The runaway freight train of government growth increases its ominous speed with each passing year. It is recklessly insane, grotesque, unjustifiable. Yet the statist establishment and many of America’s citizenry, both Democrats and Republicans, remain adoringly supportive of this modern curse.
Government spending is our deluded way of life. Heedless voters, mercenary politicians, fanatic ideologues all pay lip service to “balanced budgets,” but turn egregiously blind to the requisites of abiding by them when the time comes to walk the walk of fiscal sanity.
Today’s spending, deficit, and total debt figures are as follows: Total spending in fiscal 2018 by the federal government will be approximately $3.76 trillion dollars. We are headed for approximately a $1.2 trillion dollar budget deficit, maybe even higher this year. Our total national debt just reached $21.03 trillion dollars.
The Root Source
What perverse rationale has brought about this kind of fiscal insanity? To understand how this has come about, we must go to the root of the problem. It all began in 1913.
The first country in the history of mankind to enshrine objective law (i.e., law that is the same for everyone) abandoned its courageous commitment to it with the creation of a “progressive rate” income tax. Such a tax flagrantly violated the fundamental ideal given to us by the Founding Fathers, which is law that does not convey favors and privileges to special factions. In other words, OBJECTIVE law is the legal basis of our entire system. It is the reason why we are free. It is the opposite of ARBITRARY law, the basis of all dictatorships. Progressive tax rates destroyed this pillar of our free society.
Combined with this violation of the “objective law” principle of our Founding was the second institution enacted in 1913 – the Federal Reserve Banking System. This violated the fundamental “right to property” principle of our Founding because it allowed the government to continually inflate the currency and, thus, steal the property of the American people.
For example, if a saver has $100,000 in the bank at the beginning of the year, but the price inflation rate brought about by the Federal Reserve is 5% during the year, then the saver has only $95,000 at the end of the year. He still has 100,000 pieces of green paper in the bank, but they only buy $95,000 worth of goods and services. Where did the $5,000 go? It went to Washington because the federal government now has $5,000 extra in purchasing power, which it printed into existence. This is criminal THEFT, pure and simple. Multiply it times 80 million savers, and you’re talking about brazen criminal theft.
Thus the year 1913 imposed two disastrous and tyrannical institutions upon Americans – progressive tax rates, which destroyed objective law, and the Federal Reserve Bank, which destroyed our right to property. Both institutions gave the federal government the power to STEAL hundreds of billions of dollars from the earnings and bank accounts of the citizenry. Stealing is a criminal act. Thus we have enshrined criminality instead of constitutionality as our means of governing.
Inflationary Twenties and the Great Depression
Because of the Federal Reserve’s creation, the decade of the 1920s became an exercise in speculative irresponsibility on part of our financial community. By keeping interest rates excessively low throughout the 1920s the Fed injected waterfalls of new money (i.e., credit) into the economy that resulted in goosing the stock market from a low of 67 in the summer of 1921 to a high of 381 in September of 1929, almost a 500% increase in eight years time. The madness of crowds reigned supreme. “Stock prices have reached what looks like a permanently high plateau,” exclaimed Irving Fisher in the pages of The New York Times.
But, of course, nothing of the kind had been reached. What had happened was the age
old rule – “what goes up by extraneous stimulation will come down by the rule of mean reversion.” The Fed’s extraneous stimulation gave the stock market dreadfully false valuations, and the laws of reality will bring about a correction of such falsity eventually, which it did with the crash in late October of 1929. The Fed realized its interest rate maneuvering was out of hand and pulled back on its monetary injections. Savvy traders sensed the end of the boom and began to take profits, which resulted in a mad scramble for the exit by everyone else. This resulted in brokers issuing margin calls to all traders, which exacerbated an already panic mode sell off into an outright disaster. By summer of 1932 the Dow had crashed all the way to 41, which was lower than its price of 67 in 1921. Such are the dangers of government intervention into the free market.
The tragedy of all this was that very few “experts” understood the true nature of the wild expansion’s root source in the Fed. Most attributed it merely to the speculative nature of stock trading and capitalism. This reinforced the Marxists who had always predicted that capitalism would eventually self-destruct. Between 1932-1936 the ideas of J.M. Keynes gained popularity with the brain trust advising Franklin Roosevelt, in which Keynes declared, “capitalism had reached its mature stage and could no longer create sufficient demand.” The solution, said Keynes, was for the federal government to intervene with monetary inflation on a permanent basis to create sufficient demand.
