The View From 1776

The Fed, Campaign Finance Reform, and Budget Deficits

Federal budgets will not be balanced and campaign finance reform will remain a sham so long as the Federal Reserve is free to manufacture money at the whim of politicians.

Stopping the influence of big money in politics will remain impossible so long as the Federal Reserve has the power to create money to fund Federal deficits.  People like George Soros always will discover ingenious ways to circumvent the latest legal strictures and spend literally billions of dollars to elect or to defeat candidates and to influence candidates’ votes on legislation.

The only possible way to foreclose such manipulation, short of totalitarian dictatorship, is to reduce the incentives to big money.  And the only way to do that is to reduce the scale and scope of Federal spending to such low levels that Mr. Soros et al will have little to gain by purchasing politicians.

The surest way to accomplish that end is to put our currency back on a gold standard, so that there are fixed limits on the money supply at any given time.  Under the gold standard that prevailed before the creation of the Federal Reserve, it was possible for excess bank credit temporarily to induce excess demand for production, but that condition could not persist for long.  A short recession would clear the decks and put business back on a sound footing.

Most importantly, the Federal government couldn’t take advantage of excess bank credit to business by open-ended funding of ever-larger welfare-state spending programs.  If the Treasury sold bonds here or abroad, it had to be prepared to make interest and principal payments in gold, should the dollar’s value decline because of inflation.

Congress was restrained by the absence of today’s money-creation capacities of the Fed.  The beginning assessment in every budget debate was determining the amount of tax revenues available to fund the government.  Congress members were generally reluctant to confront angry voters after imposing additional taxes to fund new programs.  Consequently the Federal government grew no faster than the total of the nation’s economic activity.  And, apart from wartimes, there were very few years of budget deficits.

Liberals will argue that President Clinton brought the budget into balance, even with the Fed free to pump artificial credit into the economy.  This overlooks a couple of unique circumstances, the most important of which was the huge cuts made in defense spending.  At the same time, business began to boom in response to Republican action in the House to reduce taxes, generating a huge, temporary surge in tax revenues.  Even Democrats agreed privately that projections of future years’ budget surpluses were pure fiction, based on assumptions of continuous and unprecedented growth rates in GDP, every year for decades into the future.

Looming in our future today is the cancerous growth of Medicaid, Medicare, and Social Security retirement entitlements.  In no way can we escape the fact that the government has promised us welfare-state payments that are growing at a rate many times faster than even the most optimistic projections of GDP growth.  No matter which path we follow ? higher taxes or deficit funding via the Fed’s inflationary expansion of the money supply ? we are heading toward the national decline now experienced by France and Germany, and here, on a micro level, by General Motors and Ford. 

It’s no surprise that the big money boys are actively fighting efforts to change the Social Security and Medicare-Medicaid program entitlements, because they want the ever-growing supply of spending sloshing around in the economy.  Big business wants the government to pick up the tab for its own health care and retirement benefits.  Unions want the security and comfort of Big Brother’s arms securely wrapped around them, with his hands squeezing the non-union taxpayers’ throats. 

Knowing where the big money is to be had for their re-election campaigns, members of Congress are happy to accommodate these and other special-interest groups.

Meanwhile, the supposedly independent Federal Reserve board will keep pumping up the money supply to fund it all, hoping that it will be able to avoid the “fine-tuning” disaster of the Great Society’s stagflation.

Don’t bet on it.  Put some of your savings into counter-inflationary commodity-based mutual funds and ETFs, with gold and oil part of the mix.

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