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America’s Collision with Economic Reality


The United States is headed toward a financial brick wall. Although the country has been on this collision course for decades, a number of recent events have sped up its pace, and the reckoning will probably come much sooner than most people expect.

A few honest politicians and some sober economists and political pundits have been warning the American people for years that, unless Washington gets its fiscal house in order, a future generation will be confronted with a financial catastrophe. That future is now; or, as GOP presidential hopeful Ron Paul says, “We are the next generation.”

The U.S. debt is now at $15.5 trillion and growing by more than $3 billion a day. Added to this burden are the federal government’s off-balance-sheet liabilities, which are estimated to be as high as $200 trillion. And with the Feds now borrowing almost 40 cents of every dollar they spend, it is clear that they will not be able to meet these obligations, and therefore some form of default is inevitable.

If the United States were a normal nation rather than the global hegemon and issuer of the world’s reserve currency, it would be a prime candidate for one of the International Monetary Fund’s infamous Structural Adjustment Programs. Perhaps this is the true meaning of “American exceptionalism.”

But even with Washington borrowing so heavily and the Fed engaging in flagrant debt monetization, foreign central banks are not likely to dump their dollar securities. Rather they are more likely to liquidate them gradually, so as not to collapse the bond market overnight. Moreover, an international run on the dollar would have such profound geopolitical implications that a sudden collapse is not likely to occur. After all, if all that was in play here were mere economics, the fiat-dollar standard would have collapsed long ago.

However, if our foreign creditors observe a few others dumping the dollar, a panic could ensue, and the United States could be confronted with a global run on the dollar.

But rather than trying to stave off a panic, Washington appears to be taking a “bring-it-on” approach to international monetary relations. While the U.S. government’s profligacy is undermining the dollar’s reliability as a unit of account in international trade, its bellicose foreign policy is accelerating the dollar’s demise. This is particularly the case regarding U.S. relations with Iran, where Washington has imposed yet another round of harsh economic sanctions. Tehran has responded to the blockade by forging closer monetary relations with neighboring countries that exclude the dollar entirely.

These arrangements could lead to a decoupling of international trade from the dollar. The United States would no doubt try to resist this, which portends a future economic war and power struggle with China; China holds massive amounts of U.S. securities and is dependent on the American-dominated Persian Gulf states for oil.

The recent flare-up in trade tensions between China and the United States could be the opening salvo of such a war, as American politicians look to scapegoat a foreign nation for problems they themselves caused. Incidentally, it is ironic that U.S. officials are criticizing China for undervaluing its currency in order to promote exports, when they have relied on an artificially cheap yuan to finance their trillion-dollar-plus annual budget deficits.

Now, to avert a financial disaster and a possible Third World War, America’s political rulers could commit themselves to reforms that promote peace and prosperity. Unfortunately, there are no signs whatsoever that those in charge are willing to abandon their consensus of debt-financed perpetual war and welfare. Indeed, if recent history is any guide, Americans can expect to see more saber rattling, higher taxes, more debt, currency devaluation, increased capital controls, asset seizures, rationing, and perhaps another war.

The immediate financial crisis was precipitated by the central bank. The Federal Reserve’s easy-money policy under Alan Greenspan in the early 2000s financed a false recovery and various fiscal-stimulus schemes that created huge imbalances in the economy. During the Bush-Greenspan era (2001–2006) personal savings plummeted and debt skyrocketed. Greenspan’s successor, Ben Bernanke, has made things worse by keeping interest rates artificially low in a vain attempt to reinflate the Greenspan bubble.

The Fed’s post-bust inflationary policies have financed corporate bailouts and government boondoggles that have created mountains of new debt, all the while preventing the market from liquidating the widespread malinvestment that the central bank’s previous inflationary policies encouraged. A good example of this destructive meddling is the federal government’s attempt to reinflate the housing market, when deflation is the only cure for that bloated sector.

The reckless fiscal and monetary decisions we’ve witnessed over the last ten years are an acceleration of inflationary policies that have been in place since 1913, when the Federal Reserve System was created. A century of central banking in America has led to a debauched currency, with the dollar losing more than 95 percent of its value. Fed policies have created cyclical booms and busts that mainstream economists write off as “business cycles,” thus casting the blame for the country’s economic troubles onto a mythical free market rather than where it belongs: the central bank.

The fact of the matter is that the U.S. government has been implementing destructive and unsustainable policies for decades, and only now is the extent of corruption and negligence in Washington becoming apparent to the general public.

The global war on terror (or “the long war”) was supposedly launched in response to 9/11, but the evidence strongly suggests that our political rulers cynically exploited those attacks to pursue imperial policies that had been on the drawing board for at least a decade. Since the end of the Cold War in 1991, America’s military-industrial-security complex had been in search of a new “broad thematic pretext”[1] to justify its bloated existence. 9/11 was the “catastrophic and catalyzing” event that provided just that. Terrorism has now replaced communism as the threat requiring a continuation and expansion of the country’s national-security apparatus.

In any event, the U.S. government chose the most expensive and least effective way to respond to terrorism: military invasion. The wars in Afghanistan and Iraq have been disastrous in both financial and humanitarian terms. The costs of those wars have contributed mightily to the current financial crisis and accelerated America’s decline as a world power.

That these imperial policies would lead to collapse is hardly surprising. Just read history. The Greeks, Romans, Spanish, and British were afflicted with the same hubris as our imperial schemers are today. The United States embarked on empire in 1898 and since then has implemented one failed policy after another, culminating in today’s financial crisis. Unfortunately, America’s political leaders are either ignorant or indifferent to the lessons of history and unwilling to curb their imperial ambitions.

Some look at this crisis as an opportunity to educate a public that would otherwise be too contented to listen. (See Ron Paul’s presidential campaign). And no doubt, millions of Americans have woken up. However, there is no guarantee as the economic crisis deepens that the public will respond constructively. The inclinations of politicians and the vagaries of mass politics militate against such a positive outcome. Indeed, economic turmoil often leads to political turmoil that is easily exploited by demagogues and scoundrels to seize the reins of power.

Unfortunately, it is not revealed to us how this crisis will play out. So in this journey we are burdened with fear and trepidation. Nevertheless, it is the responsibility of every man and woman who cherishes liberty and seeks justice to speak truth to power, regardless of the consequences. As Ludwig von Mises wrote,

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.