Erich Rauchway, author of the critically acclaimed
Murdering McKinley, joins the list of historians and economists who are describing Bush's economic plan as
Hooverism, and accuses the current executive of ignoring the numbers.
It's a charge blog readers are familiar with - and are going to hear more about. The Bush Executive is flying blind - and taking us along for the ride. And they are doing it by doing what Hoover did - covertly borrowing against the asset base.
It might seem odd that economics - seemingly the hand maiden of Republicanism over the last 30 years - has shifted, dramatically, away from them. Perhaps nothing underlines this as much as The Economist magazine's
article on the economic benefits of same marriage - a direct attack on the Republican position. They also call the current recovery -
"phoney"
If one thinks about it, a good case can be made that Alan Greenspan's remarks on Social Security are, similarly reflective of an ugly reality stated bluntly as:
"The biggest of these--and the second main reason for concern--is the amount of debt that rich-country governments have been running up. America's official budget deficit has surged in the three years since George Bush became president, to around $520 billion and climbing. But this is just the shortfall this year. The government's total future liabilities are much larger. In fact, according to a forthcoming book by Laurence Kotlikoff, an economist, the present value of the American government's future obligations, taking into account promised pensions and health-care benefits, is a staggering $45 trillion. European governments are only slightly better at managing their budgets--witness the breaching of the single currency's growth and stability pact. Japan's attempts to coax its economy back to life have left it with a gross national debt of some 160% of GDP, the highest of any big country. No country has tried harder to debase its currency."
In otherwords, what is happening is that America is leveraging against the basis of its currency.
What is this?
Once upon a time currency and money where the same thing - every coin contained the precious metal it was based on, or, in an advance, was receipt for gold or silver. Then came the realization that not everyone who wanted gold or silver wanted it right then and there. Thus came the idea of "fractional reserve". Keep enough gold or silver to pay off the normal transactions, and lend the rest.
This lead to financial crisis when there were "runs" on banks. Because, after all, if there isn't enough gold in the bank, then not everyone can get it if the bank should collapse. Then people would go back to currency equals money again, and suffer through depression, because there isn't a good relationship between the rate you can dig a gold and silver out of the ground, and the rate an economy grows. Which meant that someone would create a version of paper money, which would lead to a bubble and a crisis...
And so it went for approximately 300 hundred years. The problem was that paper money was "fiat" - backed only by the promise to pay. Fiat money was too loose, and specie money too tight.
Under President Grant, the US went on "The Gold Standard" - before the civil war silver, not gold, had backed currency. During the late 19th century this strict standard had a perverse effect - it encouraged the creation and expansion of corporations. This wasn't what was intended, but it was, in its way, beneficial. It lead to intense poveryt among the people in cities, but it created an intense pressure for people to create new enterprises.
And in doing this, by a series of court cases, corporations became, in effect, a new kind of bank. This is why corporations, in the late 19th century, underwent an explosion of protections - they had, for example, a constitutional right to make a profit. This wasn't merely for show - after all, stock is backed, entirely, by the promise of future earnings and present value of assets.
This system spread the risk of money around - instead of being dependent on one bank and its stability, the wealth - only 1% of Americans owned shares - had a better banking system available to them.
Because corporations could issue stock and stock is usable as, for certain purposes, money. Instead of one bank, the liquidity of the stock market is the "fractional reserve". So long as there is enough liquidity in the system of brokers and banks - someone can cash their stock out by selling it. If you think about it, buying stock is like putting money into a giant bank - only there is no promise that the value of your money will still be there. When you sell stock for money, you are withdrawing from that bank. If everyone tries to sell stock at once, there is the equivalent of a run on that bank.
Over the late 19th century then, creating corporations, giving them more and more freedom allowed them to issue paper money - while real dollars remained hard to come by. The stock allowed corporations to invest in factories and buildings and machinery and inventions - which made America more and more economically, and eventually militarily, powerful.
However, periodically, there were "panics" as the failure of a bank or company would draw the liquidity out of the stock and banking system. What would follow is what we would now call a "Depression".
In the first years of the 20th century there were two such panics. And the result of panics being well enough understood by then, the large bankers, lead by JP Morgan, bailed out the stock market -giving it enough liquidity to take the hit, and prevent a full scale depression. Part of what was on their minds was the rise of communism and socialism - realizing that if they didn't do better at keeping people from doing worse - those people would decide to change the rules.
The US nominally remained on the Gold Standard, and the British tried to return to it - Churchill, as Exchequer, in fact managed the transition back to gold, though, as it is now known he had, correctly, seen this as a poor idea.
When Hoover took office, he inherited a time bomb: less than 8 months after taking office in the middle of seeming prosperity, the stock market experienced one of its sharpest falls ever. The Crash of '29 sent shockwaves around the world. Hoover, then, tried to spend government money to cushion the blow. But, trapped by the gold standard, he could only do so at a rate which could be covered over. In effect, the gold backing of the dollar was eroded. When FDR took office, he found out that the Government, contrary to every promise made, owed more in gold than it had gold.
Something had to be done. What was done is a story for another place, but the summary is that the basis of money was shifted from gold, and from the promise of corporations to pay, to assets - land and the buildings on them being two of the largest classes of them - which backed the banks. The government, in turn, backed their promises with promises of its own.
In otherwords - fiat money was turned into asset money. The government, if it blunders economically, will, ultimately, have to pay the bill.
And this is exactly how it turned out - if you look at our federal debt, almost all of it has been racked up in three great waves: the first in the early 1980's, when Reagan bailed out the stock market with tax cuts. Then in the early 1990's, when Bush Sr. bailed out the S&L system after Reagan's bubble. And now in the early 2000's - as Bush tries to prop up the stock market with tax cuts.
In short - every time the government has blundered economically, eventually the cost comes to rest in some section of the economy that the government, itself, backs. This is the difference between fiat and asset money. In fiat money, you promise to pay. In asset money, you are going to pay, one way, or another.
But Bush, like Nixon in the early 1970's and Reagan in the early 1980's, and Bush in the early 1990's - is making a huge mistake - one which Lincoln, FDR and Hamilton did not make when faced with a huge debt crisis. They did not change the basis of money - instead, assumed that by the government simply borrowing the money, it could be paid off over time. Make the poor pay is the watch word.
So how is Bush like Hoover?
Remember - the money in circulation is backed by assets - land and buildings and factories - by allowing a housing bubble, and propping up the stock market, Bush is, essentially, allowing the US to dilute the backing of our money. As more and more of the value of housing and buildings comes from the fact that interest rates are too low, it means that more and more of our money is based on the value of assets that are over priced. If a house is overpriced, that means that if things go wrong, the bank has less and less chance of recovering the value.
In Hoover's case there was, eventually, a run on the banks, as people realized that there wasn't enough currency or gold to pay off everyone. Will there be in Bush's case.
It's not something we really want to find out. Nor does anyone else. This is why Asian Central Banks - for the last 3 years - have been buying up dollars to prevent a massive devaluation of the US dollar. That's why the European Central bank is about to cut interest rates, to slow the rampaging devaluation of the dollar against the euro. But these moves only work for a short period of time: it means inflation in the Eurozone, and it means that oil gets more and more expensive in dollars, as do all other commodities. Higher priced commodities means less profit for manufacturers, and therefore lower standards of living in countries - like the US, UK, Germany and so on - that live by manufacturing or by managing.
So that is modern Hooverism - borrow covertly against the basis of ones currency.
Not a good bet, it's never worked before.