How Politics Caused Fiscal Disaster
And how central banks threaten prosperity by printing money backed by nothing.
In fact, the fiscal equation was just then tumbling into a fatal descent. And it is here -- let’s pinpoint the exact date at Greenspan’s “irrational exuberance” call in December 1996 -- where the Austrian men separate themselves from the Keynesian and Friedmanite boys. The latter continued to quibble about how to measure money, whether it was growing too fast or slow and if more or less financial regulation was needed.
Peering through a different frame, however, the Austrian notes that US money GDP was about $10.0 trillion at the time the Maestro let his exuberant cat out of the bag. Under an honest monetary regime this nicely rounded number might have stalled-out indefinitely -- owing to the Great East Asian Deflation just then gathering a head of steam.
The truth is, the extraordinary force of economic nature represented by the mercantilist export machine that sprung up in East Asia in the late 20th century was profoundly deflationary. Absent puffed-up domestic credit, the in-coming Asian trade would have flattened American employment, wages, incomes and prices. In so doing, it would have kept money GDP bottled-up at around $10 trillion, thereby denying the next decade’s debt-fueled rise in both output and prices which took money GDP to $14 trillion.
By Austrian lights, then, this $4 trillion difference represents counterfeit GDP, owing to the false conversion of unsupportable borrowings into current income -- debt which is now being forcibly liquidated. This bubble-driven inflation of money GDP also caused government revenues to swell unsustainably, thereby camouflaging for more than a decade the fiscal deficit’s actual, far more frightful, aspect.
There's no mystery in this contra-factual history. With money anchored to a standard, say gold, the armada of containerships steaming from the Pacific Rim into Long Beach would have brought massive trade deficits, but also would have set in motion their own correction. Taking flight in the opposite direction, gold bullion, not paper dollars, would have been on the backhaul to East Asia.
In turn, an old-fashioned drain on America’s gold would have obviated a lot of fatuous jawing about the Chinese being seven-feet-tall economically or excessively addicted to an alleged financial opium called “over-saving." Instead, without need for a single meeting of the open market committee, the loss of gold would have presently caused a sharp contraction of domestic bank reserves, a shrinkage of loans by an approximate 10 times multiple thereof and a sharp rise in the rate of interest on the dollar markets.
Admittedly, consumption, imports, money wages, jobs and cost-bloated domestic enterprises would have all been laid low by such hard money discipline. But having thus been put to the mat, a nation of aging and now over-priced workers -- and bankers, too -- wouldn't have found it expedient to live high on the hog. Instead, they would have discovered the “new normal” of higher savings, fewer credit cards, lower consumption, and slimmer paychecks -- all on their own and about a decade sooner.
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