The America Timebomb

Last night on BBC’s “This World” there was a showing of “The American Timebomb” a film made by the former US Comptroller David Walker originally under the title “I.O.U.S.A.” (I think you will be able shortly to see this at Tiscali).

It is a film based on the Book “Empire of Debt” by Bill Bonner and Addison Wiggin, and the film was produced by Bonner’s publishing Company Agora, which publishes a number of journals in Britain including, “Money Week”, “The Fleet Street Letter” (currently Edited by Lord Rees-Mogg, but whose one time Editor was a certain Kim Philby), and International Living amongst others. They also produce a number of E-Newsletters, including the “Daily Reckoning” .

Bonner is a Libertarian and an adherent of the so called “Austrian School” of economics, so named after the original location of the school of Karl Menger and later Bohm-Bawerk, but which in reality has come to mean the anti-socialist school of Von Mises, and Frederick Hayek. The take on the crisis of the US economy is naturally slanted to that point of view, and form of economic analysis. Having said that, I have been reading Bonner’s views for some time, and the views of some of the Austrian economists such as Kurt Richebacher, and it has to be said that they were probably analysing the credit bubble developing within the US economy, and its underlying weakness quite some time, before most Marxist economists like Brenner began to talk about Bubbleonomics. One of the other refreshing things about their writing – which is actually also quite amusing and entertaining – was the critique of US imperialism, its war in Iraq and so on, and their critique of the neo-cons and neo-liberals.

But, the Libertarians, more accurately anarcho-capitalists, are precisely that. Whilst they often repeat the idea that nothing lasts forever, that things go through a lifecycle, and in that context speak of US “late” or degenerate capitalism, they can, of course have no concept of historical development wherein that very lifecycle means that Capitalism dies, and socialism is born just as Capitalism was born out of feudalism. Rather, they see some new “Libertarian” capitalism arising out of the ashes. As an economist I found some enjoyment for a couple of years demolishing the ideas of the Austrian School on the DR Discussion Board, along with some of their more reactionary political positions. A not altogether fruitless endeavour. Lenin in “What is to be Done?” advised that it was necessary to be able to take on such bourgeois ideas at their source. In the process a number of people – nearly all contributors are based in the US – mailed me to say that although they had never even contemplated socialist ideas, they had found themselves agreeing with me. I even got an e-mail from the ACLU following one lengthy debate thanking me for taking on some of the reactionary ideas being put forward. If you want some light entertainment, and to sharpen your ideas its worth having a go.

That is the background to the message of this film. Basically, the message is the US is “going to hell in a hand cart” to use a common Bonner expression. The reason, that expounded long ago by Mises and Hayek, and also the former Trotskyist James Burnham. That is, Capitalism has moved away from its “true form” based on the free market. It has become “socialistic”. The bureaucratic State has grown to such proportions that it corrupts society and the free market. It promotes special interests connected to the State at the expense of the individual. The corruption of the free market by the State has enabled these special interests be they Big Business or the Trade Unions, to exert monopoly power, which in turn enables them to exert political pressure on the State. The anarcho-capitalists point to the US Constitution, and its desire for a Minarchist State, and point to the fact that the State in the US now accounts for around 50% of all economic activity, and to other facts which demonstrate that the Constitution has been undermined if not abandoned. They are keen to point out that the US is a Republic not a Democracy, and quote Benjamin Franklin, who said, “Democracy is two wolves and a sheep arguing over what is for dinner. Liberty is a heavily armed sheep.” It is not surprising that many “Libertarians”, favour as the best form of Government a “benevolent despot”. Failing that many would like to see voting based on how much tax you pay! The consequence, is that they see a State, which as a result of democracy, which has to meet the needs of a majority who have nothing, combined with a bureaucracy based both within the State itself, and within the Boardrooms of US Business, creating a dysfunctional Mercantilist economy, which operates not in the interests of individuals either as consumers, or as shareholders, but in the interests of that bureaucracy. Supporters of the Bureaucratic Collectivist theory of Burnham in respect of the USSR might recognise this.

The State responds to these varying needs, and maintains itself in place, enhancing its Empire essentially, by attempting to avoid any kind of economic crisis. It does so through State intervention. The good thing about the Libertarians is that they were never taken in by all of the Neo-Liberal guff about the absence of State intervention. They recognised that over the last 20 years the State had been intervening the fuck out of the economy by monetary policy, and in accordance with Misean theory of the “Crack-Up Boom”, this was bound eventually to lead to a Bust.

The symbol of that State intervention was the extent of the US Government Deficit, which grew throughout the 1980’s, whilst going into reverse for just a few years under Clinton, before doubling under Bush, and now standing at over $10 trillion. But, in fact as Walker set out this figure is a gross underestimation of just how bankrupt the US is.

