A key error of postwar finance, still uncorrected, was the persistent encouragement of debt.
(Page 2 of 2)
The Democrats, representing the recipient classes, have the power to prevent spending cuts. The debt ceiling showdown last summer was an all-out effort by the combined forces of the media and Washington to get Republicans to raise taxes. The GOP mustered the will not to do so—for the time being.
But the present path of government finance is unsustainable, and those in power don’t know what to do (except raise taxes). The chess expert Garry Kasparov said recently that some economists (such as Nobel Prize winner Paul Krugman) think “we haven’t borrowed enough to get out of a crisis brought on by too much borrowing.” But Krugman has also said some good things—for example that austerity will not get us out of the present mess and will stymie economic growth. Without that growth, something has to give—and soon.
In Europe, it’s austerity across the board. Tax increases are being imposed on everyone and we have even seen a few spending cuts here and there. The ruling class in Europe is trying to get the European Central Bank to solve its continent-wide debt crisis by inflation: devaluing the euro by printing trillions more of them.
So far, however, inflation has shown little tendency to reappear, here or in Europe. In fact governments’ hands may be tied, not by legal restrictions but by bond markets. In a free-market order dominated by debt, bond markets may be more powerful than governments. That’s what infuriates the ruling class today—its subservience to market forces.
Inflation allows governments to repudiate their own debts (as Germany did after World War I). But to do this successfully, the monetary authorities must fool creditors into lending money at low interest rates. That way, capital melts away and governments regain power at the expense of the people. On the other hand, if inflation is seen to be returning and lenders immediately demand compensatory interest rates, the government’s own debt payments soar and inflation is self-defeating.
The “bond vigilantes” are watching, but the remarkable fact is that the interest rate on 10-year Treasury bonds has been dropping this year. It is now down to 2 percent. On a 30-year fixed-rate mortgage, the interest rate is 3.5 percent—lower than it was in the Eisenhower years. The gold price, a closely watched proxy for inflation, peaked at $1,900 an ounce in August, and is at $1,592 as I write. (Its low for the year was $1,314 in January.)
Where are we headed? I’d be rich if I knew. But our time horizons are rapidly closing in and the long run is short.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?