Just whose belts are we asking to tighten?

NOV 2011

Just whose belts are we asking to tighten? The people don't need to tighten their belts anymore. Our middle class has been gutted enough, but don't look at evil capitalism for the cause. Simply turn your gaze toward NAFTA (the single greatest cause for the dismantling of our industrial base), and the Federal Reserve's expansionary monetary policy. The Fed's single responsibility was to protect the value of the dollar, and they have failed in this regard. As a result, the dollar has devalued, and concurrently the real wages have declined, amounting to a steady and consistent annual 8–12% tax increase on the middle class.

We have a spending problem, not a revenue problem. So we don't need to raise taxes, and spending is not going to get us out of this mess. And the borrowing is not going to be there forever. We need to extricate ourselves from the entangling alliances that compromise our national security and cause hostility worldwide. We need to bring our boys home from the 900+ bases around the globe. We need to revisit the debate on just what is the federal government's role. For example, it's not in education; the states are quite good at it without their help, and their from-on-high mandates have only hurt the quality of our education, and increased the costs (just talk to a college graduate, who is in debt up to his ears, with an unmarketable diploma, no skills, and no jobs to be had), plus created the poorest quality of primary education in the entire developed world (despite the fact that we spend more money per student than any other country (save for Luxembourg). As we can't depend upon our government to wage peace, educate our children, defend our borders, protect the value of our dollar, or protect our civil liberties, we can't depend upon the government to save us from economic depression, because they are the very cause of our boom and bust cycles. The government, through the prevailing (and broken) Keynesian economic policies, enact careless spending and credit actions try to take the 'failure' side out of the economic equation. By taking failure out of the equation, you only encourage more foolish actions, reckless borrowing, 9–to–1 leveraged gambles on toxic derivatives, and set bad precedents. These actions only prolong our economic downturns, because you don't allow the free market to correct, and liquidate the bad debts.

We only have history to learn from. Here are four major examples in history:

The depression of 1921. Banks collapsed and the government did nothing. As a result, the bad debt was quickly liquidated, and it only took a year to recover.

The great depression. The government stepped in, raised taxes, loosened credit, printed more money, instituted a mountain of onerous regulations, and tried to use capital to 'soften' the blow. As a result, the depression lasted well into the forties. The government outlawed the private ownership of gold (yes, it's true, and they confiscated it, and sold it back later, at a profit. Read the history of Fort Knox). It wasn't until after WWII that the government slashed taxes, raised interest rates, eliminated regulations, and allowed the private ownership of gold again.

The Wiemar Republic. After WW1, the German Wiemar Republic was buried under a mountain of debt, and was borrowing more. In an effort to 'get things under control,' they turned to the Keynesian theory, and monetized their debt by printing more money to pay down the debt – all the while, their currency had no basis in any value (sound familiar, Federal Reserve Note?). As a result, the people and the international markets lost faith in their currency, and it was reduced to worthless paper.

Our current situation. The Fed has reduced interest rates to zero, encouraging more reckless borrowing, is engaging in round after round of quantitative easing (euphemism for monetizing our debt, and printing more money), lending the money back to the taxpayers at interest, and further devaluing our currency. Want to know what the cause of the gutting of our middle class is? Don't look at the evil corporations. Look at NAFTA (gutting our industrial base) and our expansionary monetary policy (reducing the value of the dollar) while real wages also decline, for the reasons. The federal government, all the while, is trumpeting the virtues of Keynes by artificially propping up the housing market, getting into the auto-manufacturing market, the financial market, and the insurance market. With the spectre of further increased taxes and more regulation, businesses are reluctant to invest, to build, and to hire. Then writing hundreds of billions in stumulus/bailout checks to too-big-to-fail businesses both here and in Europe. Trust me, if we keep heading down the Keynesian path, there's not enough money in the world to spend ourselves out of this mess. We're lucky (for the time being) that our creditors are agreeing to make loans to us, denominated in US dollars. The day they require that the loans be denominated in their own currency, everything will change, because we won't be able to print our way out of it.

The Keynesian model believes that governments should have a heavy involvement in the economy, that wars and natural disasters, incredibly, are welcomed a positive source of revenue, and that reckless spending stimulates the economy, and discourages saving and investment. And that consumption drives the economy. It doesn't work that way. Our consumers are broke, unemployed, can't keep their houses, and their credit cards are maxed out. How can we expect them to consume? The primary driver of our economy (or any economy for that matter) is not consumption, but rather a favorable business climate, and the value of goods and services. If you create an unfavorable business climate, then no number of consumers will be sufficient to entice a business to remain or open up doors in your climate. Just look at California, as but one example.

H.G. Wells once said that Civilization is in a race between Education and Catastrophe. It's time we swallow our pride, learn from history, and take a new economic tack. We need to step back and allow the free market to do what it does best: Lift up lives, empower people, and give them the option and opportunity to carve out their own destiny. Socialism and keynesian theory, by contrast, believe that they know what's best for us. The free market is not what we currently have (we haven't had free market in a hundred years). What we currently have, is a sick, fascist, convoluted system of conspiracy, collusion, cronyism, and corruption that is exploited by power-hungry politicians, and big businesses who lobby the police power of the government to stack the deck against their competition, and force limited choices upon the consumers.

Try this on for size: If you shrink government, and reduce their roles and reduce their power, you make it less worthwhile to lobby the government. The more power government has, the more incentives big businesses will have to engage in this crony capitalism. And the free market can, when given proper guidance, do things better. Look at one example: Air Traffic Control and airport security. Why do we believe that the government does it better? Don't the airlines and airports hold it in their best business interests to make flying as safe as possible, so as to maintain air traffic and keep people flying? Did you know that the Austrian School of Economics predicted all of our major economic downturns (yes, including our current one!), and even stated what to do to avoid them?

I could not have put it better than F.A. Hayek who wrote this startlingly relevant piece in 1932:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion….

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end…. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The same Keynesian idiocy is going on in Europe, right now. They seem to believe that bailout after bailout will help Greece, Italy, Portugal, Ireland, and the like. It doesn't. It only prolongs the depression, and prevents the correction and liquidation of the debt.