The Smoking Ruin Solution

No quick fix or linking hands. Just hard choices and unpalatable truths...

JUST LAST WEEK, it was reported that the turnout for the Democratic
primary was the lowest in 80 years, writes David Galland, managing director at Casey Research. While the Republicans are clearly
energized by their concerns about the direction the Democrats are
taking the country in, the Democrats themselves seem to have decided to
forgo the voting process, perhaps in favor of a refreshing nap.

No question about it, the president is in the hot seat.

While I am sure that back in 2008 Barack Obama was one happy camper
about having taken the presidential prize, today one has to wonder if
that victory has led him to certain bitter regrets.

His problem, the problem bedeviling the government at its highest level,
is that there is actually no palatable solution to the persistent debt
crisis now gripping the Us economy by the throat.

In fact, the only tangible solution might be best termed the "Smoking Ruin Solution". Allow me to elucidate.

The Keynesians would take great umbrage at the idea that the government
is left with no viable options at this point. The solution is clear to
them – more stimulus. And this time around, no skimping! A paltry $800
billion isn’t even going to begin to get the job done. Rather, if two
trillion dollars of freshly minted money is what it takes to kick the
US economy out of its swoon, then so be it. Hell, make it three if
that’s what it takes – we can worry about the (inflationary)
consequences later.

Economists who look to someone other than Keynes for guidance, have
other ideas – but not many. And, as per my comments above, none that
would be even remotely palatable to the man on the street. That goes
double for the politicians (of both parties), who rely on the
proletariat to provide them with the votes that keep them in power and
in porridge.

While I don’t have the time to scratch even a square inch of the
surface of all the goofy solutions economists might trot out if asked, I
will attempt to briefly address, in the broadest terms, a solution
that might be considered acceptable to those who skew toward the
Austrian school of economic thought.

For those of you unfamiliar with the Austrian perspective, it puts a
large amount of faith in the unfettered free market, and almost none at
all in the ability of governments to do much more than run economies
headlong into solid walls.

I have to warn you, however, that the solution I am about to propose
involves no quick fix or linking hands around the fire, accompanied by
happy singing. Rather, it is more akin to treating a dread disease with a
very strong medicine – so strong, in fact, that should the patient
survive, they would (at least for some period of time) suffer a steep
degradation in the quality of life.

I say that because the only real solutions available to the country are
certain to result in financial carnage and social upheaval of a most
extraordinary sort. For starters...

• A dime-on-the-dollar forced renegotiation with U.S. Treasury/agency debt holders. Sorry, China, Japan, et al. – push has come to shove, and it’s over the side with you.
• Letting the banks that should fail, fail.
  Sorry, shareholders and bond holders, which now include taxpayers, but
  you made a bad bet. And sorry, anyone with more in your failed
  bank than is covered by the FDIC, you’re out of luck on the
  excess. Given that the FDIC is also broke, we’re not even sure
  about the money you thought was covered.
• Turning the lights out on the U.S. empire.
  The U.S. spends more on maintaining overseas government operations than
  all the rest of the world’s nations combined. While the cost of
  ending our involvement in perma-wars, turning off the lights at
  military installations, canceling aid and subsidies to foreign
  governments will cause widespread pain and misery – both at home
  for the dismissed soldiers and overseas for our allies – doing so
  is likely to improve our security by dramatically reducing our
  boot print on the face of the globe.

  We’ve got more than enough in the way of nukes to deal with any
  large-scale threats, and with a more streamlined national security
  apparatus, we’d be certain to get a lot better at spotting the odd
  terrorist threat before the malcontents make it to U.S. shores.

• Goodbye, big government, and thanks for all the chicken.
  It’s been a wonderful run, with promises of fat chickens in every
  pot, affordable homes for all, safety nets under safety nets,
  universal healthcare, and an almost infinite number of regulations
  to make sure we’re safe in every conceivable circumstance. We hate to
  see you go, but go you must, because even though U.S. business
  labors under the second highest corporate tax rate in the world
  and the individuals who do pay taxes pay over half of their
  income, the shortfall between revenue and government expenses is
  at historic levels with no end in sight. And that’s just
  impossible to continue.

Under my solution, the size and scope of government will have to be
seriously reduced, a process best started by severely limiting the
ability of politicians to make new regulations and pass new taxes or
mandates. With relatively little to do – as opposed to the situation
today, when literally nothing is beyond the interest and reach of the
federal government – a wholesale purge of the bureaucracy can be
undertaken.

Yes, that would mean hundreds of thousands of freshly dismissed
bureaucrats, many of them possessing no real marketable skills, hitting
the employment market. But look at the bright side, the oversupply of
labor willing to work for subsistence pay will cause “guest” workers to
throw up their hands and head to greener pastures, leaving the former
bureaucrats to clean the sewers, collect the garbage, and pick the
tobacco.

