The US Treasury, with the assistance of a distracted and overwhelmed Congress, is replacing the American Dream with the American Scheme. The American Scheme calls for a $700 billion bailout in which the government would buy troubled assets from the financial sector in hopes of melting the credit freeze. The government’s hope is that this bailout will allow capital to resume flowing fluidly to efficiently invest in value-creating activities and spur economic growth.
In reality, America is yet again refusing to let capitalism purge the economic system of excess. This situation is sadly reminiscent of the last time we saw this movie in the aftermath of the Tech Bubble collapse earlier this century. The Fed held interest rates artificially low in an attempt to thwart a recession which led to an unprecedented run-up in credit, leverage, and lending. We as a nation want all of the benefits of capitalism; the American Dream, merit based success, ability to create amazing wealth, innovation, and rising standards of living, but we refuse to accept the consequences of abusing the situation. America has become the lady in the diet pill commercial who wants to eat chocolate cake all day but still look good in a swimsuit.
The TARP (Troubled Asset Relief Program) and all of the other bailouts that we have seen this year are nice ideas if money grew on magical trees and the supply of it had no impact on the real world economic system. Unfortunately for us, the citizens of the United States, this magical tree produces rotten fruit. Thus far in 2008, the US has committed up to $964 billion dollars ($964,000,000,000.00 to be dramatic) in bailouts stemming from TARP, Freddie (FRE) and Fannie (FNM), AIG (NYSE:AIG), Bear Stearns, and the money market guarantee. The US population is roughly 300 million, so this equates to $3,200 for every person in the United States.
The threat to the American Dream and for that matter the American way of life is how the government plans to fund these obligations. Given that the Treasury has the power to print money, if our newfound nationalized investment portfolio (Freddie and Fannie, AIG, a mountain of toxic assets, etc.) performs poorly, the Treasury will simply crank up the speed of the money printing presses and make good on their obligations. The US dollar is not backed by or convertible to any physical commodity such as gold. The only store of value is the faith, credit, and confidence of the US government. The danger is that under a fiat money system there is no restrain on the amount of money that can be created. The grave concern is that history shows us that an uncontrolled fiat currency will eventually inflate itself away. As more money is printed, inflation will rise and wealth and savings will be eroded along with the American Dream.
If this sounds overly paranoid, consider why no one in the world has as much wealth as one denarius (Denarius is a unit of Roman Empire currency worth the equivalent of 1 egg or $.25 today), invested at a measly annual interest rate of 1.40% at the time of Christ. This sum would be worth $323 billion today.
So where is our Congress to protect our currency and ultimately our standard of living? Unfortunately this crisis comes at the worst possible time with elections just weeks away. Every politician wants to be associated with helping out the economy even if they do not fully understand the ramifications of their actions. The tragedy is that these temporary fixes will result in greater economic pains in the long run. Although we are all dead in the long run, I urge our public officials to not be short sighted and protect our great nation. Carpe diem is a good motto when you are on Spring Break but not necessarily when you are running a country.