Living Within Our Means

Recently, Congressman Paul wrote an article telling Congress it needs to reject the warfare/welfare state. Appropriating money leads to bigger deficits, and this has to end. Our dollar today is crashing. The Federal Reserve, socialist policies, and our militaristic notions are the driving forces behind the U.S.' problems.

Generally, wars lead to destruction, inflation, and the devaluing of currency. The U.S. has been at war for nine years with no end in sight. We have entitlement programs that will swamp the budget in the coming years, and under current policies, our national debt will continue to grow by trillions every year.

According to Congressional Budget Office estimates, the national debt held by the public will grow by more than $6 trillion over the next decade. In 2010, the United States accumulated over $3.5 billion in new debt every day. That's a rate of more than $2 million per minute. The U.S. spends trillions of dollars annually to maintain its interventionism, and all this is done through the Federal Reserve creating and borrowing money. Our country is broke. We are spending ourselves into oblivion, and none of the establishment politicians are suggesting cutting both warfare and welfare programs.

Necessity says we have to.

Right now, there is a debate on Capitol Hill as to whether or not to raise the debt ceiling, which is currently at $14.3 trillion. Federal Reserve Chairman Ben Bernanke warned against Congress not raising the debt ceiling while testifying before the Senate Banking, Housing, and Urban Affairs Committee.

He illustrated the dangers with a credit card analogy, stating:

“Not increasing the debt limit is like saying, you know, we're going to solve our family's financial problems by refusing to pay our credit card bills. These are bills that have already accrued, as opposed to cutting up the credit card and saying going forward we're not going to do any more spending. But this is money we've already borrowed, and these are commitments we've already made to contractors, to senior citizens, and so on. And what we're saying is we're not going to make these payments that we've promised. So I'd rather that we'd be forward looking and say, you know, we're going to restrict new spending and new commitments until we have reform.”

Bernanke's essentially saying that America can't default without undergoing a severe crisis. America is not in a financial position to make our payments, and therefore we need to run the credit cards again. Meanwhile, he's been appealing to Congress to make budgetary cuts so that we can make our payments in the future.

The necessary budget cuts our government needs are not going to happen. Although Senator Rand Paul has put forth serious proposals, Congress has no incentive to cut when it has the Federal Reserve. Without the Fed, politicians would be required to raise taxes or cut spending to fix the deficit. The latter would more likely be pursued, since constituents don't like paying higher taxes.

Instead, politicians use the Federal Reserve to pay for government programs, which creates a moral hazard. Politicians are incentivized to keep spending since they don't have to raise taxes or cut government programs. If they did either, it would upset the constituents they represent and hurt their chances of being reelected. Instead of making difficult decisions and being accountable, they use the Federal Reserve to either create or borrow money. Since our country is bankrupt, both of these options are detrimental to economic recovery and really create an invisible tax on the American people - invisible meaning a tax people don't “see” or “feel.”

To understand what an invisible tax is, you must first understand that we are using a fiat currency - meaning our money has no intrinsic value. It's not backed by hard assets such as gold or silver; it's just paper. The only reason it has worth is that people perceive it as being valuable. Therefore, when government increases the supply of money, this causes inflation and devalues the purchasing power of your money.

Here's an illustration:

Let's say there are four Mickey Mantle baseball cards in circulation, valued at $200,000 a piece. What if one million were found in a box in a warehouse? Each card would be worth less than before. The same thing happens with the money supply.

The more Federal Reserve Notes the Fed creates, the less value each monetary unit possesses, thereby creating an invisible tax on those who save their fiat currency. When the money supply is increased, prices rise. With each dollar now worth less than before, it can purchase fewer goods than it could in the past. This becomes even more interesting. Since the Federal Reserve was created in 1913, the dollar has lost over 95% of its purchasing power, while the value of gold has risen from roughly $20 an ounce to over $1,400.

Now, some may say that while prices may indeed rise, so do wages and salaries. Therefore, inflation causes no real net problem. This misconception overlooks one of the most insidious and immoral effects of inflation. It actually serves as a redistribution of wealth from the poor and middle class to the politically well-connected. The price increases do not occur all at once. Those who receive the money first benefit, because prices have not yet risen.

For instance, politicians, banks, corporations, and the like benefited from the TARP funds (and other recent bailouts) when they suddenly were infused with this newly created money. At that point, money still had the same purchasing power because it had not circulated throughout the economy, but by the time it reached the average consumer, he or she was left paying higher prices. This is the meaning of an invisible tax on the American people. Those well-connected that received the money first benefited at the expense of the rest of us. We still have yet to see the full consequences of the stimulus, but we will witness them in the coming years with higher prices.

Not only do the Federal Reserve's actions create a moral hazard, but Ben Bernanke's logic is unsound. He said we need to run the credit cards again to pay off our debt. What kind of reasoning is this? Since we've already made commitments to outspend ourselves, we should continue them? I prefer the sensible alternative. Not raising the debt ceiling would send the signal that we are actually going to get serious about cutting wasteful government programs and not continuing to spend money we don't have. It would send the signal that we are not going to continue to print money out of thin air or borrow money, which causes inflation and devalues our dollar.

What do you do if you max out a credit card? Do you spend your way out of debt? Do you continue to borrow more money at unsustainable rates to fund your expenditures? Of course not. It doesn't make any sense to do this. Let's say you choose to borrow more money. You're only prolonging the problem and making it worse. One day, the bills are going to be due, and generally at a higher interest rate. Any rational person would stop wasteful spending and save up to pay off their debts.

This simple logic should be applied to the global scale. No country can spend its way out of recession or borrow its way out of debt. However, for some reason, our government still believes we can borrow a billion here, spend a trillion there, and somehow it's all going to work out. In addition, there is an ethical problem here; we are borrowing money on the backs of our children and grandchildren. There is no way this debt will be paid back in our lifetime.

As of today, our national debt is over $14 trillion, with $350 billion going toward our interest rates alone! Each citizen's share of this debt is $45,787.43. We cannot continue to spend and keep the market correction from occurring. It's like our economy is on Red Bull. We keep artificially stimulating different markets and propping them up for a brief time. At some point, the crash is going to come, and perpetual stimulus will inevitability lead to a complete market failure.

It's time we let the market naturally correct itself and move away from having a mixed economy with government intervention to a true free market system protected by the Constitution of the United States -the way our Founding Fathers intended it to be. The sooner this happens, the less severe the correction and the better off we will be in the end.

A good lesson can be learned from this. Americans have an obligation as a country and as individuals to live within our means. History shows us repeatedly that countries who fail to live within their means will meet the same disastrous fates as the ones before them who did likewise. The U.S. isn't immune to economic laws.

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