Interview with Peter Schiff

Click HERE to listen to Lew Rockwell's fascinating interview with Peter Schiff who is running for the Senate in Connecticut. Schiff explains how government policy is driving the price of college tuition through the wall, making a debt-free university degree almost unattainable.

Deficits are Bad, but the Real Problem is Spending

For more about inflation and the national debt, see my article 'What the Treasury Department is not telling Americans about the national debt.'

Spend first, pay later

I have just published an article for the Spokane Examiner, being a response to Demoncrats asking for Congress to increase the U.S. federal debt ceiling by $1.8 trillion. Click on the following link to go to the article.

Spend first, pay later

To read other political articles I have written, click HERE.
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What the Treasury Department is not telling Americans about the National Debt

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According to treasury figures released today, government spent $46.6 billion more in September than it took in, a month that normally records a surplus.
 
However, this is only the tip of the iceberg. Few Americans are actually aware what a serious financial situation America is currently in.
 
The Treasury Department doesn't like to advertise the fact, but America’s national debt is larger than the total economies of China, the United Kingdom, and Australia combined and is quickly approaching or exceeding the USA's 14 trillion GDP. (It appears less than that in charts, because the government has been cooking the books since the Clinton Administration. They are not counting Social Security and Medicare obligations as part of the debt.) If the pattern continues over the next decade, the government will borrow approximately $1.72 million every minute.
 
Our debt to China alone is approximately $776.4 billion, having grown more than $240 billion in the last year.
 
How did we get to this point and what are the long-term consequences if America continues down this same course, borrowing itself into oblivion? How did America get itself into this position?
 
A Brief History of Fiscal Foolishness
 
When George Bush took office in 2001, he inherited a national debt equivalent to 57.4% of America’s yearly GDP. But he also inherited a budget surplus of $128 billion - the second successive surplus after roughly 30 years of budget deficits.
 
(For those who don't know, a budget deficit occurs whenever a country spends more money during a year than it has taken in. A budget surplus occurs every time the country takes in more money than it has spent during a year. The national debt is the accumulation of all the unpaid deficits in a nation’s history. Servicing the interest on the debt becomes a central part of successive budgets, making it progressively harder to achieve a budget surplus.)
 
Instead of building on the opportunity afforded by the surplus and reducing the national debt, Bush quickly ran up unprecedented deficits, as the chart below left reveals.

Not only did he engage in foreign wars costing hundreds of billions, but he also initiated an array of new government goodies on a scale unseen since the days of Franklin Roosevelt. His Medicare Prescription Drug Act alone will cost more than $1 trillion by the end of the decade, possibly a lot more as the baby boomers begin accessing it.
 
Far too few people asked where the money for all of Bush’s new programs and his bank bailout was going to come from. The answer, of course, is that it could only come from running up huge budget deficits and digging the nation deeper into debt.
 
When Obama took office in early 2009, the economy was crippling under the weight of so much unpayable debt. Blaming his predecessors for the recession he inherited, Obama allegedly set out to correct their foolish choices. Among the irresponsibilities that Obama pledge not to repeat was the practice of making financial commitments that the country couldn’t afford. As Obama said in a speech to the Joint Session of Congress: “Now, part of the reason I faced a trillion-dollar deficit when I walked in the door of the White House is because too many initiatives over the last decade were not paid for -- from the Iraq war to tax breaks for the wealthy.”

I.O.U.S.A

A few weeks ago I was sick and confined to bed. This gave me a chance to watch the movie I.O.U.S.A. which Michael Collender recommended I watch a few months ago. It is available on instant play through Netflicks.

The topic of the movie is America's national debt, a subject that has always given me sense of fascinated horror.


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Enough Bailouts!

The Bush Bailout and What's Wrong With It

In the 1930s America experienced an economic crisis, which has come to be known as the ‘Great Depression.’ This crisis did not occur out of the blue, nor was it caused by a series of runs on the bank.

It was caused by government intervening to cushion the consequences of imprudent investments.

Leading up to the Great Depression, the American economy had experienced massive growth. Much of this growth was illusory, propelled by investment in companies exceeding their actual profits. Because many companies had a value higher than their earnings (in some cases no earnings at all), people began to grasp that their shares weren’t worth as much as they paid. The banks realized this too, and so they began to call loans.

