The Coming Category 5 Financial Hurricane.

The tragic scenes of abject poverty in New Orleans revealed on
national TV by Katrina’s destruction were real eye-openers for
many. These scenes prompted two emotional reactions. One side
claims Katrina proved there was not enough government welfare, and
its distribution was based on race. The other side claims we need
to pump billions of new dollars into the very federal agency that
failed (FEMA), while giving it extraordinary new police powers.
Both sides support more authoritarianism, more centralization, and
even the imposition of martial law in times of natural disasters.

There is no hint that we will resort to reason now that the failed
welfare policies of the past 60 years have been laid bare.
Certainly no one has connected the tragedy of poverty in New Orleans
to the flawed monetary system that has significantly contributed to
the impoverishment of a huge segment of American society.

Congress reacted to Katrina in the expected irresponsible manner.
It immediately appropriated over $60 billion with little planning or
debate. Taxes won’t be raised to pay the bill– fortunately. There
will be no offsets or spending reductions to pay the bill. Welfare
and entitlement spending is sacrosanct. Spending for the war in
Iraq and the military-industrial complex is sacrosanct. There is no
guarantee that gracious foreign lenders will step forward,
especially without raising interest rates. This means the Federal
Reserve and Treasury will print the money needed to pay the bills.
The sad truth is that monetary debasement hurts poor people the most-
– the very people we saw on TV after Katrina. Inflating our
currency hurts the poor and destroys the middle class, while
transferring wealth to the ruling class. This occurs in spite of
good intentions and misplaced compassion.

We face a coming financial crisis. Our current account deficit is
more than $600 billion annually. Our foreign debt is more than $3
trillion. Foreigners now own over $1.4 trillion of our Treasury and
mortgage debt. We must borrow $3 billion from foreigners every
business day to maintain our extravagant spending. Our national
debt now is increasing $600 billion per year, and guess what, we
print over $600 billion per year to keep the charade going. But
there is a limit and I’m fearful we’re fast approaching it.

Runaway inflation is a well-known phenomenon. It leads to political
and economic chaos of the kind we witnessed in New Orleans.
Hopefully we’ll come to our senses and not allow that to happen.
But we’re vulnerable and we have only ourselves to blame. The
flawed paper money system in existence since 1971 has allowed for
the irresponsible spending of the past 30 years. Without a linkage
to gold, Washington politicians and the Federal Reserve have no
restraints placed on their power to devalue our money by merely
printing more to pay the bills run up by the welfare-warfare state.

This system of money is a big contributing factor in the exporting
of American jobs, especially in the manufacturing industries.

Since the last link to gold was severed in 1971, the dollar has lost
92% of its value relative to gold, with gold going from $35 to $450
per ounce.

Major adjustment of the dollar and the current account deficit can
come any time, and the longer the delay the greater the distortions
will be in terms of a correction.

In the meantime we give leverage to our economic competitors and our
political adversaries, especially China.

The current system is held together by a false confidence in the
U.S. dollar that is vulnerable to sudden changes in the economy and
political events.

My suggestion to my colleagues: Any new expenditures must have
offsets greater in amount than the new programs. Foreign military
and foreign aid expenditures must be the first target. The Federal
Reserve must stop inflating the currency merely for the purpose of
artificially lowering interest rates to perpetuate a financial
bubble. This policy allows government and consumer debt to grow
beyond sustainable levels, while undermining incentives to save.
This in turn undermines capital investment while exaggerating
consumption. If this policy doesn’t change, the dollar must fall
and the current account deficit will play havoc until the house of
cards collapses.

Our spending habits, in combination with our flawed monetary system,
if not changed will bring us a financial whirlwind that will make
Katrina look like a minor storm. Loss of confidence in the dollar
and the international financial system is a frightening possibility–
but it need not happen if Congress can curb its appetite for buying
the people’s support through unrestrained spending.

If Congress does not show some sense of financial restraint soon, we
can expect the poor to become poorer; the middle class to become
smaller; and the government to get bigger and more authoritarian–
while the liberty of the people is diminished. The illusion that
deficits, printing money, and expanding the welfare and warfare
states serves the people must come to an end.

“Money is a currency, like electricity and it requires momentum to make it Effective”
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