Impasse: Fake and Real
by Gary North: Obama
The debt ceiling
agreement that came over the weekend will raise the ceiling by $2.1
trillion enough to get this issue off the political table
until January 1, 2013, which was Obama's desire.
The House called
the bill the Budget
Control Act. It was the budget out of control act. It is 74
pages long. No one in Congress had time to read it. Typical.
be guaranteed spending cuts of under $1 trillion over the next decade,
meaning under $100 billion a year, with most cuts coming late in
be a new bipartisan committee set up which will somehow find an
additional $1.5 trillion in spending cuts over the next decade.
That's a total of under $250 billion a year, all imposed late in
the decade-long process, unless Congress changes its mind later,
which is likely.
What if the
committee fails to act, or Congress fails to act by late December?
On January 1, 2013, cuts will begin: $1.2 trillion. They will be
distributed 50-50 between defense and domestic spending. Untouchable
will be Social Security, Medicaid, veterans' benefits, federal pensions,
food stamps, and unemployment benefits. Medicare can be cut 2%,
but health care providers must bear these cuts, not Medicare recipients.
the fiscal committee took no action, the deal would automatically
add nearly $500 billion in defense cuts on top of cuts already made,
and, at the same time, it would cut critical programs like infrastructure
or education. That outcome would be unacceptable to many Republicans
and Democrats alike creating pressure for a bipartisan agreement
without requiring the threat of a default with unthinkable consequences
for our economy.
The White House
press release did not say that these cuts will come all at once.
If they did, most of the Defense budget would disappear: $500 billion
out of $700 billion. So, the cuts will come over ten years. The
press release did not say this, but that is its implication. No
one is about to shut down the Defense Department. The threat is
leaders in the House caved in to the debt ceiling increase. Democrat
leaders in the Senate caved in to a hike with no tax increases.
Lest we forget,
a decade ago, the Federal government ran a surplus of $128 billion.
It took Social Security revenues to accomplish this, but it still
was an on-budget surplus. Beginning in fiscal 2010, as I had predicted,
Social Security has been running an annual deficit. It makes the
on-budget deficit look worse. This is more accurate than before.
Tea Party Republicans
who are new to the affairs of the Washington Beltway have been handed
a psychological setback. They had hoped that the House would stand
firm. The House was in a position to force a Constitutional crisis,
by forcing Obama to assert control over spending despite the debt
ceiling. But this hope was almost sure to be betrayed. The capitulation
of the House was an extension of Republican policy.
REPUBLICAN LEGACY ON DEBT
In fiscal 1971
and 1972, Richard Nixon ran back-to-back deficits of $23 billion.
This was unprecedented. Nixon was overseeing the Vietnam War. He
was trapped by the first recession since 1957. As he admitted, he
had become a Keynesian. So, he took the nation off the international
gold standard in 1971, as deficit spending increased. But then there
was an economic recovery. The deficit fell. In 1973, it was $14
billion. In 1974, it was $6 billion.
Then the 1975
recession hit. A tipping point took place. In 1975, the deficit
was $53 billion. In 1976, it was $74 billion. These were unprecedented
deficits in peacetime.
I joined Ron
Paul's staff in June of 1976. He was defeated by fewer than 300
votes out of 180,000 in November. But in my brief period in Washington,
I became convinced that America had begun the transition from a
creditor nation to a debtor nation. Without the remains of a gold
standard, the last restraining force was the bond market. I did
not think this would be enough to bring the Federal government back
to anything resembling fiscal sanity.
In early 1977,
I predicted in my newsletter, Remnant Review, that the annual
Federal deficit would reach $200 billion in 1984. That was considered
highly unlikely at the time. Yet I was too conservative. The 1983
deficit was $208 billion.
We can see
what happened under Reagan. His first year was 1981. The deficits
were in billions of dollars. We can see the transition: from Carter
(1977-1980) to Reagan. Carter had a recession in 1980. Reagan's
recession began in 1981 and extended into 1982. Then
the undermining of the (undeserved) Republican tradition of being
opposed to deficits. George H. W. Bush continued this tradition
of record-breaking deficits.
