Catastrophe (7 page)

Right now, to stimulate the economy, the Fed is paying those who buy T-bills a measly one-quarter of one percent interest. Buy $100,000 in Treasury bills, and after a year you’ll see only $250 as a return on your investment. Yet despite these low rates people are flocking to buy T-bills. Why? Because the U.S. government is the strongest in the world—and therefore the safest place to park your money while the recession runs its course.

As soon as the recession eases, however, all demand will disappear for T-bills that pay such little interest. Instead people will want to
spend
their money, or to invest it in more profitable ventures. The Fed will have to raise T-bill rates to competitive levels to induce people to take their money out of circulation and buy T-bills with it instead. And there’s the rub: the higher interest rates climb, the more of a drag on the economy they become.

So to borrow the money to pay for Obama’s “stimulus package,” we will have to raise interest rates which will undo any good his stimulus spending may have done.

And the only way to cure an inflationary spiral, once it takes effect, is to induce a recession!

As a nation, our last experience with persistent inflation came during the 1970s, when the big deficits we ran to pay for the Vietnam War and the residue of the Great Society (all without a tax increase) led to double-digit inflation. No matter how often President Gerald Ford spoke of the need to “WIN” (Whip Inflation Now), his pathetic efforts came to naught.

The result was a period of what became known as “stagflation”: inflation continued, but economic growth lagged. Unemployment and prices rose at the same time. The only remedy, it turned out, was a new recession—this time caused by the government.

The man behind it was Paul Volcker, who was appointed chairman of the Federal Reserve by President Jimmy Carter (to Carter’s credit). It was after Volcker raised interest rates to close to 20 percent that inflation finally stopped. But of course Volcker had to nearly kill the economy to do it. The recession of 1980–1982 was one for the history books: unemployment rose rapidly, and bankruptcies soared. It took three years to tame the inflation beast, during which the nation endured a recession almost as bad as our current one.

This is the pleasant prospect Obama has in store for us. And it’s totally unnecessary!

The cause of this coming calamity is Obama’s excess spending binge and the skyrocketing deficits his plan will cause. This “cure” is certain to cause both inflation and a future recession—while doing little or nothing to stimulate an early end to the recession we’re in right now. It’s all an excuse to allow Obama to pursue his big-government dreams. And what a catastrophe it’s going to cause!

THE WILD CARD: DOUBTS ABOUT CURRENCY

So far, we’ve been talking about conventional economics: things Obama should have foreseen but didn’t. But there is an added, and even scarier, dimension: in the unfolding economic disaster, people may lose faith in the world’s currencies.

During the Great Depression, the currencies of the world were tied to the price of gold. Standing behind every national Treasury department was a commitment to buy the local currency back, at a fixed price, in exchange for gold. Nobody needed to worry about the currency losing its value as long as they could take away as much gold as their currency could buy (and they could carry) whenever they wanted.

But as the depression deepened, Great Britain went off the gold standard. With British currency the strongest in the world, London decided it wanted flexibility to inflate the currency to fight the deflation of the depression, even if it didn’t have enough gold to cover the extra money.

Its action led investors around the world to fear that their currency might also go off the gold standard. It was his desire to reassure the markets on this point that led Herbert Hoover to the disastrous tax increases and interest rate hikes of 1931 that deepened the depression.

When he took office, Franklin D. Roosevelt followed Britain’s lead and abandoned the gold standard. Whereas dollar bills used to bear the legend “Silver Certificate,” marking them as redeemable in silver or gold, now they simply read “Federal Reserve Note.” But the credibility of the United States and the United Kingdom were such that nobody minded.

After the United States abandoned the gold standard, the rest of the world followed suit. But in the current recession, the United States is borrowing money at a pace surpassed only by the World War II deficits—and once again the rest of the world is following in our footsteps. China, Rus-
sia, the United Kingdom, Japan, and the European Union are all borrowing money like mad to stimulate their own economies.

Some estimates suggest that global borrowing to pay for government and corporate spending will total $10 trillion this year. But the rest of the world doesn’t have $10 trillion to invest. In fact, it doesn’t have much to lend us at all.

China, the leading lender to the United States, is finding that its exports are down by more than one-third as the recession stops Americans from buying Chinese products. Without foreign currency coming in at a rapid pace, China has slowed its purchases of Treasury bills. And China needs to spend its extra cash on stimulating its own economy. Economists estimate that the total amount Chinese businesses will borrow this year will come to more than $2 trillion on its own.

So what happens when everyone wants to borrow and no one has money to lend? The word “borrowing” then becomes a euphemism for printing money. Uncle Sam won’t be able to borrow the $1.75 trillion he may need this year, so he’ll print new money to cover the difference. (And, no, the money isn’t literally printed. It’s virtual money, created when the Fed lets banks lend money that doesn’t exist.) And every other country in the world will do the same. After all, they’re even less creditworthy than we are.

China, which holds more than $700 billion of our debt, is clearly worried about the chances of an inflationary spiral in the United States. If prices should get out of hand, the value of its investments in Treasury bills would be decimated. The interest rates on the T-bills it is holding wouldn’t go up, but the worth of the bills would drop steeply. For this reason, China is insisting on short maturities on its Treasury debt so it can raise interest rates each time they roll over as a hedge against inflation.

