THE GREAT FEDERAL DEFICIT CONSPIRACY

 

 

THE FEDERAL DEFICIT CONSPIRACY

 

                                                              ANALYSIS & COMMENTARY

By Jay B Gaskill, Attorney at Law

 

CONSPIRACY: “A secret plan by a group to do something unlawful or harmful, (as in) a conspiracy to destroy the government”   Oxford Dictionary

 

 

CONSPIRACY???  SURELY THIS IS AN EXAGGERATION

 

After all, conspiracies are supposed to be covert. The “political arrangements” that shamefully misdirected the American people to the coming dead-end were carried out in broad daylight, weren’t they?  This was a true conspiracy by virtue of the willful concealment of agendas and consequences by the political class. Their deception was accomplished via omission, misdirection and prevarication…in other words, by deliberate deception. The classic definition of conspiracy covers the deceptive means by which our country has been brought to brink of a dumpster dive over a very steep fiscal cliff. 

 

Most, but not all members of the political class are directly culpable. Most of the rest of us are accountable through negligence. To be fair, there were voices of caution all along, but in the vast information blizzard, they were at best, a dim background noise. But silence and acquiescence of the major political figures, opinion leaders and media sources, make them the conspiracy’s enablers.

 

The problem is not trivial and its resolution is not postponable…for much longer: The US national debt now exceeds 19 TRILLION dollars. That is more than the United States’ annual gross domestic product. The annual interest payments on our 19 trillion dollar federal debt now exceed 229 BILLION dollars. That interest payment is just under half the total federal spending on Medicare. For perspective: The 2015 budget for Homeland Security is less than 40 billion.

 

THE SLIDE BEGAN WITH LBJ, THEN…

 

Leaving aside the emergencies of The Civil War, WWI, and WWII, the first major wholesale buy-in to massive deficit spending was by President Lyndon Baines Johnson. After taking office due to the assassination of JFK in 1963, LBJ embarked on two major wars: a huge escalation of the Vietnam War, and a new domestic effort, the War on Poverty. Both financed by deficit spending.

 

Every year since then there were annual budget deficits, save only five budget surplus years (1969, 1998, 1999, 2000, and 2001). At no time was the general trend of increasing national debt reversed.

 

The overall national debt increased 70% during the terms of President Obama.

 

President Johnson was relying on Keynesian economic theory. The British Economist John Maynard Keyes (1883-1946) taught two generations of economists that a deficit is no big deal, because we “just owe the money to ourselves.”

 

But Keynes was developing his theories long before the rise of the vast international market and trade system, before the sale of US bonds to foreign powers and agents, before the US banking collapse of 2008, and before the catastrophic fiscal collapse of Iceland, Ireland and Greece – leaving Italy, Portugal and Spain in fiscal jeopardy. It turns out that the Keynesian economic solutions (i.e., just create more fiat currency to spur prosperity) no longer work. The international economic system has gotten in the way.

 

Every major producing country is playing the same game. Each country’s supply of fiat money is being competitively increased. This pattern is called competitive currency devaluation. At first, this strategy had win-win appeal: It promised to decrease the cost of the country’s exports on the market while it would devalue the debt that country owes to others.  Of course, eventually one does not loan to a country that is systematically devaluating its currency. The scheme has the same limitations and the same inevitably disastrous outcome of any of the other pyramid schemes it resembles.

 

LIES, WHAT LIES?

  • Keynes proposed that a sovereign could simply make new money (we used to say “print” more money, but the process now is purely electronic) as if there are to be no consequences.  But there are consequences, often hidden, but very real.  To take a simple example: If the US suddenly doubled the money supply without doubling all the attendant costs of goods and services, the impact on the value of your income, savings and other retained goods would be an obvious devaluation.  The ensuing adjustments would be uneven, unfair, and unpredictable. A Keynesian inflation of the money supply is a deflation of the value your property and of debts owed you, in effect deflation without representation.  The inherent shell game in these measures is designed to conceal the consequences.  And that concealment is another lie. The same kind of consequences follow whenever the US borrows money to finance a deficit, then “eases” the task of repaying the borrowers by using new fiat money (think quantitative easement here). If anyone did that to you, it would be a form of fraud.

