The U.S. budget deficit will be $1.3 trillion (U.S.) this year, by the official prognosis, and several economists think it could exceed $2 trillion. To appreciate the extent of this disaster, look at any chart of historical U.S. deficits, reasonably adjusted for inflation. They go up, they go down, from year to year, and there are even some years of surplus. But suddenly in fiscal 2009, the bottom falls out of the chart.
It should further be noted that while President Obama has declared that he will cut this deficit in half by the end of his current term, and we await the serious accounting for this, his proposals so far consist only of hitting the military budget, “streamlining government,” and “taxing the rich.”
What a big spender with unprecedented ambitions for expanding medicare and social services may mean by “streamlining government” we cannot guess, but the other two are worrying in themselves. The first represents a retreat from America’s commitment to global security, at a crucial moment in world affairs. The last shows no appreciation that “taxing the rich” has its own economic consequences—for such demagogic policies have had a destructive effect on national wealth (and thus on tax revenues), wherever they’ve been tried. No exceptions: for no economy responds favourably to punishing success, and rewarding failure.
Indeed, a U.S. government that is not wrestling hard with escalating public costs for medicare and social services cannot be serious about balancing the books. Ditto, a government contemplating any further massive bailouts. The ones we’ve seen have already dwarfed such expenditures as those for Afghanistan, Iraq, Katrina.
We have heard a great deal of nonsense about greed in the last few months, from leftwing moralizers who blather as if greed were a foible accessible only to investors and bankers, and as if it were the sufficient explanation for everything that has gone wrong in the economy. Granted, investors and bankers are greedy, like all other human beings who are not saints. They are trying to make money. The problem wasn’t their greed, however, but their reckless imprudence—wild lending against poor collateral.
While less doctrinaire observers have noticed that this problem of recklessness stretches through much of our society—imprudent borrowing against inflated real estate values, piling debt on credit cards, etc.—there is a deeper problem that is not being confronted. And this is not greed so much as it is theft.
“The people” have discovered that they can vote themselves money, by the simple device of putting into office politicians like Barack Obama, who promise them cash, services, tax breaks, bailouts, and to “make the rich pay.” Democracy has been degenerating into a vicious system in which wealth is transferred by the power of law from “them” to “us.” That this must have a crippling effect on the creation of wealth should be perfectly obvious.
The Nanny State is hardly something new, but it seems that in this year of 2009 we have entered a new phase of it, which might be characterized as the “death spiral.” The U.S. government is suddenly vomiting out trillions—literally, trillions—to the people who voted for it. Partly at the expense of the people who didn’t; but mostly conjured from thin air.
The laws of supply and demand are laws of nature. They do not apply only to free markets, but with a special vengeance to those who try to subvert market disciplines. The effect of summoning huge quantities of dollars out of nothing is extremely well known. It leads to inflation, and when not then very painfully corrected, to hyperinflation.
Inflation, too, has been with us for some time, but seldom on the scale the U.S. is now risking. It was seen in Germany after the First World War, and in Hungary after the Second. It is currently on view in Zimbabwe, where Robert Mugabe played Robin Hood, first by seizing the property of “the rich,” and after laying waste to that, by printing banknotes with more and more zeroes on them. The current inflation rate in Zimbabwe is somewhere around one sextillion per cent (a one followed by 21 zeroes). In other words, the currency is waste paper, and by no coincidence the people are starving.
The American dollar was, like all the world’s other stable currencies, once upon a time, pegged to the trading value of a fixed weight in fine gold—1.505 grammes, to be precise. That “traditional” dollar would thus be worth about 45 current American paper dollars. The paper dollar is no longer pegged to gold, a basket of commodities, or any other fixed store of value; the maintenance of its trading value depends entirely on the honour of politicians. That’s how it lost its value. The collapse of what was left of that honour appears to me a more consequential thing than any banker’s transient greed.