When Chinese officials wondered publicly about the credibility of the American debt China is holding, the media attacked them. Obama and Secretary of State Clinton rushed to reassure the Asian powerhouse that its investments were secure. But China’s doubts make sense, and they’re worth listening to.

In the meantime, the Fed just keeps on increasing the money supply. On March 18, 2009, it announced a new trillion-dollar program of purchasing T-bills and issuing credit to banks in an effort to put more money into circulation.

As with its efforts to date, the Fed can give banks money, but it cannot make them lend. More likely, the banks will continue to park their money on the sidelines and bring it all out when conditions improve. The Fed will then be faced with the daunting, and likely impossible, task of mopping up all the surplus currency it is creating.

But by just printing money—not even really borrowing it—we face the frightening prospect of a global loss of confidence in currency. This unprecedented situation could bring back barter and other off-currency transactions and could spell total disaster for the markets. Nobody really knows what the effect of such a loss of confidence would be. We may be about to find out!

AROUND THE CORNER: TAX INCREASES

But we do know what’s around the corner: big tax increases. It isn’t just that Obama’s stimulus package won’t work. His tax policies are ensuring that it won’t! Everything Obama is giving with his stimulus spending, he’s taking away with the tax increases he’s proposing.

With his right hand, Obama is offering business increased tax incentives and reductions. But with the left he is proposing to raise income,
estate, and payroll taxes on those same businessmen in two years. He promotes real estate sales by offering first-time home buyers a tax credit. But then he proposes cutting the tax deduction for mortgage interest in two years!

Knowing the magnitude of the coming tax hikes, households making more than $200,000 a year aren’t spending money in response to Obama’s stimulus enticements. They’re hunkering down, trying to conserve their assets so they’ll be able to afford the tax increases they know he has in store for them.

And what increases they will be!

First, he’ll increase the top brackets to 35 percent and 39.6 percent respectively—a 9 percent hike for the first group and a 13 percent rise for the second.

Then he’ll impose the FICA Social Security payroll tax on all income over $250,000 per year. (He has yet, as of this writing, to submit a proposal to Congress, but he promised to raise these taxes in his campaign, and when it comes to tax hikes he usually keeps his word.) For these taxpayers, it will mean paying an extra 6.5 percent tax if they’re employed (and an equal amount by their employer) or, more likely, a 13 percent tax increase if they’re self-employed.

And he’ll cut the amount that taxpayers making more than $200,000 a year can deduct on their taxes (for home mortgages, charitable donations, state and local taxes, and so on) by 30 percent.

Add in state and local levies that are going up all over the country, and that means a high-income taxpayer will have to pay more than 60 percent of his or her income in taxes.

Politically, Obama is making sure to gouge only the top wage earners in the nation. But economically the impact of these hikes will be huge. It’s that top 1 percent who pay 41 percent of all income taxes in the United States; the top 5 percent pay more than 60 percent.
⁶³

Upper-income taxpayers are also the biggest spenders. By hitting them as hard as he is, Obama is ensuring that they won’t be lured into spending by his stimulus proposals but will realize that they just presage the tax increases down the road.

Upper-income taxpayers must feel a bit like hogs at the Chicago stockyards—being fattened with stimulus spending so they can be slaugh
tered with tax increases two years down the road…all to make a nice breakfast for the federal government.

CLASS WARFARE BECOMES GOVERNMENT POLICY

More and more, President Barack Obama is turning American politics into a pitched battle between those who pay taxes and those who live off them.

It’s the tax payers vs. the tax eaters.

Under the guise of a stimulus package to bring the economy out of its recession, the Obama administration is reworking the fundamental politics of our country, passing out checks like heroin to create a constituency addicted to public handouts, and concentrating the tax burden of paying for it all on a smaller and smaller number of Americans. A larger percentage of the American population is paying no income taxes at all and few other levies, making them unlikely to complain when taxes are raised on those who do. At the same time, they’re getting checks from Washington as part of a concerted effort to build a constituency that supports big government and big handouts.

The social consensus that used to underlie public policy making in the United States has melted down. In the past, when we voted to embark on new spending, we understood that we’d all have to share the burden. And we accepted that. We all agreed that the rich should pay more and the poor less, but we knew we’d all have to shoulder some of the freight. To a great degree, we followed the Marxist maxim “From each according to his abilities and to each according to his needs.” But everyone had to contribute something!

Even before Obama took office, this basic construct had begun to fracture. On the day he became president, 43 million American households—roughly a third of all households in the country—were paying no federal income taxes at all.
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In fact, most of those people got checks
from
the government.

But when Obama’s tax program is fully implemented, a majority of Americans will be exempt from paying any federal income taxes. And, instead of a tax bill most of them will get checks from Washington every year.

Under the guise of cutting taxes and “making work pay,” Obama is effectively putting a majority of Americans on welfare.

This isn’t entirely new, of course. The government has long handed out checks to large segments of our population. Economists call these payments “cash transfers.” At first these checks targeted specific groups of people, mainly the elderly and the disabled—those who had paid into the Social Security system all their working lives. Veterans who had served our country in the military received pensions and other payments. Others who got government checks include those who were especially needy, such as unemployed single mothers trying to raise small children and people whose incomes were so low they need food stamps to maintain an adequate diet.