But as I have written in these pages before, such a declaration is absurd. Capitalism has no “mature stage.” If left alone it will go on forever. The so called “mature stage” that Keynes decried was the eventual bust stage coming in reaction to the superficial boom stage created by the Fed’s massive injections of new money / credit into Wall Street and Main Street. What are we to learn from this? The way to avoid a deflationary crash is to never begin the inflationary monetary policy that brings it on.
If we had been willing to listen, economists such as Carl Menger, Eugen Böhm von Bawerk and Ludwig von Mises (who developed the Austrian School of economics with correct theories of money and value in the late 19th century) would have prohibited the monetary inflation that brings on a deflationary crash. But these scholars were ignored in favor of the madness of crowds and the nostrums of Keynes. Keynes told the politicians and bureaucrats what they wanted to hear, that capitalism was “unworkable” because it had crashed and what was now needed was a new age of Government Planning.
But it wasn’t capitalism that had crashed. It was government managed capitalism via money-credit inflation that had crashed. Bar the government from inflating the money supply via the Federal Reserve, and capitalism works just fine. You’ll have a cyclical economy, but not a boom-bust economy that crashes. This, the statist authorities of the 1920s and 1930s did not understand. Or if they did grasp it, they blanked out on it so as to pursue more power for the state and themselves.
The Path to Destruction, 1913-2018
Herein lies the two sources of destruction for the American Republic over the past 100 years. 1) Confiscatory taxation and 2) inflationary monetary policy give our overlords in Washington the necessary power to grotesquely EXPAND their laws, their bureaucracies, their wars, their imperialism, their unconstitutionality, and ultimately bring about the tyrannical suffocation of our freedom and independence as a people.
Our problems today are many faceted, but far and away their most important political-economic roots are the two institutions of progressive tax rates and the Federal Reserve Bank. The former violates the “objective law” principle, and the latter violates the “right to property” principle. Without these two principles upheld by the legal authorities of society, all freedom, stability and sanity must break down and usher in some form of dictatorship. And that is precisely what is taking place today.
LBJ and Richard Nixon continued the Keynesian fallacy that “monetary inflation is actually wealth.” We’re all Keynesians now, said Tricky Dick. The pusillanimous Jimmy Carter was only too happy to crank up new money creation. Even Reagan succumbed, but with a major twist. He was convinced that the way to economic growth was not via Keynesian “demand side” stimulation through monetary inflation, but via “supply side” stimulation through lower tax rates unmatched by lower spending levels.
The radical economist, Arthur Laffer, convinced him that if tax rates were lowered substantially, the government’s spending levels did not have to be lowered to balance the budget because the lower rates would create enough extra growth (and thus more tax revenues) to wipe out any deficits. Thus we could have our cake and eat it too. We did not have to cut government spending as we were cutting tax rates. We would grow our way out of any resulting deficits.
What were the actual results of the Laffer theory? Reagan not only did not eliminate the deficit, he became the first President in history to run $100 billion dollar deficits and then $200 billion dollar deficits. He averaged annual $176 billion dollar deficits during his eight years in Washington, and thus introduced America to outrageous fiscal insanity. Yet conservatives, alleged pillars of fiscal probity, looked the other way.
After Reagan came George H.W. Bush who gave us average deficits of $258 billion annually during his four years as President. Miraculously Bill Clinton ended this extravaganza of stupidity by balancing the budget by his second term, and actually running surpluses in his last four years. But following Clinton was George W. Bush who returned us to indefensible spending by averaging $412 billion dollar deficits yearly during his tenure. Not to be outdone, Barack Obama doubled the extravagant Bush and gave us $848 billion dollar deficits yearly.
Will Trump be any better than the prodigals who have preceded him? Hardly. He also accepts Laffer’s theory that deficits don’t matter. And by their acquiescence, it appears that the majority of his economic advisors along with the majority of GOP members in Congress do likewise.
Have we all gone batty here? We need only to read the figures of the Reagan years and those presidents who followed him to see that Laffer’s theory is a fallacy. But then all theories of government planning the economy into productivity are fallacies. Government is the problem, not the solution. It simply needs to get out of the way and leave people alone. They will produce abundant economic growth by merely being FREE! There is no need for Keynesian stimulation of the “demand side,” and there is no need for Lafferian stimulation of the “supply side.” Freedom is the only stimulant we need.
