Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

U.S. Debt Day of Reckoning Is Coming, Despite Universal Blindness of the Masses

Politics / US Debt Oct 30, 2011 - 12:27 PM GMT

By: Gary_North

Politics

Diamond Rated - Best Financial Markets Analysis ArticleThe debt ceiling battle led to a compromise. Congress and the President promised to submit to mandatory budget cuts. A bipartisan super committee was set up to put together a package of debt reduction cuts totaling several trillion dollars over supposedly a decade. If the committee deadlocks, the cuts will begin automatically on January 2, 2013. These must be $1.2 trillion in cuts, or $120 billion a year.


As expected by everyone, the committee is deadlocked. The Democrats want $3 trillion in debt reduction, mainly from tax increases. The Republicans will not grant this.

Democratic sources told CNN that at the meeting Tuesday the plan was presented to the 12-member committee by Sen. Max Baucus, D-Montana, the Finance Committee chairman. A majority of the six Democrats on the super committee supported the proposal but sources declined to say which member or members disagreed.

The plan would have made cuts to entitlement programs such as Medicare and Medicaid, which the Democratic sources described as a major concession from their party. In return Republicans were asked to go along with between $1.2 and $1.3 trillion in new tax revenue.

An unnamed Republican aide expressed anger that some Democrat had leaked the details of the deal to the press. I mean what kind of stab in the back is this? Telling the public what's in store for them! This is clearly an outrage. It means, the aide said, that the Democrats think the super committee will fail.

Did anyone in his right mind expect it to succeed? The August deal to extend the ceiling and thereby avoid shutting down some government agencies temporarily was based on a sham solution.

The politicians want no responsibility for cuts. There was no record of which Democrats opposed the leaked deal. Some did. Everything is being kept hidden. There is an election year coming up.

This was the first proposed plan. The committee has not gone public with anything in two months. It has a deadline for announcing a plan: November 23. That is less than one month away. If Congress and the President refuse to accept a plan, or if no plan is offered, then cuts will begin a year later.

So, phase one deadlock is here. There is little likelihood that members of the super committee will put their careers on the line and vote publicly for cuts that specific special-interest groups can identify. There would be retaliation in November 2012.

THE IMPORTANCE OF POLITICAL SYMBOLS

The debt ceiling extension had a back-up plan: mandatory cuts, imposed by no one in particular, beginning on January 2, 2013. That gives the politicians a year to find a way to defer the cuts.

The cuts can be blamed on no one in particular. But the cuts will start hurting special interests. One of the main targets will be the military. The Pentagon will howl.

I think the reason why Obama is pulling out all U.S. troops from Iraq in December is to take advantage of the deadlock. He is willing to accept these cuts in the Pentagon's budget in 2013. They will not be blamed on him in 2012. After all, this was part of a bipartisan compromise. Those Republican voters who were committed to keeping troops in Iraq "for as long as it takes" – with "it" being undefined, open-ended, and forever – will not be able to pin the tail on the Democrat donkey. The cuts in the Defense budget will come because Republicans in Congress demanded this budget compromise. This is Obama's moment of opportunity. One of his campaign promises was to pull the troops out of Iraq. He is finally doing it. He gets a Republican cover. He can say that these reductions are part of his good-faith attempt to conform to the budget compromise made in August 2011.

The deadlock in the super committee transfers to the President the right to pick and choose the cuts he will make. Constitutionally speaking, the House must introduce all spending bills. In fact, the President has possessed this power for two generations. Obama has been granted a license to cut as he sees fit. It is clear that his first cut is the cost of keeping troops in Iraq.

The name of the political game is to defer taking unpopular political actions. The Congress is a master of this game. The public put pressure on Congress last summer to do something symbolic to defer the debt crisis "with honor." The looming debt ceiling limit was a convenient hammer for the minority of Tea Party-leaning Republicans in the House of Representatives to use to force the Republicans to agree to something resembling a balanced budget.

Of course, the budget is not going to be balanced. The Congressional Budget Office has projected $1 trillion annual deficits through 2020. But the Tea Party Republicans demanded a fig leaf: $1.2 trillion in cuts over a decade, beginning in 2013 at the latest.

