Spend-or-Suicide

Matt Collins (January 27, 2010)

Will America take her medicine or reap the Whirlwind?

Later this evening, you’re going to get the unique chance to watch what some are calling career suicide on national broadcast television.

Don’t worry. It won’t interfere with your viewing of the Lost season premiere (they were careful to schedule around it). I’m talking about Barry’s first State of the Union address, of course, where he’s expected to announce an across-the-board spending freeze.

The president’s supporters, meanwhile, are currently preparing their reactions; guffaws, stark silence, righteous indignation, or perhaps a few curse words muttered aloud. In the mainstream, they’re saying he’s betraying his base. He’s pulling crucial supports out of a fragile economy, they say. They also believe the measure could lead us to lose more jobs…to more short-term pain.

Right on, we say…bring on the pain…

Are we masochists? Heartless financial writers who enjoy the Schadenfreude of watching our fellow man suffer?

Not in the least. We’re just trying to advocate the right solution.

See, back in the 1920s, an economist emerged by the name of Ludwig von Mises. The guy was eerily prescient; he predicted the fall of the Soviet Union all the way back in the 1920s. When he was approached in 1929 and offered a lucrative position by the Austrian bank Kreditanstalt, he turned down the job. The bankers asked why he’d turn down such an incredible opportunity, and he looked up at them and said, “A great crash is coming, and I don’t want my name in any way connected with it.”

Two years later, the collapse of that very bank would trigger a wave of defaults that ravaged the European financial system. Ludwig would go on to pioneer a fringe school of economic thought – known today as Austrian economics, largely in his honor. And while the discipline is sometimes characterized by its libertarian bent, it’s virtually the only school of economics that can offer a plausible explanation for virtually every credit-fueled economic crash in recent history.

In short; old Luddy had an annoying tendency to be right almost all of the time.

And when it comes to Barry’s “career suicide” tonight on live TV, old Luddy had a bit of advice for that sort of situation as well…

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result …of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

So in Ludwig’s esteemed opinion; you either take your medicine now – facing the immediate consequences of credit contraction – or you get sick and die later.

It kind of makes sense. After all, the media can’t quit saying how we “narrowly averted another Depression.” But there’s no free lunch in this world…so what, then, have we sacrificed to avert such a harrowing fate? In Ludwig’s opinion; we may well have sacrificed our currency. If you’re having a hard time imagining the consequences there, just read up on Weimar Germany, or 1994 Yugoslavia, or even Zimbabwe. Currency failure is an absolute bloody nightmare. It makes the Great Depression look like a Shiatsu massage.

But it’s not too late.

Any successful spending freeze would be tough medicine to take. More jobs would be cut, stocks could potentially tumble, and a whole host of States would start ringing the bankruptcy bell, defaulting on a huge swath of municipal bonds.

It’s hard to get re-elected when you’re the guy carrying out that sort of thing. But people – on the whole – tend to be damn fools. All across these fifty states, they’ve taken out far more debt than they can ever pay off, and that means only one thing…Liquidation.

In Austrian economics, the collapse of credit-fueled expansion requires a period called “restructuring,” alternately known by more pessimistic academics as a recession or depression. During this period, the Austrians assert, investment capital is moved from less productive, less constructive pursuits (called “malinvestment” in Austrian economics and “the Real Estate market” in the vernacular) to more promising investments. In this way, an economy can persist and grow throughout generations, innovations and changes in global power.

Cast in that light, our economic “pain” would seem our burden to bear…

The jobs have to go because they’re producing goods and services that no one wants anymore. Millions of empty houses and H3 Hummers can testify to that fact. Those companies had their shot, and many of them blew it.

The states are beyond overstretched, and it’s not the responsibility of the world’s dollar-holders to fund their shenanigans. Period. There’s no reason why we should print dollars – stealing the wealth of everyone from a diversified Argentinean pensioner to the Central Bank of Ghana – in order to pay for the re-election promises of some scumbag in Delaware. There’s a term for that kind of debt…it’s called “odious debt,” and it can often be defaulted with relative impunity.

Will there be collateral damage? Absolutely.

There’s always collateral damage with restructuring. Economic efficiency will slow as resources are realigned, and more people will be laid off than can justifiably be attributed to the restructuring.

But think of that as all the backed-up collateral damage we’ve avoided in the last eighty years or so. We had Fannie and Freddie to make housing more affordable, the Federal Reserve tinkered with inflation rates to make money more accessible, and we as Americans have generally been a pretty prissy lot for the duration. It’s worth mentioning that – during a currency collapse – the collateral damage reaches extreme levels.

No, it’s time for the pain.

I for one am disgusted by the idea of making our kids pay for our mess…and I justifiably fear the nightmare now going on in Zimbabwe. So bring it now, it’s our burden to bear.

But Obama’s “spending freeze” won’t really bring us any closer to that. Because the terms of his “spending freeze” don’t actually involve freezing military spending, curtailing a second stimulus package, or a number of the other spending obligations the administration has recently entered.

So, from here at least, it looks like we’re out to prove Luddy’s prescience once again. I need to go find some jingle-money…

Yours in Personal Sovereignty,

Matt Collins, A-Letter Editor

P.S. If you’re interested in diversifying away from the dollar and protecting your wealth as the world’s largest currency collapse slowly unfolds, click here…