Don’t misconstrue what is being said here. Cutting taxes is vitally necessary for freedom and justice. Taxes should always be as minimal as possible. But cutting taxes without cutting spending is the logic of flim flam. We must always abide by the laws of reason, which means we don’t try to get more out of life than we are putting into life. We balance our budgets. Great nations do this; dictatorships do not.
Why running massive budget deficits is so undesirable is because it increases the National Debt that will never be paid off and, thus, will have to be serviced indefinitely. We as taxpayers will have to continually pay the annual interest, which at present is about 1.5% amounting to $310 billion yearly. But since the deficits are growing larger every year, the debt servicing will continue to grow larger. As faith in the dollar continues to erode, inflation will increase, which will increase interest rates and, thus, the servicing owed on the debt.
Former Reagan Budget Director, David Stockman, expects the deficits under Trump to average as high as $1.5 trillion dollars annually. In eight years that would push the National Debt to $33.0 trillion dollars. If the dollar continues to erode in value and interest rates rise to the historical norm of 4%, we will then be paying $1.3 trillion every year just to service the National Debt. Under such a scenario taxes must reverse course and be raised just to pay the vig on our profligacy in addition to our tax bill for all the other welfare extravaganzas liberalism demands that we accommodate with our earnings.
What is the ultimate denouement from all this? Accelerating price inflation, higher taxes and ultimately a hyper-stagflationary depression that will create massive bank failures, unemployment, and tanks in the streets to preserve order. This catastrophe will be accompanied by a major push from collectivists to further centralize the economy in Washington where banks and major industries can be run by Federal Production Czars.
Ending the Income Tax and the Fed
Hopefully, the reader can now see that back in 1913 we set the forces in motion to descend into the statist irrationality now wrapping its chains of tyranny more and more tightly around our way of life in America. We allowed the federal government to violate objective law with a progressive tax system, and we allowed the federal government’s central bank (the Fed) to violate our right to property with continual inflationary monetary policy. This allows the government to continually STEAL our earnings and savings every year. This is why we have Godzilla on the Potomac now destroying freedom and sanity in America.
If we want to save the country, the place to begin is by ending these two malevolent institutions – the income tax and the Fed. AFR has launched a means to circumvent their disastrous aspects and eventually phase them out of our lives totally. You can read our proposal in our 12-page Tax Report, Ending Progressive Tax Rates in America, which also discusses how to handle the problem of the Federal Reserve. You can also see an introduction to our tax reform plan in our accompanying 9-minute Video.
Whether the predicted stagflationary depression comes or not, the answer to our hideously distorted political-economic system is to rid America of the income tax and the Federal Reserve. The AFR plan will phase us out of them both over time. And if the system crashes in the upcoming years, then we will need to convince our economists, political savants, and voters to climb out of the crash without “progressive tax rates” and without a “Federal Reserve Bank” so as to never criminalize our system again.
Is this possible? Yes, patriots today are a lot wiser than they were in the 1930s. At that time 90% of the nation trusted government, and felt it was proper to let them bail us out. Today the figure that trusts the government is about 40% instead of 90%. The works of Ludwig von Mises, Friedrich Hayek, Murray Rothbard, Ayn Rand, Henry Hazlitt, Paul Johnson, and Patrick Buchanan are big sellers to millions of Americans.
So it’s entirely possible that we can rally Americans to purge Keynesianism and restore free enterprise as the solution to this coming crash. Today’s freedom movement has created millions of savvy citizens who realize full well that government is the problem, not the solution. Thus we might be able to stop a large-scale government centralization of the economy as the answer to the crash. There were no voices in the 1930s to effectively oppose FDR and the socialist bureaucratization of American life. Today there will be millions that will do so. Socialism has failed everywhere it has been tried on earth. In the 1930s, socialism was the “wave of the future.” Today it is the wave of a new Dark Ages.
Will this be enough to overcome the socialists and statists out there? Can’t say, of course. But herein lies our hope to save the country. How do we climb out of the coming crash? Do we further centralize the economy in Washington and prepare for phasing into One World Government? Or do we restore Jeffersonianism and get back to what the Founders decreed to us – limited government, a free economy, and gold and silver as money? It will be a monumental fight, and the fate of freedom for all mankind will hang in the balance. How goes America, goes the world.
