees who are trying to break into the CFR’s inner
    circle. The decision-makers are never sure who has the best insight
    on the future, so the editor publishes lots of articles that sink
    without a trace.

    Nevertheless,
    once in a while, one of these articles does become the basis of
    long-term government policy. Such was the case with the 1947 article
    by George Kennan, who published anonymously as “X.” It set forth
    the entire post-War policy of containment of the Soviet Union. So,
    it pays for columnists and analysts and investors to be aware of
    what the latest issue of Foreign Affairs has to say.

    A TURNING-POINT
    ARTICLE

    The November/December
    issue features an article that I think will become a turning point.
    A decade from now, or a quarter century from now, historians will
    return to it and summarize its contents. It will be regarded as
    the first official announcement in the highest of high places that
    the Federal deficit is out of control, and that this in turn threatens
    the survival of America’s position as the world’s most influential
    political-military participant.

    The article
    is titled, “American Profligacy and American Power: The Consequences
    of Fiscal Irresponsibility.” I have been reading Foreign Affairs
    for about four decades, but I do not recall any article with
    a title this inflammatory.

    It is co-authored
    by Richard Haass and Roger Altman. Haass has been the president
    of the CFR since 2003. He was trained as a philosopher. He received
    his doctorate from Oxford. He was a Rhodes scholar. In short, he
    is a true representative of the Anglo-American Establishment, as
    described by Georgetown University Professor Carroll Quigley’s book
    of the same title. It
    is free here
    .

    Haass has been
    a high-level policy-maker and advisor for two decades. This is from
    his Wikipedia biography.
    Haass
    was Special Assistant to United States President George H. W. Bush
    and National Security Council Senior Director for Near East and
    South Asian Affairs. In 1991, Haass received the Presidential Citizens
    Medal for helping to develop and explain U.S. policy during Operation
    Desert Shield and Operation Desert Storm. Previously, he served
    in various posts in the Department of State (1981-85) and the Department
    of Defense (1979-80) and was a legislative aide in the U.S. Senate.

    Haass’s
    other postings include Vice President and Director of Foreign
    Policy Studies at the Brookings Institution, the Sol M. Linowitz
    Visiting Professor of International Studies at Hamilton College,
    a senior associate at the Carnegie Endowment for International
    Peace.

    I list all
    this to indicate that he has the bona fides, or in another context,
    he has made his bones. When he writes an article in “Foreign Affairs,”
    anyone who wants to get a sense of what the latest thinking is in
    high places would be wise to pay very close attention.

    His co-author
    comes from the investment-banking/hedge-fund world. Citing his Wikipedia
    entry,

    He
    was a general partner of Lehman Brothers from 1974 to 1977. From
    1977 to 1981 he served as the Assistant Secretary of the United
    States Department of the Treasury, during which time he helped oversee
    the then-troubled financial affairs of Chrysler. In 1981, he returned
    to Lehman Brothers, where he became the co-head of investment banking
    and served on the board of the company and the management committee.
    During the 1980s, he was a lecturer and adjunct professor at the
    Yale School of Management. In 1987, Altman joined the newly-formed
    Blackstone Group as vice-chairman, head of its mergers and acquisitions
    advisory business and a member of the investment committee. . .
    .

    Altman has
    served as advisor to two presidential candidates: John Kerry in
    2004, and Hillary Clinton in 2008.

    When these
    two men jointly publish an article on what the United States is
    facing, we can be sure that this opinion is well within the boundaries
    of acceptable discourse at the top of the American Establishment.
    I will go even further. The article was designed to establish the
    starting point for discussion. This article, in short, is ground
    zero.

    CONFIRMING
    NIALL FERGUSON

    Niall Ferguson
    is the senior academic representative of the Anglo-American Establishment.
    He holds an endowed chair in international affairs at the London
    School of Economics. He also holds endowed chairs at Harvard University
    and the Harvard Business School. I can think of no one else in my
    lifetime who matched his simultaneous endowments, in every sense.

    Additionally,
    he is well known to the American literati for his PBS series on
    The
    Ascent of Money
    , which was much better than PBS deserved.
    He is all of 46-years-old, which is academic uppitiness on an unprecedented
    scale in the humanities.

    For three
    years, he has been issuing a series of warnings in the form of historical
    comparisons and predictions. His most graphic historical comparison
    is the Ottoman Empire after 1870. Here
    is his assessment.

    Yet,
    on closer inspection, we are indeed living through a global shift
    in the balance of power very similar to that which occurred in the
    1870s. This is the story of how an over-extended empire sought to
    cope with an external debt crisis by selling off revenue streams
    to foreign investors. The empire that suffered these setbacks in
    the 1870s was the Ottoman empire. Today it is the US. In the aftermath
    of the Crimean war, both the sultan in Constantinople and his Egyptian
    vassal, the khedive, had begun to accumulate huge domestic and foreign
    debts. . . .

