“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
—Ernest Hemingway, The Sun Also Rises (1926)
Special Note: I offer two great gifts for the holidays recommended by STEVE FORBES. See below at the end of this article.
The United States faces many threats to its status as the greatest country in the world. There are many candidates: terrorism, both at home and abroad… nuclear war… cultural decay and uneducated youth… dictatorship and the loss of democracy… crumbling infrastructure… increasing crime and drug addiction… the rising cost of living, making it more and more difficult for young people to keep up with their parents’ standard of living…
Environmentalists say “global warming” is the most serious threat…
But perhaps the greatest symptom of decay keeping us from “Making America Great Again” is fiscal irresponsibility at the individual and federal level.
Debt levels by consumers, business and government are at an all-time high. We are in the gradual phrase of debt accumulation, and government debt is accelerating, with the interest rising faster than the debt itself. It now exceeds $1 trillion, the largest budget item, more than defense (war) spending.
The U.S. Debt Clock is ticking and is now over $38 trillion. It is mesmerizing to watch it: U.S. National Debt Clock: Real Time.
Congressman David Perdue (Republican — Georgia), warns, “The rising national debt is this nation’s greatest national security threat.”
And George Will says, “The national debt is the most predictable crisis in American history.”
‘Is the Bill Coming Due?’
Last week, Steve Forbes and I debated John Tamny, editor of “Real Clear Markets,” at George Gilder’s annual COSM technology conference, on the coming national debt crisis.
Jay Richards interviews John Tamny, Mark Skousen and Steve Forbes
In his new book, “The Deficit Delusion,” Tamny is a debt denier. He argues that the United States is nowhere near bankruptcy, as many critics claim, and is in fact showing signs of prosperity.
Tamny isn’t the first free-market economist to criticize the “debt crisis” doomsayers. In his textbook, “Man, Economy and State,” published in 1962, Murray N. Rothbard wrote, “Many opponents of public borrowing have greatly exaggerated the dangers of the public debt and have raised persistent alarms about imminent ‘bankruptcy.’ It is obvious that the government cannot be ‘insolvent’ like private individuals — for it can always obtain money by coercion, which private individuals cannot” (p. 882).
Furthermore, the Federal Reserve can print money to finance the debt, something individuals can’t do without going to jail.
Tamny explains why Armageddon has been postponed time and time again. First, he focuses on “investor trust in the U.S. Treasury’s ability to tax abundant production now, but an even greater ability to tax it in the future,” just as investors are willing to invest in the stock of growth companies that are losing billions.
The High Cost of Rating Treasury Securities Triple A
Treasury securities have a top safety rating of AAA or close to it. His thesis is that we in the United States have growing deficits and debt financing because we are “prosperous and keep growing” and consequently we can afford excessively high taxes that will “be much higher in the future… Soaring revenue enabled much more borrowing.”
But there are negative consequences. Having a triple A rating allows the U.S. government to issue a lot of debt at artificially low interest rates. Moreover, institutions are often required to hold a large percentage, often a majority, of their liquid funds in Treasury securities, which again keeps rates low, often below the inflation rate.
The Real Culprit: Excessive Taxation
According to Tamny, the real culprit of deficits is excessively high taxation. By implication, the key solution is to starve the beast by sharply reducing taxes — not to increase government revenues, as the Laffer curve suggests (which he says “perverts” supply side economics), but by restraining government. As Milton Friedman once said, “If a tax cut increases revenues, you haven’t cut taxes enough!”
I am glad to see Tamny recognize that tax increases do not necessarily reduce the deficit — it actually allows Congress to spend more and maybe even increase the deficit! Anyone who has been to a “mark up” budget meeting in the House Ways & Means committee knows that the first question the chairman asks is, “How much tax revenue do we expect to receive this fiscal year?” Only then does the committee decide how much funds to apply to a specific program.
Government Debt: Blessing or Curse?
Tamny claims “debt is trust” and “debit is a sign of health.” It is, until it isn’t. Right now, the U.S. Treasury debt is the largest, most liquid market in the world, and the dollar is the world’s currency. As such, the Federal Reserve and Washington have a sacred obligation to maintain its stability or keep it fairly stable, without too much inflation. In doing so, it can be a blessing, as Alexander Hamilton said. But if there’s too much debt, it can be curse. It has been a blessing in the past, and it can be a curse in the future.
