Best of the Week
Most Popular
1.US Dollar Crashes, Gold And Bitcoin Skyrocket As Economic Recovery Lie Is Exposed - Jeff_Berwick
2.Now Obama Warns Americans to ‘Be Prepared’ for Disaster… What Does He Know? - Jeff_Berwick
3.EU Referendum - Britain's Immigration / Migrant Crisis Explained - Nadeem_Walayat
4.EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - Nadeem_Walayat
5.Prominent Billionaire Investors Warn of Financial Crash, Quietly Position Themselves - MoneyMetals
6.Bankers Warn of BrExit Financial Armageddon if British People Vote for Freedom - Nadeem_Walayat
7.Bad U.S. Jobs Report Prompts Stocks Bear Market Rally Towards New All Time Highs! - Nadeem_Walayat
8.Gold And Silver – Friday May Have Marked A Pivotal Turnaround - Michael_Noonan
9.EU Referendum - British People vs Establishment Elite, the Illusion of Democracy and Freedom - Nadeem_Walayat
10.Felix Zulauf: Monetary Stimulation Creates Bubbles, Not Prosperity Nor Growth - GoldandLiberty
Free Silver
Last 7 days
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16
Could Central Bankers Be Gold and Silver's BIGGEST Allies? - 20th June 16
Words Still Mean Things – Brexit With Graham Mehl - 20th June 16
Baroness Warsi the Manchurian Candidate Quits LEAVE for REMAIN, Boris Johnson Next? - 20th June 16
FTSE Soars, Stock Markets Bounce on LEAVE Polls Surge, Bookmakers Widen BrExit Odds - 20th June 16
Brexit Would Trigger Devolution of Europe - 20th June 16
Stock Market Week Of Uncertainty - 20th June 16
Will Gold’s Bullish Price Chart Outperform Gold’s 5 Bearish Indicators? - 20th June 16
Bonds And Stocks At All-Time Highs: Are Markets Confused Or Broken? - 20th June 16
Silver Sleeping On the Job - 19th June 16
BrExit Odds Sink, REMAIN Polls Boost by Jo Cox Killing by Radical Right Extremist, Conspiracy? - 19th June 16
How Elliott Waves Tell You When to "Jump In" & When to "Jump Out" of Markets - 18th June 16
Stock Market Inflection Point During Bifurcation - 18th June 16
Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - 18th June 16
Gold Stocks - Bull Markets that Follow Epic Bears - 18th June 16
The Fed Giveth and the Gold Bullion Banks Taketh Away… - 17th June 16
Brexit: "The Vote Heard Around the World" - 17th June 16
Gold Stocks Summer Breakout? - 17th June 16
Stock Investors Get Higher Returns and More Dividend Income - In Less Time With Less Risk - 17th June 16
How to Use the Gold-to-Silver Ratio? - 17th June 16
Inflation, Deflation & Associated Trading Prospects - 17th June 16
Overnight Markets Struggling to Stay Flat - 17th June 16
Gold Price Surges to Highest in Nearly Two Years On Central Bank and Brexit Haven Demand - 17th June 16
Stock Market Thinking Upside Down; Dow 18k Still Key - 17th June 16
Jo Cox MP Terror Attack Killing Claimed for "Britain First" - Witness Report - 17th June 16
Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors? - 16th June 16
EU Referendum Campaigning Suspended Following Shooting of MP Jo Cox, Suspect Named as Tommy Mair - 16th June 16
Why People are Migrating to the UK, Illegal Immigration, Housing Crisis Consequences - 16th June 16
Stocks Fluctuate Following Recent Decline - Bottom Or Just Pause Before Another Leg Down? - 16th June 16
The US Consumer-Driven Economy Has Hit a Brick Wall - 16th June 16
Bitcoin Price Going Parabolic Again, Now At $730 and Up 60%+ In Last Three Weeks - 16th June 16
China's Hard Landing Has Already Begun! - 16th June 16
Crude Oil Price - Oil Bears vs. Support Zone - 16th June 16
Central Bankers Are Wrong About Inflation and Deflation - 15th June 16
Alignment Of The Dow, Interest Rates, Debt and Silver Cycles Will Deliver A Fatal Blow - 15th June 16
Stock Market Bounce May be Over - 15th June 16
EU Referendum: Have the Bookmakers Got it Wrong? LEAVE Opinion Polls Lead - 15th June 16
Gold Price Rally - 15th June 16
How to Invest for Brexit Report - 15th June 16
Stock Market Short of the Decade? - 15th June 16
Stock Market Sell Off Coming! - 14th June 16
QE - The Good, Bad & Ugly - 14th June 16
This Demographic Shift Makes Our Social Security Useless - 14th June 16
Gold Stocks Ultimate Objective in a World of Monetary Transition - 14th June 16
Philosophy of the New World Order - 14th June 16
The Brexit Game - Boris Johnson vs David Cameron EU Referendum Zombies - 14th June 16
EU Referendum: LEAVE Opinion Poll Lead of 51% to 49% Whilst Bookmaker Odds Still Strongly Favour REMAIN - 14th June 16
George Soros Making Big Bets on Gold - 14th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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.


© 2005-2016 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

Catching a Falling Financial Knife