    The loans
    had been made for both military and economic reasons: to support
    the Ottoman military position during and after the Crimean war
    and to finance railway and canal construction, including the building
    of the Suez canal, which had opened in 1869. . . . In October
    1875 the Ottoman government declared bankruptcy. . . .

    His concluding
    words are no doubt what caught the attention of the senior members
    of the CFR.
    It
    remains to be seen how quickly today’s financial shift will be followed
    by a comparable geopolitical shift in favour of the new export and
    energy empires of the east. Suffice to say that the historical analogy
    does not bode well for America’s quasi-imperial network of bases
    and allies across the Middle East and Asia. Debtor empires sooner
    or later have to do more than just sell shares to satisfy their
    creditors.

    PROFLIGACY

    The article
    begins with a statement that would not have been taken seriously
    in academic or policy-making circles as recently as three years
    ago. I will be quoting extensively from this article, because there
    are readers out there who would otherwise say, “you are exaggerating.
    No one at the CFR would say such things publicly.” They did say
    them, and I have no need to exaggerate.
    The
    U.S. government is incurring debt at a historically unprecedented
    and ultimately unsustainable rate. The Congressional Budget Office
    projects that within ten years, federal debt could reach 90 percent
    of GDP, and even this estimate is probably too optimistic given
    the low rates of economic growth that the United States is experiencing
    and likely to see for years to come. The latest International Monetary
    Fund (IMF) staff paper comes closer to the mark by projecting that
    federal debt could equal total GDP as soon as 2015. These levels
    approximate the relative indebtedness of Greece and Italy today.
    Leaving aside the period during and immediately after World War
    II, the United States has not been so indebted since recordkeeping
    began, in 1792 (p. 25).

    The key word
    is “unsustainable.” The authors go on to say that current interest
    rates are low, but “this calm will not last.”
    If
    U.S. leaders do not act to curb this debt addiction, then the global
    capital markets will do so for them, forcing a sharp and punitive
    adjustment in fiscal policy.

    Here, in the
    refined and august pages of “Foreign Affairs,” the head of the CFR
    has used the phrase “debt addiction.” This is right out of the hard-money
    newsletter camp. So is the conclusion.
    The
    result will be an age of American austerity. No category of federal
    spending will be spared, including entitlements and defense. Taxes
    on individuals and businesses will be raised. Economic growth, both
    in the United States and around the world, will suffer. There will
    be profound consequences, not just for Americans’ standard of living
    but also for U.S. foreign policy and the coming era of international
    relations.

    So far, this
    is the soft-core stuff. The next section spells it out in no uncertain
    terms.

    “THE
    ROAD TO RUIN”

    Yes, this
    is their section header. They begin by pointing out that, 12 years
    ago, the Federal debt was 35% of GDP. The country had no tradition
    of massive Federal debt, except during World War II. This ended
    with the Presidency of George W. Bush and the bipartisan overturning
    of a tradition of fiscal restraint. It was a combination of anti-tax
    sentiment and pro-entitlement spending.
    Federal
    spending grew at two and a half times the rate it did during the
    1990s. . . . Public debt per capita rose by 50 percent, from $13,000
    to more than $19,000 over this period. The eight years of the Bush
    administration saw the largest fiscal erosion in American history
    (p. 26).

    This is an
    accurate assessment. Austrian School analysts have been crying in
    the wilderness for nine years, warning that this would happen. The
    CFR and the Establishment media did not give an advanced warning.
    Now, what we predicted has happened.

    Then came
    the recession of 2007–9, which Austrians also warned was coming
    as early as 2006. We were dismissed as crackpots.
    Revenues,
    which had averaged 20 percent of GDP during the 1990s, fell to nearly
    15 percent, while spending reached 25 percent in 2009. The deficit
    for fiscal year 2009 hit a staggering $1.6 trillion, or nearly 12
    percent of a GDP of just over $14 trillion. In nominal terms, it
    was by far the largest in U.S. history. The deficit for 2010, at
    $1.3 trillion and nine percent, was nearly as huge (pp. 26–27).

    That is the
    story of the deficits. What is the story of the total on-budget
    debt?
    Federal
    debt is the dollar-for-dollar result of deficits, and it has essentially
    tripled over this past decade, from $3.5 trillion in 2000 (35 percent
    of GDP) to $9 trillion in 2010 (62 percent of GDP). The Congressional
    Budget Office now sees it reaching 90 percent by 2020.

    These are
    staggering numbers. Of course, the unfunded Medicare and Social
    Security obligations dwarf the on-budget debt.

    Interest rates
    will rise. The authors say that interest expenses will equal the
    entire Defense Department budget by 2020. In 2020, the Treasury
    will have to borrow $5 trillion a year to roll over the debt. Don’t
    forget the Treasury’s obligation to Fannie Mae and Freddie Mac.
    The debt of government-sponsored enterprises is already $8 trillion.
    State and local debt totals $3 trillion. They say that Washington
    indirectly stands behind all of this. (They mean politically, not
    legally.) Add to this unfunded state and municipal pension obligations
    of $1 trillion. All this will get much worse after 2020.

