War, The Economy, and the Fed

War is expensive.  VERY expensive.  It’s also a racket.  Paying for it can be done in a couple of ways.  One is to raise taxes.  However, if every man, woman, and child had to fork over $16,000 as their true cost for the wars, chances are good that the conflict would stop fairly quickly due to public outrage.  Since 1913 and the establishment of the Federal Reserve Bank, the preferred method is for our leaders to simply print the money they need by purchasing government debt.  Under this system, the costs to the public are transferred in less obvious ways, such as debasement of the currency (inflation) and time spent in the unemployment line.   In fact, an argument can be made that this one of the main purposes of the Federal Reserve.

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As Austrian Economic theory explains, the business cycle is caused by central banks holding interest rates below their true market levels which encourages mal-investment throughout the economy.  Because interest rates are low, entrepreneurs see this as a signal that savings are plentiful.  With money easy to borrow, they begin funneling this new cash into capital-intensive projects.  This easy money can be funneled into all sorts of bubble activity: stocks, dot-coms, houses, government bonds.  Unfortunately, the entrepreneurs who started building strip malls, houses, whatever, eventually learn the painful truth: that the low interest rates were not a signal that savings were plentiful and that there would be a future market for their product, but that there really wasn’t enough savings in the economy to justify these projects at all.  These bubble activities are fueled entirely by debt and easy money which has to be paid back at some point.  When the bills come due, and there’s no money to pay, the whole scheme begins to unravel.

What does this have to do with war?  While the money is flowing freely, and people are feeling prosperous despite the growing mountain of debt-driven pseudo-wealth – i.e buying more house than they can afford – they don’t really pay attention to the atrocities that are occurring overseas in their name.  The Fed’s money printing, therefore, serves two nefarious political objectives:  It allows for expansion of the empire and redistribution of money to the military industrial complex while obscuring the true costs from the public.

There has been a lot of discussion in Washington regarding the debt ceiling lately.  Ever wonder why that is an issue and how it all started?  I’ll let Peter Schiff explain (emphasis mine):

The debt ceiling itself is both an ill-conceived compromise and a relic of past governmental integrity. For its first 128 years as a republic, the United States was able to function without a debt ceiling. This was possible for the simple reason that U.S. government had no central bank and could not borrow beyond its ability to repay through taxation. And since the ability to tax is always limited by taxpayers’ assets (and their extreme hostility to those who want to take them), legal gimmicks were not needed to prevent Congress from spending too freely. But the creation of the Federal Reserve in 1913 gave the Federal Government a potential means to borrow indefinitely by having the new bank buy its debt. Sensing this danger, the original Federal Reserve Act of 1913 prohibited the Fed from buying or holding government debt.

But just four years later the United States needed a means to raise money quickly to pay for its efforts in the First World War. The government passed an amendment to the charter to allow the Fed to purchase Treasury Bonds. Fearing (correctly) that this would create a mechanism for perpetual debt expansion, conservative lawmakers insisted that the amendment include a “debt ceiling” provision that would cap the amount that the government could borrow.

What these otherwise forward looking politicians somehow failed to grasp was that such a statutory limit was wholly meaningless, as it could be perpetually raised by future legislative action. This is exactly what has happened. The debt ceiling has been raised, with varying degrees of fanfare, every time it has been hit. This renders the law completely meaningless.

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As Schiff points out, within the first four years of the new bank’s existence, it was used to fund the largest and bloodiest war up to that point in human history.  Since then, it has gone on to create multiple boom-bust cycles that somehow just happen to coincide with the U.S’s overseas adventures:  Following WWI, we had the panic of 1920-1921*, Vietnam and increased welfare spending gave us the stagflation of the ’70s, the first Iraq war created an economy that was so depressed it cost George H.W. Bush his re-election.

In more recent history, when Bill Clinton’s dot-com bubble burst, it gave us the recession of 2000.  After George W. Bush took office, he rightfully blamed Clinton for the sorry state of the economy.  Then 9/11 happened and the U.S. decided to launch two wars.  In addition to his war spending, Bush maintained all welfare state programs and even added the incredibly costly Medicare Part D.  Somehow, during this time, people were, nevertheless, feeling quite prosperous.  Large new homes were being built at a frantic pace.  People with no jobs were getting low-interest loans.  SUVs were selling as fast as they could be produced.  The government was even sending us checks as “stimulus” and encouraged us to go shopping.

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How is it that while the country was mired in two wars and paying more than ever for welfare, people could still spend with impunity?  The Federal Reserve had the money machine going nearly full-blast the whole time**.  This is what caused the crash of 2008 that we are still suffering from today.  Those who understood the Austrian theory of the business cycle saw it coming years before.  The printing of fiat currency does not equal wealth – it only serves to make us all poorer.

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*By the way, no one has ever heard of the depression of 1920-1921.  Why?  Simply because it was over so quickly and the reason doesn’t fit the narrative the advocates of big government would like you to believe.  At the time the panic began to unfold, the advice given to President Harding by his treasury secretary, Andrew Mellon, was to do nothing.  That’s right, NOTHING.  The government, in concert with the Federal Reserve bank caused the problem – to fix it, they needed to back off and allow the market to reallocate resources that were mal-invested during the boom.  Failure to allow the market to reallocate capital through government interference is the reason the Great Depression lasted so long and is the reason why our current recession is lasting so long.

**Now that Ben Bernanke has embarked on QE-Infinity, the money machines really are going full-blast.

This post was inspired by Scott Horton, Lew Rockwell, and Ron Paul.

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