Remnant Review (Feb. 28, 2011)
The public is going back to sleep about the economy. This is the goal of the Federal Reserve System and the government. The Federal deficit is growing at an unprecedented rate. The monetary base now is growing after a year of deflation.
It is clear that Keynesianism is now dominant. Academia is not sounding the alarm The financial press runs columns about "one of these days . . . but not soon" there will be a crisis. There is no sense of urgency. There is no sense that the government is digging the nation into another hole of debt. There is no real concern about unemployment. The experts have written off the millions of ex-workers whose lives will never be the same again. "Sorry about that, but you are expendable."
The goal of every central banker and every legislature is to defer the day of reckoning. The voters are content with this. Why? because the day of reckoning will bring an era of pain and sacrifice. There is no easy way out of the period of sacrifice. Everyone wants to defer the pain for another year, or another decade.
The voters assume that they have no power. They are correct. Voters In the United States get to choose every two years between politicians, but the choices do not vary much. The candidates all run on this basis: minor changes in Washington are all that we need to make. No one runs on a platform of a balanced budget next term. No one expects it.
The public has accepted Obama's budget projections: a trillion dollars a year for the next decade. The fact that it will be $1.5 trillion this year does not produce a sense of despair. The Republicans in the House are thumping their chests about spending cuts amounting to 10% of the deficit.
It's business as usual. There are no major political changes when it's business as usual.
The voters assume that the people in charge know what they are doing. In 2008, they didn't all assume this. Now most of them do. In 2008 and 2009, Glenn Beck built his audience. Now half of it has departed. The viewers do not want to hear that things are really bad. They don't want to hear reasons why things are unlike to get better without comprehensive change. Comprehensive change will require comprehensive sacrifice by the entire society, all around the world.
If you think that you cannot change things in Washington, then what you want to hear is that the political system and the economy are fundamentally sound. This is the view of most Americans most of the time.
People wanted to hear Ronald Reagan tell them that it was morning in America. They did not care that he refused to veto Congressional spending bills. They did not care that he began the massive deficits of the modern era, deficits nine times Nixon's annual deficits in 1970 and 1971. The Democrats blamed Reaganomics for the deficits. The Republicans did not know what to say. They wanted Reagan to be Reagan, but Reagan wanted to avoid confrontations with Congress.
Both sides wanted to avoid asking the voters to sacrifice. So, there were no fundamental changes economically. Reagan signed the Social Security tax hikes in 1983 that we are paying for now. No one criticized him.
The Great Depression mandated sacrifices. Yet those sacrifices merely accelerated the process of the expansion of the Federal government that began in 1913. There had been a hiatus under Harding and Coolidge, but that period was paid for by Federal Reserve policies after 1924 that created the boom. The boom went bust in 1929. Then came a decade of sacrifice.
Then came World War II. More sacrifice. The government grew huge. This was consistent with the political philosophy of Progressivism, which the intellectuals had been promoting ever since 1885. First came the change of thinking. Then came crisis that mandated sacrifice: World War I, the Great Depression, World War II.
Then came the Cold War. By the time it ended in late 1991, the load of public debt was so great, and the promises to oldsters were so huge, that any call for a departure would have sacrificed the political careers of anyone doing the calling. The politics of deferral by 1991 was the only politics there was.
What we find is this. For decades, the intellectuals absorb and then promote a new way of looking at the world. They begin to write about this. They seem to make no inroads on the thinking of the voters. They stick to their agenda. The tendency is for intellectuals to favor the growth of the state, because they assume that they will be able to get into control of the bureaucracy. So, they will be able to feather their nests: more power, more money, with tenure.
Then comes a crisis. The Panic of 1907 was a crisis. It was used to justify the creation of the Federal Reserve in late 1913, just before the Christmas recess.
World War I was a crisis. It was used to hike the tax rates of those in the top income brackets. This was the fulfilment of Karl Marx's call for a steep graduated income tax. He had called for this in The Communist Manifesto, published anonymously in 1848. His ideas were used by Lenin to justify bloody revolution in Russia in 1917. World War I had made the liberal-socialist revolution possible in February 1917. Lenin captured it the following October.
There is a pattern here. An intellectual comes up with what appears to be a crackpot idea. It is promoted by a handful of crackpot intellectuals. Then it spreads to a wider circle of intellectuals. It percolates for decades. Then comes a crisis. This creates a window of opportunity for the wider body of crackpot intellectuals to promote their solution to the crisis.
The voters do not know who is right. They listen to promoters of political change and make a decision. They blame the entrenched politicians. So, they vote for some rival. The new politicians get a chance of passing parts of their program.
The parts that stick are those that create a strong minority of beneficiaries. This voting bloc will organize to defend its permanent receipt of government money. The opponents have their own fish to fry. There is no well organized opposition.
There is a series of spending programs that go up, never down. This is an iron law of politics. I call it the law of ratchets.
The sacrifice imposed by the crisis makes possible a major shift in political power. In all cases, the new politicians are elected to Do Something. They call for more government spending, more government control. That was why they got elected.