• Farewell, Fannie and Freddie.
  Nationalizing the mortgage industry was a horrible idea… an idea whose
  time has now expired. The loans these zombie institutions hold
  should be pumped out into the market at whatever the free market
  will pay, which won’t be much, then the doors shut.
• Institute a flat tax at a level that everyone will happily pay.
  But that’s not fair, shout the progressives. To which I might
  respond, look at the facts. One of the biggest differences between
  America in its youth and the lands whence the citizenry came was that,
  in America, there were none of the entrenched classes that dog so
  many countries even to this day.

I can’t begin to count how many rich people I know who have lost
essentially all their money due to bad investments or business
decisions. Likewise, I know any number of wealthy people who started
with little or nothing, but through hard work and enterprise made their
mark and their money. The key to a robust economy is to make it as easy
as possible for anyone to earn, and keep, the benefits of their
efforts… and a reasonable flat tax goes a long way in that direction.
As an added advantage, a flat tax would result in a wholesale shedding
of accountants, lawyers, IRS employees, and more.

“But that will only add to unemployment,” you might fret (well, not
you, but the person next to you). To which I would answer,
rhetorically, by asking the question, “Is the desire to avoid such
downsizing reason enough to keep the wasteful, counterproductive, and
impossibly complex current tax system in place?” Hardly.

What the country needs now more than anything is transparency and the
fostering of a solid foundation that allows businesses, and the
entrepreneurs that start them, to do what they do best – create wealth.

• Link the money to something that limits the ability of government to print the stuff up at will.
  While some sort of a gold standard seems logical to me, anything that
  anchors the currency in such a way that the Fed – or the Treasury
  (in the absence of the Fed… one can only hope) – is unable to grow
  the money supply at a faster clip than, say, population growth,
  or the rate at which gold can be pulled out of the ground, would
  do just fine.

I could give you other examples of the sort of steps and attendant
mayhem that would result from slashing government and letting the free
market run its course. But I’ll stop there, if for no other reason than
that by now, I suspect, many readers are recoiling in horror at the
inanity of the ideas just presented.

No question, these solutions would leave the economy in smoking ruins –
in worse shape, even, than at the height of the Great Depression. While the devil is invariably in the details, the argument for pulling
the proverbial trigger on the smoking ruin solution is understandable –
at least to me – by getting back to the positive outcomes that would
result.

• The overhang of unpayable government debt would be gone.
  Sure, the Chinese, Japanese, and Middle Eastern oil sheiks (along
  with anyone else who got stuck with a lot of bad debt) would be
  really, really unhappy with us. Again, sorry – but we’re bankrupt and
  pretending we’re not is just going to make things worse in the long
  run. Besides, in relatively short order, I suspect our trading
  partners would get over their losses on defaulted government bonds
  because...
• Business would be booming.
  Unshackled from high taxes and excessive regulation – and freed from
  the fear that at any moment some change in the regulations, or
  even the whim of a minor bureaucrat, can knock the pins out from
  under a business – the U.S. would once again become the world’s
  preferred place to do business.
• The debt bubble would deflate.
  As it now stands, we can’t even begin to tally all the outstanding bad
  loans, let alone who ultimately owns that debt. Each new bank that
  fails, each new equity and bond holder that goes bankrupt, and
  each new financial institution that folds reduces the toxic debt
  that will otherwise plague the economy and create uncertainty
  until it’s ultimately resolved. Under the scenario painted above,
  the deleveraging and destruction of debt would come fast and
  furious, allowing the nation to understand the true value of
  everything and to move forward from there.
• Housing prices would fall to a market clearing level.
  People who were forced to sell their houses would be forced to
  sell them at a price someone is willing to pay – and that price
  would likely be a lot less than the current market. Tough break, and it
  could lead to a bankruptcy that takes down yet another bank – but
  so be it. It’s time to let the chips fall where they might.
• The U.S. dollar would once again become trustworthy, and therefore in demand. It might even be able to retain its reserve status.

Such strong medicine would make the patient sick – and likely even
cause reduced quality of life for some extended period of time. But I
have to believe returning America to a foundation built on the
principles of self-reliance and an individual’s right to the fruits of
their labor would lead to a breathtaking groundswell of optimism and
enterprise. Further, just as was the case in 1776, the U.S. would again
provide a model for the rest of the world to follow, so the benefits
would be global.

Of course, everything I just wrote would be considered almost
criminally outrageous by most of the citizenry – and written off as the
ravings of a madman by the politicians. 

Which is why, in time, it will be the Keynesians’ arguments that win
the day, and the next leg down will be met by a wave of newly printed
funny money – a veritable flood of the stuff. Certainly not before the
November elections, and certainly not before the threat of a
deflationary collapse provides the cover the government needs to act –
but it’s coming.

Buying Gold still seems a safe bet to this observer.