Breaking the Camel’s Back

Bill Bonner sounds scarily like me:

We are watching the destruction of an empire. All empires must go away sometime. They are natural things. And nature puts a time bomb in everything she creates.

The U.S. empire is doomed. Just like all the others that went before it. It is doomed by nature herself — condemned by the gods to blow up and die.

None of this should be surprising. We’ve seen this movie before. Hundreds of empires have come and gone. We know how this movie ends. More or less.

What we know for sure is that the U.S. is going broke. There is hardly any other plausible outcome. We’ve gone over the numbers so often we don’t need to repeat them.

Yes, it is true that the feds could still save themselves if they had the will. They could cut taxes to a flat 10% and spend only what they raised in tax revenue. That would do the trick from an economic point of view.

But it’s too late for that politically. Empires have lives of their own. They go forward…expanding…spending…stretching…until, boom, they go too far. Empires do not back up. Some merely go bankrupt. Others are defeated in war. All end disastrously.

Only one presidential candidate favors rescuing the nation’s finances and pulling the empire back from disaster. Ron Paul. He is considered such an unelectable kook that the newspapers barely mention him. And the papers are right. He is unelectable. Because he is opposed by the zombies.

Perhaps my last post got a little fatalistic, just as Bonner does here.

Certainly, the last thing I want is for America to fail, for any reason. As I explained, I believe America’s constitution to be perhaps the most liberty-defending in history.

But if imperial overstretch is the general problem,  things could get a lot hairier.

From the New York Times:

Atomic inspectors in Vienna confirmed Monday that Iran has begun enriching uranium at a new plant carved out of a mountain, an act of defiance that comes amid rising tensions between Washington and Tehran over oil revenues and global sanctions.

More than five years ago, the United Nations Security Council began calling on Iran to stop purifying uranium, which can fuel nuclear reactors or atom bombs. Instead, Tehran accelerated its efforts, saying its nuclear program is entirely peaceful in nature.

Can America afford another war?

Yes — say the military-Keynesians. Just what we need — stimulus! That will do wonders for aggregate demand!

But I say no. Rates are artificially low due to quantitative easing, which has constricted the supply of Treasuries, and due to the Fed’s zero-interest rate policy that punishes saving and investment, and encourages leverage and credit creation. Rates could very easily rise for a number of reasons, which would mean the debt would become much more expensive to service. Even arch-Keynesian Paul Krugman foresaw the potential for such a scenario.

More importantly, the last thing America needs is to lose even more productivity, even more resources and even more manpower to another pointless debt-accruing war, particularly one which will drive the Eurasian powers into deeper anti-Americanism.

America needs her money, her people and her resources to develop her domestic economy and create energy independence. To create wealth, to innovate, to compete.

We will see who is right.


Ron Paul & Austerity

Regular readers will be aware that on the topic of austerity, I generally agree with John Maynard Keynes:

The boom, not the slump, is the right time for austerity at the Treasury.

Regular readers will also know that I like Ron Paul — a Presidential candidate who promises a $1 trillion spending cut in his first year in office.

Is that a contradiction? I don’t think so.


In comparison to most austerity-stricken nations, the United States under Ron Paul would be a special case, for one key reason.

Ron Paul’s cuts — rather than destroying productive output like Brüning in the 1930s, or Papandreou today — are aimed at cutting the two greatest wastes of productive output: financial sector corporate welfare, and imperial military spending.

This topic cuts to the heart of the Keynesian and Rothbardian views on recessions in general, and depressions in particular.

Essentially, the Keynesian position (and its later monetarist adaptation) is that a slump in aggregate demand (i.e. GDP) is — for whatever reason — the problem, and that this can be remedied by the government doing whatever it can to raise aggregate demand (Keynesian stimulus, quantitative easing, nominal GDP targeting).

The Rothbardian position is that the problem is caused by government-led malinvestment, and that the junk must be allowed to liquidate before an organic recovery can ever take hold (zombification).

Both views have something to them, but both views overcomplicate the problem. The real issue is the drop in productive output.

As I have shown before, it is perfectly possible (and actually quite common) for monetary and fiscal policy to raise or stabilise aggregate demand without actually addressing the underlying productivity issue — leading to superficial (and hollow) recovery, like Japan in the 90s and (probably) America today.

