The View From 1776

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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.

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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.

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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-Fran

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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?

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Writing in 1929, Jos

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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

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