George Rebane

[This editorial appears today (12 December 2009) in The Union’s print and online opinion sections (here).  This is the submitted version. gjr]

The news is good, we seem to have bottomed out of our Great Recession – job losses are decreasing, government is hiring, hundreds of thousands of mystery jobs have been “created or saved” by the various stimulus packages, our healthcare system is about to be fixed once and for all, and ‘cap and trade’ will add untold new green jobs.

But a few of us still shake our heads periodically as if to wake up from a bad dream.  Yet our neighbors seem happy and oblivious to the world we see.  It is as if they were living in the 21st century version of the Ozzie and Harriett 1950s, only now it’s American Idol and the various ‘reality’ shows that make up the daily circus.  The mood is definitely upbeat – this recession is like all others before it, and it’s about over.

The country seems to have reverted to an innocent youth.  Government has things in hand.  We’re looking forward to hope and change.  A mike recently stuck in the faces of some Detroit ladies reflects the public’s understanding.  ‘Where’s the money coming from?’, ‘From President Obama’; ‘Where does he get the money from?’, ‘I don’t know, he’s got a stash somewhere.  He’s the President!’  In the background you can hear the happy chanting, ‘O-ba-ma! O-ba-ma!’  All is well.

But if we look behind the tightly drawn curtain, we see a different reality.  This reality is reshaping the very foundations of our Republic, preparing it for the promised “fundamental transformation”.  It’s the numbers mixed with a bit of history that tell the story.

We have used fiat money since 1971.  Fiat money is backed by nothing and no one. It floats on a froth of faith that the country’s economy will continue growing, and the fiat dollars will continue to represent a draw on the goods and services pumped out by the economy.  But people who keep their wealth in fiat money also pay a continuous stream of asset taxes through inflation, asset taxes that will allow the government to eventually take it all.

Governments love easy-to-print fiat money.  Such money is used to make transfer payments with deferred costs, especially if those payments generate deficits that are covered with borrowed money.  Transfer payments are used to buy votes through wealth redistribution by ‘robbing Peter to pay Paul’.  The Pauls reliably vote for politicians promising such redistribution.

By CBO estimates, we will be borrowing more than a trillion dollars annually from now on forever.  Forget the meaningless deficit to GDP ratio, and keep an eye on the national debt service cost to GDP ratio.  This is a consistent measure because both occur during the same period, one serving to directly diminish the benefit of the other.  In ten years or sooner we will also pay over one trillion dollars a year on interest alone, and that interest will grow every year.

A more immediate concern is the debt service percentage of the federal budget.  Under a very hopeful economic growth scenario that is not in the cards, we will pay almost a third of our federal budget in interest on national debt.  And with the deficit pumping healthcare and ‘cap and trade’ programs coming on line, that fraction will continue increasing.  Something will have to give.

People unclear on the concept are hopeful that the change to green industries and green jobs will continue the American gravy train of borrow and spend.  In Nevada County we are particularly susceptible to such subsidized siren songs.  Unfortunately, a little thought shows that this is equivalent to taxing ourselves into prosperity.  The Soviet Union tried it for seventy years while making its citizens indescribably miserable. Today village idiots like Chavez of Venezuela, Correa of Ecuador, and Morales of Bolivia are charging down the same path.

As long as the real cost of fossil fuels and nuclear power remains low, the green thing will be a temporary fantasy.  Making energy or anything else artificially expensive through added taxes creates no additional wealth – it is a bookkeeping bamboozle for the dimwitted.  Frederic Bastiat (The Law) and Henry Hazlitt (Economics in One Lesson) explained it to us in detail.

So here we are, headed for a Weimar-like debacle which can only create a crisis summoning the notorious ‘man on a white horse’ to take control and set things right, perhaps on a global scale.  Short of that, the only plausible explanation for the current calm is that we are planning to witness a miracle.

George Rebane is a retired systems scientist and entrepreneur in Nevada County who regularly expands these and other themes on Rebane’s Ruminations (www.georgerebane.com).