The Idea of America, Part II

In the conclusion of his essay, Pierre Lemieux examines the impact that the crumbling American ideal has had on the rest of the world, and on Canada in particular.

Dangers of the State

How could a state – the American state – founded on the ideal of individual liberty become so powerful? How could a state embodying the idea of America become so anti-American? It is true that all Western states have followed the same route during the 20th century, and that their citizens have lost many of their traditional liberties. But how can we explain that this also happened in America? In many areas, the conditions of individual liberty and privacy have become even worse than in other countries.

Consider a related paradox. Canada remained a British dominion while America became an independent country. The Canadian state (federal and provincial governments) was in theory unlimited; the American state was trusted with the sacred mission of protecting liberty and was formally constrained by the Bill of Rights. Now, look what happened. At least during the 20th century, virtually all slippery slopes started in the U.S., many years, sometimes decades, before being imported into Canada. The U.S. federal income tax was established in 1913; in Canada, it started in 1917. The U.S. feds introduced unemployment insurance in 1935; the Canadian feds in 1940. The Federal Reserve System was created in 1913; the Bank of Canada in 1935. The American New Deal was imitated by a Canadian Conservative government after a lag of a few years, and much resistance. Born in 1934, the SEC predates its first Canadian sister by 11 years and, even then, securities regulation remains, to this day, a provincial jurisdiction north of the border. Money laundering legislation was introduced in American law in 1970, and plagiarized in Canada only in 1991; the more severe American laws of the 1980s and 1990s were imitated by the Canadian federal government only in 2000. Up to the 20th century, even the right to keep and bear arms was, in some respects, as well protected in Canada as in the U.S.

The creeping up of government ID papers, mainly the driver’s license with photograph, started in the U.S. a few decades ago, before being imitated in Canada, during the 1980s and 1990s. The ubiquitous use of the Social Security Number in the U.S. predated by ten years or so the proliferation of the Social Insurance Number in Canada. The war on drugs, the catch-all crime of domestic violence, the feminist legislative agenda, the environmental craze, the corporate governance witch-hunt, the prosecution of sexual harassment writ large, the anti-smoking jihad, the fat hunt – all these crusades started in the U.S. and were only later embraced by Canadian governments.

There are glorious exceptions where Americans remain freer, but it is seldom completely black and white. Taxes are lower in America than in Canada, but this is only since the 1960s. Self-defense, the right to keep and bear arms, and free speech have resisted better in America, but have also been under attack. Private health insurance is not prohibited in the U.S. as it has been for a few decades in Canada, but 40 per cent of health expenditures come from the taxpayer (compared to 70 per cent in Canada) and the industry is tightly regulated. At any rate, it is only since the ’60s that individual liberties have been under heavy attack in Canada. It is as if, in Canada, the state had simply forgotten to legislate, to regulate, to control, except for importing tyrannical fads from elsewhere, including from the Land of the Free.

How could a country founded on the ideal of individual liberty, with a state devoted to the mission of protecting it, slide down the road to tyranny as fast as, and sometimes faster than, other countries? The economic analysis of politics suggests some explanations. With hindsight, the Founders probably did not take seriously enough the danger of the state, as illustrated in Madison’s argument for a federal government that would be kept in check by the States and the will of the citizens. Perhaps the state is so dangerous that trusting it with any glorious mission is looking for trouble, even if this mission is the protection of liberty. Consider France and America. In both countries, the typical citizen thinks that his is the country of the rights of man, and that everywhere else in the world people are in chains. In both countries, the state has become an irresistible force for surveillance and control – more advanced in one country or the other depending on the people’s capacity for resistance and the vagaries of history and culture. Compared to these two monsters, the mission-less Canadian state remained humble for a long time, and protected individual liberty by its lack of ideas and initiative.

Failure and Hope

We must admit that the idea of America is, if not dead, in great danger. Can you imagine that any of the admirers of America I have cited, or any of the Founders, would see today’s America as a free society? It is certainly less unfree than many other countries in the world. It may or may not be less unfree than other Western countries, depending on which area of human activity is considered. But it is far from the idea of America.

Not all hope is lost. Some barriers to power remain in America, and some powerful symbols of the idea of America survive. The right to keep and bear arms seems to have recently regained some lost ground. Freedom of speech is still better protected in America than anywhere else. More importantly, it is in America that the advancing steamroller of the state is meeting the most resistance.

