The Mirage of Fiscal Responsibility™

It's hard to ascribe cause to anything in a system as complex as an economy. Such systems are susceptible to "the butterfly effect" (a butterfly flaps its wings in the Amazon, and a series of subsequent events leads to a hurricane). But which butterfly...?

Nevertheless, the U.S. has succumbed to the siren song of Fiscal Responsibility™, reducing its deficit significantly seven times since 1776. The last such deficit reduction was the Clinton surplus. The time before that occurred in 1929. Andy Jackson even paid off National 'Debt' entirely in 1835.




One hundred percent of these 'Debt' paydowns are followed by Great Depression-sized holes in the economy, too. We know about the "Great Recession" following the Clinton surplus, and the Great Depression following the 1929 deficit reduction. Even the "Panic of 1837" followed Andy Jackson's 1835 'Debt' payoff. (reference.)

A history buff acquaintance heard this, and he objected. The Panic of 1837, he said, occurred when Jackson opened up the Southeastern U.S. to cotton planters, driving out the Indians in the genocidal "Trail of Tears." The planters borrowed huge amounts to purchase slaves, and produced such a bumper crop of cotton that the price of cotton tanked, even with 60% of the crop warehoused. The planters couldn't pay the lenders for their slave loans, and the Panic followed.

But none of that contradicts the notion that 'Debt' paydowns were part of the problem. Remember, if your bank were to reduce its debt (i.e. the size of your accounts), you would be vulnerable to some interruption of your income. Your mortgage company wouldn't say "Well, your savings are low, so we'll skip this month's payment." No, they'd say "Pay your loan or we'll take your house."

So Jackson's 'Debt' paydown removed the dollar financial assets of the population--i.e. their savings. It made the economy more fragile, and the planters in particular, more vulnerable to their creditors. When that income from cotton didn't arrive, a wave of asset forfeitures and foreclosures ensued. In other words, the Panic of 1837.

But why is there such an appetite for "Fiscal Responsibility™"? Why, for one of many examples, would Democratic Congressman, Ami Bera, sponsor a "Budget Workshop" put on by one of Pete Peterson's think tanks? In case you're unfamiliar, Peterson is a former Nixon commerce secretary, an investment banker (the "Stone" in Blackstone), and a big promoter of "fix the debt"--i.e. reducing National 'Debt.'

Why would people promote such a counterproductive economic strategy as 'Debt' reduction? The answer is that some people profit from the distress of others. These vultures include the creditor class, which hates inflation and loves deflation. A shortage of dollars is deflationary, as is commodity-backed currency, in most circumstances.

The object of the creditor class is to create a population of debt peons, unable to manage their own lives without kowtowing to the creditors. (See "Mr. Potter," the villain in It's a Wonderful Life for one example.) And they have largely succeeded. The Federal Reserve just declared that 40% of the U.S. population can't handle a $400 emergency without selling something or borrowing. Sixty-five percent of seniors have only Social Security.

Why attack social safety nets? Two words: "Labor discipline." It sends the message that you had better take whatever crappy job is on offer or suffer the indignities of poverty, even homelessness and starvation. And if you're extra ornery, we'll incarcerate you (the U.S. has 5% of the world's population, but 25% of its prisoners).

I'll remind you that this is a bipartisan project. Bill Clinton not only produced that 'Debt' reduction, he conspired with Newt Gingrich's congress, and "ended welfare as we know it." That threw a half million adults off of food stamps. Before that "end," 76% of those needing public assistance got it. After: 26%. The strategy of starving the economy of dollars (reducing the deficit) plays into the hands of the creditors, and the current crop of debt peons is the result.

This is also part of U.S. international entanglements. The vanquished Japanese and German populations were granted a debt jubilee (their debts were forgiven) after World War II, but the colonies--like Vietnam--who fought the Japanese were not granted such concessions. The U.S. involvement in Vietnam was in support of French creditors and their local proxies. The Vietnamese fought against a far better armed opponent (the U.S.) until victorious because they knew that debt peonage awaited them if they lost. (See Geoffrey Race's War Comes to Long An for more about this.)

Michael Hudson writes that Jesus himself was an advocate of debt forgiveness, something the Romans did not allow. Jesus opposed the Pharisees who advocated exceptions to the Jewish tradition of debt jubilees. "Forgive us our debts" is part of the Lord's Prayer not just to encourage better behavior. It's also an admonition to forgive real, economic private (not national) debt.

Simply "reducing National 'Debt'" is a very bad idea. Increasing it is what keeps dollars plentiful, and debtors from defaulting. Unfortunately most of the increase has been going to the very tippy top of the income pyramid, so it matters where the dollars go too.

Is there a danger that our nation would default and be unable to pay its 'Debt'? The U.S. is a sovereign currency creator -- not like Greece! -- they don't make drachmas any more, they need the European Central Bank to supply euros. We will run out of dollars when the Bureau of Weights and Measures runs out of inches. In other words: never. Sovereign fiat money creators (with a floating exchange rate) like the U.S. can never be involuntarily insolvent.