Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (25 page)

But it should go without saying that the politicians prefer it when voters are unaware, and therefore, untroubled by worries over the dire fiscal position of the state.

It is probably worth recalling here that the Greek fiscal mess is not merely the culmination of usual social democratic largesse and Keynesian excess. For years during and after Greece's accession to the European Union, the country's fiscal accounts were consciously fraudulent. At one point, the entire Greek defense budget was taken off budget. The Greek government actually hired Goldman Sachs to help them fiddle their accounts with derivative trades.
Der Spiegel
(Europe's leading news magazine and Germany's top news web site) explains:

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.
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These frauds came to light early in 2010 as Greece first flirted with default. Greek politicians went hat in hand to the European Union (EU) and International Monetary Fund (IMF) begging for cash. After months of dithering a €110 billion bailout was cobbled together in May 2010, conditioned upon the promise by Greek leaders to slash their deficits. Only then did the illusion of social consensus in support of unaffordable spending break down in the crucible of austerity. Now taxes have been raised, spending has been slashed, and Greek economic growth has ground to a halt, with unemployment soaring to 15.9 percent.

In the process, Greece's operating shortfall expanded and was projected to rise even further in the fiscal years to come, demonstrating anew the apparently mysterious principle that you cannot cure a problem of unmanageable debt by adding still more debt. The EU and IMF bailouts of Greece merely enlarged the country's debt burden, making it still heavier and more difficult to bear.

Given that Greek debt is denominated in euros, but the Greek government cannot print euros, it lacks the option of gradually or not-so-gradually repudiating its obligations through inflation. Its only remaining choice is to default by unilaterally abrogating the terms of its debt obligations or not repaying at all. Although Greece has received yet another bailout in the amount of $170 billion, the country remains insolvent. It seems only a matter of time until Greece succumbs to a messy default.

The result to be expected is a deflationary shock to the system, possibly equivalent to the failure of Creditanstalt in 1931 as contagion effects raise yields on debts of other European countries and thus raise funding costs for their banks. And of course, banks and other holders of Greek debt (and other southern European sovereign debt) will be obliged to write off their losses, wiping out fiat money in the process. Moody's Investors Service warns that it may downgrade BNP Paribas S.A. and two big French banks because of their Greek debt holdings. In London, former UK treasury official Neil Mackinnon said, “[T]he probability of a eurozone ‘Lehman moment' is increasing. The markets have moved from simply pricing in a high probability of the Greek debt default to looking at a scenario of it becoming disorderly and of contagion spreading to other economies. . . .”

The collapse of Lehman Brothers led to $2 trillion in write-downs and losses among the world's biggest financial institutions according to Bloomberg financial news. If something similar happens now, you can expect the world economy to notch down to a deeper level of depression similar to what happened after the failure of Creditanstalt. As Edward Harrison notes in “Thinking about Creditanstalt Today,” the business news at this time in 1931 reflected “extreme levels of rebound confidence (in what we now realize was the middle of a terrific slide into Depression).”
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Among the sources he cites is a report that the Harvard Economics Society says

gains in seasonal spring recovery this year have been far less widespread than a year ago, but, since they started from a much lower base, should be longer lasting. We anticipate that they will continue and spread and that an upturn of general business is in early prospect.
15

Note the similarity to today's confident forecasts of stronger growth.

The dynamic in the United States is somewhat different from that in Greece. The United States has one great advantage that Greece lacks: its debt is denominated in dollars, a currency the U.S. government can print. The ability to create unlimited amounts of dollars at essentially no cost would seem to give U.S. politicians the ability to enlarge deficits without limit. But as Emerson suggested, this is an illusion. A matter of “climbing to a higher diving board.” He writes, “Always pay; for, first or last, you must pay your entire debt. Persons and events may stand for a time between you and justice, but it is only a postponement. You must pay at last your own debt. If you are wise, you will dread a prosperity which only loads you with more.”
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The United States borrows a currency that it can depreciate, almost at will. But the apparent consensus in support of spending trillions from an empty pocket has begun to fissure as the prospective costs rise. The issue as the United States grapples with the limits of sovereign debt kiting is that it seems prepared to flirt with what von Mises described in this chapter's epigraph as “the final collapse of a boom brought about by credit (debt) expansion . . . as the result of a voluntary abandonment of further credit (debt) expansion.”

Events of 2011 showed that there were almost enough Tea Party Republicans in the House of Representatives to block extension of the debt ceiling or link it to meaningful spending cuts. In the event, the Republicans and Democrats debated for months about whether a $10 trillion increase in the national debt in a decade should be abated by 3 percent or 4 percent.

The debate discredits an optimistic forecast from 1886, when Andrew Carnegie, then one of the world's richest men, wrote
Triumphant Democracy
to sing the praises of the United States. A big part of his argument was focused on the heavy indebtedness that burdened Russia, France, and other European nations. As Carnegie put it, “National debts grow troublesome. Year after year the burden they lay upon the productive energies of nations becomes harder and harder to bear.”

Carnegie believed—wrongly, as it turned out—that democracy had defeated the temptation for America to burden itself with debt. “Our great advantage which the democracy has secured for itself in America is its comparative freedom from debt. The ratio of indebtedness to wealth is strikingly small.”
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What a long way the United States has come in a century and a quarter. The United States was still the largest creditor nation in the world when I was a child. Today, it is the largest debtor nation in history.

