The Great Deformation
Page 97
But it was the Swiss National Bank which was the ultimate canary in the mine shaft: it has been forced into massive expansion of its balance sheet in order offset the destructive flare-up in its exchange rate owing to flight capital out of the euro zone into the “swissie.” Indeed, when the Swiss central bank, the paragon of “hard money” in modern times, is forced into negative interest rates on deposits and an explicit policy of trashing its own money, then the currency wars have started, and there is no turning back.
The new government of Shinzo Abe in Japan has already fired the warning shot on the matter of competitive currency depreciation and the on-coming race to the bottom. Its outright attack on the Fed is epochal, and contrasts dramatically with the actions of the Nakasone government which came to the Plaza Hotel in 1985 to receive the “Texas treatment.” Implicitly referring to the “Connally treatment” of a decade earlier, the Japanese statesmen meekly declaimed, “We enjoyed that, may we have another?”
No longer. The Japanese government has buried itself in debt building roads to nowhere and implementing every hoary fiscal stimulus device ever conceived. With government debt at 250 percent of GDP, it now stands not only as a monument to Keynesian folly, but as a potent warning about how thoroughly and swiftly financial discipline has been destroyed by the Fed and its convoy of monetary roach motels.
At a meeting in early 1981, a high-ranking delegation of Japanese financial officials came to the White House to politely and discreetly ascertain whether the Reagan administration really intended to create massive and permanent fiscal deficits. At that point, Japan’s niggardly public debt stood at less than 35 percent of GDP and their officials were genuinely astonished that the American government would risk violating every standard of fiscal prudence by implementing big tax cuts without paying for them.
Needless to say, today Japan raises in tax revenue less than 50 percent of what its government spends, and it doesn’t dare ask about fiscal prudence. With taxation at levels needed to finance its current spending, Japan’s economy of old people and increasingly old industries would sink rapidly into the Pacific. Yet Japan’s domestic savings rate has fallen from 18 percent at the time of the aforementioned White House visit to essentially zero today, and its long-running current account surplus is turning sharply and rapidly into deep deficits.
Accordingly, there is no place left to sell the vast outpouring of government debt promised by the new LDP government except at the Bank of Japan. Were Japanese interest rates ever to rise even to 3 percent from the current comically low rates pegged by the Bank of Japan (80 basis points for ten-year notes), the interest cost on Japan’s gargantuan debt would absorb every single penny of government revenue. Japan’s economy would thus sink into the Pacific by another route.
So the Bank of Japan is also hostage to its sovereign debt, and will print yen faster and faster in stride with the QE-to-infinity posture of the US Fed. The ECB will also have no alternative to rapid money printing, as its constituent national economies shrink into permanent recession under the weight of fiscal austerity policies needed to keep their bloated welfare state budgets afloat. More likely than not, the Germans will revolt in the face of extreme ECB money printing and the euro will blow up, sinking the continent into deeper recession still.
Likewise for China. It goes without saying that this towering edifice—of bank credit, rampant speculation by much of the populace, massive state-financed construction of what amount to pyramids and other unusable public infrastructure and unspeakable corruption—cannot function without its export economy: that’s where it earns the real capital to keep going the monumental excesses and imbalance of Communist Party–managed economy.
So China’s central bank must keep printing, too, and dares not allow the currency to appreciate much more than the token amounts of recent years in order to keep its export sector above water. Indeed, in a world of honest money much of China’s export economy would have never arisen or would have sunk below the waves long ago. And with it, of course, would have gone the whole system of tributary raw materials and intermediate components suppliers that feed on the great Chinese Factory; that is, Australia and Brazil in the former category and South Korea, Japan, Taiwan, Malaysia, and Singapore in the latter.
In short, the world economy is now extended on the far edge of a monetary bubble that has been four decades in the making. The next phase of money printing, however, may be the last because all the major, aging consumer economies of the world are failing; that is, the United States, Europe, and Japan. Accordingly, democratic politics will turn increasingly ugly, strident, and nationalistic in the face of chronic fiscal crisis, recession and quasi-recession, middle-class austerity, and bubble opulence among the 1 percent. It will result in protectionism, currency wars, and anti-capitalist policy interventions, including capital controls, punitive taxation of the “rich” (which few will actually pay), and endless bailouts and boondoggles.
During the final phase of the global monetary bubble, economic growth in the United States will be ground to a halt. As this happens, the $20 trillion of prospective debt now obscured in CBO’s rosy scenario will become increasingly visible, causing the fiscal cliff to loom ever more forbidding and unmovable. American politics will consequently become more fractious and paralyzed, and the Keynesian state will inexorably sink into insolvency and failure.
The interim winners from this ordeal will be the gangs of crony capitalism and the opulent 1 percent who thrive off the central bank’s money printing. But in the end sundown will descend upon the entire nation—even on the 1 percent.
CHAPTER 34
ANOTHER ROAD
THAT COULD BE TAKEN
IT GOES WITHOUT SAYING THAT WHEN HISTORY GETS INTO A DEEP RUT it becomes hard to alter the course of affairs. But even at this late date the sundown scenario could be avoided. The Fed’s financial repression and Wall Street–coddling policies could be pronounced a failure and abandoned. Crony capitalism could be put out of business by constitutional writ.
