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To the American Ruling Class: For Budgetary Triage & the End of Public Deficit Financing

A friend had emailed me an article by Charley Reese of the Orlando Sentinel.  Entitled "545 People," the piece discusses the frustrating irony that 300 million American citizens are represented by a mere 545 political representatives, "One hundred senators, 435 congressmen, one president, and nine Supreme Court justices equates to 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country."  Resse's theme is summarized by a quick excerpt:
It seems inconceivable to me that a nation of 300 million can not replace 545 people who stand convicted -- by present facts -- of incompetence and irresponsibility. I can't think of a single domestic problem that is not traceable directly to those 545 people...
If the tax code is unfair, it's because they want it unfair.
If the budget is in the red, it's because they want it in the red ..
If the Army & Marines are in IRAQ , it's because they want them in IRAQ.
If they do not receive social security but are on an elite retirement plan not available to the people, it's because they want it that way.


So I’m angry at Washington and I hate the deficit, QE1, QE lite, QE2 [lite], etc.  I think blame sits largely on the shoulders of the controlling class, as well.  But unequivocally arguing that ‘it is this way because POLITICIANS WANT IT TO BE THIS WAY’ ignores the fact that economies are governed by the laws of physics, and economies (over the long term) are certainly not orchestrated by a human conductor—whether “the Maestro” Greenspan, Bernanke, Clinton, Barney Frank, Hank Paulson, Obama, Hoover, FDR, so on.
 
I’ll even admit that I believe in conspiracies—like an intergenerational oligarchy developing in your United States a la the Venetian Conspiracy—because ours is not a representative republic.  Regardless, the pesky deficit is just a manifestation of the only guarantee in economics, as the famous Keynes once noted, “in the long run, we’re all dead.”
 
You can blame the deficit on imbalances wrought by China.  You can point at the widening wealth gap.  These problems are all real, but the overarching theme still exists: you can’t squeeze blood out of a stone, and you can’t force an economy to grow at 5% (ex inflation) ad finitum… not even on average, at least.  There’s such a thing as a sustainable growth rate, and that’s why we have a deficit: debt has kept the ball rolling.
 
The remedy is deleveraging and/or austerity.  Both are deflationary, politically impossible, and socially painful.  Yet, it forces government to self-reflect, figure out its fundamental purpose, and triage.   (For example, security> infrastructure >entitlements>healthcare… until you run out of money.  Then it’s up to the private sector to provide what it needs for itself.)
 
As the world's reserve currency and the premier economic power, the United States can test debt ratios beyond anything an economist has ever considered.  But even while we survive in the face of pushing Debt/GDP to record highs, our mounting leverage makes me feel like I'm riding the Tower of Terror in Disney's Orlando theme park: the higher our elevator is raised, the further we have to plunge.  For an equity investor in a Limited Liability age, how beautiful is it to have no recourse beyond your invested capital!? (An investment can only drop to zero.)  Yet, let Lehman or LTCM serve as examples: leverage magnifies every little fluctuation, for better or worse, with the ability to wipe out equity & debtholders, then ripple to the most remote, most removed players in [or out] of the game.

History always repeats itself, but it's never the same twice.  I've read so many comparisons of today's US v Japan v Great Depression v Asian Crisis v Tech Bubble v S&L Crisis...  I'm compelled to compare modern America to World War I England, wherein a swelling dependence on the financial sector wrought increasing leverage and decreasing marginal real economic growth.  Maybe I'll post another article dedicated to this comparison, but to satisfy the point, England's London-based banking center was the last crown jewel of a crumbling British Empire.  From Brad DeLong's Economic History of the Twentieth Century:
Britain's relative decline springs from its inability to partake fully of the acceleration of growth in productivity that the twentieth century saw. And American economic preeminence sprang from the American economy's ability to create and ride the wave of this growth acceleration...

In the last years of the nineteenth and the first years of the twentieth century Britain lost its leading position in new, modern industry after new, modern industry...

Even in textiles, Britain began to be excluded from foreign markets on the basis of too high a price. British levels of productivity remained high. They just failed to grow at the same rate as in the rest of the leading edge of the industrial world. And British companies lost, or failed to develop, market position in what were going to become the leading industries of the first half of the twentieth century...

In fact, in the thirty years before World War I factors of production behaved as if there was something pernicious about locating in Britain. On net both British capital and British labor left the island for better opportunities elsewhere...

Thus the year 1914 saw close to 40 percent of Britain's national capital stock-of its produced means of production-located overseas. No other country has matched Britain's high proportion of savings channeled to other countries...


Yet economic preeminence in the twentieth century appears to have required much more than an initially-rich country and a laissez-faire economic policy. It also required a government willing to invest in education to create a skilled labor force and a solid corps of technologically-trained engineers, it required financial institutions to channel savings into the domestic accumulation of the machines that embody industrial technology, it required a labor movement eager to share in and not to block economic reorganization and technological change, and modern business enterprises to take advantage of economies of scale and to translate scientific knowledge into productive engineering applications. In all of these Britain was deficient. In all of these the United States was--by luck--abundant.
If nothing else, London had capital, thus that became the nation's trade.  WWI rolled around, and Britain found herself financing a war that she had expected to last less than a year.  She hadn't considered the financial consequences of an enduring military campaign, so in the interest of patriotic pride, the private financial sector was tapped, and capital spewed forth begrudgingly to finance these ongoing military efforts.  The system grew overleveraged, with diminishing marginal real growth opening the door to new world powers after the War.

At the end of the day, I understand why no politician in modern America has undertaken an agenda to reverse our course, ‘I don’t want to be remembered for sparking a Depression or ending the Era of American Dominance.’  (Did McCain have the humility and love for his country to bear such a burden?)  It would trash GDP, plus, most people fear another superpower (China) usurping power.

Not that it was his intention, but Reese's article scares me.  It's the stuff that riles up social unrest and witchhunts.  That being said, an oligarchial rise to power is a difficult train to stop.  Not only today, but NEVER should a consituency feign indifference, becase a concentrated Ruling Class gains power by assuming the political proxy of each indifferent constituent.  I'm submitting my opinion in a letter to my Senator: our government must cease Quantitative Easing henceforth, and triage all government spending, services & agendas.  Let the private sector pick up the pieces left behind when public triage reaches the end of its government budget.


Disclosure: No positions