Tamny knows this. He actually quotes Alexander Hamilton on p. 15: “a national debt, if not excessive, will be a national blessing” (emphasis added).
Ben Franklin’s Warning
He should not be too quick to chastise those of us in favor of fiscal sanity. Benjamin Franklin had the right approach to debt. For private enterprise, he advised, “Great spenders are bad lenders. No revenue is sufficient without economy… A man’s industry and frugality will pay his debts and get him forward in the world… Business not well managed ruins one faster than no business.”
As for public debt, Franklin warned, “Honesty in money matters is a virtue as justly as to be expected from a government as well as an individual subject. Therefore, I am quite of the opinion that our independence is not quite complete till we have discharged our public debt.”
Even Hamilton arranged for a sinking fund (taxes) to gradually pay the national debt he helped create, and the United States did so by 1820.
Many irresponsible countries have gone through this cycle, such as Sweden in 1992 and Argentina in 2001… 2014… and 2020. Everything is fine, then suddenly it’s not. Interest rates rose to 500% during the Swedish monetary crisis, obviously unsustainable. Fortunately, it was an opportunity for Sweden to devalue its currency, and then adopt monetary and fiscal reforms, including tax cuts, privatization and school choice that they are benefiting from to this day.
Interestingly, Tamny does not mention these monetary crises in his book.
Lesson from the North: The Canadian Monetary Crisis of 1994
Nor does he mention the Canadian monetary crisis in 1994, all of which are relevant to the coming monetary crisis in the United States. Canada faced a monetary crisis in 1994 due to mounting concerns over its large government debt, a situation exacerbated by the Mexican peso crisis at the same time. John Fund wrote a famous op-ed in the Wall Street Journal on the Canadian crisis, referring to the “Canadian peso.” It caused an uproar in Canada. Investors grew nervous about Canada’s ability to service its debt and pressured the Canadian dollar, leading to sharply higher interest rates as investors demanded higher risk premiums. The crisis was not caused by a single event but was the culmination of years of large, persistent deficits and insufficient action to control government spending. At one point 34% of all tax revenues were to pay for interest on the debt, and government spending reached 60% of GDP.
Tamny would like the solution — the Liberal and Conservative Parties in Canada got together and sharply reduced federal spending, laid off federal workers, privatized government-run businesses and balanced the budget in two years, then went on a “supply side” tax cut program, rather than increasing taxes, that was so successful that Canada grew rapidly into the 2000s and saw the Canadian dollar recover. It was in such good shape that no banks had to be bailed out in 2008. Sadly, under Prime Minister Justin Trudeau, Canada went back to its old ways, and suffered the consequences of inflation, taxation and a declining Canadian dollar during the 2015-2025 period that Trudeau was in office.
While Tamny takes pains to make the dubious claims that deficits and the debt do not cause inflation or higher interest rates, and that central banks don’t finance government deficits, that “there’s no such thing as cheap or ‘easy money’ in capitalism” and deficits are not caused by excessive government spending — we are left with no chapters at all as to what does cause inflation, easy money, higher interest rates and a declining dollar. Only briefly does he suggest the big elephant in the room — that higher government spending and deficit finance reduce economic growth and can even lead to stagflation.
High Debt = Slow Growth
The evidence of this cause and effect is overwhelming. Economists at the Mercatus Center studied over 70 academic papers on the relationship between debt and growth.
They concluded a strong consensus: “Clear and persistent empirical study: higher public debt levels (as a percentage of GDP) are associated with slower economic growth.” In general, when debt exceeds the threshold of 80% of GDP, it imposes a tangible cost: crowding out of private investment, upward pressure on interests, heightened inflation and credit risk.
Why We Should Be Running Budget Surpluses
If that is the case, imagine what a generous surplus in government budgets would do. The era of Clinton-Gingrich is a case in point. The late 1990s witnessed high economic growth, a sharp slowdown in government spending (from 22% to 18% of GDP) and a balanced budget, with talk of substantial tax cuts for the first time in years.
In his conclusion, Tamny says that “deficits don’t matter, and neither do ‘balanced budgets.’” Really? Yet the fact of the matter is that if the government runs a healthy surplus, Tamny’s wish for drastic tax cuts and reduced government has a much higher probability.