Likewise, the corpulent warfare and welfare states could be put into a constitutional chastity belt and the rule of no spending without equal taxation could be made the modus operandi of a shrunken state. Eventually, the free market could regain its vigor and capacity for wealth creation and, under a régime of sound money and honest finance, the 1 percent could continue to enjoy their opulence by earning it the old-fashioned way; that is, by delivering society inventions and enterprise that expand the economic pie, rather than reallocate it.
The crucial steps that would be needed are few but large. They would never be adopted in today’s régime of money politics, fast money speculation, and Keynesian economics, but they can be listed. They are compelling.
1. RESTORE BANKER'S BANK AND SOUND MONEY. The Fed’s open market operations and interest rate pegging would be abolished in favor of a mobilized discount rate at a stiff penalty over the money market. Humphrey-Hawkins would be repealed and all other Fed mandates with respect to the macro-economy or equity and debt markets would be rescinded. The Fed has created enough central bank credit for the next thirty years, meaning that it would not need to buy government debt or otherwise monetize securities for the foreseeable future. In reverting to the role of a banker’s bank, it would examine collateral presented at the discount window and ensure ultimate liquidity of the banking system, while bringing free market interest rates back into the center of financial markets. With open market purchases eliminated, the FOMC and the 12 regional reserve banks could be abolished: bank applicants for discount loans would mainly transact on-line with the borrowing desk at the Eccles Building. Over the next decade, the natural roll-off of maturing treasury and agency securities would automatically shrink the Fed’s balance sheet to the September 15, 2008, level (under $1 trillion), thereby paving the way for a full return to sound money, that is, a gold-backed dollar.
2. ABOLISH DEPOSIT INSURANCE AND LIMIT THE FED DISCOUNT WINDOW TO NARROW DEPOSITORIES. The abomination of
deposit insurance would be abolished, and the Fed’s discount window would be open only to “new charter” national banks. These charters would be offered to “narrow” depository banks which would take deposits and make loans, but would be banned from trading, underwriting, or agenting any business in securities, derivatives, commodities, or whole loan paper they had not originated. Nor could chartered banks be in the asset management, insurance, or financial advisory business, and they would be required to maintain minimum equity capital ratios of 20 percent or higher, the levels which prevailed before the 1920s. A postal banking system would be set up by the federal government for blue-haired ladies and timid savers who were unwilling to risk putting their savings into uninsured, chartered banks, but they would receive a penalty interest rate below the chartered bank rate to compensate the federal government for use of its balance sheet and credit rating.
3. ADOPT SUPER GLASS-STEAGALL II. The great Wall Street Banks would be put out in the cold to compete as enterprises on the free market without recourse to funding from insured deposits or access to the Fed discount window. Pursuant to the implementation of Glass-Steagall II, the large banks would be forced to divest their deposit banking business, and cap their balance sheets at 1 percent of GDP ($150 billion) for ten years in order to regenerate honest, competitive financial markets and to reduce the risk of crony capitalist recidivism.
4. ABOLISH INCUMBENCY THROUGH AN OMNIBUS AMENDMENT. The US Constitution would be subject to an Omnibus Amendment, a twenty-first-century “reset” to restore viability, honesty, and functionality to democratic governance. Accordingly, the terms of the president and House and Senate members would be set at six years, staggered elections to the Congress would occur every two years, and no incumbent of federal office could stand for reelection. The electoral college would also be abolished, bringing the nation into the modern world of one citizen, one vote.
Federal election campaigns would be funded strictly with public funds and the time for federal campaigns would be limited to two months every other year. No federal campaign money would be available before that designated election period, and it would be illegal to campaign for federal office with private money. Additionally, no former federal office holder would be allowed to lobby and the Citizens United decision would be explicitly overturned and replaced with a ban on election funding and legislative lobbying with corporate or union funds. The overall purpose of the Omnibus Amendment would be to rid the nation of a permanent governing class, and weaken the political parties to the point of their disappearance, as they would have no useful purpose in the citizen-based government provided under the amendment.
5. REQUIRE EACH TWO-YEAR CONGRESS TO BALANCE THE BUDGET. A crucial component of the Omnibus Amendment would be a strict requirement that the federal budget be balanced within the two-year term of each Congress other than under a constitutionally valid declaration of war. Enforceability would be guaranteed by a monthly certification from the secretary of the treasury that the run rate of spending and revenues were on track to achieve the balanced budget requirement over the two-year term. The certification would be signed by the president and the top officers of the Treasury Department, upon Sarbanes-Oxley-type criminal penalties for knowing misrepresentation or willful negligence. In the absence of certification, spending run rates would be automatically cut across the board to the estimated run rate of revenues.
