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Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
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And Now We Have Spain

by

American statists love to tell us how important it is that the U.S. government continue spending and borrowing ever-increasing amounts of money. They say all that spending and borrowing is the key to economic prosperity. Stimulus, they call it. By spending and borrowing, the government “stimulates” the economy, which then becomes strong and booming.

That’s why statists don’t give a hoot about the debt ceiling. The way they figure it is that the very worst thing that could happen is to restrain the government from borrowing more money, which the ceiling is designed to do.

After all, what is the debt ceiling? It’s a declaration by Congress that the total amount of debt that the government has accumulated should not surpass a certain point. It’s an acknowledgement that too much government debt is a bad thing, even a dangerous thing. By setting a “debt ceiling,” the Congress is essentially saying this: The government can incur this amount of total debt and no more.

For the past couple of years, the American people have been able to see what lies at the end of the borrowing-and-spending road that the statists have us on. All they have had to do is look at Greece. For decades the Greek government has been doing precisely what American statists say the U.S. government should continue doing — spending and borrowing ever increasing amounts of money.

The result in Greece? Busted. A deadbeat government, one unable to pay its bills. Begging for bailouts from foreign taxpayers. And so addicted to welfare that it cannot even reduce its habit even to a small degree. Everyone knows that without a bailout from foreign taxpayers, Greece will be forced to exit the euro zone and revert to a badly devalued currency.

And now we have Spain. A front-page article in yesterday’s New York Times entitled “Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain” provides more insight into what lies at the end of the statist road.

Like Greece, Spain’s welfare-state way of life is on the ropes. The economy is in a deep tailspin and people have long been predicting the necessity of a Greek-style bailout. Like Greece, the idea is to have foreign taxpayers underwrite and subsidize Spain’s welfare system.

The possibility of a bailout and repeated assurances by government officials that all will turn out fine are not easing concerns among the Spanish citizenry. Guess what they’re doing. They’re getting their money out of the country and converting it into foreign currency. Why are they doing that? To protect themselves from being hung out to dry by a sudden exit from the euro and a return to a devalued currency.

Even worse, many Spaniards are leaving the country, refusing to wait around for what lies ahead. As 38-year-old Julio Vildosola, who just moved to England with his family, put it, “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

He’s not the only one. According to the Times, “The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone. According to a recent research note from Nomura, capital departing the country equaled a startling 50 percent of gross domestic product over the past three months — driven largely by foreigners unloading stocks and bonds but also by Spaniards transferring their savings to foreign banks.”

Of course, we all know what American statists say about people like Vildosola. They say that he isn’t a “patriot.” He’s abandoning his country in time of need. It’s because of people like him that Greece and Spain are suffering.

But the statists are wrong. The problem is not with people like Vildosola or others who are simply trying to protect themselves and their families. The problem is with the government, specifically the massive spending and the borrowing that the government embarked upon, with the full urging of statists. Let’s face it: The problem is with statism, the economic philosophy that the world embraced in the 20th century and that is now plunging the world into a downward economic spiral.

So where are foreigners putting their money? For years, they’ve looked to the dollar and U.S. debt instruments. So, in a perverse sort of way, the U.S. government has benefited from the monetary chaos abroad because the dollar has been considered the best in a bad bushel of fiat-money currencies.

Statists think that that process can go on forever. But it can’t. Ultimately, people begin having the same doubts about U.S. debts and the U.S. dollar as they have with the Greeks and Spanish monetary systems. People begin to realize that the debt has become so large that there is no practical way to pay it off, especially given taxpayer resistance to paying ever-increasing taxes.

Enter the Federal Reserve, whose job it is to print the money to pay off the debt without the necessity of raising taxes. But that means a devalued currency, the same possibility that Julio Vildosola and others are fleeing in Spain. It’s not a coincidence that the dollar is worth about 5 percent of its value compared to what it was worth when the Fed was established in 1913. Decade after decade, the Fed has inflated the money supply to pay for ever-increasing welfare-warfare debt.

So, what happens when people who have their money in dollars and U.S. debt instruments start feeling the same fears that the Greek and Spanish people are feeling now? Where do those people take their money? That’s impossible to predict but given the uncertainties of fiat-money currencies, the likely answer is gold. A massive flight out of the dollar and U.S. debt instruments would mean a monetary crisis the extent of which no one can really predict. It’s also impossible to predict how the federal government would respond, especially to Americans who are trying to protect themselves and their families from the chaos.

The whole statist system is coming apart. The chickens are coming home to roost. It’s just a question of whether Americans will just sit around and let it happen or whether they’ll reject statism and embrace the principles of sound money and economic liberty before it’s too late.

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.