Austerity policies during a recession can often totally choke off productivity (Brüning, Papandreou, etc). This is particularly true in nations that are very centralised, and where government has become a very important economic actor.

Now Austrian economists may say that government spending is always a misallocation of capital. Well, I agree that central planners lack the information of the free market. But government is useful in supporting underlying productivity (as Adam Smith noted) through infrastructure creation, the rule of law, etc, and withdrawing that support during a slump for the purpose of paying down debt is detrimental.

So the key here is that government should do what it can to support productivity. What the Keynesians (and monetarists) got wrong is the idea that aggregate demand was somehow a good reflection of underlying productivity, and that underlying productivity can be effectively supported with money pumping, or by digging holes. My model is that the best means to sustain and increase underlying productivity is that government should let failing economic systems completely fail, end wasteful and capital-destroying activities like imperial adventurism, and recapitalise the broader people of the nation. Ron Paul’s aim of cutting taxes and simultaneously cutting military adventurism and corporate welfare would do that.  His policies are not the austerity policies of tax hikes and spending cuts which constrict the economy by sucking money out to pay down creditors without putting anything back in.

Hemingway on Krugman

Paul Krugman — surely the most (deliberately) provocative economist in the world — thinks we need more inflation.


From Paul Krugman:

Inflation hawks, including Paul Volcker in today’s NYT, often invoke the supposed lessons of history, to the effect that inflation is always harmful and always gets out of control.

But that’s a selective reading of history, and it skips the most relevant examples.

Early on in this crisis, I began wondering why the US didn’t relapse into the Great Depression after World War II. And there’s a good case that this had something to do with it:

The big rise in prices during and after WWII arguably did a lot to eliminate the debt overhang, making it possible for the economy to enter a sustained, non-inflationary boom.

So his reasoning is that inflation is necessary for debt elimination. And when it comes to debt elimination, (for once) I agree with him. But should that be done through inflation?

Absolutely not. If a debtor cannot afford its debts, there are two paths to debt-elimination:

  1. Admitting that the mountain of debt is immovable, and giving negotiated haircuts to creditors
  2. Inflating away the debt with money printing

The second option — which is effectively what Krugman is advocating — is incredibly risky. From the perspective of the consumer, inflation coupled with stagnant wages would be painful — and the potential for a hyper-inflationary spiral is downright dangerous. A far better option is giving consumers more options to default on or renegotiate their debts, including mortgages.

But from the perspective of the US Treasury, inflation would be far worse still. Why? Money printing is increasingly seen as a sign that foreign creditors need to get out of the dollar, and into harder assets. This would result in many foreign-held dollars flooding back to America, worsening the inflationary spiral.

From alt-market:

The private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history.

Conversely, a straight-forward haircut would be painful in the short term, but would do far less than money printing to undermine the dollar in the medium term — and cause far less of a flood of dollars back into America. Creditors, particularly China, would be happier to see a short-term default stopping the printing presses and safeguarding the long-term purchasing power of the dollar than they would see the dollar constantly undermined.

So, in conclusion, default achieves debt elimination in a clean and relatively one-dimensional manner, while safeguarding the value of the currency. Inflating away the debt achieves the same thing in a more dangerous fashion, because it endangers the quality of the currency. The international ramifications of such a policy are unpredictable, especially given the fact that so much of America’s economic might is built on its ability to acquire resources and energy with dollars.

As Ernest Hemingway put it:

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

No — we don’t need more inflation. We need to pay down our debts in a timely and honest fashion, and if we can’t do that we need to default.

Of course, there is another aspect to this:

Krugman thinks weak demand is eating the American economy, and that money printing and a little inflation will provide enough of a boost to juice the economy into a stronger position. But weak demand is not the problem. The biggest problem is imperial overstretch.

9/11 — Ten Years On

The attacks of 9/11 were a horrendous deed.

What makes me angrier than 9/11? Making the mistake of occupying Iraq and Afghanistan. It’s exactly what the Salafis and Wahhabis want — an easy way of selling their poisonous narrative of eternal and irreconcilable conflict between Islam and the West. And it costs billions upon trillions of dollars.

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