"A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them."
-- John C. Maxwell
The war between socialism and free market capitalism has been raging for almost 200 years – and far longer than that, if you toss aside those particular monikers and go straight to the ideological conflict that has pitted economic and financial entrepreneurs against collectivists since the dawn of human history. But never has the war been more pronounced – nor more critical – than in the current economic crisis in which the world finds itself mired.
For decades, proponents of the famed Austrian School of Economics – to which I proudly subscribe – have predicted that, as huge central governments, like the bloated United States federal bureaucracy, increase deficits and spending attempting to control the economy, they will have to continuously find new and creative ways to manipulate debt and currency-creation in order to maintain the illusion. Indeed, many great economists have agreed that, even though the game can continue for a very long time – even decades or more – eventually the scheme will run out of resources, at which point the government will have to return to sound fiscal and monetary policy, or else print more money and destroy its currency, and by extension, the economy.
For many years all of this was largely based on theory; Keynesians and Fed proponents printed and spent with reckless abandon. And why shouldn't they? They had time and history on their sides. After all, didn't taxing and spending get us out of the Great Depression? Weren't World War II expenditures the catalysts for enormous economic growth thereafter? No, the Austrians absolutely had to be wrong, and even if they weren't, what self-serving politician in his right mind was going to ignore his "children" clamoring for someone – anyone -- to do something? That's no way to attract votes. Keynesian policies were just the panacea for any gloomy economy. Or so it would seem.
Unfortunately, Austrians were right – albeit patient: Government spending is not the solution. Oh, sure, it might work for a while – just like living off credit cards with no job might work for a while. But the government can only play these silly games for a time, until eventually the immutable economic law mandating that resources are indeed scarce will catch up to even the mightiest of empires. And so here we are – not just a single nation in peril, but an entire globe staring into the abyss, telling ourselves it can work again…if we only believe…
But it won't work again. With the recent addition of Fed's strategies, The U.S. government has now committed itself to $8.8 trillion in expenditures over the next two years. Some economists predict the number will actually easily exceed $10 trillion. In real terms, even a conservative appraisal still exceeds all of the major projects the U.S. has undertaken in its entire history, combined.
I'll say it again. We face two choices: we can suffer now and return to sound monetary and fiscal policy, or we can print money and inflate our problems away – postponing the suffering until a later date. Of course, if we do choose postponement, the suffering will be much more severe and much more difficult to endure. Yet the truth is we really don't have two options, because we live in a paternalistic democracy run by politicians who cannot possibly risk angering an irresponsible and undisciplined constituency, and therefore, a return to sound monetary and fiscal policy is about as likely as the sun burning out tomorrow. Sure, it could happen. But it's not going to. Thus, we arrive at the focal point of my article.
I have a confession to make. I used to be a socialist. I have read with breathless passion the dogma – from Marx to Proudhon, to Bakunin, to Chomsky. And while I have long since rejected all of it – having been persuaded initially and irreversibly by Mises' Economic Calculation Argument, and subsequently by so many others – I am luckier than most of my fellow free market advocates in that I truly know my enemy. But I have also spent a great deal of time reading and listening the proponents of free-market capitalism -- both classical and modern -- and I find myself convinced more than ever by the theoretical and practical maxims of the Austrians, that we are indeed on the verge of an economic and socio-political tragedy whose magnitude is almost unfathomable.
I find myself devouring anew the works of great minds like F.A. Hayek, David Boaz, Murray Rothbard, and David Friedman, reviewing the entreaties to reign in the federal government before it's too late. And too often these days, I lift my head and sigh, realizing the warnings no longer mean anything -- it's already too late. Beyond my resignation that it really is "different this time," and all the concomitant fear that comes with the acquiescence, I also find myself frustrated by some of the contemporary voices carrying the flag of free markets.
Case in point: Peter Schiff. Please don't misunderstand me – I have read everything I can get my hands on by Mr. Schiff, and I listen and watch his interviews with eager focus. Here is a man who, like me, predicted almost everything that is happening around us – in print, years before the fact -- and I have nothing but the deepest respect for his insight, born from deep Austrian roots. But time and again, when asked about the solution to the problem, Mr. Schiff launches into a brilliant effusion about eliminating debt, lowering taxes, soaking up excess currency, and raising interest rates.
Again, it's not that I disagree with him, in that doing all these things would solve the problem. But my question is this: why on earth eat up valuable airtime discussing such moot points? The government isn't going to buy down debt. It isn't going to lower taxes. It isn't going to stop printing money. And it certainly isn't going to raise interest rates anytime soon. So are these really solutions?
Peter Schiff is a rock, and when he's under pressure on national television – taking heat from the likes of Ben Stein and Art Laffer – he exudes equanimity, and he sticks to his guns. He is an inspiration in this era of the super-status quo, driven by egalitarian-media propaganda that expects only the appropriate conditioned responses from anyone with makeup and a set of vocal chords. I admire Peter Schiff for his cool and his conviction, and I certainly don't know that I could maintain my composure in such environments. And yet, his "solutions" pack no real punch because they fail to reflect realistic outcomes in any kind of meaningful way. I am disappointed, because I think this is Mr. Schiff's only weakness.
Even Jim Rogers -- whose no-nonsense, blunt approach to the crisis has me nearly jumping out of my seat in applause – fails to present any viable strategy for the government. When a reporter asks what he would do if he were appointed Chairman of the Federal Reserve, he answers without hesitation: "I'd fire everyone. Then I'd resign." And in the midst of my laughter, I realize his strategy would be brilliant – if he were appointed Chairman of the Fed. Of course, he has about as much chance of getting that position as my 16-month-old daughter.
In my mind, the identification of the problems is now something for the history books: people like Peter Schiff and Jim Rogers – and their Austrian predecessors -- called it right, and with every passing day, they only get more right. But now is not the time to propose outlandish, unachievable strategies. We can't fix the mess the government has created over the last century; it has sealed its own fate, and the only thing we can do now is watch it unravel and collapse before us, as it delivers the final blows to our weakening currency.
But there are things we can do – realistic solutions that will become more viable as inflationary price-increases return with so much vengeance. We, as individuals, can move our assets away from the dollar, and other weakening currencies. We can invest in commodities and instruments that allow us to profit and thrive in the coming economic hurricane. We can also support politicians and business leaders who understand that we are on the cusp of a revolution not unlike the one that occurred over 200 years ago.
What will it look like? What will the outcome be? Who knows, but as with every revolution, the outcome will be extreme and radical. I, for one, would rather be a part of the new paradigm than a voice attempting to salvage the old one.
Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.