The Path to Economic Disaster
There's still time to turn around.

Federal Reserve chairman Ben Bernanke's plan to buy back $600 billion of outstanding U.S. Treasury bonds is an astonishing act of brinkmanship, splendid in its boldness, perhaps, but in fact, insane. It is the desperation throw of a country that will appear to have abandoned all hope of retaining for its currency the respect of the world, and of paying down its own gluttonously accumulated debt, and will instead just devalue the currency in which the debt is denominated. Last year, the United States, by running a $1.4 trillion deficit, effectively increased the money supply (by one definition) by more than 100 percent, but much of the increase was contained within the federal system, by having the central bank, in effect, buy a good part of the government's new obligations that financed the deficit.

This sort of method was utilized to restrain the inflationary impact of the huge deficits the U.S. incurred in World War II: The vast increase in the money supply was not unleashed on consumer prices. Almost all industry was focused on war production, 10 percent of the entire population was in the armed forces receiving a minimal wage and severely confined in expenses, and most ingredients in the consumer price index were rationed. National determination to win the war suppressed most of the instinct to speculate and corner markets, and regulations (which the war emergency caused to be more easily tolerated than would usually be the case) protected price stability. There was full employment, a spirit of sacrifice, and an overarching goal shared and pursued by the population, almost unanimously.

Almost none of these mitigating factors exist now, and what is in contemplation is an immediate 30 percent increase in the money supply (as more conventionally defined), thrust in cash into the hands of largely foreign bondholders, designed to incite spending by those whose bonds are redeemed and to reduce the value of the U.S. dollar (despite official disclaimers), facilitating U.S. exports and discouraging imports. No international reserve currency has survived such a harum-scarum move intact. Monetarists argue for moderate money-supply increases not greatly exceeding productivity increases. The purpose of money-supply increases is to try to ensure moderately increasing consumer spending and investment, and the job creation both stimulate. In the Great Depression, when the study of such severe economic phenomena was much less advanced, the Hoover administration adopted precisely the worst policy choices: higher tariffs, higher taxes, and a shrinking money supply (deflation). In that era, there was no direct federal relief for the unemployed and no guaranty of bank deposits. By the time Franklin D. Roosevelt was inaugurated in March 1933, unemployment had ballooned to between 25 and 33 percent (the Commerce Department did not calculate the figures then), 45 percent of family residences were in danger of foreclosure, the entire banking and stock and commodity exchange systems had collapsed and shut down, and farm prices were below subsistence levels for most farmers. The practice was to dump agricultural surpluses abroad, and then advance loans to those countries to buy the surpluses, and confidently await the default on the loans contracted for the purpose.

Roosevelt got most of the equation right, as he guaranteed bank deposits and reorganized the banking system, which quickly reopened; put many millions of people to work in workfare infrastructure and conservation programs; brought in Social Security and unemployment insurance; partly abandoned the gold standard; devalued the dollar; refinanced home mortgages; and had farmers vote by category to limit production, raising prices. He encouraged price-fixing, cartelism, and collective bargaining to try to raise incomes and spending. Unfortunately, he also allowed himself to be spooked by political splinter groups, especially that led by Louisiana's Huey P. Long, into raising income taxes on the rich, in order to dampen class warfare, reduce income disparities, and reduce the deficit. The efficacy of stimulative tax reductions was not widely known or practiced at the time. The economy gradually recovered and was complete with the great defense buildup and peacetime conscription in the two years between the start of World War II and American entry into it after Pearl Harbor.

The Obama administration, dealing with the greatest economic challenge since the Thirties, has waffled around, has been distracted by a mad and regressive health-care bill, has offered no relief from a limitless horizon of immense federal and national current-account deficits, and has now been severely repudiated by the country. The Bernanke initiative will precipitate a war of devaluation between the yen, euro, and U.S. dollar, which have no value, other than opposite one another. There will be an immense flight to durable value, especially gold and some other commodities. The administration seems not to realize that employment will not snap back from its current 9.6 percent (almost twice that if the under-employed are included) without a change in employment patterns, which can be encouraged by the tax system, with fewer lawyers, stockbrokers, merchant bankers, consultants, and retail salespeople, and more people engaged in sophisticated manufacturing, research and development, public-interest construction, primary industry, and creation of genuine intellectual property.

The administration, even now, could retrieve its credibility and prevent a power dive into the second half of the double dip if it scaled back the announced bond purchase (in exchange for minor concessions from some of the other main economic zones, so no one loses face); named the Democratic co-chairman of the Debt Commission that has just reported, Erskine Bowles, as secretary of the Treasury to succeed the ineffectual Timothy Geithner, with a mandate to implement the Commission's excellent proposals; produced a serious energy program to reduce oil imports, and not a lot of nonsense about alternate green sources muddled with cant about global warming; and proposed a stage-two health-care reform that would actually reduce health-care costs. The result would be a far greater political recovery than President Clinton managed in 1994, and a partial restoration of the U.S. to the place of trust and respect in the world that it has been relentlessly squandering for many years. Apart from anything else, it would also show that the political system can work, and is not just a fountain of patronage and a culture of evasion and deferral of the greatest and most challenging issues: a culture that elevates progressively less distinguished office holders, producing tidal waves of voter rejection every two years while the best people — the Alan Simpsons and Evan Bayhs — withdraw in ever greater numbers.

President Obama had a good trip to India and Indonesia, and is moving steadily to strengthen relations with those powers and Russia and Japan, which will be the real bulwark against the increasingly irritating shenanigans of the Chinese and their naughty North Korean puppet. If he could steel himself to take out the incubating Iranian nuclear military capacity, and not waste more time on sanctions, he might still rank as a force for stability in the world, and not just as he has been, an agent for disintegration of the Western Alliance, and the facilitator of an immense rush for deterrent nuclear weapons, while he mouths delusional exhortations to disarmament, as if in a Monty Python farce.

— Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom and Richard M. Nixon: A Life in Full. He can be reached at [email protected].

© 2025 Conrad Black