George W. Bush
did even more to undermine the Republicans' supposed tradition of
fiscal responsibility. He had one year of surplus, a legacy of Clinton's
economy, though of course bolstered by Social Security receipts,
as all of these figures are.
made it clear that Ford's deficits had indeed been the tipping point
for the government. There was no longer any threat of foreign governments
demanding gold as a way to protect themselves against the decline
of the dollar due to Federal Reserve inflation to purchase a growing
portion of the rising Treasury debt.
When the 1982
Mexican banking crisis hit on Friday, August 13, 1982, Volcker over
the weekend reversed the Federal Reserve's tighter-money policy,
which had begun in the fall of 1979. That was the beginning of a
new era of Federal Reserve inflation, which was accompanied by a
decline in the purchasing power of currencies worldwide.
In 2004, Harry
Browne summarized Reagan's legacy on Federal spending.
may remember that when Ronald Reagan took office, the federal
budget was only $678 billion. During his 8-year tenure, the budget
grew by 69% on its way to today's $2.3 trillion budget.
average increase in government during Reagan's administration
was 6.8%, compared with "big government" Bill Clinton's average
annual increase of 3.6%.
to balance the budget within his first term. Instead, the annual
deficit rose from $79 billion to $212 billion in that first term
and the Reagan years added $1.9 trillion to the federal
known as a tax-cutter, and the term "Reaganomics" implies dramatic
cuts in tax rates. But after pushing through a tax cut to be implemented
over three years, he cooperated during the second year in the
largest tax increase in American history up to that time. The
nation's annual tax load increased by 65% during his time in office.
after Nixon could no longer be taken seriously as defenders of fiscal
responsibility. That reputation was not deserved anyway. Bipartisan
spending became a way of political life on December 8, 1941. But
political rhetoric is important, and Republican rhetoric until Nixon
was in favor of balanced budgets. Then came his admission of Keynesian
What we have
seen ever since is the Republicans' capitulation on spending. The
1995 attempt to resist the debt ceiling deadline ended in a complete
surrender to Clinton. It has ended even earlier this year. The House's
1995 holdout did last a few days after the ceiling was hit. This
time, it did not.
So, we should
not regard the enormous hike in the debt ceiling as anything but
business as usual. Under
Reagan, the debt ceiling was hiked 18 times. People forget.
The media blamed
the Republicans in the House for brinksmanship. It was, indeed,
but not in the way that the media wanted the public to understand.
"brinksmanship" was applied by the media to the foreign policy of
the Eisenhower Administration. The media reported that Secretary
of State John Foster Dulles was using strong rhetoric against the
USSR, thereby moving America to the brink of nuclear war. It was
all fake. Dulles was in fact a one-worlder.
He was a
one-worlder from his days as Woodrow Wilson's legal counsel at
the 1919 Versailles peace conference.
He was a
one-worlder in religion: a liberal Presbyterian, as was his father,
who taught theology in a liberal Presbyterian seminary. He was
the defense attorney for John D. Rockefeller, Jr.'s favorite minister,
America's most famous liberal preacher, Harry Emerson Fosdick,
at Fosdick's 1924 trial for heresy. Dulles won.
He was a
founder of the World Council of Churches in 1948. He had begun
working on this project in 1937.
He was a
one-worlder in his profession: a fabulously wealthy international
lawyer, who did deals with the Nazis in the 1930s until his staff
finally revolted. Even after this revolt, he continued to do it
on the sly. (For the real story of the Dulles brothers, read John
Loftis' book, America's
He was a
one-worlder when he was chairman of the Carnegie Endowment for
International Peace in 1946. He had demanded the appointment of
Alger Hiss as president. Hiss had been a Soviet spy. Dulles in
1946 had been warned about Hiss's Soviet connection, but he ignored
this. (The best book on this is Alan Stang's The
He was a
trustee of the Rockefeller Foundation, 1935-53.
entirely with Truman's Secretary of State, Dean Acheson. He wrote
in his 1950 book, War or Peace, this stirring call to action:
"The United Nations represents not a final stage in the development
of world order, but only a primitive stage. Therefore its primary
task is to create the conditions which will make possible a more
highly developed organization."
