Wednesday, July 27, 2011

The Meaning of the Debt Crisis

The complexities of money and credit in the economy often serve to obscure the simplicities of the market economy. It is built on trust. When you hire someone to do a job for you, then you trust that they can and will do a good job. When you lend money to someone then you trust that they are good for the interest payments and the return of principal.

In the real world, of course, things get messy. People are optimistic. They offer themselves for jobs they are not quite qualified for; they borrow money on more of a hope that their business plan will work out than a real knowledge of the difficulties and the problems ahead.

Then there is government. Historically, government has entered the credit system to borrow money to finance its wars. If the wars turned out well then the bond holders got their money back. If the war was a disaster then the credit system crashed and bond-holders were lucky to get anything back. Anyway, governments default on their debt all the time.

But the Anglosphere was different. It managed to pay its debts more or less, from 1700 to 1930. That was, no doubt, because politics was dominated by the merchant class and the merchant class wanted a functioning credit system.

The century of the welfare state, starting in 1900, was different. Now politics revolved around the bribing of the employee class by the political class. Credit conditions were a secondary question. The only thing that mattered for the political class was winning the next election. The only thing that mattered for the employee class was getting and keeping their benefits.

Our present crisis is the end game of the century of the welfare state. The manipulation of the credit system to buy votes, in outright government debt, Federal Reserve open market operations to print money, and subsidies for debt in a host of vehicles like Fannie Mae and Freddie Mac have debauched the currency and brought the government debt up to about 100 percent of GDP.

President Obama is therefore in a bit of a bind. Sooner or later he must cut spending and/or raise taxes, but not before the 2012 election when he hopes to be reelected. Thus, for him, the long-term health of the economy is nothing. The propping up of the economy through the election is everything.

Republicans, goaded by the Tea Party movement, think that we might as well start baling out the ship of state right now by cutting spending. It's easy for them; Republicans don't buy votes with spending. Instead they buy votes by offering tax cuts.

Many people are shocked and appalled by the undignified spectacle of the debt-ceiling debate. But what we are seeing is the opening battle in the struggle for the future. Will the big authoritarian welfare state continue with its centralized, politicized programs of pensions, health care, education, and welfare, or will we cut these failed programs down to size? The Republicans, representing the middle class with jobs in the private sector, don't see too much of the benefit of big government. Democrats, as an over-under coalition of government administrators and experts on the one hand and program beneficiaries on the other are fighting to maintain their sinecures and their benefits. The fight is getting nasty and it will get worse. Of course it will. We are fighting over money.

In the end, of course, the American people will get what they want, whatever it is. In the meanwhile, government will break just about every promise it ever made.

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