Politicians did not get much
time to pat themselves on the back for supposedly rescuing the economy with
the debt limit deal last week. The ink was barely dry when Standard & Poor's
downgraded the US debt ratings anyway, roiling world financial markets.
Anyone who has taken an honest look at the government's fiscal situation,
taken into account how Washington works and the direction it is going would
have a very difficult time arguing with S&P's decision, although a strong
case can be made that this was too incremental a downgrade and that it took
far too long for S&P to admit the obvious.
Nonetheless, the
administration nitpicked over a $2 trillion "mistake". S&P
rejoined with the fact that $2 trillion here or there hardly makes a
difference in the time frame under discussion. That, if nothing else, should
tell you the magnitude of the problem. $2 trillion has become a drop in the
bucket.
S&P cited Congress's
inability to act like grownups and make necessary, meaningful cuts, which is
true. I must take issue however, with their suggestion that tax increases are
part of the answer. Taking capital out of the private sector, where it can
create real value in the form of new jobs and products, and instead giving it
to Washington to waste and squander is not the solution. Tax increases may
seem penny-wise to some, but in reality they would be very pound-foolish. The
government currently takes in $2.2 trillion in taxes per year, which is far
too much already. It spends $3.7 trillion, which is ridiculous and criminal.
The problem is runaway government spending, not the American people having
too much money.
And yet we can't even have a
serious discussion about bringing our troops home and ending our expensive
occupations around the world - things the president used to claim to favor!
Even without this downgrade,
major investors are waking up to what lies down the road for the United
States in fiscal terms. China is showing more signs of losing its taste for
our debt. Others are following suit. What we are about to see is the end of
the dollar as the reserve currency of the world. When that happens, we will
no longer be in a position to have pretend debates about things we probably
should spend a little bit less on - we will be forced to implement
serious spending cuts as our sources of credit dry up. Of course, we can try
to postpone the day of reckoning by printing more money but the resulting
"inflation tax" will be far worse than a reduction in government
benefits.
Hyperinflation devastates the
middle class. After Weimar Germany hyper-inflated their currency in the
1920s, an entire life savings couldn't buy a postage stamp. The bank wouldn't
even send customers a check for all the money they had saved their whole
lives. It wasn't worth the paper it was printed on or the stamp to send it.
This is what is meant when it is said that the middle class gets wiped out.
The pieces for this to happen here are all falling into place, and have been since
1971. The only way to avoid that sort of chaos now is for Congress to
immediately reduce federal spending and take the Constitution seriously
again. The welfare/warfare state will end either way, but winding it down
responsibly is a far better way to do it.
