Perhaps as the outcome of Darwinian-style evolution in the economy, the United States consumes far more than it produces. Even as we remain the world's most productive economy (as measured by dollar value output per unit of labor), the U.S. still lacks a forward-looking industrial infrastructure program and balanced trade policies.
If this unsustainable model persists much longer, the burden of our national debt may result in a forced restructuring to avoid default. This restructuring will be on terms dictated to us by our creditors…one of whom is a communist regime. I wonder how agreeable those terms will be. This is not an indictment of any political party, but an impeachment of our politicians and their decades of ill-informed policy choices.
As we struggle through this crisis, we are left with one inescapable policy decision that leads like a trail of breadcrumbs to our immediate dilemma: The elimination of the gold standard and the modern era of inflation. Enter the Federal Reserve.
By design, the Fed seeks to maintain credit creation and inflation in order to support economic growth. In the environment of rising social mood (as measured by the trend in the DJIA) of the late 1990s and early 2000s, the Fed's easy monetary policy led to easy credit. Credit explosion helped create the economic boom (now gone bust), and private-sector debt began to significantly outpace the GDP. To borrow a phrase, “we were long debt and short cash” – and here we are, in a deflation.
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Job losses are rising and asset values are falling. In a desperate attempt to forestall a full economic collapse, the U.S. government (both the old and the new administrations) has embarked on an unprecedented spending and borrowing program under the guise of stimulus. Congress has discovered that it has, under our Constitution, unlimited borrowing power.
This flip-flop in credit creation from the private sector to the public carries inherent risks to our liberty as individuals. When the government re-allocates funds and taxes one citizen on behalf of another, we are all diminished. Are the trillions in new indebtedness to keep the lines long at the department stores worth the loss of liberty? Long Wal-Mart and short liberty – it’s a bad bet.
Bill Fox is EWI's Senior Bonds Analyst and editor of Interest Rates Specialty Service. Bill has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders spread around the globe.