The Coming Crisis

Late May 2003
By James R. Cook

"If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system." - Ludwig von Mises

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders." - Ludwig von Mises

Apparently there's a move afoot to pass several new amendments to the Constitution. I heard Al Sharpton describing one of them recently. The amendment makes health care a right. I expect that most people feel they already have a right to health care. Let's clarify what the amendment really means. It gives people the right to have someone else pay for their health care. It's the same old story. The people that work pay for the people that don't.

Our government subsidizes just about everything in sight these days. They give money to farmers for growing crops on their land, and at the same time they pay them for not growing crops on their land. They pay corporations to make gasohol, a bogus fuel that nobody would buy if it weren't made cheaper by subsidies. They give money to artists who couldn't sell their art at an art fair. They give poverty money to alcoholics and drug addicts that enable them to persist in their self-destructive habits. They subsidize the world's worst parents, who bring children into the world who will grow up to threaten the safety and welfare of the people who paid the taxes that supported them.

Government folly seems limitless. So is the list of problems and imperfections in the world. The attempt by government to cure all these adversities means an open-ended commitment to spending and meddling. Take on enough problems and no matter how large the budget, you'll eventually go broke. This year we're going to see a record government budget deficit somewhere around $500 billion. That's the amount the government will have to borrow. Hopefully, foreigners will pony up. If not, some of the debt will be monetized. That means the government will create new money to cover those debts. All that new money waters down the value of the current money stock. You pay for the government's spending twice, once through your taxes and once through the depreciation of the currency you earn and hold.

The government debases the currency to pay for its social schemes. To compound matters, the Federal Reserve also sees currency debasement (money and credit expansion) as the cure for a sick economy. They feverishly attempt to prolong the boom through artificially low interest rates that encourage excessive borrowing. At no time in the history of money has a major nation practiced such flagrant examples of monetary abuse. The consequences bode ill for America. We are now seeing the slippage of the dollar's value in the foreign exchange markets. By persisting on the present reckless course, we risk the destruction of our monetary system.

A nation faces two consequences when it persistently inflates. It must either stop the printing presses and suffer through a period of depression, or experience the ultimate boom and inflationary blowoff that ruins the currency. At that time people will not hold dollars, but will spend them before they depreciate. You cannot go on endlessly with inflationary ventures. It should be apparent to anyone who takes the time to think about it that creating more and more money out of thin air (as opposed to working and saving) can only have disastrous consequences.

Factories and producing facilities get built when people save and invest their capital. Unfortunately, saving is discouraged in our country. For example, the government pulled the rug out from savers by shrinking interest rates. Furthermore, the government's cradle to grave security blanket made savings less necessary. Spending and consuming have been elevated above prudence and husbandry. Shopping malls have replaced factories. The economy has become a Frankenstein that requires borrowing and spending for its sustenance. Its voracious appetite cannot be appeased but by endless credit creation for the consumption of goods.

Normally, depressions and recessions cure the excesses of the boom period and build the foundation for a new and healthy upturn. Historically, they have been bitter but brief. Now it is too late for this best and most logical outcome. America has gone too far with its credit excesses. A depression will cause a large number of people to lose their homes. It will collapse corporations and turn their employees into the street. A depression will render governments bankrupt and destroy the value of bonds and retirement plans. It will empty the malls and vacate the office buildings. A depression will punish the highly leveraged, and those who facilitate them. Depressions cause too much pain. The politicians and the monetary authorities will do everything in their power to avoid a depression. Do they understand what can happen? By all means. The deflation they talk about preventing is the code word for the unmentionable depression.

So we are trapped. Never before has a country faced such extensive economic destruction if its credit expansion were to be halted. In the 1930s, we somehow got through it. Not now. Today's excesses are far worse. Some compare us to Japan and the possibility of a similar prolonged setback. If only it were so. A depression will ruin us and alter our way of life. And here's the bad news, a depression is still to be preferred over what awaits us.

The Federal Reserve and the government are irrevocably committed to manufacturing an open-ended quantity of dollars. This is a policy that cannot last because when you get too much of something, it loses its value. It's a policy that has never lasted when any nation has been foolish enough to try it. Why do you think stocks were bid up so high, and still are? Why are house prices and so many other assets going through the roof? It's because of copious amounts of new money and credit. It's not working to restart the economy, so one way or another there will be more and more money.

At some point the public wakes up. They realize that this deliberate policy of inflating makes holding dollars undesirable. The demand for money falls, because a reduction in its purchasing power makes the public reluctant to hold it. People are anxious to turn their dollars into tangible goods. Suddenly a panic occurs and the rush to exit the dollar renders it worthless. Hard times follow.

Most will doubt that such an outcome is possible. In reality, it's inevitable. It matters not how large the economy or how great the nation. When a country manufactures endless amounts of money and credit to foster consumption and pay for wildly elevated government spending, this is the road to monetary disaster, pure and simple. This is the path our leaders have chosen and we will stay on it until the day of our ruin.

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