The Reckoning Awaits

They told me that if I took a break from blogging, the U.S. government would lose its Triple-A credit rating, and . . . . Well, actually nobody told me that, and I’m glad that I followed my impulse not to kibbitz while the House Republican leadership tried to persuade President Obama and the Senate Democrats to agree to a deal that would bend the debt curve downward. What they got was paltry, at best not a step in the wrong direction. The S&P downgrade shows how much more is needed and highlights how determined the Obama/Reid/Pelosi axis is not to do it.

Though Tim Geithner tried to quibble, S&P’s downgrade was not only justified but overdue. The current trajectory of federal indebtedness is up, up and away.

If this goes on, the U.S. almost certainly won’t repudiate its obligations in an overt way. Treasury bondholders won’t be told to take a haircut on principal or anything of that sort. Instead, at some moment when debt service becomes more than the tax base can bear, the Federal Reserve Board will create enough new money to inflate it away. Someone who lends money to the U.S. today faces the risk of being repaid ten or 30 years from now with junk dollars.

Untroubled by such prospects, the President earlier this year offered a budget that generated trillion-plus deficits forever. He has now abandoned that document (voted down by the Senate 0–97) but has offered nothing in its place. His “plan” for fiscal stability consists of an unspecific plea for higher taxes. He opposes reducing spending on anything except national defense.

The dearth of tax revenue is indeed a problem; tax collections in 2010 were $400 billion below 2007. But that wasn’t because of some newly enacted tax break for billionaires. It was because the economy is in wretched shape. A tax system that relies on milking corporations and rich people runs into trouble when the rich aren’t getting richer. The solution – more easily said than done, of course – is to revive economic growth. To that end, the Obama Administration has dosed us with Dr. Keynes’ Expansion Elixir, i. e., federal spending – up $800 billion since 2007. That panacea has done as much for the economy as bleeding and purges did for the life spans of the French nobility of the Ancien Regime. The President naturally wants to increase the dosage.

In parallel with fiscal Keynesianism, the Fed has done what hindsight reveals it should have done in 1930. It has vastly expanded the money supply. That’s just what the country needed when money primarily meant currency and currency was so scarce in some regions that private scrips took over as the medium of circulation. “Unexpectedly”, though, what would have worked 80 years ago made no difference in an utterly different context. Abundant money then would have fostered economic activity that people wanted to engage in but couldn’t. Abundant money now sits unutilized, because the great impediment to activity is lack of the desire, rather than the means, of exchange.

A dead weight of uncertainty presses down on the economy: the short-term uncertainty of revolutionized financial regulation – the unaccountable caudillo of the Consumer Financial Protection Agency and the rest of the Dodd-Frank apparatus – accompanied by the fear that the President will get his way on tax hikes, the medium-term uncertainty of Obamacare, and the long-term uncertainty of federal obligations that will, if they come to pass, overwhelm any conceivable tax base.

Abe Greenwald has a good response to the Democrats’ effort to blame the “Tea Party” for the downgrade:

Let’s acknowledge that the Tea Party played Russian roulette with America’s future. Which means it took five bullets out of the loaded revolver the U.S. had to its head and gave the country a fighting chance. . . . When the debt-ceiling first came up, Democrats wanted no spending cuts, period. Forget Russian roulette, that’s liberal roulette and the odds are 100% against survival. Anything that the GOP proposed afterward was necessarily a walk back from the edge.

Unhappily, the President has made it clear that the abject failure of his policies to date proves only that George W. Bush’s maleficent influence is even greater than he thought. We can expect him to reiterate his demands for higher taxes and more “investment” in wealth-draining boondoggles, to block all attempts to steer toward fiscal sanity, and to devote hundreds of millions of dollars of campaign expenditures to slandering his opponents. By this time next year, “terrorist” will be the mildest of his surrogates’ epithets.

There’s always a risk of overdramatizing the moment one is in. I remember all the folks, many of them normally sober-minded, who were convinced circa 1968 that America was on the brink of a revolutionary uprising. Nonetheless, it looks very much like we are at or near a Reckoning, when our country will either take all of the bullets out of the revolver or pull the trigger. I note that the inimitable Mark Steyn has written a new book looking ahead to the second contingency. He ought to donate a few percent of his royalties to Standard & Poor’s.