But the mainstream
media love to create kabuki theater. So, they invented the myth
of Dulles' brinksmanship.
same media game goes on today. The rhetorical battles in Congress
over the last few weeks have centered, not on the deficit itself,
but on issues beloved by the two parties. The Republicans want reduced
tax rates for the rich. The Democrats want increased taxes imposed
on the rich. Both parties claim that their policy will be good for
the middle class.
say that reduced taxes on the rich will lead to increased capital
formation, which will bring down unemployment. The Democrats' electoral
base is perceived by Democratic leader as responding to appeals
against the fat cats.
as always, are the big banks, which are cleaning up with short-term
interest rates (T-bills and Federal Funds) at well under 0.25%.
They can borrow short and lend long. So, profits of the large banks
are high. The carry trade is once again alive and well.
Main Street is still in crisis mode. Unemployment is rising. Uncertainty
regarding medical insurance costs is widespread. The safest thing
for a small business to do is either avoid hiring or hire temps.
was never any danger of an actual default on the debt, which is
why stock and bond markets did not tank, and why Treasury rates
went down on Friday, July 29. Mid-term and long-term rates fell
in July. Sophisticated investors knew that the gridlock was for
show, that the two houses of Congress would work out a compromise,
and if they somehow failed to do so by August 2, they would within
a short time.
economic issue is the Federal debt, not the debt ceiling. The size
of the increase indicates that Congress and the President have no
intention of cutting spending. They were under siege from constituents.
Politicians were receiving letters from constituents on Medicare.
The ratio was 100 to one against cutting Medicare payments. This
was what nine Senators told John Mauldin, when Mauldin spoke to
them informally for 90 minutes on the debt problem. Here
is his summary.
it clear that getting it done is going to be very hard, and it
will take real commitment from men and women like them to get
us through this. They all noted that their mail was running 100
to 1 against cutting Medicare. Every one of them. They know that
they cannot close the deficit gap just with the elimination of
the Bush tax cuts. And I think I convinced any who weren't already,
that not getting the deficit under control means Depression 2.0
and a disaster.
in 2012-13 will be, how much Medicare do we want and how do we
want to pay for it? Sadly, I think the only way is with a VAT
(value-added tax), since less than 50% of citizens pay any income
taxes now. Want to run on a program of taxing the "middle class?"
Didn't think so. Want to run on a platform of cutting Medicare?
That is not a winner either. We are at an impasse.
He is correct.
We are at an impasse. We are not facing gridlock. We are facing
the steady decline in the Treasury's credit rating. We are facing
a crisis in the financing of the deficit. We are ultimately facing
a test of the solvency of the welfare-warfare state. But this will
not play out in 2012. I think it will be much clearer in 2016.
That is Larry
the Cable Guy's mantra. It has been the mantra of voters all through
this political posturing over the debt ceiling.
there is a way for Congress to settle the debt issue. They saw through
the parties' kabuki theater positioning on the debt ceiling. The
House voted overwhelmingly for the compromise bill: 269 to 161.
So did the Senate: 74 to 26.
cannot work out is the debt crisis. It really is a crisis, but it
is not perceived as a crisis by voters. So, it is not yet a political
of the debt ceiling settlement points to the politically inescapable
nature of the impasse. The voters believe that the impasse is political,
in the sense of partisan, in the sense of Washington partisan. They
are wrong. The impasse is fundamental. It is political in the sense
of rival demands by the same voters. The voters all want the bankrupting
welfare programs: Medicare, Medicaid, and Social Security. Republican
voters also demand a large defense budget, and a majority of Democrats
in Washington always vote with the Republicans on this.
political impasse has to do with voters' expectations. The politicians
ever since 1965 have made promises that cannot be met: stable prices,
Medicare benefits, and a solvent government. This is true throughout
the West, including Japan. The bills are now coming due. The voters
demand that the promises be fulfilled by the government at pain-free
tax rates. This cannot be done if Treasury interest rates rise.
Ultimately, it cannot be done even at low rates. Social Security
and Medicare are both in negative cash flow conditions.
think deals can be worked out to deliver on the promises at low
prices. At some point, reality will set in. Then the real political
battles will begin.
be a default. It is not clear who will win, i.e., who will lose
The ease of
the weekend resolution of the debt ceiling mini-crisis will reinforce
the voters' belief that there are always pain-free ways to get out
of a seeming impasse. This is misleading. It will lead most Americans
to make very bad investment decisions and retirement decisions.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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