The end of days is close at hand, so sayeth the prophets of the Mayan Calendar. Will the end come from a meteor strike? A nuclear holocaust? A deadly viral outbreak? For some reason, I doubt it. However, there is another group of prophets who have been quietly predicting a different kind of doom for quite a while now; and the scary thing is, their predictions to-date have been remarkably accurate. The group of prophets to which I am referring are Austrian School economists.
To get an idea of just how accurate the Austrian School’s predictions have been, allow me to provide a small sampling of their prognostications.
Ron Paul, September of 2001:
“After the NASDAQ collapsed last year, the flow of funds into real estate accelerated. The [Government Sponsored Entities] accommodated by borrowing without restraint to subsidize new mortgages, record sales and refinancing. It’s no wonder the price of houses are rising to record levels.
“Refinancing especially helped the consumers to continue spending even in a slowing economy. It isn’t surprising for high credit-card debt to be frequently rolled into second mortgages, since interest on mortgage debt has the additional advantage of being tax-deductible. When financial conditions warrant it, leaving financial instruments (such as paper assets), and looking for hard assets (such as houses), is commonplace and is not a new phenomenon. Instead of the newly inflated money being directed toward the stock market, it now finds its way into the rapidly expanding real-estate bubble. This, too, will burst as all bubbles do.”
Peter Schiff, August of 2006:
“I think it’s going to be pretty bad, and whether it starts in ’07 or ’08, I think it is immaterial. And I also think it’s going to last, not just for quarters, but for years. See, the basic problem of the U.S. economy is that we have too much consumption and borrowing, and not enough production and savings. And what’s going to happen is the American consumer is basically going to stop consuming and start rebuilding his savings, especially when he sees his home equity evaporate. And when you have the economy 70% consumption, you can’t address those imbalances without a recession.”
Chris Mayer, August of 2003:
“The central problem with the housing boom is that housing is an artificially stimulated sector of the economy. Surely, the housing market would look vastly different if not for the massive liquidity and support provided by the GSEs such as Fannie Mae. Fannie Mae enjoys the implicit guarantee of the federal government, which lowers the cost of its debt and extends the limits of leverage that it may undertake in its efforts to grow mortgages. Home loans, as the Journal opines, ‘freed from the vagaries of local economic and banking conditions, became cheaper and more readily available…’
“Flooding the economy with money and credit is a banking trick, creating the illusion of wealth … when the bubble bursts, many will not properly see that the root of the problem lies in the monetary order of the nation and in its interventionist political culture.”
A list of 75 other predictions of a housing crash by Austrian School economists can be found here – an impressive feat of accuracy that puts Nostradamus to shame. For a comparison, not only did mainstream economists fail to predict the housing bubble, they actually called for the Federal Reserve to create one! Paul Krugman had this to say in August of 2002:
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Now that I’ve established why you should pay attention to these Austrian School doomsayers, I want to provide their predictions for our very near future. The short summary: We’re screwed. To fully understand why economic doom is hanging over our heads like the sword of Damocles takes some effort and a lot of reading, but I’ll try to give you a few facts to drive the point home.
Chairman Ben Bernanke just announced that the Fed will spend $45 billion dollars a month until unemployment drops below 6.5%. If unemployment ever drops below 6.5% (which it won’t), this means the Fed will be adding over half a trillion dollars in base money to the economy per year. I predict this monthly amount will increase over time as the Fed struggles to print enough money to keep interest rates at zero permanently. To put $45 billion in perspective, that’s more money than ExxonMobil makes in profits for an entire year, and it’s roughly equal to Coca-Cola’s annual revenue — each and every month! Of course, Coke and Exxon provide us with soft drinks and gas, which is a lot more than the Fed gives us.
Presently, the U.S. government is spending $6.3 trillion annually. Total state spending accounts for roughly 40% of U.S. GDP; which is 10% higher than Iran and 20% higher than Hong Kong. In other words, 40% of the U.S. economy exists to serve the purposes of war, imprisonment, welfare entitlements, bureaucrat salaries, regulatory bodies, subsidized housing and subsidized industry. Such vast state spending means tremendous amounts of resources are being directed into wasteful or destructive projects; just think of all the trillions spent on bailouts and business subsidies.
Due to the state’s spending, resources that would otherwise go towards the production of useful things are being squandered. This means the U.S. is not producing nearly as much as it is consuming. This process of consuming more than one produces cannot go on indefinitely into the future. Eventually other nations will cease to accept our money in exchange for their goods. This could come about in a few different ways.
If the Fed were to accelerate the amount of Treasury and mortgage bonds it is buying, the value of the U.S. dollar may fall faster than the interest being earned by the foreign holders of our debt. This would mean that foreign holders of U.S. debt would be stupid to keep holding on to that debt because they would be effectively losing money on the deal. This could precipitate a bond run that completely destroys the value of the dollar overnight, as all of our foreign debt comes home to roost in a gigantic game of hot-potato.
Alternatively, inflation may begin to creep up as the excess consumption begins to take its toll on the U.S. economy. Should this occur, the Fed is not in a position to be able to reduce the money supply without driving interest rates up. This poses a real problem for the U.S. government. Should interest rates rise even a small amount, it could effectively bankrupt the entire nation. Considering that our present debt is over $16 trillion, every 1% rise in rates equates to an additional $160 billion in annual interest cost to the state. Imagine if rates were to shoot up to the levels they were at in the early 1980s. It happened once, and I assure you, it can happen again — only this time it would completely demolish the state in the process.
In the end, no matter how you slice it, the state is either going to have to radically reduce itself in size voluntarily, or it will have to directly print all the money it needs in order to sustain itself leading to Zimbabwe-style hyperinflation. There are no alternative scenarios. No matter which way things go, it is going to be a wild and chaotic ride for U.S. citizens as the moochers wage war against the producers in a final economic Armageddon.
Listen to economist Peter Schiff describe the end game scenario: