OPINION:
It is too late to prevent a sudden or gradual collapse in the dollar’s value. The U.S. Federal debt of $30 trillion is now more than 130% of GDP — and that is just the “on the book” amount and not the unfunded liabilities. The debt-to-GDP ratio is twice what it was back in 2008 and four times what it was in 1982 near the end of the last great inflation.
The Federal Reserve has been holding interest rates on the debt at artificially low levels — at about 1.5% — which has hidden the true costs of the deficits. With the rise of inflation, the Fed will increase interest rates. In 2001, the average interest paid on the federal debt was 5.4% or about three times the current level. There is a high probability that the interest rate on the debt moves back to that rate or higher, which means that interest cost to the taxpayer will be about $1.4 trillion (as contrasted with $413 billion last year). To compare, last year, the Treasury collected about $1.9 trillion in personal income taxes.
Inflation is now running at 7.5% — and there is no realistic plan to reduce the current and projected future deficits by spending rate reductions, which means either more inflation or higher taxes (50% higher to attempt to obtain the needed extra trillion dollars?) or both. Inflation is a non-legislated tax increase, particularly brutal on those with low incomes. It is the same as if their employer cut their pay or if the government increased their taxes. High-income people and/or those with considerable real assets do not feel the pain of inflation nearly as much as their less affluent fellow citizens.
Wages are rising but at a slower rate than inflation — so Americans are getting poorer — and there is no painless way out. If the Democrats had passed their proposed “Build Back Better” bill, the situation would worsen because it would have resulted in even more debt-funded by monetary expansion. Rather than criticizing Sens. Joe Manchin and Kyrsten Sinema, the Democrats ought to be thanking them for bringing a pause to the craziness.
There was no central bank in the U.S. until Congress passed the Federal Reserve Act in 1913, and likewise, there was no sustained inflation before the creation of the Fed. The U.S. was on the gold standard, which limited the ability of the government to borrow. Once the last tie to gold was removed in 1971, there was nothing to restrain deficit spending except having enough fiscally responsible members of Congress.
The American Founding Fathers well understood that all too many of their citizens would fail to grasp or ignore the second-order effects of their actions and would give in to the passions of the moment. That is why they created a representative federal constitutional republic rather than a direct or indirect democracy.
The Founders were history students and understood why the early experiments, as far back as the ancient Greeks, with direct or indirect democracy, failed. Unrestrained democracies almost always end up with majorities oppressing or taking away rights and/or property from minorities and giving in to the passions of the moment, which often leads to unnecessary wars and wasteful spending.
The early Romans avoided some Greek mistakes by creating a Republic with clearly prescribed rights and duties of the people, who had a limited voting franchise to elect a ruling group (the Roman Senate) with limits on its power. The Roman Republic functioned for almost a half-millennium before succumbing to Cesar and the creation of the Roman Empire.
This historical knowledge led to Ben Franklin’s famous quip to a waiting citizen when asked what type of government the founders had created, “a Republic if you can keep it.” A constitutional republic is an undemocratic construct. It does not allow simple elected majorities to take away prescribed individual liberties, such as freedom of speech, the press, religion, assembly, the right to bear arms, etc. It takes substantial supermajorities to amend the Constitution both in Congress and among the states.
The U.S. Constitution also requires supermajorities for the impeachment of the president. (Think what would happen if all it took was a simple majority to get rid of an elected president. Every time a president became unpopular, the Congress [if under control of the opposition] would likely throw out the president — leading to temerity and instability.)
The Senate has historically some supermajority rules and the filibuster to again delay hasty action, which may prove unwise (as often it is).
If the money — legal tender — is not tied to gold, silver or some other metal, or commodity of value, history illustrates the incentives to devalue (inflate) the currency become overwhelming. Various balanced budget amendments have been proposed, but most contain serious flaws. A better solution may well be a constitutional amendment requiring a three-fifths supermajority for all tax and spending bills. As noted, it is probably too late for our current dollar to be saved. Fundamental monetary reform, allowing for private monies and supermajorities for all government taxing and spending, maybe the only way to save the American Republic.
• Richard W. Rahn is chair of the Institute for Global Economic Growth and MCon LLC.
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