The Purple Muse

End of the Post World War II Era

Tweet

Last week I watched President Obama deliver his State of the Union address to the nation.  The US is struggling to overcome a very deep recession that shows no signs from abating from an unemployment perspective.  The government solution to the recession is to borrow more and more money to juice the economy with government programs.  The objective is to return unemployment to politically acceptable levels and deliver the good life to all of their constituents. 

President Obama, the Congress and the Federal Reserve continue to substantially increase the money supply through issuance of debt as the means of solving our economic problem.  This is a trend that has been in place since the end of World War II.  It has been supported by both Republicans and Democrats over the years.  This solution path is not an issue between political parties.  It was born out to the entitlement attitude of Americans that developed after the US won World War II and liberated the rest of the world from the evil nations that were defeated.

After suffering through the Depression of the 1930s and winning the war, the US established itself as the only viable nation on the planet.  The US dollar became the world's reserve currency.  The US ruled the world from a military perspective and eventually faced down the Soviet Union, its only post war challenger for world leadership.  Following the war the rest of the world was either destroyed or undeveloped.  No one could compete with the US and its industrial machine that was fully intact.

During the years that followed the citizens of the US decided they deserved more and more of the good life.  Social Security was expanded.  Medicare and Medicaid were created and expanded.  When there was a recession the Federal Reserve simply created more money to finance the government's fiscal deficits.  In 1971 President Nixon closed the gold window and decoupled the US dollar from gold.  The US did not want the good life to be encumbered by the limits of having a hard currency.  During the past 40 years the finances of the US have gotten further and further out of control as the linkage of the US dollar to gold has become a distant memory.

During his speech President Obama blamed the Bush administration for the nations financial ills.  It is absolutely correct that the Bush administration was irresponsible from a fiscal management perspective.  However, much of our ills today were advanced by the Clinton administration.  During Clinton's two terms the world trade dramatically expanded due to the agreements made under the auspices of the World Trade Organization.  The combination of the new global trade agreements, advanced satellite and fiber optic communications networks that connected the world and advanced logistics systems (shipping, rail, trucks, etc.) that can move vast amounts of goods cost effectively gave developing nations a chance to complete worldwide with extremely low cost labor.  US unskilled and semi-skilled labor, both white and blue collar, in many manufacturing and service industries must now compete against work forces on the other side of the world willing to do the same work at a fraction of the cost of a US worker.

US politicians, especially Democrats, don't want to talk about the impact of the trade agreements of the reorganization on the world's manufacturing industries that has occurred.  One can easily understand why free or freer trade is a good thing but there is no question that US based manufacturers were the big losers.  After WWII the US was the only provider of most of the the worlds manufactured goods.  Now the US must compete against the lowest cost suppliers in the world.

US politicians have been unwilling to explain this story to the people.  They don't want to explain that the advantages that were gained in World War II are now gone.  They have been dissipated by various forms of consumption, including wasted military expenditures, wealth transfer to people that contribute nothing to the economy and gross amounts of unnecessary overhead in the government and the economy.  Our politicians want to debate details and hide the impact of their actions over the long term.  No one wants the big picture to be clearly explained to the people. 

The US has a national debt that it won't be able to finance in the years ahead without massive monetary inflation.  Monetary inflation is effectively a tax on everyone holding US currency and debt obligations.  It is a free ride for those in debt at the expense of the responsible people that saved and invested intelligently.  Since the US government has a significant percentage of its debt held by foreign interests it may not be possible for the US to inflate the problem away.  The rest of the world may call the question.  The global debate on the future of the US dollar as the world reserve currency has already begun. 

The US has about $6 Trillion dollars of unfunded Social Security liabilities and over $40 Trillion of unfunded Medicare liabilities.  There are billions and billions of dollars of other unfunded liabilities.  All of these programs, including poorly thought out housing related programs, must be completed restructured.  The US government can't deliver on its promises to its citizens in today's world.  Decades of government promises must be broken in order for the US economy to be properly restructured to compete in today's world.  The President and Congressional leaders must tell the people the truth and start the restructuring process that is required.

Some people believe that the only solution is to return to a gold standard.  A price range of $2,500 to $5,000 an ounce will be required to back all the US debt with physical gold owned by the government.  The current  gold market price is just under $1,100 per ounce.  When Nixon closed the gold window the official price of gold was $35 per ounce.  The massive difference in prices is an indicator of the gross level of fiscal mismanagement that has occurred over the past 40 years.

The good life the US earned during World War II has come to an end.  We have a truly global economy.  We must compete in every market segment for goods and services.  Unskilled and semiskilled labor have limited value in the global economy.  The government promises of past decades are no longer relevant.  There is no free lunch.  Everything must be earned through hard work by the current and future generations of US citizens.

I believe most of the US population fundamentally understands the problem at a personal gut level.  They are looking for leaders that will be honest with them and tell them the truth.  Once the US acknowledges the truth we can get serious about changing direction and setting a course for greater success in the future.

Will our political leaders have the guts to be honest with the people and tell them the truth?  I haven't seen or heard of anyone that fully understands the issues and is willing to tell the people the straight scoop.  It is more likely that the rest of the world will simply dictate the terms they want to satisfy our debts.  Don't be surprised if much of the gold we currently hold is shipped to foreign governments to settle the US debt obligations at some point in the next few years.

The President and Congress of the United States are now engaging in a debate over what to do with the US running out of cash without an increase in the US government's debt limit.  Tea Party members of Congress, mostly elected in the fall of 2010, are correctly calling for fundamental restructuring of US government expenditures.   They are holding the debt limit hostage to force Congressional action on the out of control spending by the US government.  The liberals and progressives (Democrats) want to essentially maintain the status quo (continued annual increases) on spending while increasing taxes on the more well off citizens.  It is clear that the Democrats don't have the intellectual integrity to acknowledge what has happened over the sixty plus years since World War II and tell the people the truth.  It appears that the Democrats want to spend the US government into insolvency or into a hyperinflation fiat money printing catastrophe.