As Comptroller, Walker’s job was to Audit the Nation’s Books, and sign them off. He began to use his position in combination with others to campaign against the burgeoning fiscal crisis. On the one hand the “Austrians” do dig out some useful data, for example the work that Richebacher did in exposing the fraudulent nature of US Productivity, and GDP Growth statistics due to the use of hedonic pricing was very useful. On the other they can be rather sloppy in their approach. Partly, that is due to their methodology. Where Marxists begin by collecting the facts, sorting the facts, analysing them, fitting them into a whole, and then working back again, building their theory on the solid basis of reality, the Austrians begin with a theory, a view of the world, and from that theory logically deduce how the world should be. Mises was well known for hating to do any factual research. For the Miseans facts tend to be inconvenient, if they do not fit the theory then the facts must be wrong. Such an approach cannot but lead to sloppiness. On a number of occasions I have debated with Austrians who have put up statistics and data to prove their argument, only for an examination of it to actually disprove the point they were trying to make.

There were a number of such pieces of sloppiness in the film, for example giving Alan Greenspan’s period of tenure as being 1993-2007, whereas it was in fact 1987-2006. That’s not altogether irrelevant. Greenspan is a hate figure for the Libertarians. He is to them something of a traitor, a one time student of Ayn Rand, a supporter of Gold Money as opposed to paper currency, and opponent of easy money, he became the devil incarnate that spawned his successor “Helicopter Ben” Bernanke.

But, the main thrust of the statistics that Walker set out are not in doubt. In reality, even the period of budget surpluses of he 1990’s are not all they appear. Some of that surplus is accounted for by the Social Security surplus, that is the money paid in by US citizens to cover Social Security costs such as Pensions, Medicare and Medicaid. However, the changing demographics of the US mean that rather than a Social Security surplus the US will face a rapidly growing deficit as the Baby Boomer generation retires, stops paying into the Fund, and begins to draw its Pensions and other Benefits. As these Baby Boomers retire over the next 5 years this deficit is set to balloon massively, dwarfing the current $10 trillion deficit. In fact, the deficit could rise to more like $80 trillion.

This is not a problem that has just arisen. It is a symptom of the underlying structural weakness of the US economy that has been developing over the last 20-30 years, and of which the current financial crisis is merely a symptom. It is a problem of epic proportions for the US as a wide variety of commentators spelled out throughout the film. The problem the US could face, and indeed is already close to facing is this, as I think it was Warren Buffett set out in the film; in order to finance this deficit the US Government has to borrow money. In the past Government’s have borrowed money from their own citizens – companies have profits, which they do not always use up, Capitalists use some of their dividends and Capital Gains to buy Government Bonds, individuals save money, which is accrued in Banks, which in turn buy Government Bonds. But, for a long time the US has had either a very low savings rate, or even a negative savings rate. By contrast, some Chinese workers were shown who despite earning only $10 a day each, lived on one person’s wage and saved the other. So the US has borrowed the money it needed – both for the Government and for individuals who made up their negative savings by borrowing too - from foreigners. It has become dependent for its livelihood on “the kindness of strangers”.

All well and good if at some point you can pay it back at some point. But, as the film pointed out. In 1956, the US blackmailed Britain and France into withdrawing their troops from Suez by threatening to call in its loans effectively ending British and French Colonialism. China now has such economic influence through its ownership of US debt that it could begin to apply similar pressure – though I think there is little evidence that it is doing so, or that the US would respond.

But, the economic problem is more real. Like every other borrower the Government has to pay interest on all of that debt. Let us suppose that the interest to foreigners on that debt amounts to 3% of GDP. In effect then, unless the US economy grows by more than 3% it experiences no real domestic growth at all. All of the growth that takes place goes not to enhance the US Capital stock, not to enhance wage levels and so on, but simply to pay out its foreign debtors. If it grows by less than that 3%, then in reality the economy is shrinking, becoming poorer, and thereby even less able to meet its obligations. Its like someone who gets a £10 wage rise, but finds themselves worse off, because they have contracted a debt which requires them to pay £12 in interest. The US is close to that point already when its debt rises from $10 trillion to $80 trillion it will be pushed way beyond it.

The only way out of such a situation is the one that Governments have adopted in the past. Usually, in modern economies the Money Supply is increased not by actually printing more money, but by enabling the financial institutions to create more credit. But, credit itself entails borrowing. Faced with huge debt obligations to foreigners Governments can instead of raising the money to pay these debts from their citizens through higher taxes pay them off by simply printing more money. That is what the Weimar Republic in Germany did as a means of paying off Germany’s Debts under the Versailles Treaty, it is what Argentina did in the late 1980’s, and what Zimbabwe is doing today. The consequences in all the above cases, and in every other case I am aware of is hyperinflation.

Its interesting to note that today the US Federal Reserve has announced a further package of measures and intervention worth around $800 billion. There has been no legislative approval of a further package to cover this money, that is it is not money that is being raised by taxation or borrowing. In short, the Central Bank has simply printed another $800 billion.

The end of an Empire? Maybe.