 

  • Members of the political class and their pet Keynesian experts have repeatedly told the media, the academy and the rest of us that the US would be able to grow itself out of the debt.  But wait: Our country’s total economic output has NOT grown as fast as the new national debt. The current US growth rate, as measured by the GNP is anemic at best.

 

  • Government economists have assured us that the national debt is a manageable problem as long as our country’s aggregate indebtedness’s below our total annual Gross National Product.  But wait: That ship had already sailed by 2006.

 

The Coming Political Reckoning

 

Have you noticed? None of the presidential aspirants have dared to mention the national debt, let alone, has any one of leading candidates come up with a serious proposal to deal with the problem.

 

Why? At least three reasons are in play:

 

  1. The candidates actually don’t understand the problem in any depth, and therefore are afraid to engage in the public square.
  2. The candidates in question have been in public life long enough to be perceived as part of the problem.
  3.  The candidates are at least smart enough to have figured out that all of the solutions will involve painful adjustments in taxation, spending, consumption and middle class prosperity.

 

This is why the major financial collapse events (think of bubbles popping with the force of an earthquake) always seem to catch policy makers by surprise: Many of them are well aware of the risk and understand the sacrifices needed, but are deliberately waiting until a catastrophe arrives to shake voters out of their complacency. This is the conspiracy of deliberate inaction.

 

The prospects of the US growing itself out of its indebtedness will not work …except in the fairy tale universe where: [1] The US begins to borrow prudently and US production of goods and services remain in constant demand in the world markets at profitable prices. [2] The cost of the US borrowing never gets out of hand. [Context: Things may already be out of hand in the sense that the annual cost of debt service, at the currently low rates, was “only” $200 billion in 2015. The Homeland Security budget was less. Any increase in the cost of borrowing will drive that number up, even if the US never borrows another dime.

 

So far, the US system has been perceived to be relatively more stable than its competitors. This only means that we are closer to the top of the pyramid in the international Ponzi scheme.

 

But that comfortable perch is rapidly eroding.  The cost of borrowing will certainly increase, probably early in 2017. If we default on the debt, we will not be able to borrow more.  If we do not default, we have just two choices: Pay our debtors with fiat money, in effect shorting them. Or pay them out of our actual tax revenues, ahead of other programs.

 

Either way, the day of reckoning will be at hand.

 

The most opaque of the candidates on this issue is Donald Trump, whose own fiscal behavior in the private sector has relied on bankruptcy as a business strategy. The only economically trained figure whose has been named in connection with the POTUS race is the new Speaker of the House, Paul Ryan, so far a non-candidate. Congressman Ryan is associated with a number of creative fiscal solutions of a gradualist nature.

 

ONE OPTIMISTIC SCENARIO

 

If the US still has time, a fiscal and market meltdown can be averted by incremental imposition of fiscal discipline and “tax reform” (carefully structured tax increases), spread over ten years. But there is a caution: It is a house of cards. Everything is subject to the vagaries of the international market. The economic playing field is complicated because the US is not the only player running the game using fiat money and over-borrowing. Our country’s situation is more problematic that it was at the end of WWII, when the USA had the world’s largest undamaged manufacturing base, one readily convertible to civilian use, and there was a huge pent up demand for manufactured goods. Fortunately, we had a prudent and competent consensus leader in the person of General Dwight Eisenhower.

 

The bottom line:

 

No candidate for POTUS who does not already have a world class economic team, or who is not personally endowed with the requisite economic savvy, should be elected President of the US. 

 

Amateur hour is over.

 

JBG

 

Copyright © 2016 by Jay B Gaskill, Attorney at Law

 

A license to link to this article or to publish pull quotes from it (with full attribution) is hereby granted. For all other permissions and comments, please contact the author via email at law@jaygaskill.com.

 

The author served as the chief Public Defender for the County of Alameda, CA, headquartered in Oakland for 10 years, following a long career as an Assistant Public Defender. Then, Gaskill left his “life of crime” to devote more time to writing.  Learn more about Jay B Gaskill, attorney, analyst and author, at http://jaygaskill.com/WhoIsJayBGaskill.pdf