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In a
speech this week summarizing his administration's economic policies,
President Obama grossly overstated the support these policies enjoy by
claiming, "economists on the left and right agree that the last thing
the government should do during a recession is cut back on spending." There
are a great many economists who were surprised to learn that, apparently,
they now agree with the President.
Reading straight from the Keynesian
playbook, Obama justified the creation of multi-trillion dollar deficits by
asserting that the government must fill the spending void left by the
contraction of consumer and business spending. As one of those mythical
economists who do not agree with the President, I argue that it is precisely
this type of boneheaded thinking that got us into this mess, and it's the
reason we are now headed for an inflationary depression.
We do
not need, nor should we attempt, to replace lost demand. As Obama himself
pointed out in the same speech, Americans have been borrowing and spending
too much money. These actions created artificial demand, underpinned by the
illusion of real wealth in overvalued stock and real estate markets. Given
his intelligence and rhetorical training, it is hard to fathom how President
Obama cannot notice the inherent contradiction in his argument.
While
Obama commended millions of American families for making the hard choices to
reduce spending, pay down debt and replenish savings, he later outlined the
government's intention to spend every American household deeper into debt,
thereby undermining all the good that personal austerity would have otherwise
produced.
Obama
also made the clear-eyed observation that the foundation of our economy was
unsound and that a sturdier one needed to be laid. To do this, he even
asserted that we need to import less and export more. This has been one of my
fundamental points. Our economy is unsound precisely because it is built on a
foundation of consumer debt. Instead of spending for today, we need to invest
for tomorrow. However, we cannot save more unless we spend less. Production
requires capital, which only comes into existence when resources are not
consumed.
However,
by interfering with this process, Obama prevents the very transformation he
acknowledges must take place. When the government spends what individuals
save, private investment is crowded out. Society is deprived of the benefits
such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all
our cement?
This
brings up an oft-repeated, but oft-forgotten, point: government does not have
any money of its own. It only has what it takes from the rest of us. If
individuals repay their debts, but their government takes on additional debt,
we are all simply swimming against the tide. All forward progress is lost as
private debt is replaced by public debt, which must be repaid by private
individuals. Whatever gains individuals hope to achieve are negated by the
higher taxes or increased inflation necessary to repay their share of a
larger national debt.
Obama
claims that much of the additional debt is not going to finance consumption,
but rather "critical investment". This is a vain hope. In the first
place, much of what he categorizes as investment, such as additional spending
on education, is not investment at all. Yes, an educated workforce is
important, but throwing more government money at education will do nothing to
achieve this goal. Spending money on education and calling it an investment
squanders resources that otherwise would have financed real investments. In
the second place, to the extent some government money is invested, those
investments will likely be less efficient than those the private sector might
otherwise have financed. There is absolutely no evidence that governments
have the foresight or incentives to make investments that facilitate real
economic growth. "Five year plans" didn't work in the Soviet Union and they won't work here. If the
government simply builds bridges to nowhere, society gains nothing.
If we
are going to rebuild our economy on a solid foundation, the market, not the
government, needs to draw the plans. When private citizens invest their own
capital, those who invest wisely are rewarded with profits, while those who
do not are punished with losses. Bad investments are therefore abandoned,
with capital reallocated to more successful ventures. Conversely, when
governments invest money, these checks and balances do not exist. There is
nothing to correct bad investments, as losses are endlessly subsidized by
taxpayers. In fact, the more a government plan fails, the more it tends to be
funded in the hope that additional resources will finally achieve success. Obama
himself proves this by allocating still more funds to government-run schools
and student loan subsidies. Other examples, such as Amtrak, the New York MTA,
the U.S. Postal Service, Fannie/Freddie, and countless others, prove this
process is never-ending - until perhaps the bureaucracy collapses under its
own weight.
When
it comes to government making tough choices, Obama talks a good game, but
refuses to actually make any. However, once the dollar finally begins its
collapse, he will have no choice but to match his rhetoric with action. It's
unfortunate that we cannot make these tough choices on our own terms, rather
than waiting for our creditors to force our hand.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Read
all the other essays published by Peter Schiff
For a more in depth analysis of
the tenuous position of the American economy, the housing and mortgage
markets, and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley, 2008).
More importantly take
action to protect your wealth and preserve your purchasing power before
it’s too late. Protect your wealth and preserve your purchasing power
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