A Great Deal of Ruin In A Nation?

In 1777, following the defeat of General Burgoyne’s British Army by General Horatio Gates’ Continental Army at the Battle of Saratoga – a defeat that brought France into the War – one John Sinclair lamented to Adam Smith that: “If we go on at this rate, the nation must be ruined.”  Smith responded cryptically: “Be assured, my young friend, that there is a great deal of ruin in a nation.”  In Smith’s carefully measured judgment, bungling governments imposed only a limited check on the economic performance of a Great Nation. 

Adam Smith would be much less sanguine were he confronted with today’s financial crisis and economic contraction,  and  with the ill-advised responses of the administrations of George W. Bush and Barack Obama. For he would recognize the very real prospect that the US economy may collapse into second-world status under the crushing national debt and the national socialist financial and industrial policies that these administrations have and are promoting.

The US economy suffers from a growing culture of indebtedness that has increasingly infected the federal government since 2001, and that has spilled over dramatically into private household behavior.  The fiscal furnace fired by President  Bush in conjunction with first a Republican-controlled, and then a Democrat-controlled Congress throughout his two terms, combined with the reckless monetary-furnace fired by Alan Greenspan and Ben Bernanke throughout the period 2001-2007, fueled  unsustainable housing market and stock market bubbles whose collapse generated the financial crisis and economic contraction of 2008-9.  Surely private behavior played a significant role.  But the failure,  primarily, was that of  a government that signally failed to provide the kind of fiscal and/or monetary stability that had sustained  remarkably high rates of  US economic growth and  unexpectedly low rates of unemployment throughout the period of the Great Moderation, 1984-2000.

President Obama and the Democrat-controlled Congress have since tripled the profligate  policy responses of President Bush to the debt bubbles that caused the crisis and downturn.  These policy responses reflect crude political considerations rather than any profound economic understanding.  If excessive government indebtedness is a major source of the problem, why increase the national debt yet further?  If excessive household indebtedness is a secondary infection, why encourage households to enter yet further into mortgage and credit card debt?  Why pump additional toxins into an open wound? 

The prognosis is little short of catastrophic if  announced government policies are not cut back.  According to the White House’s own estimates, the federal budget deficit in 2009 will be $1.6 trillion, or approximately 11.2 per cent of  US gross domestic product, the highest on record since the end of  World War II.  By 2019, the national debt will approximate 76.5 per cent of US  gross domestic product, the highest proportion since just after the end of World War II.  In such circumstances, the dollar will lose its international reserve status to the Euro, to a newly-developed bancor,  even to China’s RMB, or to some mix of these currencies. As the dollar fades, and especially if the US government resorts cynically to currency debauchment as a method of reducing the real burden of its international indebtedness, interest rates on government securities will rise sharply and private investment will be throttled.  In such circumstances, the US economy, like that of Iceland at the present time, will teeter on the edge of an economic black hole.

As private investment is increasingly  crowded out by government expenditures, and as entrepreneurship is dashed by national socialist policies – as indeed was the case in the US throughout the the first two administrations of FDR – the once-powerful engine of the US economy will sputter and then die.  Unlike in 1945,  in 2019 the United States will not bestride  a shattered world economy like some hegemonic Colossus.  Rather its state capitalist, social market economy will struggle just to maintain existing living standards, while newly-emergent, vibrant market economies demonstrate to a former master the awesome power of laissez-faire capitalism.

(For a more detailed discussion of these issues see Rowley, Charles and Smith, Nathanael: Economic Contractions in the United States: A Failure of Government available at www.amazon.com)