Get a second mortgage, lease your car, run up your credit cards and you can live rich — for a while. Then the bills come due. Stress and poverty follow. Bankruptcy tempts. That which holds for personal finance holds for nations as well. Debt is useful for temporary emergencies (major wars) and high returning investments. But for other purchases, debt is dangerous, both for individuals and governments. There is no paradox of thrift.
The wise we elect to rule us should know these things, but clever intellectuals have gifted them with elaborate rationalizations enabling the political players to stay in denial, granting unaffordable government largesse and tax cuts. We must debunk these rationalizations before we can move forward with any significant program of debt solutions. And so I address each major faction in turn:
Liberals take note: the fundamental paradigm of Keynesian economics – the Circular Flow Model– is deeply flawed. Important boxes are missing. Even with those boxes added, the Circular Flow Model omits time and close to half of current economic activity. This is indeed a hard lesson, as Keynes provided potent rationalizations for redistribution and government action. However, Keynes called for subsidies for the rich as much as he called for redistribution. Who do you think pays for the deficit? For stimulus programs funded by debt? Answer: the working class! Those who desire more economic equality would do well to study a different model of economic depressions and act on it.
Conservatives take note: Supply Side Economics has been oversold. We are below the Laffer Curve maximum for all but the lower classes. Tax cuts for the rich had power for Kennedy and Reagan when the top rates were 90% and 70% respectively. Today they are counterproductive save for some special cases (to be covered later). Furthermore, the debt has grown nearly as large as the economy. We cannot grow our way out. We will be fortunate to grow at all soon, as the Baby Boomers are preparing to retire!
Libertarians take note: economic collapse benefits you not. Whatever you gain with your gold portfolio, you will likely lose in liberty. Look to history. Look to the French Revolution and the fall of the Weimar Republic. Bankrupt government often leads to worse government. When times are dire, people turn to their leaders for help. Recall how Franklin Roosevelt gained near dictatorial power. Conversely, when times are good, people chafe at the costs of government. To make things better we must make them better. Finally, we cannot close down the Fed and go to a gold standard without deepening the current recession, unless we pay down trillions of dollars of debt first. Our economy is addicted to inflation.
Environmentalists take note: Keynes is your enemy. Keynes called for ever more consumption, forced consumption. Politicians strive to boost GDP even when maximal happiness calls for more leisure. An unstimulated capitalist society would be more laid back than what we have today, with people taking more time to enjoy family, community and nature instead of commuting thousands of miles per year to live in McMansions filled up ever more plastic stuff. Sustainability requires sustainable economics.