If liberty and civilization have any future, the world needs the idea of America.

Regards,

Pierre Lemieux
for The Daily Reckoning
July 9, 2008

Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais ( pierre.lemieux@uqo.ca). He is the author of many books, including The Idea of America, with co-author Bill Bonner. His latest work, Comprendre l’économie (Understanding Economics), will be published at Les Belles Lettres (Paris) this fall. He has also authored a large number of articles, including in the Western Standard, where he was a columnist. He is now the Editor-in-Chief of LibertyInCanada.com (http://www.LibertyInCanada.com and, in French, at http://www.LIBERTEauCANADA.com). His personal website is at http://www.pierrelemieux.org.

The war continues. The unstoppable forces of inflation continue to smash into the immoveable lines of deflation. Caught between the two is the U.S. consumer…the American voter…and the lumpeninvestoriat.

Yes, dear reader, we are getting shot to pieces from both directions. Prices are rising. And prices are falling. Mr. Market marks down prices for housing and stocks. Mr. Federal Reserve System pushes up prices for oil and food.

Yesterday brought more hits, more near misses, and more casualties from "friendly fire." But the big story was that after so many weeks of reporting huge gains by inflation, deflation is back in the news with a major counteroffensive. It had begun to look as though inflation was the clear victor. Prices are rising everywhere; everyone came to believe inflation was unbeatable. Analysts had begun talking about oil at $170…even $200.

But yesterday, while the Dow rose 152 points – a weak bounce after a long streak of losses – both oil and gold fell. Gold dropped back $5, to $923. Oil lost $5 too – slipping down to $135. Commodities, generally, may be in retreat.

More bad news comes from the housing sector too. Yesterday, it was reported that previously owned house sales fell 4.7% in May…more than expected. They’re down 14% from the year before.

Also in the housing news was a report that repossessions are up 100% over 2007, while mortgage payment delinquencies are at a record level. Foreclosure filings are running 48% ahead of last year.

With so much deflation in the housing sector, economists are just waiting for more of it to show up in the retail sales…and then spread to the rest of the economy. With no house price gains to spend, consumers will have to cut back. When they do, retail sales will fall…and so will the demand for goods and services all up and down the line. So far, we’ve seen a big drop in demand for automobiles – especially SUVs. GM shares are down 75%. We’ve seen a drop in driving too. And unemployment numbers are increasing. But, so far, no big drop in spending. Of course, part of the reason for that is simply that prices have risen so high, consumers need to keep spending every penny – even though they are getting less for their money. But soon, we should see a significant drop in sales, followed by a further drop in economic growth.

Last week, we saw a report telling us that vacancies in retail space were increasing. The United States has ten times more retail space per person than France. When people spend less, much of this space will cease to be commercially viable. Soon, abandoned shopping malls will follow abandoned houses.

"Suburban office space losing occupancy and value," too, adds the Chicago Tribune.

What this represents to Wall Street is a big drop in the value of its collateral…and its clients’ ability to service their loans. First, the borrowers can’t make the payments. Then, the lenders realize that their collateral is worthless. We’ve seen big hits taken in the subprime mortgage market. But what about other parts of the mortgage market? And what about credit card lending? Student loans? Commercial loans?

In England, Bradford and Bingley, a big mortgage lender, got whacked yesterday. Its shares fell 18%, to less than $1. And a leading London stockbroker put out a target price for them of "zero."

U.K. mortgage lending is down 44% from last year. "London house price forecast deepens gloom," reports the Financial Times.

Back in America, the Fed says it will extend its PDCF program into next year. The program is simple to understand. It allows Wall Street to borrow from the Fed at 2.25% – or about half the level of consumer price inflation. It should be easy to make money. You just borrow at 2.25% and lend at…say, 5%. The borrower would be paying a real interest rate of only 1% or less. And the lender would be earning 2.75% on someone else’s money. What could go wrong?

What could go wrong is what is already going wrong. Lenders put out too much money to too many people who can’t pay it back. Now they’re reluctant to lend to anyone. And who’s eager to borrow? Who wants to build more retail space? Who’s building more houses? Who’s setting up a new auto plant in the U.S.A.? Who’s expanding production of any sort?

