THE BLOG
02/11/2009 05:14 pm ET Updated May 25, 2011

Medieval Economic Nostrums


PARIS - Europe's economies are by now seriously ill with what many are calling, `la maladie Americaine,' or American sickness. Virtually every European leader, including Russia's Vladimir Putin, is blaming the current global financial mess on Wall Street and Washington.

Gone are the days when Americans used to sneer at French and Canadian financial industries as 'hidebound,' 'stuffy' or `sclerotic'. France and Canada's conservative banks have so far held up better than any others in the G8.

Meanwhile, social unrest is simmering across Europe as unemployment surges and government handouts fall sharply. A peaceful student demonstration at Paris' Sorbonne University over the obscure issue of research grants was blanketed by thousands of regular police and the notoriously tough CRS riot police. Such is the level of government unease here in Europe

Britain, whose tax-haven capitol had become a haven for every sort of financial pirate, is in particularly bad shape. A recent visit by this writer to Canary Wharf, London's new financial center, showed a dreary spectacle of the mass firings of financial workers and entire floors in giant bank buildings going dark. Britain is now the worst hit of any of the western economies.

European and Asian governments are increasingly concerned that President Barack Obama's multi-trillion dollar economic rescue package may prove far worse than the sickness it is meant to cure.

Politicians everywhere are panicking as voters demand they do something to keep their debt-driven economies running in high gear. This is impossible. The debt bubble has burst. But politicians are afraid to tell voters the hard truth: the party is over. Voters should be told to retrench, stop borrowing, cut spending, start saving, live smaller. That, of course, is political suicide for politicians, particularly in single-factory towns and the auto belt.

The U.S. economy, 25% of the world's total, was fatally addicted to the steroid of debt. Consider this: America's total national debt (liabilities) amounted to 3.5 times its gross domestic product (assets). The U.S. Treasury kept running on loans from China and Japan.

Now, Obama and his team of Democratic Keynesian economists plan to spend the U.S. out of deep recession. The $838 billion stimulus package just approved by Congress is meant to be the next step in restoring the economy.

The famed 1930's economist Lord Keynes claimed governments could correct recessions by massive deficit spending which would be repaid when boom times returned. His theories have become a state religion for liberals on the left of the Democratic Party.

But massive deficit spending is like treating a poison victim with more big doses of poison. This kind of economic voodoo reminds me of medieval medicine: try every kind of dangerous procedure until you either kill the patient or he somehow survives the doctors. We have now reached the leeches and boiling mercury stage.

Why doesn't the Treasury simply hand out a pot of $25 million to each taxpayer and begin a new game? After all, it's only paper.

The current crisis was caused by runaway borrowing by the Bush administration, individuals, hedge funds, and the unregulated 'shadow' financial industry in New York and London. Obama's remedy: borrow and spend trillions more.

Europeans are gravely concerned that Obama's planned spending blitz will eventually ignite worldwide inflation, undermine the U.S. dollar, and raise U.S. interest rates. Since the U.S. runs on borrowed money, any decline in the value of its currency will require higher interest rates to be paid to foreign investors to make up for their added risk.

Europeans have a well justified horror of inflation. The storm of inflation during the 1930's Depression was the financial equivalent of the Black Death, and led directly to fascism. Europe fears the U.S. is stoking inflation in hopes its vast foreign debts (about $1.2 trillion to Japan and China alone) can be repaid in depreciated dollars. We've seen such financial chicanery before, and it leads to disaster.

Speaking as one involved for nearly 50 years in business and investments, and whose investments largely escaped the 2008 crash, I wish President Obama would tell Americans to patiently accept a long period of hardship and hangover, tighten their belts, and start living within their means. After eight years of untruths from the Bush administration, many Americans are ready to hear the facts, however unpleasant. But many are not, and the media will trumpet the many inevitable cases of economic suffering.

While aiding the financial system, the government should investigate all the bankers, realtors, money managers and financial alchemists who created America's bubble economy of debt. Wall Street was simply Enron writ large. Fraudster Bernie Madoff was not alone. Time for handcuffs, not golden handshakes.

The best way to stimulate the ailing economy is to cut taxes. Let people decide how to spend their money. Washington's plans for new bridges and daycare centers may win votes, but won't revive the economy. Japan tried this in the early 1990's and it failed miserably. Today, Japan's economy remains dead in the water and its treasury is left with a Mount Fujiyama of debt. The U.S. needs productive industrial investments, not 1930's WPA projects.

Obama should cut government spending and half the Pentagon's bloated budget (50% of world military spending when there are no enemy regular military forces left to fight.) Amazingly, so far, there has been hardly any talk about serious cuts in military spending. The military-industrial-petroleum complex is drooling over new spending for the expanded war in Afghanistan. Defense contractors are running cheery ads about $3 million apiece aircraft radar sets whose sole purpose is to spot an individual walking in a steep mountain valley.

President Roosevelt launched mass social welfare schemes in the 1930's similar to ones that Obama now proposes. Roosevelt's New Deal may have staved off popular revolution, but it did not revive the economy. It took goading Japan into war to end the Depression. Let's hope President Obama does not intend to follow this example in Afghanistan.