The Specter of Default
We need to restore sanity to national economic policy.


Conrad Black

The core of the tumult in current public discussion is the whipsaw between those who dread inflation and those who fear a relapse into economic decline and are aroused about health care. It took the former administration (but the same Federal Reserve chairman, Ben Bernanke) an unconscionable length of time to “break the glass” and pull the fire alarm, in former Treasury secretary Hank Paulson’s words. Then there flooded out from the Federal Reserve an unprecedented 100 percent one-year increase in the money supply, 30 or more times what is normal, as the Treasury bought hundreds of billions of dollars’ worth of “troubled” or “toxic” assets.

This total monetary immersion staved off the feared collapse into depression, which the fearmongers, especially on the pre-Reagan left, were excitedly bandying about. But unemployment has continued to rise, the economy has not really revived, and the United States, which had been encouraged by its fiscal and monetary guardians for over a decade not to save anything, but to binge on unaffordable housing and non-essential goods whose production had been outsourced to China and Japan and paid for with borrowings from China and Japan, has rediscovered the virtues of savings. Banks, heavy-laden with the taxpayers’ money, are still too shell-shocked to lend, and the public is too shaken to spend. Personal and corporate loans are being sensibly paid down, to a large extent with money created for the occasion by the Federal Reserve.

Within this deepening vortex, the vast and unedifying battle of health care has raged and stormed, as the ambition to ensure that all have health insurance has been overtaken by the debate about costs. Medical care in the U.S. costs $3,000 per capita more than in other advanced countries. Switching course in mid-tempest, the administration claimed that it would reduce medical costs by taking over the insurance of those already covered. The cost-conscious didn’t believe it, and those concerned about covering the uninsured were unimpressed.

Until the risks of being awash in newly created money were finally recognized as the 800-pound self-inflating tiger in the room, the administration and congressional leadership were hinting at a new stimulus package. As was widely seen at the time, the $787 billion stimulus bill was a disaster, a riot of children left to ransack the candy store and gorge themselves. It stuffed money into the districts of prominent Democrats in Congress, on a delayed trip-wire to coincide with upcoming elections, as less than a quarter of the money has been spent; but it has been a very inefficient job-creator. The whole concept of stimulus is bogus, as the borrowing of the money consumes at least as much stimulus as it generates.

There was no excuse for such a bumbling program by this administration. The procedural playbook, if not all the substantive policy, was written by Franklin D. Roosevelt 75 years ago: Prepare a precise program, round up public support for it, send completed bills to Congress and ram them through, alleviate unemployment with low-paid conservation and infrastructure workfare, and solve banking problems with investments in the banks, not in their worst assets. Instead of that, we have witnessed a bunch of grumpy boy scouts trying to put up a pup tent in the dark.

With Social Security, Medicare, and the FDIC (totalling $125 trillion of obligations) as well as the Federal Reserve itself now confronting appalling debt scenarios (the Fed’s loans and other advances, some of them vulnerable, are backed by hard assets of only about one half of 1 percent of the obligations), the administration projects trillion-dollar annual deficits for ten years. Obviously, the Chinese and Japanese are not going to go on buying this debt, and have already moved much of what they hold to short-term Treasuries, to translate into U.S. assets at knock-down prices. To sell on any real market any serious amount of this debt in the next decade would require torqued-up interest rates, which would be steroids for bulging debt, while strangling economic growth. It would be the 30-year-old bugbear of stagflation. And most is already being bought by the Federal Reserve: a straight open-faucet addition to the money supply, future inflation, and the reduction of the dollar’s value.

The present health-care bills include large tax increases. The proposed cap-and-trade bill to reduce carbon emissions would pile increased heating and air-conditioning costs on homeowners and employers, but would neither reduce emissions nor raise government revenues. The whole program is based on the unproved eco-terror arguments that have made Al Gore a Nobel Prize laureate centimillionaire, and the bill is ill-conceived if not insane.

It is also mad to increase taxes when in, or just starting to emerge from, a recession. Contemplation of debt on the scale now envisioned, plus negligible interest rates, has driven up the price of gold, undermined the dollar, and pushed the stock market to unnatural highs of 17 times anticipated (tax-loss-increased) cash flow. It has also produced destabilizing flights of capital to Brazil, Canada, Australia, and China, all of which are coming through (provisionally in China’s case) the recession well. The first three are natural-resource exporters; China the low-cost exporter, saver, and lender; the U.S. the borrower and consumer, i.e. the chump. American leaders should embrace the prospect of an investment-based, rather than consumption-based, economy, rather than lamenting that people aren’t throwing their savings out of the windows buying mainly foreign-produced goods.

Currencies are only as strong as the economies they represent, and their values are determined by money supply and measured against one another. There is no reason to mourn the gold standard: The world’s currencies should not be dependent on the success of the world’s gold prospectors and mining engineers. But a little discipline goes a long way. The World Wars and the Great Depression have caused a century of accelerating inflation.


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