Our lost decade
America hasn't fared well in the last 10 years, and unless some changes are made, prosperity still won't be in the cards for America any time soon
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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The Greek debt deal was essentially another bank bailout. The US deal is another can kicked down the road…to be stumbled over after the next election.
In the end, goes the theory, Americans will come together to get the job done. The US is a winner. “Nobody ever got rich betting against America,” chimes Warren Buffett.
But gold is fundamentally a bet against America. It’s a bet that, over the long run, America’s experiment with a pure paper money system will not work…and that no matter how smart or innovative its central bankers and authorities are…they will not be able to hold the system together any better than any other geniuses throughout history.
The Romans tried central financial planning too. Under Diocletian they tried to control prices. It didn’t work. Then Richard Nixon tried the same thing in the ‘70s. It didn’t work either. But the US leadership still clings to the idea that it can control the economy…that by some magic as yet never fully described…it can do what the Romans couldn’t do…that there is no destiny involved in a paper money system.
Of course, it should be obvious to everyone by now that the real problem in Europe as well as America is debt. In Europe, government debt is a problem. In America there is government debt plus household debt. Both are problems. America has about as much government debt as France – about 5 times GDP when you include unfunded pensions and health care costs. But America also has huge household debts.
Generally, Europe can solve its debt problem by cutting government spending. America can’t. One reason for this is that Europe only has to worry about social welfare spending, which can be cut fairly easily. A big item of the Italian budget, for example, is chauffeurs for government employees. This kind of silly spending can be cut without too much suffering. And the economy will be better off as a result.
Also, Europe is not facing the same sort of household de-leveraging as America…so there’s no private sector slump, dragging the economy down just when government has to cut back too. Cut government spending in the US and the economic slump will worsen – at least, in the short term.
But the main reason Europe can cut its spending is because it has little choice. The European central bank…and the European authorities…are not in a position to be able to permit runaway spending and debt in their member states. They have no way of forcing the Germans to pay for the Greek’s bad debts. So, the Greeks eventually run out of money and have to cut back.
That’s the big difference between Europe and the US. In America, the authorities have both the means and will to continue to run up huge debts and debase the currency. And since they can, they will. Or, to put it another way, when the authorities don’t have to cut, they won’t be able to do so. And the experts will find plenty of reasons why cutting spending (or raising taxes) is not only unnecessary, but undesirable. As the Great Correction intensifies, the demand for US social welfare spending, and counter-cyclical stimulus spending, will increase. Revenues will fall too, leading to bigger budget deficits and more debt. More debt, in turn, depresses growth…leading to a greater demand for bailouts and boondoggles…and so forth.
The other noteworthy difference between Europe and America is that Europe is free from the burden of empire. The US is the world’s only empire, and has been ever since the Soviets closed up shop 22 years ago. The Soviets found that the combination of central economic planning and the expense of a military empire were just too much to bear. They gave up.