The Austrian Masters' Wisdom
[Excerpted from Minyanville.com.]
My proposition today is that we're in a fiscal calamity caused by the further, and perhaps final, triumph of politics. Admittedly, I issued this very same forecast awhile back — 23 years ago to be exact. But I'm not reluctant to try again. Having read Grant's continuously since 1988, I've learned there's no shame whatsoever in being early — even often!
The Triumph of Politics was published early, mainly in the unflattering sense that I'd not completed my homework. I was hip to statist fiscal and regulatory evils, but had only dimly grasped the Austrian masters' wisdom on money; that is, in printing money backed by nothing, central banks inherently threaten prosperity. So today I'll add the proposition that fiscal decay is the inevitable stepchild of the very monetary rot that the Austrians — Mises, Hayek, Rothbard — so deplored.
My tardiness on money perhaps owes to the Reagan Revolution's disinterest. Secretary Don Regan averred that sound money could be readily attested by the height of the Dow, while his deputy, a monetarist, gauged it by the width of M2.
Even Alan Greenspan, that is, Greenspan version 1.0, urged us not to worry. Gold, he assured Ronald Reagan, was meant to anchor, not the Fed's actual balance sheet, but something more ethereal, like perhaps its state of mind.
My libertarian screed thus omitted money while cataloging the Reagan Revolution's lesser shortcomings. These included gargantuan deficits, subsidies for favored Republican constituencies like farmers, homebuilders, and exporters, a complete whiff on entitlements, and protectionism for dying industries like steel and textiles — even for a motorcycle company whose ticker symbol, fittingly, was HOG.
Then, too, there were tax giveaways to real estate, oil and gas, and, come to think of it, to any other industry with the foresight to hire a pair of Gucci loafers domiciled on K Street. On top of this came the big defense budgets at a peacetime-record 7 percent of GDP. Deep federal deficits thus stretched as far as the eye could see.
Yet, I didn't perceive that this already alarming fiscal ledger would be further aggravated by two looming tectonic shifts. Oddly enough, these financial temblors were rooted in history's most consequential pair of train cars.
The first was the sealed car that took Lenin to Moscow in 1917 — a 75-year trip to hell and back that finally ended in 1991 when a Moscow politician, whose normal confrontations were with a Vodka bottle, was inspired to mount a Soviet tank and command the Red Army to stand down. Promptly thereupon, the US defense budget was stood down, too, dropping overnight to approximately 3 percent of GDP — half its prior size. This unexpected game changer, coupled with marginal tinkering on taxes and spending, computed out to a balanced budget. Soon enough, the fiscal all-clear horn was sounded by no less than Wall Street's own money man, Secretary Rubin.
In fact, the fiscal equation was just then tumbling into a fatal descent. And it is here — let's pinpoint the exact date at Greenspan's "irrational-exuberance" call in December 1996 — where the Austrian men separate themselves from the Keynesian and Friedmanite boys. The latter continued to quibble about how to measure money, whether it was growing too fast or slow and whether more or less financial regulation was needed.
Peering through a different frame, however, the Austrian notes that US money GDP was about $10.0 trillion at the time the Maestro let his exuberant cat out of the bag. Under an honest monetary regime this nicely rounded number might have stalled out indefinitely — owing to the Great East Asian Deflation just then gathering a head of steam.
The truth is, the extraordinary force of economic nature represented by the mercantilist export machine that sprung up in East Asia in the late-20th century was profoundly deflationary. Absent puffed-up domestic credit, the incoming Asian trade would have flattened American employment, wages, incomes, and prices. In so doing, it would have kept money GDP bottled up at around $10 trillion, thereby denying the next decade's debt-fueled rise in both output and prices, which took money GDP to $14 trillion.
By Austrian lights, then, this $4-trillion difference represents counterfeit GDP, owing to the false conversion of unsupportable borrowings into current income — debt which is now being forcibly liquidated. This bubble-driven inflation of money GDP also caused government revenues to swell unsustainably, thereby camouflaging for more than a decade the fiscal deficit's actual, far more frightful, aspect.