*** In a credit crunch, lending, spending, and borrowing all contract. The Japanese found that lending money even at a zero percent interest rate didn’t revive the ‘animal spirits’ of a booming economy. Deflation wins, in other words.

But that doesn’t stop central bankers and central governments from trying. In this space yesterday, we reported a guess from Bridgewater Associates that the credit crunch could take $12 trillion of credit out of the economy. The authorities will try to make up this amount with a combination of fiscal and monetary policy. But you see, the amount is too great. And it doesn’t include the natural tendency of people in hard times – to draw back and save. If Americans suddenly started turning Japanese, and began to save money like the Japanese, it would take another $1 trillion out of the consumer economy every year.

So the U.S. economy is probably in for some rough handling. But we keep pointing out that the United States is not Japan; it’s not as healthy. And the world economy has changed in a fundamental way in the last 20 years.

When the Japanese tried to stimulate their economy with zero interest rate loans, the money often ended up in speculative bets on the US stock market in the ’90s…or new factories in China. Now, when the feds try to stimulate the US economy, the speculators turn to oil and commodities. Prices rise, forcing Americans to pay more for imports…and driving up consumer inflation rates all over the globe. Result: inflation wins too.

And so, the poor American takes it from both sides. He gets smacked by inflation…and booted by deflation as well.

*** We filled up the car yesterday. The price of diesel fuel was 1.57 euros per liter. That works out to almost $10 a gallon.

Curiously, the rising price of oil has done less damage in Europe than in America. Partly because people were already used to high fuel prices, partly because Europeans use less energy, partly because the euro has gone up against the dollar (making oil less expensive in euro terms) and partly because, since fuel is so heavily taxed, the increase caused by rising prices of the raw material is less as a percentage of the whole.

Europe was designed before the machine age. Its dense, old cities – a few still surrounded by stone walls – were meant to protect people from Goths. Vikings, Huns – and the English. Now, those cities protect people from rising energy prices. People can walk to local shops. They take buses, metros and tramways to work. They live in houses with thick walls…shutters…and often double glazed windows.

*** Ron Paul explains how we got into this mess:

"There were several stages. From the inception of the Federal Reserve System in 1913 to 1933, the Central Bank established itself as the official dollar manager. By 1933, Americans could no longer own gold, thus removing restraint on the Federal Reserve to inflate for war and welfare.

"By 1945, further restraints were removed by creating the Bretton-Woods Monetary System making the dollar the reserve currency of the world. This system lasted up until 1971. During the period between 1945 and 1971, some restraints on the Fed remained in place. Foreigners, but not Americans, could convert dollars to gold at $35 an ounce. Due to the excessive dollars being created, that system came to an end in 1971.

"It’s the post Bretton-Woods system that was responsible for globalizing inflation and markets and for generating a gigantic worldwide dollar bubble. That bubble is now bursting, and we’re seeing what it’s like to suffer the consequences of the many previous economic errors.

"Ironically in these past 35 years, we have benefited from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas (indirectly encouraging our jobs to go overseas as well) and enjoy unearned prosperity. Those who took our dollars and gave us goods and services were only too anxious to loan those dollars back to us. This allowed us to export our inflation and delay the consequences we now are starting to see.

"But it was never destined to last, and now we have to pay the piper. Our huge foreign debt must be paid or liquidated. Our entitlements are coming due just as the world has become more reluctant to hold dollars. The consequence of that decision is price inflation in this country – and that’s what we are witnessing today. Already price inflation overseas is even higher than here at home as a consequence of foreign central bank’s willingness to monetize our debt.

"Printing dollars over long periods of time may not immediately push prices up – yet in time it always does. Now we’re seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It’s a gross distraction to hound away at ‘drill, drill, drill’ as a solution to the dollar crisis and high gasoline prices. It’s okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.

"This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to ‘monetize’ U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone – especially the U.S. Congress that doesn’t care, or just flat doesn’t understand. As this ‘gift’ to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever.

"This time – since there are so many dollars and so many countries involved – the Fed has been able to ‘paper’ over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history’s greatest.

"The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don’t have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty."

Until tomorrow,

Bill Bonner
The Daily Reckoning