Why We Need Sound Money

Newsweek has a good article called, Why Americans Are Going Broke

Times are bleak for the U.S. consumer. The average household owes 20 percent more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations. And the nation's economy isn't in much better shape. The Treasury Department has estimated that, with the added costs of the economic stimulus plan passed by the House of Representatives this week in an effort to avoid a recession, the federal deficit could rise to as much as $400 billion this year.

God bless Keynesian economics!

(Oh... that sound you heard was called "sarcasm".)

For those who may not know what that is, that’s pretty much the standard perspective you get when you take a college economics course. According to the propaganda, economic health is measure by how much we spend. Gross Domestic Product (GDP), is a measure of all the expenditures made in a given economy in a year. A recession is defined by negative growth in this number for two consecutive quarters.

This is why you get Bush and company telling us to go out and spend, and have “confidence” in the economy. This is why they think that these rebate checks will stimulate the economy. Spend, spend, spend! And if you don’t have it… borrow some money and spend it! After all, saving your money will only make you poor. (It’s true. Modern Econ textbooks will talk about something called the “paradox of thrift”. It’s total bunk, but apparently, they can get away with peddling such nonsense.)

The plan does promise some relief for struggling Americans: a rebate for taxpayers. The government is counting on recipients not to save it or put it toward debt but to do what they've done best over the past 30 years: spend it. Never mind that overspending is what's put many in the financial predicament they now find themselves in.

But this may not address the fundamental issue:

What other explanations should we consider? One of the most important factors is the easy availability of universal credit, plus the fact that the marketplace [is open to us during] every waking moment. Because purchases can be completed so quickly, they're very unlikely to be interrupted by a prudent thought. A third reason why people are going broke is the basic insecurity of our economy. If you have a consumer society where no one is saving—where no one is encouraged to save—and millions are in debt [and then] you hit them with a jolt to their income, they're instantly going to be in trouble.

Exactly.

Now, many of the proponents of the FairTax rightly point out that a consumption based taxation system, like the FairTax, would alter the incentives in the system and help improve things. They are essentially correct to a degree on that point. However, look at the root cause: easy credit. That is only made possible because of a loose, fiat monetary system…ie. The Federal Reserve system. A consumption tax will not curb government spending, and it will not curb spending patterns of individual consumers who have already demonstrated that they have no problem with living a lifestyle financed by debt.

The only way the really put the economy back on sound footing, with the proper incentives in place for prudent and stable economic growth, is where the costs of credit can reflect real market conditions. Credit and savings must be linked in a real way, and you cannot do this when the central bank can raise or lower interest rates on a whim, and create new money out of thin air.

Anyway, the interviewee in this article implicitly accepts many of the economic assumptions that are being peddled today: spending drives the economy, government can make things better by forcing people to act properly, and that “predatory lending” was the cause of the housing bust. All of those are pure nonsense. But I’m glad to see the seeds of recognition are being sown. The real culprit is the Federal Reserve and its monetary system of inflationary fiat currency.