Meltdown-or is it?

March 24, 2008

The sky is falling! Our economy is collapsing! It's fiscal Armageddon!

Well, that's the perception out there, anyway. And that's scary - because when the public is in a panic, the Government feels it has to do something. And we all know that the most dangerous words you can hear are, "I'm from the Government, and I'm here to help."

Unfortunately, there is a fundamental disconnect with economic reality which is inherent in Government.

When the economy slows, the first response has been for the Fed to lower interest rates. Great. All that does is encourage the assumption of more debt.

Then, when things get bad enough, they put together an election year "stimulus package" to "rebate" some tax money. Terrific. Then the federal government goes further into debt to mail out checks which people use up in a month or two. It might gain a few incumbents some additional votes, but doesn't really help the economy fundamentally.

What people don't realize, and the Government knows but won't say, is that the entire economic structure of the U.S. is a house of cards built on IOUs. That dollar bill in your pocket isn't even money... it's a promise to pay... an IOU... a Federal Reserve (promissory) note. Since we left the gold standard, our currency is backed by nothing except the credit rating of the Fed. The Fed isn't even a Government agency... it's a private organization. The Federal Reserve creates currency out of nothing, and lends it to the government at interest. Talk about a bubble doomed to pop at some point!

Then the Fed loans money to banks, at interest. They loan money to the public, at interest. They're all making a profit (as long as the money itself is perceived to have value).

But the rest of the world is starting to shun the U.S. dollar in favor of other currencies. On the worldwide market, the dollar's value is declining.

Concurrently, our Helpful Government noticed a few years back, that many minority folk were not qualifying for mortgage loans. Of course this was a factor of their credit worthiness - and not of their ethnicities... but our Helpful Government was not satisfied with the fact that some people can't afford a mortgage. They insisted that the financial markets find ways to get more of these "less than qualified" individuals into home-ownership. And so was born the "sub-prime mortgage" market. We all know what happens when you squeeze someone with minimal credit worthiness into a house they can barely afford at introductory rates which will adjust upward!

So, what's the fix? Sadly - the real fix will probably never happen. But I'll propose it here anyway.

First, return to the gold standard and eliminate the Federal Reserve. Give our money real intrinsic value backed by gold and quit creating money out of nothing. Of course, some politicians who even considered making this proposal a reality have met sudden ends.

Second, make the tax cuts permanent, and reduce taxes further. As Bush, Reagan and Kennedy have proven, reducing tax rates stimulates the economy, generating growth and expansion, and resulting in gains in tax revenues. Tax cuts don't cost the treasury... they increase it.

Third, reduce or eliminate as many "social programs" as possible. The government is a horribly inefficient transfer agent... it takes it $3 to spend $1 on anything. That's $2 it takes from you and me just to deliver a third dollar that they take from you to give to someone else. Government must begin to understand they cannot provide womb to tomb "care" for people. Instead, people will be better able to provide for themselves if the economy is strong, and sound enough to produce gainful employment, and the tax burden is eased enough to allow the people to use their money to their own benefit.

Fourth, enforce our borders and immigration laws. Legal immigrants and citizens will do most any job for a reasonable wage... if you don't believe it, tune in Mike Rowe's "Dirty Jobs." The massive influx of illegals is not only a security risk, it is an economic rocket barrage.

Fifth, implement term limits on our Federal Legislators. As long as one can make a lifelong career out of being a lawmaker, doling out goodies from the federal cookie jar for re-election votes will remain a problem. Until entrenched lawmakers are purged out and we have a new crop of Congressmen and Senators who understand they are in for a time, to serve the public good, and then they return to private life... the other four proposals are virtually impossible to implement.

No, even the implementation of all the above will not bring about a utopia without ups and downs... the economy is far more complicated than these simplistic proposals can address - however these are fundamental flaws built into the very fabric of our economic infrastructure. Without repairing these, there will always be the risk of economic shipwrecks.

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Copyright ©2008 Doug Edelman