The sacrifice is supposed to be shifted to the rich. Voters are not after a reduction in government boondoggles that they benefit from. They are after a reduction of taxes on them, and a reduction of government spending on the constituents of rival political parties.
The politicians speak of the need for sacrifice, but they avoid telling the voters that they must bear these sacrifices. No, it is the rich who must pay. The voters accept this. All they want is for the pain to stop. They want the recession to end for them. They don't care if it doesn't end for members of a voting bloc that is in the rival political party.
The voters want sacrifice later. They want sacrifice by others. They do not want sacrifices imposed on them, beginning now. They will vote against anyone who proposes widespread sacrifices now.
This applies to war, as long as there is a volunteer army. The love of warfare is now basic to the United States, as long as the war is kept quiet. Bush knew this, which is why there were no photographs of caskets draped in American flags. "Out of sight, out of mind." The strategy worked. Obama is carrying it forward. The deaths seem minimal. The troops are over there. None of it is on prime time news most of the time. Teddy Roosevelt named the phenomenon: "a splendid little war."
The big wars ended in Vietnam. That was when the volunteer army was born, at the end of the war. That ended war protests in the United States.
Voters are all for sacrifice: sacrifice by others. This is what modern politics is all about: promising to reduce sacrifice by large constituencies and imposing sacrifice on other, smaller constituencies.
Here is how the story unfolded in America.
First, a young George Washington lost control over his Indian troops at the Battle of Jumonville Glen on May 28, 1754. They killed their French prisoners, including lieutenant Jumonville. That led to the Seven Years War, also known as the French and Indian War. It was a world war between France and Great Britain (1756-1763).
When it ended, the massive debt had to be paid for. Parliament imposed minor taxes on paper in the colonies, which alienated the two groups that no government should ever alienate: newspaper publishers and lawyers. The result was the Stamp Act crisis in 1764-66.
The political victory of the colonists, who used violence against local tax collectors, gave the colonists confidence. Over the next seven years, resentment against Parliament's troops increased. This led to the American Revolution in 1775. That led to massive debt. The victory at Yorktown in 1781 did not solve the debt problem.
The sacrifice imposed by state debts was solved by the Constitution (1788), which transferred state debts to the newly created Federal government, which was national more than federal. Under the new government, power and spending increased. Two central banks, privately owned, created inflation (1791-1811, 1816-1836). In only one year, 1836, did the Federal government have no debt. The recession of 1837 changed that: an economic crisis. There was another one in 1857. Then came the Civil War, when debt and inflation skyrocketed, North and South. The South lost. This wiped out the aristocracy of the South. In the North came centralization.
See the pattern? War produces debt. Debt produces sacrifice. Sacrifice creates resistance. Resistance leads to either another war or another centralization of power. "Stick the debt burden on another constituency."
This pattern is unbroken. Debt increases. Then centralized government increases. Resistance increases -- not against centralized government as such, but against the existing allocation of the debt burden. The search for a politically weak constituency increases. "Let someone else sacrifice!"
As long as the checks from the Federal government keep coming, there will be no fundamental political change. As long as the money buys things, there will be no fundamental political change. As long as the sacrifice can be deferred, there will be no fundamental political change. This has been the story of America since before there was the United States.
The Tea Party movement came in response to an economic crisis. That crisis came as a result of Greenspan's career of deferring the day of reckoning by means of fiat money: in 1987, 1996, and in 2000-2001. Bernanke is doing it again.
There is widespread believe that government deficits, when financed by central bank inflation, can overcome all recessions. They enable the government to kick the can again. All of Western politics rests on this Keynesian religion of public spending and central bank inflation. In all the world, only Austrian School economists deny this religion totally. But there are hardly any Austrian School economists. They have no influence in academia, the media, or politics. They are voices crying in the wilderness.
The Internet has made it less expensive for voices crying in the wilderness to penetrate the fringes of society. We have seen this since 2008.
The Austrian School got a hearing in 2008 and 2009. It no longer does. The pain has gone away. The sacrifice that the recession imposed on large numbers of voters went away. There is no commitment to principle by voters. There is little awareness of economic cause and effect. If economists cannot see that the problem is Federal deficits and central banking, we should not expect voters to understand.
The voters are innately optimistic. They believe that there is a solution to every problem, and this solution does not require them to make major sacrifices. They have no memory of the Great Depression. The New Deal promised to make the pain go away. World War II did, but only at enormous expense: high taxation, high inflation, price controls, wage controls, and rationing.
The recovery after controls were eliminated in late 1946 persuaded voters that the government can solve every major economic problem. Keynes died in 1946, but his legacy is dominant today.
The voters will not change their minds today. The Tea Party cries out for a smaller Federal deficit, but it is Reaganite to the core. Reagan promised a balanced budget, but he did not veto spending bills that added to the deficit.
To get a balanced budget, there would have to be cuts in Medicare, Medicaid, Social Security, and the Department of Defense. There is no commitment by the Tea Party to any cuts in these areas. The Tea Party movement is based on the same old slogan: cut the other guy's welfare. It never works. The quest for a constituency to bear the sacrifice is never-ending. It always leads to larger government, larger debt, and more central bank inflation.