It will be interesting to see how long it takes for the markets to force the political authorities in the United States to adopt a plan to actually slash spending akin to the Plano Real instituted two decades ago by then-Finance Minister Fernando Henrique Cardoso in the administration of President Itamar Franco in Brazil.

Under the Plano Real, deficits were tamed because spending was curtailed on a real-time basis to match available revenues. To adopt such a policy in the United States today would mean reducing government outlays by $1.3 trillion, presuming that GDP did not fall precipitously. As I write, current U.S. government receipts are running at about the levels of 15 years ago while the National Debt has increased by roughly $10 trillion since fiscal year 1994.

In short, the U.S. economy has been more stagnant than is widely understood. Rapidly escalating deficits have disguised a slowdown or decline in real private economic activity. That being the case, if deficits were eliminated, nominal GDP would certainly plunge. If you subtract the annual government deficit from GDP data, average annual economic growth in the United States since 1980 is actually −0.3 percent. Without government deficits to disguise the faltering growth of the real private economy, nominal GDP could plunge by 10 percent or more.

This would shift the full burden of kiting debt to the Federal Reserve. Chairman Ben Bernanke and his accomplices would almost certainly expand the Fed's balance sheet by trillions more in the attempt to ward off a deflationary collapse of the banking system. Whether this would be sufficient to avoid the final collapse of the boom is impossible to project. What is clearer is the likelihood that a sharp fall in nominal GDP and a surge in unemployment that would accompany drastic surgery to curtail the deficit would have decisive political effects. It would reveal the flimsiness behind the façade of democratic consensus in U.S. politics, one predicated on runaway deficits and continued kiting of the national debt.

In the next chapter, we take a look at the United States' path to bankruptcy and its similarities to the fall of Rome.

1
Kenneth J. Gerbino, “The Great Deceit,”
321gold.com
, May 28, 2010,
www.321gold.com/editorials/gerbino/gerbino052810.html
.

2
See Nikhil Raheja, “There is Nothing Wrong with Price Deflation,” Seeking Alpha, October 19, 2009,
http://seekingalpha.com/article/167225-there-is-nothing-wrong-with-price-deflation
.

3
Kel Kelly, “How the Stock Market and Economy Really Work,” Mises Daily, September 1, 2010,
http://mises.org/daily/4654/How-the-Stock-Market-and-Economy-Really-Work
.

4
Fritz Machlup,
The Stock Market, Credit, and Capital Formation
(New York: Macmillan, 1940), 78, 90, 92.

5
Kelly, “How the Stock Market and Economy Really Work.”

6
“Can Stocks Rally Without the Fed Juicing the Market?,” Zero Hedge, June 17, 2011,
www.zerohedge.com/article/can-stocks-rally-without-fed-juicing-market
.

7
“Federal Spending Grew Nearly 12 Times Faster than Median Income,” Heritage Foundation, chart entitled “Percent Change of Inflation-Adjusted Dollars (2010),”
www.heritage.org/budgetchartbook/growth-federal-spending
.

8
President Barack Obama, April 17, 2009.

9
Ludwig von Mises,
Omnipotent Government
(New Haven, CT: Yale University Press, 1944), 251.

10
Jeff Cox, “US Housing Crisis Is Now Worse Than Great Depression,” CNBC, June 14, 2011,
www.cnbc.com/id/43395857/US_Housing_Crisis_Is_Now_Worse_Than_Great_Depression
.

11
Ralph Waldo Emerson,
Essays: First Series
(1841).

12
Available at
www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html
.

13
Beat Balzli, “How Goldman Sachs Helped Greece to Mask its True Debt,”
Spiegel
online, February 8, 2010,
www.spiegel.de/international/europe/0,1518,676634,00.html
.

14
Edward Harrison, “Thinking about Creditanstalt Today,” Credit Writedowns, April 23, 2010,
www.creditwritedowns.com/2010/04/thinking-about-creditanstalt-today.html#ixzz1PSQq3IEU
.

15
Harrison, “Thinking about Creditanstalt Today.”

16
Ralph Waldo Emerson,
Essays: First Series
(1841).

17
Doug Wakefield, “The Next Landslide: Lessons from Andrew Carnegie,”
Safehaven.com
, May 29, 2009,
www.safehaven.com/article/13462/the-next-landslide-lessons-from-andrew-carnegie
.

The menacing specter of state bankruptcy drew ever nearer. The old remedy was prescribed: reduction in the value of the currency and increased taxation. . . . Thus began the fierce endeavor of the State to squeeze the population to the last drop. Since economic resources fell short of what was needed the strong fought to secure the chief share for themselves with the violence and unscrupulousness well in keeping with the origin of those in power. . . .

In these disturbed and catastrophic decades of the third century countless people, especially of the bourgeois middle class, were impoverished, even ruined, and these were precisely the men who had brought into being and maintained the economic prosperity of former times. The wasteful policy of the State, the constant interference with private economic life, and the inflations, amounted to a landslide beneath which a vast amount that was of value was crushed out of existence.

—
The Cambridge Ancient History
, Volume XI

Collapse may come much more suddenly than many historians imagine. Fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice. Many nations in history, at the very peak of their power, affluence and glory, see leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation.

—Niall Ferguson,
The Rise and Fall of the American Empire

To most people, the idea that we could be approaching the End of America is preposterous. After all, the United States has been the world's foremost economy for a century. Almost no one now living can recall a time when any country other than the United States was on top of the world. In fact, it requires a good education today to decipher Walter Lippmann's belief that “what Rome was to the ancient world, what Great Britain has been to the modern world, America is to be to the world of tomorrow.”
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