“Change” Has Come to America?

Posted by Kenn Jacobine

The current financial meltdown has its origins in a presidential act that took place in 1971. In that year, through presidential directive, the United States defaulted on its obligations under the Bretton Woods system. Because the Vietnam War and LBJ’s Great Society required large expenditures on the part of Uncle Sam, inflation and a devalued U.S. dollar resulted. The problem for the U.S. at the time was that foreign countries could demand gold in exchange for devalued dollars. Naturally, this is exactly what they did. Fearing a complete depletion of U.S. gold reserves, Richard Nixon closed the gold window and began the age of the fiat dollar.

With the Gold Standard out of the way, the federal government could monetize even larger amounts of debt. In 1971 the national debt of the United States was $425 billion. At the end of 2008, the national debt exceeded $10 trillion – a 2252 percent increase in 38 years! Naturally, this mammoth increase in debt did come at a cost to our economy. For one thing, every dollar in debt the government monetized was one dollar less that could be used by industry to grow the economy. Another cost was inflation – the erosion of savings and purchasing power. From 1792 to 1971, the average yearly inflation rate was .7 percent. From 1972 to 2008, the super monetized debt era, the average yearly inflation rate was 4.66 percent. This increase in inflation contributed to the ballooning of household debt during this time period. If things cost more money and savings isn’t worth as much debt is likely to increase. In 1971, U.S. household debt was about $500 billion. In 2008, the number ballooned to about $14 trillion – a 2700 percent increase in 38 years!

Spending sprees, whether personal or governmental, can’t last forever. The depression we are heading into is the hangover for our binging. Taking the debt numbers from above into account, we are headed for the mother of all depressions.

The funny thing is that Washington has tried very hard to avoid depression. It has done it through, you guessed it, more monetized debt. It is like policymakers at the Federal Reserve, Executive Branch, and in Congress have no creativity or memory. They have spent trillions of dollars to stimulate the economy out of the current financial crisis. What we have to show for it is a record number of Americans receiving jobless benefits, many well-known brand names on the brink of bankruptcy, and an assets market that has already lost trillions in value continuing to flounder.

Then on January 20, 2009, Barack Obama, the man that promised us “Change We Can Believe In”, was sworn in (well, sort of) as president. What was one of his first priorities? - to monetize over $800 billion in new debt to stimulate the economy. This is the same exact thing we have been doing for the last 38 years. Isn’t one definition of insanity to repeat the same action over and over again expecting a different result? But, it gets worst. Obama’s stimulus bill is packed with spending that doesn’t have anything to do with economic recovery. Washington can’t even make it look good anymore. The spending proposals include: $420 million to battle avian flu, $335 million for programs to combat AIDS, VD, and TB, $2 billion for Head Start, $10 billion for science facilities, and $6 billion to bring high-speed Internet to rural and underserved areas. If this is change then I am a communist.

We do need change in America. We need to change our political leadership and install statesmen that can think outside the Keynesian box. We need to change our expectations of what government can and should do. We must return to the limitations placed on Washington’s power found in the Constitution. We need to change our monetary system. The Fed should be abolished and our currency should be backed by a scarce commodity. We need to change our personal habits. Many Americans need to learn there is no such thing as a free lunch. The bills eventually come due as is being proven through this impending depression. Finally, we need to change our economic system. We need to reject the statism, socialism, fascism or whatever ism you want to call it of at least the last 38 years and reinstitute a free market system. That free market system would pay its bills, reward merit, and penalize misbehavior. If President Obama genuinely wants to fulfill his campaign pledge to “Change” America then he can start with this blueprint.

Kenn Jacobine teaches History, English, and Information Technology in a Global Society for the American International School of Lusaka, Zambia. Visit his website at: The View from Abroad.