The Rise of the Job and Savings Killers; Wealth Destruction Is the Worst since World War II

The Washington Times (Washington, DC), April 14, 2010 | Go to article overview

The Rise of the Job and Savings Killers; Wealth Destruction Is the Worst since World War II


Byline: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES

Responsible people are fearful. Those who save for the future increasingly understand that they are the targets of the predatory class. They see the United States and most other governments running record deficits, and most implicitly understand that this will not come to a good end. Greece and California are already serving as the canaries in the coal mine.

The Federal Reserve is holding short-term interest rates below the rate of inflation, so those who have interest-bearing savings accounts or certificates of deposit are seeing their savings erode, while at the same time, the Obama administration and Congress are increasing tax rates on interest, dividends and capital gains. Governments are expropriating (stealing) people's savings.

The U.S. and most other governments of the world are issuing debt at such a rapid rate and at such high levels, with no real plans to reverse such behavior, that it is almost a certainty they will not pay back what they owe. How will they avoid paying back the money? Well, there is always the old, tried-and-true way of inflation, whereby the central bank (the Federal Reserve in the United States) prints so much money as to erode the value of the money - so the government ends up paying (in real value) only cents on each dollar it borrowed. (I actually own a bank note for one hundred trillion dollars issued by the central bank of Zimbabwe in 2008. The note is next to worthless except as a collector's item. The issuance of so much currency is how the government of Zimbabwe managed to expropriate all of the savings of its citizens.)

Politicians in developed countries have found that their citizens often get upset when inflation reaches high levels and then tend to vote out the culprits. You may recall that the less-than-astute Jimmy Carter lost his re-election campaign, in part, because inflation at one point reached 14 percent and the prime interest rate hit 21 percent.

An insightful European banker suggested to me over breakfast a couple of weeks ago that the European political class would use selective expropriation, rather than inflation, to avoid paying back all of the debt. The way this would be done would be that the political leaders would announce they would only pay back those bonds with full interest that were held by labor unions and other politically correct interest groups but not the bonds held by greedy bankers and rich people. Maturities would be extended and promised interest rates lowered - effectively reducing the value of the bonds.

My initial reaction was that, yes, such a selective expropriation might work in Europe, but not in the United States. As I thought more about it, however, looked at what was happening and heard President Obama's rhetoric attacking greedy bankers and insurance companies, I began to think that not only was my European friend right about Europe, but his scenario was equally valid here.

Look at the evidence. Savings by individuals and businesses and their productive investment (what economists call capital formation) are necessary for an economy to grow because that is where the money comes from to build new factories, buy equipment, engage in research and development, and fund new jobs. …

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