These cuts are symbolic. But symbols are important in life. They are important in politics. Someone has to propose cuts, and some special-interest groups must suffer cuts. Special-interest groups resist all cuts.

EMERGENCIES ALLOW DEFERRAL

Politicians will label their spending programs with whatever emergency is available. In Eisenhower's era, Congress passed spending bills in the name of national defense. The best example is the interstate highway system. In 1956, Eisenhower signed into law the National Interstate and Defense Highways Act. In 2001, terrorism was the catch- all. The homeland security law had been sitting in Clinton's files for years in 2001. He just did not introduce it. The time was not ripe. Today, it's job creation.

As the U.S. economy heads into a recession in 2012, an election year, the government is running a deficit of over $1 trillion. This is four years after the recession of 2008 and the bailouts in September and August of that year. Unemployment is still over 9%. Businesses refuse to borrow. New businesses, which provide most increases in employment, are locked out of the bank loan market.

The voters are most concerned over the rotten job market. The deficit is a nagging concern, but unemployment is on the front burner. The politicians know this.

So, as the economy slows, and unemployment rises, Congress will be able to come before the public and call for emergency increases in spending. It is unlikely that unemployment insurance will be cut off. Other programs will receive funding. But new large-scale programs are less likely in an election year. Republicans will block them.

It is doubtful that Obama will get another stimulus package passed in the House. He keeps proposing big spending plans in the name of job creation. Why? Because he knows the House will reject these bills. He can go to the voters in the name of the Democrats in 2012 and claim that the Republicans are to blame for the lousy job market.

For the first two years, he blamed Bush. This year, that strategy has failed to gain traction. It is now his labor market. So, he is setting up Republicans in the House for the great tail-pinning in 2012. He will cease blaming Bush and instead blame Republicans for their refusal to pass his stimulus bills.

He may not get away with this. His rhetoric is no longer drawing crowds. The word magic has worn off. But it is clear what his strategy is: propose, propose, propose; blame, blame, blame. He has the mainstream media on his side. He also has academia.

THE KEYNESIAN ESTABLISHMENT

His political strategy assumes that Keynesianism is true, that the best way to create jobs is for the government to borrow or tax or inflate in order to get the economy rolling again. It assumes that money extracted from the private sector by force today (today's taxes) or promise of future force (tomorrow's taxes) will be used to create jobs, while money left in the private sector will not.

The political economy of the world is built on this assumption: in the USA, in Europe, and in mercantilist Asia. At the center of the modern economy, according to Keynes and his disciples, are the state and the central bank.

In contrast to the Keynesian worldview is Austrian School economic theory, which argues that there is no center. There is decentralized capital in the broadest sense: money, tools, skills, and vision. The absence of any center is the basis of creativity and growth, including job growth. Other schools of free market economics accept this same outlook to one extent or another, but all of them insist on the need for a central bank.

President Obama is relying on the Keynesian analysis to justify additional stimulus spending laws. But he faces a major obstacle. His $787 billion "shovel-ready" law of February 2009 has not led to a strong job market. This job market has been the most resistant since the Great Depression. The unemployment rate stubbornly refuses to come down. This is creating problems for Keynesian economists. They are calling for even greater stimulus spending. But this is no longer politically marketable. The voters have had enough. They know the spending will not lead to unemployment at 5%.

This is not the first time that economic reality has put a crimp in Keynesian theory. The Keynesian outlook was called into question in the 1970s by stagflation. By the end of the decade, the monetarists had gained considerable influence in Washington and in academia. Academia worships power, and monetarism seemed to be the wave of the future. It looked as though Keynesianism was in retreat. The 1980s and 1990s brought a boom and a rising stock market. Keynesianism seemed vulnerable.

The recession that began in late 2007 has brought Keynesians back into unchallenged power. The monetarists are nowhere to be seen or heard. They did not challenge the Paulson-Bernanke coup in 2008. They either said nothing or hailed the October big bank bailout as necessary. They did not challenge Obama's stimulus, either. Yes, a few did, but they were minor figures for the most part: a few hundred out of tens of thousands of economists on various payrolls.

