The View From 1776

The Wall Street Journal reports (U.S. to Ratchet Up Borrowing, July 31, 2008):

With this fiscal year’s budget deficit expected to more than double from the previous year, the U.S. government plans to nearly quadruple its borrowing to $555 billion.

The Federal Reserve’s dilemma is that opening the money-supply spigot enough to provide funds for banks and other institutional investors to buy the $555 billion of new Treasury debt will contribute further to the inflation already under way. 

Imported oil is a prime example.  Measured in gold, the price of oil is about the same per barrel as it was a decade ago.  To a lesser extent, the same is true of oil measured in Euros.  Our spectacular oil price increase for imported oil is to a very large degree the result of past over-expansion of the money supply by the Fed, with its inflationary effect.

Alternatively, keeping the money supply steady will cause interest rates to rise and will have a crowding-out effect on non-government borrowers, from businesses, to people buying consumer durables like autos and homes.

This is particularly true in today’s financial markets, where lenders already have much reduced liquidity and pinched capital bases as a consequence of the subprime mortgage bubble-burst.  Banks are dumping subprime assets at fire-sale prices, while scrambling to find equity investors to rebuild their balance sheet ratios.

Both for lender equity-raising, and for absorbing new Treasury debt, the course of least resistance is to seek funds from overseas investors.  Foreign central banks in Japan, China, and other large exporters of merchandise to the United States are over-loaded with dollars, dollars that are depreciating in value via inflation.  To some extent those overseas dollar holders welcome income-producing investments for their great dollar holdings.  Needless to say, however, they will exact a high price, both in interest rates and in equity ownership.

As noted in Our Inflation is China’s Foreign Relations Weapon, continuing to expand the money supply to accommodate Federal deficit spending, in present circumstance, is tantamount to loading a pistol already pointed at our heads. 

Both by absorbing yet more Treasury debt, and by becoming the investors of last resort for financial institutions and for corporations seeking to stay afloat in the current credit crunch, foreign nations achieve a growing power to influence our foreign policies and ultimately to threaten our national sovereignty.

The Fed’s present dilemma - to fund yet more Treasury debt via over-expanding the money supply and thereby adding fuel to the inflationary fire, or to curb the excessive money supply to forestall inflation while squeezing the economy - has been inherent in our system since Congress’s passage of the 1946 employment Act.

That Act added to the mission of the Federal Reserve the task of maintaining full employment.  Ultimately that task is wholly incompatible with the Fed’s basic role, established in 1913, of maintaining a sound currency and acting as a temporary lender of last resort for banks during credit crunches.

Senator Obama’s faith that his personal diplomacy with our sworn enemies will transform them into reasonable and peaceful partners is as old as American liberal-progressivism.  Its most celebrated expression was in the policy of the Democratic Party’s progressive president Woodrow Wilson, pronounced in his April 2, 1917, message to a special session of Congress.

President Wilson, responding to Germany’s resumption of unrestricted submarine warfare and the sinking without warning of three American ships the previous month, declared:

The world must be made safe for democracy...we shall fight...for a universal dominion of right by such a concert of free peoples as shall bring peace and justice to all nations and make the world itself at last free...

That universal dominion of right and freedom was to be implemented, in President Wilson’s expectation, by the post-war League of Nations.  Wilson went to Paris after the war to negotiate the Treaty of Versailles, confident that his great personal popularity in the United States and in Europe would convert the world to his vision of peace through civilized diplomatic negotiation of foreign policy conflicts.

Inevitably, the League of Nations was a dismal failure that could only protest fecklessly when the Japanese invaded Manchuria in 1931 and when Fascist Italy attacked Ethiopia in 1935 , setting the stage for World War II.  The root problem, of course, was that the League had no military forces of its own to enforce its resolutions (nor does the UN today).

The UN’s few successes in stopping aggression have only come when the United States took the lead and committed large military forces to the effort.  Diplomacy alone in the UN General Assembly and Security Council results at best in unenforceable resolutions condemning aggression or build-up of nuclear arms.

Aside from the fact that Woodrow Wilson’s rhetoric sounded not unlike that of President George W. Bush with regard to Iraq and that Wilson was promoting entry of the United States into World War I, rather than surrender in Iraq, his sentiment was fully congruent with the liberal-progressive policy espoused by Senator Obama in his primary campaign speeches and in his recent speech to socialist throngs in Berlin. 

Underlying liberal-progressive views about human nature and foreign policy, despite differing circumstance, are the same for Senator Obama and his liberal-progressive supporters as were the views that supported President Wilson’s naive policy.

