Monday, August 8, 2011

Panic in the Streets, Part I: It's Not as Bad as You Think. It's Worse.

First, let's not belittle the disaster of the downgrading of the credit rating of the United States. It will raise prices, make government more expensive, and make it more difficult for what government there is to function. There's also the possibility that with the United States seen as weakening, terrorist attacks will rise.

Ironically, none of this was necessary, and all of it was avoidable. The basic problem is that, within the framework dictated by reliance on the Currency Principle, the "supply of loanable funds" depends absolutely on existing coin, currency, demand deposits and some time deposits — M2. M2, in turn, relies on the government maintaining a permanent outstanding debt in order to have something to back the currency.

In consequence, the fixed belief is that for economic growth to take place, the government has to be in debt. If things take a turn for the worse or get out of whack, the obvious solution is to spend more, and for local, state and federal governments to go further into debt. Of course, when things were good, local, state and federal governments were going into debt because they figured that the good times would continue and they could shift the payment for current benefits into the future when it would be the worry for other taxpayers or even not have to be repaid at all. This "new philosophy of public debt," as Harold Moulton called it, is directly contrary to what common sense dictates. As Moulton explained,

"Fiscal experts have always regarded it as wise to reduce the debt materially in easy times in order to have a margin of safety for possible hard times in the future. This is simply common sense, prudent financial management." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 52.)

As regular readers of this blog are aware, these Currency Principle assumptions are false. The thought intrudes that not only was the downgrade avoidable, it is possible, within a very short time, to reverse the downgrade and put the faith and credit of the United States back on the soundest possible basis to an economy that supports sustainable economic growth for every child, woman and man just by changing assumptions and acting in accordance with the dictates of common sense. Frankly, it's been done before, and there's no reason why it can't be done again.

Okay — technically this is the first downgrading of America's credit rating by the rating agencies. In a sense, that's like saying nobody ever died before the obituary was invented. The history of the United States from 1776 to 1913 is, from an economic point of view, periods of brilliance and phenomenal growth interspersed with politically motivated financial incompetence that boggles the imagination. Forget about The Conspiracy. We need look no further than our apparently unlimited ability to bury our heads in the sand and ignore the obvious until somebody yanks us out of the dirt and rubs our noses in the results of our own stupidity.

In the coming week — assuming that we aren't diverted by other disasters — we'll try to present the case for immediate adoption of a Capital Homestead Act as the soundest possible response to decades of fiscal and political irresponsibility, and why every reader and the organizations with which he or she is affiliated should join the Coalition for Capital Homesteading. As we've remarked before, citing Bluto in Animal House, "It don't cost nothin'," and might actually get something constructive done to everyone's benefit.

Or you could sit back and wait for the politicians and academic economists to fix everything. That's worked so well up to now, hasn't it?

#30#

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