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The Looming Threat of National Bankruptcy

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During the recent crisis in Georgia, conservatives reveled in comparing Russia’s actions to those of the former Soviet Union. But did you notice that not once did they remind people of how Ronald Reagan supposedly brought down the Soviet Union? Reagan, they used to unceasingly remind us, caused the Soviet government to spend the nation into bankruptcy.

Can you guess why conservatives no longer bring that up? It’s because that’s exactly what the federal government, led by conservatives (and supported by liberals), is doing to our nation — spending us into bankruptcy.

Many Americans live under the quaint notion that the federal government is infinitely rich. They view the government as they view American businesses — as just another enterprise within the American economy. They think that the government produces wealth, just as American businesses do.

But that’s just not reality. The federal government gets its money in two ways: taxation and borrowing. Whether it is taxing or borrowing, the effect is the same — it is sucking capital out of the pockets of productive people in order to fritter the money away on welfare or grandiose government schemes, both at home and abroad.

As most everyone knows, the federal government is spending money — lots of it. There’s all the domestic welfare, including Social Security, Medicare, Medicaid, subsidies, and education grants. There is the rebuilding of Iraq and Afghanistan. There is the massive replacement of weaponry that was used in the destruction of Iraq and Afghanistan. There is the drug war. There is the enormous amount for salaries and other expenses for all the politicians and bureaucrats in the federal government, including the welfare providers, the regulators, and the troops. And now there is the trillion dollars or so (no one really knows how high the bill is going to be) in welfare for Wall Street cronies.

Where is the federal government getting all that money? You’d almost think that the federal government owns a fountain of infinite wealth, wouldn’t you?

Well, you can rest assured that they’re not going to raise taxes to cover the difference between what they’re bringing in in taxes and the amount their spending. In fact, despite the fact that the federal government is spending much more than it’s bringing in, both John McCain and Barack Obama are steadfastly maintaining that they’re going to lower taxes. That’s not surprising. The surefire way to get elected by a gullible electorate is to simply promise to spend more and tax less.

Since the amount being spent far exceeds the amount coming in through taxes, they’re going to have to continue borrowing to raise the difference, which is what they have been doing, especially since 9/11.

They continue financing and refinancing all that spending with debt, piling it onto the American people as if there were no tomorrow. Ultimately, however, the day of reckoning will arrive. That debt will have to be repaid. It’s something the American people do not want to think about, and so they don’t. But the day will come when investors, especially foreigners, will fear a default and decline to purchase U.S. government debt instruments.

How will U.S. officials pay off the debt? They won’t raise taxes to pay it off because that will get American taxpayers upset. Instead, they’ll turn to the tried-and-true method of liquidating debt that profligate government officials have turned to for eons. They’ll simply print the money to pay off the debt.

What do you think a central bank is for? That’s the main point of having a Federal Reserve — to provide the means by which the federal government can inflate the money supply to finance its ever-increasing expenditures and debt.

As the Fed embarks on that scheme, make no mistake about it — there are people who are going to get hurt — very badly hurt. Contrary to popular supposition, all this federal spending for welfare and warfare does not come free. Americans are going to pay for it all, one way or the other. It’s just a question of which Americans are going to shoulder the burden of it and in what amounts.

Of course, the benefit of using inflation, as compared to raising taxes, to finance all this welfare and warfare is that the average person won’t know that it’s federal officials who are responsible for what is happening. This is especially true for people who received their economics education in government schools, government-approved schools, and government-supported universities and colleges.

When prices of everything start rising, in response to a constantly debasing currency, people will blame the private sector — entrepreneurs, speculators, profiteers, capitalists, OPEC, illegal aliens, and whatever other scapegoats they can find. The last entity they will suspect is responsible for their economic woes will be the federal government. In fact, when the inflationary process manifests itself in rising prices, economically ignorant citizens will actually look to the federal government to take care of them and protect them from the private sector. That’s when price controls will come into play, followed by shortages and criminal prosecution of “price-gougers.”

The ancient Chinese symbol for crisis consists of two words — danger and opportunity. We can only hope that during the danger posed to our nation by out-of-control federal spending, the American people will seize the opportunity to reject the welfare-warfare paradigm that holds our nation in its grip and restore our nation’s heritage of economic liberty and free markets.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.