The Economic Mess... and the future.


#1

This is the best article I’ve read about the debt crisis and entitlements and interest rates in a long time. Should be required reading for entrance to the polling places! It backs Romney…but only at the very end. The real meat is in the prior discussion. Worth your time.
The Economic Case for Romney-Ryan | RealClearPolitics

Snippets:

"… the basic structural problem that is driving us toward an economic “death spiral” of unsustainable borrowing. In this fifth year of the “Great Recession,” it may not feel like things can get any worse, but they can. A lot worse.

Mitt Romney occasionally talks about how we’re headed to where Greece is right now. It’s a thoroughly valid comparison, but I suspect it doesn’t have the punch that it should because most people don’t really understand what is happening in Greece, so they don’t understand the parallels to what is happening in the United States.

With its debt hidden and the implicit backing of stronger economies, particularly Germany, Greece was able to borrow money at low interest rates and proceeded to do so. But then came the global recession and the revelation of the country’s hidden debt, and the country’s borrowing costs suddenly spiked.
The impact of the increased interest rates was shattering. The sudden increase in interest payments, coupled with reduced revenue due to the recession, put the country in a serious bind. To make its interest payments, the government had to raise taxes or cut spending, or both. But that depressed the economy, reducing revenues even farther. This made lenders even more nervous and caused rates to go even higher. We saw this same pattern recently in Spain, which imposed “austerity” only to have its spending cuts eaten up by higher interest rates. That gives you an idea of how hard it is for a country to get itself out of a debt crisis.

That is what the Eurocrisis is about, and under Obama, America is setting itself up for exactly the same kind of death spiral.

… But even if we start to panic about the looming debt crisis, we can’t just suddenly stop borrowing, because of the massive commitments we have made to the entitlement state. Currently, the federal government is taking in between $2 trillion and $2.5 trillion in tax revenues-and paying about the same amount out again in Social Security, Medicare, Medicaid, and unemployment insurance. We are then forced to borrow upward of a trillion dollars to pay for everything else, including basic functions of government like national defense."

Much more good stuff at the link.


#2

A great article, Cam.

Often lost in all the arguing about spending, among people who should know better, is that the most threatening spending, the stuff that’s putting us on the rocks, is the stuff that is most widely popular; Medicare, Medicaid, and Social Security. The interest will consume us, but the bus is driven by those entitlements. The Fed is just a facilitator and, despite what the Paulistas think, is not the fundamental problem. Yeah, absent it and a gold standard, we probably couldn’t have borrowed all that money, but that’s like blaming the bookie for letting you make a bet.

The real battle, and it cannot even begin until we get “regime change” in Washington, will be faced in telling the American people, primarily the middle class, that they and our spending on them are the real problem. Of course, no one is going to actually say that, because to do so is political suicide, but that’s the upshot of what is going to have to happen. Twenty five years ago, we might have talked about Big Bird and had reason to take ourselves seriously, but we’re good and well past that now.

The other thing the author fails to mention is that the only reason we’re not Greece now, already, is because the world conducts its business in dollars. We look at Europe and see a debacle. Europe looks at the USA and says, ‘please God, no’ because if the USA becomes Greece the whole world economy goes Tango Uniform.

The future ain’t gonna be pretty.


#3

Yes, it is. It is the enabler so that makes it the fundamental problem. The drive for big government was not exclusive from the creation of the Fed, and it is no coincidence we got the income tax the same year. Wilson was trying to create a monster.

It’s generally the same economic plan as state-lover Hamilton wanted: a bank and protectionist tariffs.

If we converted to a system of decentralized free banking and replaced all class warfare enabling taxes with sales taxes, government would be tremendously restrained.


#4

Yeah, that’s like saying an alcoholic’s enabler is the reason the alcoholic drinks. For whatever its weaknesses, the Fed didn’t make the dollar the world’s preferred currency and it didn’t force the congress to overspend.

While I’m not particularly happy about the Fed’s recent actions, preferring it to limit its focus to controlling inflation, it is neither the problem nor the solution to our current mess. Eliminate the Fed tomorrow and you’ve still got a massive problem…and you throw the dollar out the window. Yeah, that’d help.


#5

Using that logic, let’s just remove the enumerated powers and let Congress do whatever it wants, and hope we put the right people in office. The fact is, if there is no alcohol, there can be no drinking.

The Fed controlling inflation? That’s pretty funny. The policy of the Fed has always been to inflate, even though that leads to credit cycles and less purchasing power.

I don’t want to eliminate the Fed tomorrow. First I would restore the original Federal Reserve act, and then transition into a free market of decentralized banking. Market interest rates, market reserve requirements. No more massive credit cycles, no more systemic risk, no more top down inflation pyramiding.

Free Banking, as proposed by Professors Larry White and George Selgin, explained in a quick video.

BTW, the dollar is being thrown out the window with the massive pumping going on. Here is the current balance sheet visualized: Credit Easing Policy Tools :: Federal Reserve Bank of Cleveland


#6

The Fed isn’t going anywhere and it does serve a purpose, as do all central banks. We’ve a long history of trying to avoid having one, only to always end up finding having one indispensable.

More: George Will: The Fed’s mission creep - The Washington Post


#7

The Fed probably isn’t going anywhere anytime soon, I agree. I do agree it has a purpose, a purpose I diagree with. Central banks do not prevent economic crises, they cause them. Lack of a central bank did not cause any crisis, reckless government intervention did.


#8

About the time it was decided the Barbary Pirates were a concern that should not go unmet, and that a navy should be indispensable for those efforts, the need for a central bank moved from the theoretical to essential.


#9

That isn’t why it was created. Not remotely why. It was part of Hamilton’s plan to grow government and benefit the few wealthy. Indeed, Hamilton believed only the well educated and wealthy should run the country, and even advocated for a monarchy at one point. Expanding government and its role in the economy was also his goal, and he was a classic mercantilist who supported protective tariffs. The Constitution was not a priority for him. It’s almost as if he wanted to copy Britain.

See: American School (economics) - Wikipedia, the free encyclopedia

On the other hand, I prefer a system where the rule of law is enforced, there is free trade to improve the prosperity of everyone, and decentralized free banking to mitigate recessions and allow for a market based allocation of capitol.


#10

whether it was created upon those impulses is moot. The fact is, as much as it’s been tried to be eliminated, it always is found later to be essential. If the federal government cannot borrow money from the Fed it would never have been able to fight a war.