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Letters from Downunder

The Midas Syndrome
Submitted by Lindsay, Melbourne Australia!

A national debt, if it is not excessive, will be to us a national blessing.
        Alexander Hamilton, April 30, 1781

That most delicious of all privileges - spending other people's money.
        John Randolph, American politician

(6/11) Some years ago I had the privilege of visiting the site of what was possibly the oldest silver mine in Europe, as well as being the oldest mint for silver coins. These and other coins were vital for trade long before the Romans, and as populations and commerce grew over the centuries other forms of exchange developed - until today 'real' money hardly exists, at least in the west. Coins and notes are still tokens of the real stuff, however, and are there for everyday transactions - but an electronic byte or two cascading around the world in 80 nanoseconds is the 21st century mode of finance, with someone somewhere eventually looking at a screen to determine how theirs, or someone else's, wealth, has changed.

According to the screen, that is. What if you actually want to see the cash? The numbers generally involved are so large that actually counting enough banknotes would be impossible, while you could never tell if the sight of all that gold or silver was the right amount. Anyway, who cares about that when your screen money is good, and can be used to trade with other electronic gurus? Lots of money can always be made, (and lost), but when you can buy practically anything on earth with sufficient electronic cash, who needs to see the dough? There's always enough of the green stuff for day to day, while the big stuff - well, everybody is doing it, aren't they, so how can you lose? Why, that's also easy, and not just individuals or corporations - governments do it too. You don't have it? Borrow it. Plenty of lenders, you can't go wrong.

Enter our hero, Alexander Hamilton. No matter anything else he may have done, he got the nuts and bolts of the economy of the new nation in place. But, as always, he could not foretell the future, and his little aside quoted above grew into a mantra that shaped the thoughts of those who followed: How much debt can we run with? Good question. It turns out the answer is 'whatever we can get away with'. And that is a lot, when you have parleyed your economy into the strongest in the world. You do not argue with the strongest man on earth if he says he'll pay you what he owes you when he's ready, especially when he keeps buying your products (without paying COD) that keeps your own economy booming.

But, heigh ho, the gold standard went away in the 20th century, because it was argued that if gold could be used as a guarantee, then so could a nation's wealth - and that consists of far more than gold reserves. And who would value that wealth? Why, the government, of course. And the government can be trusted, in such a successful economy, can't it? Heh!

Whether wittingly or not, what then develops is the Midas syndrome. He's the king who was given the power to turn anything into gold - providing he began with the very first thing he saw, which turned out to be his adored daughter. All the gold in the world could not restore her to life, and he cursed his bargain. The syndrome forms when the lure of wealth (gold) blinds one to the risks, and that is pretty much what has happened in the USA. Want something? Use debt to get it. Buy money with debt and trade it. Make money. The treadmill is in operation, and the resulting debt accrued so far outstrips any possible national wealth. That's more than trillions.

And someone is going to get unhappy pretty soon. While American needs oil, cheap goods, and a population that is mostly happy to see it continue, the suppliers and creditors are going along, because you are still the biggest market. But, with the dollar so low and falling, interest rates near zero, and a threat to your credit rating, then China, for one, may bail out. There ARE other markets, ones who actually pay for the goods then and there. How about Japan and the Emirates? And all the other countries that you are into? What will they do?

Can you forestall this by balancing the books? How? Print money, the German solution in 1930? Yes, that's been done, and inflation has become the dragon. Raise taxes to a sustainable level? Heavens no, that would mean taxing the 10% at the top of the heap at a rate they need to pay, but never will. Mr. Randolph rules OK.

As I sit writing this the death of Osama bin Laden has been announced. Interesting, but hardly earth-shattering news. Not that the media think that. A great news day! So much hoopla it makes me sick. My wife said, as the TV ran, "So, the end of the age of terror has arrived!" Yeah, sure. Nero could not have had a better day. Rome still burnt.

The United States of America has many things other than terrorist activity to worry about. Perhaps it's time to stop being the policeman for the world, pull in the horns and lick the wounds. Survival is painful, but it is not too late to achieve. Stop funding wars, using credit, and start taxing the rich. Alexander Hamilton is turning in his grave.

Read Past Down Under Columns by Lindsay Coker