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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.
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