6. END MACROECONOMIC MANAGEMENT AND SEPARATE THE STATE AND THE FREE MARKET. The Keynesian predicate would be abolished by virtue of the Omnibus Amendment. Accordingly, the state would be separated from the free market by a sturdy fence. The outcomes of the latter in terms of wealth, living standards, GDP, jobs, housing starts, and shipments of container-board would be determined on the free market by the actions of consumers, producers, savers, and investors. If there weren’t enough jobs, wage rates would tend to fall until there were enough jobs to balance supply and demand; that is, the free market would be in charge of job creation, not Washington and its crony capitalist gangs.
7. ABOLISH SOCIAL INSURANCE, BAILOUTS, AND ECONOMIC SUBSIDIES. The end of the Keynesian fiscal state would require a fundamental reconstitution of the role and functions of government. The provision of police functions (including most of homeland security) and public goods such as highways, education, and amenities like recreational facilities would revert to state and local governments. Social insurance, bailouts, and other forms of federal economic intervention and subsidization of the free market would be abolished. These changes in the functions of the state and the level of government at which they are carried out would eliminate the fiscally suicidal forces built into the current system, including intergenerational thievery under social insurance and interregional larceny embedded in federal grants in aid and economic subsidy programs.
8. ELIMINATE TEN MAJOR FEDERAL AGENCIES AND DEPARTMENTS. Under this régime, much of the federal government could be abolished including the Departments of Energy, Education, Commerce, Labor, Agriculture, HUD, Homeland Security, the SBA, DOT, and the Ex-Im Bank. Likewise, other Washington venues for crony capitalism would be eliminated by abolishing, for instance, Fannie and Freddie, the FHA, homeowner’s tax preferences, and the remainder of the housing goody bag. In the same vein, all forms of energy, black and green, would be put strictly on the free market; Amtrak would sink or swim as a private enterprise; subway commuters or taxpayers in New York City would pay the full fare, not innocent taxpayers in Nebraska; and GE, Caterpillar, and the rest of the corporate freeloaders would be deprived of cheap export financing from the Ex-Im bank.
9. ERECT A STURDY CASH-BASED MEANS-TESTED SAFETY NET AND ABOLISH THE MINIMUM WAGE. Outside of national defense and foreign affairs, the primary function of the federal government would be to maintain a means-tested safety net. The latter would fulfill the humanitarian sentiments held by the electorates in modern urban-industrial societies where extended family support networks no longer exist, while strictly containing the risks of abuse and freeloading by the able bodied and non-needy. This means that social insurance and the rigmarole of trust funds and insurance mythology would be abolished and that any citizen wanting aid from the state would be subject to a strict and intrusive means test, including the spend-down of all assets to some minimum level. Additionally, a work requirement for the able bodied of normal working age would be coupled with the abolition of the minimum wage and the scaling out of transfer payments to the working poor based on an all-in tax rate which rewards work and effort. Finally, all existing programs including housing, food stamps, and Medicare and Medicaid would be converted to cash equivalents, thereby eliminating the provider abuse and the crony capitalist policy and administrative exploitation that are inherent in in-kind programs.
10. ABOLISH HEALTH “INSURANCE” IN ALL ITS FORMS. The replacement of Medicare and Medicaid with cash-based transfer payments would be coupled with the repeal of Obamacare and the elimination of the massive tax subsidies for employer health insurance. So doing, the giant third-party payment deformation would be eliminated from the medical care markets and real consumers would take charge of their own health expenditures, putting providers under the competitive discipline of the free market. The cancerous growth of the medical care complex would be halted and reversed, thereby stifling the ultimate driver of welfare state bankruptcy. Indeed, the free market would rapidly give rise to solutions to all of the problems which have justified the massive incursions of the state: cost of care would be lower; pricing would be nondiscriminatory; and proficient fee-based medical care advisory services would arise to help consumers, especially the elderly and poor, navigate the medical care system and get the largest bang for their buck. The one necessary concession to socialism would be a system of federally licensed catastrophic insurance funds which would automatically cover the means-tested safety-net population regardless of preexisting condition in return for mandatory premiums; these would be withheld from beneficiaries’ cash transfer payments and be set by competitive bid.
12. IMPOSE A 30 PERCENT WEALTH TAX; PAY DOWN THE NATIONAL DEBT TO 30 PERCENT OF GDP. Even if another road were chosen, the debt of the US government would not stop growing due to the built-in deficit momentum until it reached $20 trillion at minimum. But contrary to the present Keynesian foolishness, national debt of that magnitude is a time bomb on an economy that will struggle for years to reach $20 trillion of GDP, or a 100 percent debt ratio. The reason is that eventually interest rates must normalize or the monetary system will implode in a final orgy of money printing. Normalized interest rate increases of, say, 300–500 basis points under a mobilized discount rate régime at the Fed, in fact, would cause an explosion of budget outlays (up to $1 trillion annually) and a resulting feedback loop into honest debt markets which could not be contained because free market interest rates would rise even further. The prudent solution, therefore, would be to get the federal debt burden back to 30 percent of GDP where it was at the time of the Camp David infamy. That would amount to a $6 trillion debt limit compared to a $20 trillion GDP under an unrosy scenario a half decade or so down the road.