As is widely known, the federal spigots in foreign affairs, as in domestic affairs, are now wide open: hundreds of billions of dollars will be spent in Iraq, not to mention the billions of dollars in foreign aid that will be sent to dozens of foreign governments, all under the purported rationale of improving life in those countries.
Setting aside the fact that historically foreign aid has failed to improve the economic well-being of people in the recipient nations, what all too many Americans are blocking out of their minds, unfortunately, is the threat that the U.S. government’s uncontrolled spending binge poses to our own economic security.
According to the Congressional Budget Office, the current fiscal year, which ends this month, will end up with a $401 billion deficit. The original projection for next year was that federal spending would exceed income by $480 billion; the anticipated spending in Iraq has raised that projection to at least $540 billion.
Like it or not, federal spending must ultimately be paid for by the American people, either now — in the form of income taxation — or by adding to the federal government’s ever-growing mountain of national debt ($6.8 trillion and growing), to be paid later either through income taxation or the more likely means of central-bank debasement of the currency (i.e., inflation). Given the unlikelihood that the Bush administration will raise taxes prior to the 2004 elections, it is a virtual certainty that most of the new spending will be financed by new debt, to be paid off later, most likely through inflation.
Those who think that passing the debt to later generations poses no economic cost to current generations ignore the adverse impact of diverting such large amounts of private capital into unproductive government spending. Rising levels of private capital are the key to increased productivity, which in turn forms the basis for real (i.e., noninflationary) increases in wages. Thus, massive government spending, whether financed through taxation or debt, ultimately means a lower standard of living for society.
What Americans might also find disconcerting is the amount of U.S. debt that is held by foreigners — $1.347 trillion, more than one-third of the total. According to an article entitled U.S. Debt to Asia Swelling, published in the September 12 issue of the Washington Post, Japan now owns $440 billion in U.S. securities, equal to more than one-tenth of all outstanding issues. China, the second-largest buyer of U.S. securities, now owns more than $122 billion, while five other Asian countries — Hong Kong, South Korea, Taiwan, Singapore, and Thailand — own more than $166 billion.
As Joan Zheng, formerly of the central bank of China (i.e., China’s Federal Reserve System) and now an economist at J.P. Morgan in Hong Kong, put it, “The U.S. dollar is now at the mercy of Asian governments.” She might have added, “Thanks to the profligate spending habits of U.S. officials.”
Americans had better hope that foreigners never decide to dump all that debt onto the market at once, because it would undoubtedly produce an extremely ugly financial and economic crisis whose magnitude is impossible to predict. Given the propensity of Washington officials to make enemies overseas, the threat of such a crisis now hangs over our nation like a sword of Damocles.
The American people might well come to rue the day they embraced the “Don’t worry. Be happy. Trust us” mantra of their elected and appointed federal officials, who undoubtedly would view a severe economic emergency as just another opportunity to further expand their powers over the American people. We could easily imagine them repeating the mantra that federal officials employed after monetary manipulation by the Federal Reserve caused the 1929 stock-market crash and the Great Depression: “America’s free-enterprise system has failed. Entrust us with more power so we can get you out of the crisis.”
It would behoove the American people to reject the notion of blind trust in government, at least with respect to economic matters, long before such a crisis can befall us. Americans would do well to finally take to heart the admonition of our Founding Fathers: that the greatest threat both to our liberty and security lies not with some foreign enemy but rather with our own government, which is precisely why the Framers designed the Constitution with the aim of protecting us from it.