    The
    post-2020 fiscal outlook is downright apocalyptic, for two reasons.
    First, the aging of the U.S. population will drive sharp increases
    in health care costs (and at the same time, more Americans will
    be retired). Second, federal interest expense will rise exponentially,
    as the Treasury’s borrowing costs grow with the debt.

    What is the
    threat? The Austrian School’s famous – and always previously
    denied – crowding-out effect.
    Why
    is this scenario so dangerous? One reason is that a large amount
    of federal borrowing would eat up the stock of private capital that
    is available to finance investment. A higher and higher percentage
    of personal savings would be diverted to purchasing government debt
    and away from productivity-enhancing investments in equipment and
    technology. This would shrink the base of productive capital and
    flatten gdp and family incomes. As more and more debt piled up,
    growth would slow and Americans’ standard of living would fall.

    Notice, they
    do not say that the standard of living will cease to increase as
    fast. They say that it will fall.

    China and
    foreign central banks will not continue to support this increase
    of debt. Interest rates will rise. The present safe-haven status
    of T-bonds will disappear, they say.

    Then will
    come the spending cuts. Everything will be cut: defense, social
    spending, and even Medicare and Social Security.

    They see what
    will happen to defense spending. The war in Afghanistan is now twice
    as expensive as the war in Iraq (p. 31). They do not think that
    the promised troop draw-downs will be anything more than token.
    This is costing $100 billion a year. This will not be repeated.

    Nation
    building is a time-consuming, labor-intensive, and expensive exercise,
    and for these and other reasons, it is unlikely to be repeated on
    a scale approximating that of Iraq or Afghanistan for the foreseeable
    future. This does not mean that there will not be wars of choice
    – a conflict with Iran is a possibility given its nuclear ambitions
    – but rather that such wars will be both less common and more
    limited in their aims (p. 33).

    Side note:
    Why do they imagine that a war with Iran would not result in expenses
    rivaling those of the Iraq war? It would not be nation-building,
    but it would be very expensive. Inciting the Shia paramilitary forces
    in Iraq would not be nation-building. Sadr City would extend its
    boundaries fast.

    DEADLINE;
    2015

    They call
    for a balanced budget, other than interest expenses, by 2015.
    That,
    however, will require reducing Washington’s budget deficits by approximately
    $300 billion a year – a large amount by any standard (p. 33).

    Wait a minute.
    They call for a piddly deficit reduction of $300 billion a year,
    when the CBO projects deficits of $1 trillion a year out to 2020.
    The CBO prudently refuses to say what will happen after 2020. There
    is a serious statistical disconnect here.

    They add:
    “But the politics are difficult.” Difficult as in “running the hundred-meter
    dash in six seconds flat.”

    What is to
    be done? Those old favorites: cut spending and raise taxes. What
    is the chance of that?
    The
    bottom line is that it will be extraordinarily difficult to pass
    a deficit-reduction program of the required magnitude (pp. 33–34).

    That is the
    bottom line politically. It is not going to happen. So, what is
    the bottom line economically when the required reforms are not passed?
    They refuse to say. I can hardly blame them. They do comment on
    what will happen to the American Empire.
    Just
    over two decades ago, the historian Paul Kennedy published his influential
    study of the rise and fall of great powers. His thesis of “imperial
    overstretch” was simple but important: the costs of carrying out
    an ambitious and expensive overseas policy can undermine the economic
    foundations of a state (p. 34).
    To which I respond:
    “Every dark cloud has a silver lining.”

    CONCLUSION

    They end their
    article with this – a plea for fiscal restraint on the welfare
    side, so that the nation can still pursue the course of empire.

    It
    is fiscal, economic, and political failures at home that are threatening
    the ability of the United States to exert the global influence that
    it could and should. In other words, it is not reckless American
    activity in the world that jeopardizes American solvency but American
    profligacy at home that threatens American power and security. The
    American people and their elected representatives postpone solving
    the country’s debt addiction at their great peril.

    These two
    Establishment spokesmen see what is coming. The American empire
    is about to sink in a sea of red ink. The debt-driven economic cataclysm
    is going to hit. The empire will be crowded out, along with economic
    growth.

    The welfare-warfare
    state is going to become the welfare state. Then it will go bust.
    Long before it goes bust, the voters will decide not to fund the
    military-industrial complex’s lucrative game plan. When push comes
    to shove, the voters will shove the American empire away from the
    trough. This will end the dreams and schemes of the faceless experts
    who have quietly directed the ship of state ever since 1921. Their
    gravy train will come to an end.

    This could
    not happen to a more deserving bunch of people.

    December
    4, 2010

    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
    .

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