Lew Rockwell recently linked to an article by Richard Russell. While I certainly agree with some of what he wrote, I have some specific criticisms that I will point out. I am not being critical just for the sake of doing so. A lot of libertarians read these articles and some of the less experienced ones may take everything to be true. So I just want to give another viewpoint on some of the issues discussed in this piece.
Russell wrote, "Suppose we decided to stabilize our growing debts through spending cuts alone? We'd have to cut all government spending by 31%." He goes on, "But suppose we decided to stabilize our growing debts through taxes alone. We'd have to raise taxes by an impossible 46%."
Then he wrote, "Both of these 'solutions' would wreck the nation. Therefore, neither one will be on the table. But a combination of both will probably be tried."
I agree with him that raising taxes by a huge percentage would essentially "wreck the nation". But he is absolutely wrong on cutting spending. In fact, as I have written about so many times before, massive government spending cuts are exactly what the U.S. economy needs.
The federal government alone is spending close to $4 trillion per year. It is about one quarter of the national income as measured by GDP. While not all of this government spending is completely wasteful, it is all a giant misallocation of resources. It hinders future wealth creation. It makes our living standards far lower than they should be. Cutting government spending is a major answer to solving the economic troubles.
Russell then discusses the biggest debt problem, which is government health care. He says, "By the year 2050, health programs will chew up about 14% of the US's entire gross national product. Cutting back substantially on Medicare is politically impossible." He then goes on to say that the answer is "for the Federal Reserve to turn to printing us out of trouble." While I understand that he is not advocating this "solution", he is missing a major point.
If the government simply tries to solve the Medicare unfunded liabilities through monetary inflation, it will not fix the problem. It will be like a dog chasing its tail. If there is massive inflation, then medical costs will skyrocket too. The resources simply won't be there to keep all of the promises that were previously made. So don't think that Congress can solve all of its problems through the use of monetary inflation. The government will eventually be forced to cut spending on medical care, regardless of the Fed.
Russell then goes on to talk about the U.S. dollar. He stated, "As the dollar declines in purchasing power, it will begin to lose its international reserve status. Foreigners will begin to avoid the US dollar. At around that time I believe the dollar will face growing competition from the Chinese yuan. To make matters more difficult, I believe the yuan will ultimately be partly backed by gold. This will be part of China's plan to take over leadership of the world."
This is utter nonsense. While it is possible that the yuan could one day be the reserve currency (almost anything is possible), it is highly unlikely any time soon. Perhaps the U.S. dollar will begin to lose it international reserve status, but why would he think the yuan will take its place? The Chinese yuan isn't even a freely floating currency. There basically is no currency exchange market in China the way there is in the U.S. or Europe. The average guy in China can't go to a broker and buy foreign currencies with his yuan. This in itself makes it virtually impossible to be considered as an international reserve currency.
I think it is important to be clear in your thinking and writing. While this article made some interesting points, there were also a lot of inaccuracies and myths perpetrated.
In a future post, I will discuss the notion of not selling gold, even in a bull market.