All these historical examples above are serious sins of omission that needs to be included in a second edition. But I suspect a second edition may never see the light of day; what is more likely is his book will soon have a prominent place in “The Library of Mistakes” in the city of Edinburgh, along with books such as “The End of Inflation,” “The Depression of 1990” and “Bankruptcy 1995.”
President Trump Channels Ben Franklin!
President Trump wants to “Make America Great Again.” Recently, he displayed the famous Houdon bust of Benjamin Franklin in the Oval Office (see photo below):
There’s no better founding father to turn to for sound financial advice than Ben Franklin.
American foreign policy: “The system of America is to have commerce with every nation; war with none.” (148)
On the optimal size of government: “A virtuous and laborious people may be cheaply governed.” (189)
On the proper role of government: “Laissez nous faire: Let us alone… Pas trop gouverner: Not to govern too strictly.” (300)
On the freedom of the press: “By the collision of different sentiments, sparks of truth strike out, and political light is obtained.” (335)
On fair trade: “Commerce among nations as well as between private persons should be fair and equitable, by equivalent exchanges and mutual supplies. The taking unfair advantage of a neighbor’s necessities, tho’ attended with a temporary success, always breeds ill blood.”
On legal immigration: “This country affords to strangers a good climate, fine wholesome air, plenty of provisions, good laws, just and cheap government, with all the civil and religious liberties that reasonable men can wish for… Immigration does not diminish but multiplies a nation.”
On the public debt: “Honesty in money matters is a virtue as justly as to be expected from a government as well as an individual subject. Therefore, I am quite of the opinion that our independence is not quite complete till we have discharged our public debt.”
And on the universal cause of freedom: “Our cause is the cause of all mankind. God grant that not only the love of liberty but a thorough knowledge of the rights of man may pervade all nations of the earth so that a philosopher may set his foot anywhere on its surface and say, this is my country!” (380)
Two Christmas Gift Ideas
For the holidays, here are two gift ideas from the Skousens, both recommended by Steve Forbes:
My new book, “The Greatest American,” is now in its second print. It’s 80 short chapters on how to apply Franklin to today’s hot topics. Steve Forbes writes:
“Mark Skousen lucidly, delightfully and successfully lays out the life of one of the most extraordinary figures in American — and indeed world — history. Franklin personified and promoted the characteristics and culture that made America great, especially the drive for self-improvement and inventiveness. His genius for diplomacy was absolutely essential for the success of the American Revolution. The significance of his astonishing scientific achievements, insights and research are only now being fully appreciated. One can only exclaim: What a man!”
Each holiday copy will include a rare Franklin stamp, be autographed and shipped at no extra charge inside the United States in time for Christmas. Discounted price is $24 ($19 for additional copies). To order, go to Skousen Books at Discount.
Matriarchs of the Messiah
Second gift idea:
My wife Jo Ann has written an empowering book about heroic women in the Bible, including Eve, Ruth, Bathsheba, Mary Magdalene and culminating with a chapter about Mary, the mother of Jesus. Autographed copies of “Matriarchs of the Messiah: Valiant Women in the Lineage of Jesus Christ” are available at Skousen Books at Discount for $20 each, and we pay postage.
Steve Forbes recommends it: “Believers and nonbelievers alike will be fascinated and inspired by the women whose stories are skillfully told here by Jo Ann Skousen. Their trials, triumphs, strengths and shortcomings will speak to both women and men today. Skousen’s knowledge of the times in which they lived is particularly impressive.”
Good investing, AEIOU,
Mark Skousen
You Blew It!
How the High and Mighty Fall
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” — Warren Buffett
Many famous people got caught up in the Jeffrey Epstein affair, including Prince Andrew in the United Kingdom, and Larry Summers in the United States. Prince Andrew is the younger brother of King Charles III, and was second in line to be king. Now he has lost his title.
Summers is the former president of Harvard University and Secretary of the Treasury under Bill Clinton, and a brilliant Harvard economist who appeared frequently at the annual meetings of the American Economic Association (AEA).
But now, because he continued getting advice from Epstein on sexual matters, he has become persona non grata everywhere, even Harvard, and is now banned from the AEA for life.
This affair reminds me of two Bible references:
“Pride precedeth the fall.” — Proverbs 16:18
“Therefore whatsoever ye have spoken in darkness shall be heard in the light; and that which he have spoken in the ear in closets shall be proclaimed upon the housetops.” — Luke 12:3