Now naturally when banks begin to call bad loans, this creates losses. But this is not a bad thing. In a free market, loss as well as growth are necessary components for stability, since bad business practices are then allowed to suffer their natural consequences. However, instead of letting things to take their natural course, the government stepped in to try to fix things. From 1923-29, the American money supply was increased 61 times by the Federal Reserve. This amplified inflation which accelerated the boom market, perpetuating the illusory sense of prosperity. Naturally the new money supply encouraged more imprudent investments.

Things could only be put off for so long and in February of 29 the stock market ceased to expand, causing Wall Street to collapse.

President Herbert Hoover (picture on left) responded by doctoring the market again. In ‘31 he launched the greatest peace-time deficit spending program in history to try to prop up the economy. Because money has to come from somewhere, it was the tax payer who had to foot the bill. Thus, in ‘32 Hoover launched the largest peace-time tax hike in America’s history. To pay their taxes, people had to remove massive amounts of money from the banks, which increased the burden the financial institutions were already under, creating a vicious cycle.

Alexander Solzhenitsyn once remarked that “If we don’t know our own history then we simply have to endure all of the same mistakes and all of the same sacrifices and all of the same absurdities over again times ten.” Nowhere is the truth of Solzhenitsyn’s words more evident than in America today, which is like a replay of the events of the Hoover administration.

During America’s recent economic boom, the Federal Reserve deliberately kept interest rates low in order to encourage investments. As in the 1920’s, this distorted the market because it allowed entrepreneurs to engage in malinvestments - investments which failed to take into account actual resource availability.

The artificial sense of prosperity led to many Americans to invest in homes they could not afford. Gambling on the idea that house prices would keep rising indefinitely, they counted on selling or re-financing their homes before the bill came due. Banks allowed this to occur by giving out sub-prime mortgages. (A ‘sub-prime’ mortgage is a type of loan granted to individuals with poor credit histories.) As can be expected, when the house market levelled out, many simply had no way of paying. As a consequence, currently 9% of all Americans with mortgages are either behind on their payments or in foreclosure.

The nature of politics in America has also contributed to the financial crisis. It is candidates who promise the most ‘goodies’ who get elected and voters rarely ask, “Where is the money for that going to come from?” When unforeseen expenses, like the war in Iraq or hurricane Katrina, are added to the cost of all the entitlements, pensions and programs government has already committed to pay, there is only one place for the money to come from: debt.

Given the irresponsible pattern of spending and investment from both the public and private sector, it should come as no surprise to find the American economy going belly up. The question is: will the United States learn from the stock market crash of ‘29 and allow bad investments to suffer their natural consequences, or will government try to artificially prop up the economy? It is the later course that the Bush administration is pursuing. According to current proposals, the American taxpayer will have to pick up the bill for a $700 billion bailout, in which government will buy toxic loans and mortgages from hurting financial institutions. This will increase the national debt ceiling to at least $11.315 trillion, bringing the federal deficit to 79% of the American economy. That equals nearly $2,300 for every man, woman and child in the USA.

By removing the consequences of bad business practices, the government is setting a terrible precedent. The Bush administration as well as presidential candidates, Barack Obama and John McCain, are trying to cure the problem by the very means which brought it about. If the market had been allowed to be truly free rather than being doctored with by the Federal Reserve, then interest rates would have reflected reality and discouraged malinvestment. It is perhaps asking too much to expect the government to have learned its lesson and be willing to finally take a “hands-off” approach to the economy, whatever the short-term consequences might be.

Not all members of government have been so blind. Congressmen Ron Paul (pictured left) has argued that what is needed is the liquidation rather than the purchasing of toxic debt. Commenting on the proposed bailout, the Texas representative said: “It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year…. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market's attempt to re-establish rational pricing of houses and other assets.” (Visit Ron Paul's blog HERE)

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Solzhenitsyn (picture on right) was correct: if we don’t know our own history then we simply have to endure all of the same mistakes and all of the same sacrifices and all of the same absurdities over again times ten.

In this case, times billions.

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