This pattern goes back to 1755. Why should anyone expect this to change? It is what voters want.
Only one thing will stop it: the bankruptcy of the Federal government. This has not happened since 1788. It has always found a way to kick the can.
But the numbers tell us that this can-kicking must end. It could end in hyperinflation. It could end in outright bankruptcy: a refusal to pay interest on the debt. It could end by hiking the Medicare age limit, or rationing health care. But the numbers tell us that the sacrifice is coming.
The politics of this decade will be based on the same old politics: the quest for a constituency to bear the sacrifice. As long as the level of debt does not lead to double-digit interest rates on T-bonds, there will be no major change. Everything hinges on the willingness of private lenders and foreign central banks to continue to buy the Treasury's debt. There will be no fundamental change in people's thinking until double-digit interest rates appear.
Anyone who thinks that the Tea Party will change anything prior to double-digit interest rates is politically naive.
Anyone who thinks that Congress will change, short of Federal bankruptcy, is politically naive.
Anyone who thinks that the media will change, pastors will change, liberal arts professors will change, financial journalists will change, or that public school teachers will change is intellectually naive.
People change their thinking only under pain. This pain must be constant. It forces them to re-think their presuppositions.
Any relief of that pain through Congressional can-kicking and central bank can-kicking will be interpreted as another confirmation that government can solve the economic problems of life. The government will find a new constituency who will bear the pain in silence.
The goal of politics is to make sure that Atlas will not be allowed to shrug.
Here is the central question of politics in the West: How long will the governments of the West be able to persuade lenders that they should not shrug?. All other questions are peripheral.
The politicians know this. They know that the numbers point to a great default. But they believe, just as Keynesians, Chicago School monetarists, supply-siders, and rational expectation economists believe that the Federal government can and will find a way to persuade lenders to keep lending. The West rests on this faith. If this faith ever wanes, then the day of reckoning will arrive.
At that point, the West gets hyperinflation or another Great Depression.
The solution to the politics of can-kicking is bankruptcy.
The Remnant must do today what it had to do in 1755, 1787, 1836, 1861, 1898, 1912, 1929, 1941, and 2008. It has to maintain that the use of government to redistribute wealth is immoral. As an immoral act, it has negative consequences. The end result is bankruptcy.
The government will sacrifice the public's interests to save the big banks and big financial entities. This, the voters learned in 2008 and 2009. There should be no doubt.
The voters are grousing about the bailouts, but they are pragmatic. They still have jobs. They still have faith that the government can kick the can for another few years. Beyond a few years, voters don't care. Politicians know this.
There is a small fringe of voters who know that a day of reckoning is coming. They are few in number. They have no clout.
Their job is to prepare for the future. That future will involve national bankruptcy. The checks will bounce, or else they will be worthless. In the first case, the Federal Reserve stops buying T-bonds. In the second case, it continues to buy.
The bankruptcy of the national government will create the revolution. This has not happened since 1755. This revolution will involve the transfer of power back to local governments. There will be a great decentralization.
Here is the problem. There is no developed philosophy of decentralization. There is some awareness of the benefits of economic decentralization, but only within the context of the ultimate wisdom of the national government. The Austrian School preaches decentralization without bailouts, but it has little influence.
As for political philosophy, the best we have is state's rights. But the states will be bankrupt, too.
What Americans need is a political philosophy based on county rights. But we have never had this. Always, the colonial governments were considered sovereign. The debate was colony vs. Parliament in 1765-75. Then it was state vs. federal: 1783-88. Step by step, the states have been absorbed into the national government. The governors go begging to Washington whenever state budgets must go through sacrifice. When a governor crawls on his knees, with one arm supporting him, and the other arm extended for a handout, he does not believe in state's rights. Neither does his constituency.
For as long as Washington's checks don't bounce, and the money buys something, there will be no fundamental change.
It is the job of the Remnant to keep reminding themselves and their peers that there are no free lunches in life, that the bills always come due, that debt is a great threat, and that central banks serve the needs of large commercial banks.
All over the world, the Remnant must operate. People do not believe this message. It takes stubbornness and courage to keep saying that can-kicking will lead to bankruptcy.
The accountants have told us that the present system cannot go on indefinitely. This is a recent development. For decades, they said, "no problem." Now they all say that there will have to be changes One of These Days, Real Soon Now. But they never identify who must suffer or who must pay. They all know that politics is a game of deferring widespread sacrifice until the burden can be shifted onto some low-influence group.
We must proclaim the religious truth now: "We will reap what we sow." "The borrower is servant to the lender." "Count the cost."
We proclaim the economic truth now: "There is no such thing as a free lunch."
We must proclaim the political truth now: "County rights."
Hardly anyone will listen. Hardly anyone listened to Karl Marx and Frederick Engels in their lifetimes. But Lenin did. Mao did.
It takes time. We have time.
It takes ways to get out the message. We have them today.
It takes preparation for the future. This is rare.
I will take active leadership when the checks bounce. When the sacrifices can no longer be deferred, there will be outrage against those who preached can-kicking as a way of life.
That outrage and despair will be the ploughed soil of revolution. Plant seeds today.
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