There is not much price inflation today. This undercuts the monetarists. Their schtick rests on either double-digit price inflation (late 1970s) or double-digit price deflation (1930-33). There is surely stagnation today. Monetarism seemed to explain the 1970s: two recessions and rising consumer prices. It does not explain today's economy. This puts monetarist defenders of limited government at a disadvantage in the competitive marketplace of ideas.

Monetarism for over three decades has been the only prominent alternative to Keynesianism. The supply-siders have never had a college-level textbook. The public choice theorists have no unique monetary theory. The rational expectations economists' position is "accept the present and make no changes." Only the Austrian School has provided both a theoretical explanation for the bubbles and the busts. Only they called the recession in advance. Only they argue that decentralization is the only theoretically plausible solution to the problem of systemic unemployment: the decentralization of ownership, political power, and money creation.

This defense of decentralization dooms the Austrian School in academia. Liberal arts academia worships power. Academics did not actively criticize all aspects of the Soviet Union, Red China, and their satellite nations. The intelligentsia did criticize a few peripheral aspects of Communism, such as its limits on the freedom of speech. The intelligentsia did not criticize central economic planning in terms of its inevitable waste of resources and its decades-long failure to increase the standard of living. Academic economists publicly denied that the Soviet Union suffered from widespread poverty. They trusted the published statistics issued by the Soviet Union. The handful of economists who said that the statistics were fabricated were ignored. How many economists in 1970 had ever heard of Naum Jasny (d. 1967), who showed for years that the statistics were fake? Hardly any, and those who had heard of him usually rejected his warnings. I cited his findings repeatedly in the chapter on Soviet economic planning in my 1968 book on Marx, but who noticed? No one. (http://bit.ly/gnmror) Most important, in the eyes of academia, was this fact: the Soviets had nuclear weapons. They also had domestic power. Academia did not turn on the USSR until after the Communist Party committed suicide on December 31, 1991.

The Austrian School argues that centralized political power makes nations poorer. Some call for a lightly armed night watchman state. Others call for disarming the night watchman. All call for a vast decrease in political power, taxation, and regulation. They call for a comprehensive surrendering of power by Washington. Academia will not tolerate this. It is subsidized by the state. Its bread and butter is supplied by the state. Eliminate all academic subsidies from the state, including the state's enforcement of accreditation, and college professors would wind up at the unemployment office – the privately funded unemployment office.

This is why there will be no solution to the fiscal crisis in Washington. There is no body of academically acceptable economic opinion that can be invoked by any political faction to justify the only viable solution: the decentralization of political power and the cutting of Federal spending back to what the Constitution authorizes.

A SYMBOLIC DEFEAT

The inability of the super committee to come up with any plausible plan to balance the budget is an indicator of the present state of the economy. The automatic budget cuts that will begin in January 2013, if they even take place, are merely symbolic. They will not do much to balance the budget. But they at least will be symbols of the need to do so.

Then what of the debt ceiling? Will Republicans be able to hold the line and force a balanced budget? Ron Paul has offered the only plausible scenario for doing this. No other Washington politician in modern times has.

No one takes it seriously in Washington. They do not think he will be elected. They know he will leave Congress in 2013. They think they can safely ignore the plan.

When the symbolic budget cuts begin in 2013 – assuming they are not deferred by a new law – the voters will have a play-pretend solution to keep them asleep at the wheel. The trillion-dollar-plus deficits will continue. The Federal debt will grow.

The symbolic victory of the August debt ceiling compromise was in fact a symbolic defeat. It meant that the Congress is not serious about the cuts. There were some promised cuts, but they will be dwarfed by the deficits.

The fiscal numbers are not irrelevant. They do have meaning. They do point to the bankruptcy of the U.S. government. They cannot be evaded. They can be sustained only for as long as investors, especially the central bank of China, continue to fun what is obviously a suicidal fiscal policy that cannot possibly be sustained for another decade.

CONCLUSION

Most investors hide their eyes. Most voters hide their eyes. All but two members of Congress hide their eyes. There is universal blindness. The masses really do think that the day of reckoning will never come.

They are wrong. It will come. Deferral is a tactic, not a strategy. Blindness is a tactic, not a strategy.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2011 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014