Both based their faith upon an unrealistic assessment of human nature and upon their abilities to effect world peace through popularity and personal negotiation with antagonists, without regard to the harsh realities of conflicting national interests.

In the liberal-progressive paradigm, all peoples are benevolent and governed by reason.  This implies, dangerously unrealistically in practice, that the Axis powers in World War I, and Islamic jihadists today in Iran and elsewhere in the Middle East, truly desired peace and stable relations with the United States and Israel. 

Seeing themselves as supremely intelligent and rational, liberals find it inconceivable that other people might not willingly and happily accept their conclusions and their leadership.  Therefore, they believe, the world’s problems can be solved simply by reasoned discussions in the halls of the League of Nations or the UN.  Resort to military force, by the same token, is irrational and reprehensible, even in response to mortal threats to national interests.

In his 1920 Human Nature in Politics, Graham Wallas, a major theorist in the British socialist party, called this the rationalist fallacy: the assumption that human beings will act in domestic politics and foreign affairs on purely rational motives and only upon logical trains of reasoning. 

If Senator Obama wins the election this Fall, we can only hope that he will be mugged by reality before allowing Iran to dominate the Middle East and seize control of the world’s major sources of oil.

American liberal-progressive-socialism, in the person of Senator Obama, is a carbon copy of European socialism, and Islamic jihadists recognize that socialism offers no opposition to their ruthless jihad to enslave the entire world.

For historical perspective, let’s look to one of France’s leading socialist theoreticians, the late Jean-François Revel.  As I wrote at the time of M. Revel’s death in May, 2006:

Jean-François Revel, who died last week at the age of 82, was that exceedingly rare person: a French intellectual who didn’t despise the United States, an intellectual who understood the cancerous prognosis of liberalism.

Revel’s 1983 “How Democracies Perish” described liberalism’s debilitating effect on confronting the threat of domination by the Soviet Union.  His observations apply equally today in our long-term struggle against Islamic jihad.

Revel wrote about democracy, meaning societies unhinged from historical tradition, in which people come to accept the idea that a constitution is nothing more than the latest social-justice fad formulated by intellectuals.  That is a 20th century derangement, very different from what the Constitution instituted: a Federal republic with power divided between the states and the national government and split, within the national government, among the three main branches; a constitutional government designed to protect the rights of individuals against PC tyranny of the majority.

Earlier, in 1970, Revel had a sharply different, eagerly accommodating view of the nascent Baby Boomer cultural, educational, and political revolution in the United States.  He happily foresaw a worldwide revolution spreading from this nation and transforming the world.

The ensuing thirteen years, however, were severely disillusioning to him, leading to the reassessment quoted above. 

What was his assessment in 1970?

Contrary to the hate-Bush party line, Europeans have despised the United States at least since the early 1960s.  Describing the typical European perspective, Revel wrote in Without Marx or Jesus (published in 1970):

On the one hand, there is America, the citadel of reaction; and, on the other hand, there is the rest of the world – the revolutionary camp, composed of everyone who resists America...The basis for such a division of the world, obviously, is the opposition between capitalism and socialism...And, since imperialism is a necessary concomitant of capitalism, it is clear that the United States will move toward socialism only if it is forced to do so from without...Thus the spirit of revolution and anti-Americanism become synonymous.

In 1970, Revel had high hopes for the late 1960s cultural anarchy in the United States: the Cal-Berkeley Free Speech Movement, SDS, Weatherman, the Reverend Martin Luther King’s civil right campaign, feminism, homosexual outing, the black power groups, and the push for abortion, no-fault divorce, and sexual promiscuity.  All of these, he anticipated, would lead to full-fledged socialism in the United States and would become the model for the remainder of the world.

The particular relevance of M. Revel’s 1970 analysis, with respect to Senator Obama’s public relations tour of the Middle East and Europe, has to do with the Senator’s speech in Berlin.  To roars of approval from the socialist throng in the Tiergarten, he declared:

I come to Berlin as so many of my countrymen have come before. Tonight, I speak to you not as a candidate for President, but as a citizen—a proud citizen of the United States, and a fellow citizen of the world.

Citizen of the world is liberal-progressive-socialist code for world government, the fundamental socialist goal impelling the 1960s student anarchism.  This became the foundation for Senator Obama’s cultural and political doctrine.  Underlying Senator Obama’s continual refrain of change is M. Revel’s 1970 expectation:

With respect to the second world revolution [originating during the 1960s in the United States], it is clear that it can have only one goal, on which all other goals, however numerous, must depend.  And that single goal is the establishment of world government...On that, depends all else, including the establishment of economic equality and the abolition of social classes...

