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During the 1990s, inflationary Federal Reserve policy fueled a
tech stock bubble. When that bubble burst, the Fed inflated a larger one in
real estate. Now that the real estate bubble has burst, the Fed is inflating
the biggest bubble of them all - a bubble in government. While the earlier
booms at least provided the illusion of prosperity and some fun while they
lasted, the government bubble will cripple the economy and deliver widespread
misery to the vast majority of Americans.
Of course, there will be winners in the government bubble, at
least for a while. As was the case with the stock and real estate bubbles,
plenty of money will be made by the well-connected and parasitic classes.
Government employees will continue to enjoy pay raises at our expense, as
will anyone benefiting from the new wave of subsidies, such as Wall Street
investment bankers, financial speculators, and those working in health care
or education.
These gains will come at the expense of the taxpayers who foot
the bill and the consumers who face higher prices. As government grows, it
deprives the private sector of the resources it needs to survive and grow.
The result is a lower overall standard of living. Not only are government
jobs less productive than private sector jobs, but bureaucratic interference
actually makes the remaining private sector jobs less efficient as well.
Our economy is being transformed from a mostly capitalistic one
to a mostly socialistic one. More decisions are being made by politicians and
lawyers in Washington and fewer by entrepreneurs. The motivation behind this
shift is the mistaken belief that the financial crisis of 2008 was caused by
too much capitalism and a lack of proper government oversight. This
conclusion is self-serving for those in power, and couldn't be more
economically misguided. Through corruption or just plain ignorance, Congress
and this Administration have embraced an ideology that has failed every
time it has been tried.
Take the recent student loan reforms that were slipped into the
health care bill. Obama wants to reduce the cost of providing student loans
by taking the profits out of the industry. According to Obama, student loans
are too expensive because banks profit from making them. If the government
nationalizes the function, we would apparently bring down costs by
eliminating those pesky profits.
This is a Marxist argument, pure and simple. If true, it would
apply to all industries, not just banking. States like Cuba and North Korea
would be the envy of the world, as they prohibit profits across the board.
The truth is that profits, earned from free-market competition, keep cost
down. By taking the profits out and putting the bureaucrats in, any incentive
to provide better service or lower costs is eliminated. It's not hard to
predict that student loan costs will now rise faster than ever.
That is clearly not the result we want. To solve the problem,
people must understand that college tuitions are so expensive specifically
because the government has guaranteed student loans (see my video blog on this topic for a detailed explanation). Guaranteed loans
don't mean more access to education, but rather that universities are free to
charge more per pupil than if their customers were paying out-of-pocket.
Obama's plan only serves to remove more market forces and
creates an even bigger moral hazard. Under the new rules, students will be
required to repay a much smaller portion of what they borrow. As a result,
students will be willing to borrow even greater amounts of cash to pay
inflated tuitions, making it that much easier for colleges and universities
to raise them.
Also, since the government will actually be loaning the money
directly, rather than simply guaranteeing private-sector loans, the Treasury
will actually have to borrow the money itself before it can re-lend it to
students. I suppose the irony of going into debt to loan money never
registers in Washington. Further, as this bill will cause tuitions to rise
even faster, it will necessitate even larger loans that will produce even
greater taxpayer losses when the loans end in default or forbearance.
Whether it is in education, housing, health care, automobiles,
insurance, or banking, greater government involvement in the economy means
higher prices, lower productivity, more bailouts, bigger deficits, increased
taxes, diminished industrial capacity, fewer private sector jobs, less
freedom, and a falling standard of living.
In the end, when runaway inflation and skyrocketing interest
rates burst the government bubble, there will be no more bubbles to replace
it - just one hell of a hangover.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the tenuous
position of the American economy, the housing and mortgage markets, and U.S.
dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
More importantly take action to
protect your wealth and preserve your purchasing power before it’s too
late. Protect your wealth and preserve your purchasing power before
it’s too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free
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available at www.researchreportone.com
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