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The Coming Financial Train Wreck
(A Tale of Peters and Pauls)
by Steven Yates
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.
(A Tale of Peters and Pauls)
by Steven Yates
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.
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