In other words, bringing us together and transcending racial barriers is to be accomplished by moving toward world government.

This goal of world government has been prominently in evidence since Senator John Kerry’s 2004 presidential campaign emphasizing “sensitive” foreign policy, in which the United States is to take no international action not approved by all of its purported allies and by the UN.

Senator Obama in his Berlin speech echoed Senator Kerry:

Yes, there have been differences between America and Europe. No doubt, there will be differences in the future. But the burdens of global citizenship continue to bind us together. A change of leadership in Washington will not lift this burden. In this new century, Americans and Europeans alike will be required to do more—not less. Partnership and cooperation among nations is not a choice; it is the one way, the only way, to protect our common security and advance our common humanity.

Again, M. Revel’s assessment clarifies and amplifies both liberal-progressive-socialist denunciation of President Bush’s foreign policies and the implications of world government espoused by Senator Obama:

...we can conclude that the abolition of what we call foreign policy will be one of the essential components of the future world revolution.  And it will also be the key to all other changes that constitute the revolution...The second world revolution will therefore consist in putting an end to that notion which is the source of all evil: the notion of national sovereignty...only multilateral agreement on reciprocal controls, leading to planetary multinational law, will allow us to escape safely from this absurd situation.  Bilateral accords must be avoided like the plague, for they are only the framework for warlike foreign policies, local hegemony, or imperialistic domination...

Whether one supports the liberal-progressive agenda or not, there must be clear-eyed recognition that it is pushing the United States toward abolition of national sovereignty.  From Supreme Court advocacy of international and foreign country law as superseding the Constitution, to “sensitive” foreign policy that must be pre-approved by the UN, we are barreling down the slippery slope to socialist impoverishment and domination by foreign powers.

Read about inflation’s effect in leveraging the counter-American power of China and other nations accumulating vast amounts of dollars, as out citizens neglect saving and spend more than they earn to receive instant gratification of their desires. 

Heedlessly, almost all administrations since the advent of socialism under Franklin Roosevelt’s New Deal in the 1930s buy votes and political power with relentlessly expanding deficits funded by the Federal Reserve’s flooding the market with dollars.

For additional background, read Exporting Inflation to China and Need We Fear Inflation?

Writing in 1929, José Ortega y Gasset described the new phenomenon emerging in post-World War I Europe.  The masses had come to believe themselves entitled to the technological benefits of civilization without understanding or preserving the cultural underpinning of that civilization.

That, unfortunately, is applicable to the United States since the 1960s student anarchist upheavals.  Senator Obama and his supporters are dead sure that everyone is entitled to whatever he wants, at government expense, and moreover, that we can afford it.  This without understanding the economic realities that have produced what we have already.

Adulation for the ephemera of Senator Obama’s rhetoric reflects a populace that has rejected John Adams’s observation that our Constitution of limited Federal power can survive only when our citizens are firmly grounded in Judeo-Christian morality.

For more about Ortega’s perceptions, read The Mass Man by Joseph Bottum.

Friday night’s Bill Moyers’ Journal on PBS placed the blame for Cleveland’s very real foreclosure problem on financial institutions’ greed, along with the Bush administration’s indifference to human suffering.

Applying the same analysis to the spread of AIDS, Parson Moyers might conclude that AIDS became a scourge because manufacturers of condoms were greedy.  He would demand new Federal regulations to prevent AIDS, when, in fact, the root cause is immoral individuals’ rampant sexual promiscuity.  If everyone had practiced sexual abstinence outside marriage, AIDS would be a minor footnote in medical journals.

Similarly, the underlying cause for the subprime mortgage meltdown and for the follow-on distress of foreclosures in places like Cleveland is the liberal-progressive-socialist welfare state and its array of entitlements financed by deficit spending, coupled with the infantile belief of borrowers, fostered by the liberal welfare state, that they are entitled to whatever they want, without first working and saving for it.

Ignoring the culpability of his own liberal-progressive-socialist cohort, Mr. Moyers blames all economic and social ills on private enterprise.  Implicitly, in his world view, non-government action by individuals and businesses is motivated by anti-social greed, if not malice.

For this, the antidote always is additional Federal spending and more regulation.  The repeated lesson of history – that government intervention always has unanticipated and usually negative consequences – is ignored.

