Debt is Prosperity

Treasury Secretary Timothy Geithner has been making the rounds over the past few weeks lobbying for Congress to raise the debt ceiling. According to him, if we don’t increase our debt limit, we will effectively default on our debt.

“On August 2nd, we’re left running on fumes, We have no capacity to borrow,” Geithner said this morning on CBS’ Face the Nation. “We have no other option to buy more time.”

My question for Secretary Geithner: what is the point of having a debt ceiling if we’re just going to raise it every time we approach it?

Sad Timmy

If I have a credit card with a $5,000 limit I cannot lobby Visa or MaserCard to increase my limit because I want to buy more iPads and TVs. If for some reason I was able to increase my personal credit limit to $10,000, it would not make my personal budget more solvent.

The problem isn’t with my credit card limit, it’s with my spending. Not too long ago, if individuals wanted to make a big purchase, they would have to save so that they could afford the product. During the last decade the prevailing thought was, “buy now, pay later.” We’re paying for our overindulgence now.

The Federal government operates within the same economic bounds as individuals. Just like there are laws of physics that cannot be broken, there are unavoidable economic laws. Washington, DC, has tried to circumvent these economic laws for decades.

Debt Chart

Since Nixon officially took us off the gold standard in 1971 and pronounced us “all Keynesians now,” the US national debt has skyrocketed. There is more than just a correlation between fiat dollars and an increase in the debt.

The US Dollar is the world’s reserve currency, but it’s backed by nothing except the “full faith and credit of the US government.” How much faith do you have in Washington DC? The Tea Party has risen as a reaction to big government. Government could not have grown this big without fiat money. Paper money is the lifeblood of big government.

French economist Jacques Rueff said that having the paper dollar as the world reserve currency allows the Federal government to run “deficits without tears.” Essentially, we leverage our position in the world by forcing other countries to use our dollars. As other countries use our dollars we can export our paper in order to pay for imports. We can maintain our dollar’s relative value and continue to pay for the warfare/welfare state.

Declining Dollar

Paper money allows us to run up these huge deficits. We don’t feel the decrease in living standards because we export our inflation. If we’re serious about cutting spending we have to attack the root of the problem:  paper money.

The Federal Reserve has a monopoly on the money supply. Everyone recognizes that monopolies are bad, but most people accept — even promote — this money monopoly.  Here are four steps we need to take to realize sound money:

1. Audit the Federal Reserve. 75% of Americans are in favor of an audit. With rumors of QE3 in the works, we cannot trust a private monopoly to maintain the value of our money.

2. Eliminate Federal legal tender laws. Legal tender laws force people to accpet money that loses value. In an environment with these laws, bad money drives out good money (Gresham’s Law) because people will trade with the paper money and hoard the money that maintains its value.

3. Abolish taxes on gold and silver. Gold and silver have been used as money for over 4000 years. Their physical properties make them valuable commodities. Our experiment in paper money has lasted 40 years. Which do you think has the better track record for maintaining value?

4. Allow for competing currencies. Free markets thrive on competition. When consumers can voluntarily choose between two or more products they will select the one that gives them the best value. In a marketplace of money, people will choose the form which best maintains it’s value.

The fiat Keynesian system has distorted our economy for too long. We have suffered through two major busts in the past decade and are on our way to blowing up a third bubble. We must restore sound money.

If George Orwell was areound to re-write Nineteen Eighty-Four, I think he would have added a fourth plank to the Party’s platform:

WAR IS PEACE.

FREEDOM IS SLAVERY.

IGNORANCE IS STRENGTH.

DEBT IS PROSPERITY.

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