To present his case, Mr. Moyers interviews the director of a Cleveland homeless shelter, whose job presumably qualifies him to pontificate on the workings of finance and the economy.  He also interviews William Greider, a writer for The Nation, one of our oldest socialist publications, a man whose journalistic career has been devoted to bashing private enterprise and to extolling the nascent forces of socialism.  While Parson Moyers clucks in horror, these gentlemen tell us that the foreclosure problem was caused by capitalist greed and the indifference of Federal regulators.  Imprudence of borrowers, in a good socialist society of welfare entitlements, of course, had nothing to do with it.

Looking at the history of Cleveland demonstrates, however, that the spate of foreclosures is just the current manifestation of decades-old economic ills arising from the metastasis of socialism at the Federal, state, and city levels.

In the 1950s, Cleveland was a thriving industrial city, the 7th largest in the United States, with a population of approximately one million.  Today, it is less than half that size.  John D. Rockefeller’s Standard Oil Company was originally headquartered there.  Cleveland was one of the largest ports on the Great Lakes, and it was the largest iron ore trading and shipping port in the world.  Major automobile and steel production was centered there, along with one of the largest concentrations of railroad transportation in the nation.

By 1966 all of that was collapsing.  The straws on the camel’s back were the Hough riots from July 18 to 23 in 1966, which resulted in more than 240 fires, four deaths, and hundreds of serious injuries.  This span of rioting was one of many that afflicted major cities in the northeast, the midwest, and California in the years after passage of the 1964 Civil Rights Acts and the Johnson administration’s enactment of the Great Society welfare entitlements.  In what the New York Times called the revolution of rising expectations, inner city blacks decided that the best way to improve their lives was to loot and to burn down businesses and housing.

With Cleveland police and firefighters unable to maintain control in large sections of the city, businesses began relocating, usually to the Sunbelt states, where taxes, regulations, and labor unionization were less costly and burdensome.

Higher taxes and more regulation are the hallmark of liberal-progressivism, the first, to redistribute income in accord with socialism’s conception of social justice, the second, to socialize business via indirect government control, as Henrie de Saint-Simon had proposed in the first decades of the 19th century, when he systematized the concept of socialism.

Among the counter-productive regulations, Thomas Sowell writes, was the 1977 Community Reinvestment Act, which set the stage for foreclosures in Cleveland and elsewhere by forcing lenders to make loans in high risk areas, to people with poor credit records.

Labor unions’ ability to push up labor costs to heights that drove major employers to new locations in the non-union Sunbelt states was a product of the New Deal’s legislation conferring monopoly powers upon unions and making most business resistance to unions unlawful.

The hypocrisy of Parson Moyers’s sanctimonious inquisition is particularly galling, because he was present at the creation of a major element of the mess, working as special assistant to President Lyndon Johnson at the time of the Hough riots. 

Socialism and its inevitable inflation got their greatest push from the enactment of President Johnson’s Great Society, a set of programs that made a host of welfare handouts entitlements, regardless of merit or effort by the recipient.  Without means testing, being permanently on welfare became a new career choice. 

When, as in Cleveland, fewer people work for a living, taxes soar while government strives to keep up with demands for ever-rising welfare spending.  Illegitimate births increase, education deteriorates, and violent crime increases rapidly.

Had there been no massive expansion of the socialist welfare state in President Johnson’s Great Society, along with the judicial activism of the Supreme Court under Chief Justice Earl Warren that created a panoply of criminals’ rights, there would have been no Hough riots. 

Since the imposition of socialism under Franklin Roosevelt’s New Deal in 1933, deficit spending by the Federal government, chiefly now on mandated welfare entitlements, has been funded with over-expansion of the money supply by the Federal Reserve.  By definition, this is inflation, which artificially puffed up housing prices and fueled demand for houses on the assumption that prices could only go up.

When the economy is awash in inflationary currency, bankers will find a way to lend the funds, and businesses will find ways to use borrowed money on ever more risky projects.  Inflation produced by the excessive money supply impels lenders to seek higher rates of return to compensate for the declining value of money repaid against their lending, just as businesses must seek ever higher rates of return for their investments.  Unfortunately, higher rates of return are associated with greater risk, such as subprime mortgage lending.

Banks and mortgage originators have paid for their folly with massive losses.  Meanwhile the real culprits - liberal-progressive legislators - are now playing the hero’s role, posturing with legislative hearings to impose yet more ineffective and counterproductive regulations.

None of this excuses unethical lending methods.  But neither does it absolve the imprudence of welfare-state citizens who have come to believe that they are entitled to whatever they desire, without the need first to work and save to pay for it.