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The Case for

Americas Future
by Gary North
hen we look at the economics of
the Social Security System, which
went into decit mode in 2010, we can
see that we are facing what I have called
Retirement Armageddon. But thats not
the whole story. Default by the Federal
government is not the same thing as the
collapse of the United States.
It is easy to make a case for east Asias
economic success, but only over the next
two decades. East Asias economies are
growing because their economies are
being freed by decisions by politicians to
reduce government regulations. But they
all have two major problems: (1) the ex-
treme boy/girl birth ratio of at least 120
to 100; (2) the threat of a rapidly aging
population after 2025 or 2030. Econo-
mist Nick Eberstadt has been writing
about this for a decade.
Japan will hit the demographic brick
wall rst. It probably has already hit it.
South Korea faces the threat, but it has
a developed economy. Te largest Asian
nationsChina, India, Indonesia, and
Pakistanare not yet rst world nations.
Even at high economic growth rates,
they will have trouble becoming rst
world nations by the time their ageing
populations force a social crisis: the care
Gary North
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Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
and feeding of oldsters, especially old
men who never married and who have
no sons to support them.
Te United States does not face a
demographic crisis anything like what
Asia is facing. It is also not facing what
Western Europe is facing: extremely
low birth rates, well below the replace-
ment rate of 2.1 children per family. Te
USA is at replacement rate. Part of this
is because of net immigration.
Tis is positive in another way.
Immigrants come here because of eco-
nomic opportunities. Second, there is
sucient optimism about the future to
keep families reproducing. Te recent
economic setback may cause a decline
of births, but we have not seen this
yet. Tere is a future-orientation in the
United States that has sustained popu-
lation growth. We should not dismiss
this as a liability, as the zero population
growth movement has.
Because of the rapid growth in Fed-
eral debt since 2008, free market critics
have become more pessimistic about
the economic future of the nation. It is
easy for non-Keynesian economists to
see that the Keynesian policies of de-
cit spending and Federal Reserve credit
expansion will harm this economy.
Tese policies will indeed hamper the
economy. Tey will not cripple it.
Why not? Because there is going to
be a Great Default by the U.S. govern-
ment. Te old line by economist Herb
Stein will come true: When things
cannot continue, they have a tendency
to stop.
Te Federal government will default.
Tis is not a matter of intellectual
speculation. It is a matter of nancial
speculation. Tere is no question that
Medicare will break the bank in Wash-
ington. Tere will have to be cutbacks
in spending. Te promises will not
come true.
Te same is true for Social Security.
FICA taxes today are not sucient to
cover the expenses of Social Security,
which went into default at the end of
scal 2010.
Ten there are the projected on-
budget decits of $1 trillion a year be-
tween now and 2020, at which time the
government forecasters cease to oer
forecasts. But we also know, as Ber-
nanke reminded us on October 4, that
these decits are unsustainable. He also
quoted Herb Stein. Te planners know
that what the forecasters predict will
not come true. Tere will be a default,
or else there will be rising interest rates.
If there are rising rates, then fewer of
the promises by government will come
true. Te Federal budget will have to be
reallocated to pay the interest expenses.
State and local budgets are facing
the same problem. Te pension and
medical care promises to retired gov-
ernment workers will be impossible to
pay. Tis is nally becoming obvious.
Yet politicians refuse to face this reality.
Tey are still in the clutches of the state
employee unions, especially the Na-
tional Education Association. But the
27 Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
unions cannot tell the politicians how
to persuade voters to consent to the tax
hikes that will be required to fulll the
promises. Te tax revolt has begun.
People think the Tea Party is a
short-lived phenomenon. It isnt. Tat is
because the taxes required to eliminate
the decits are long-term issues. Tere
is nothing but decits ahead of uson
paper. Te promises have been made.
Te tax base sucient to meet these
promises is now a thing of the past.
Te voters are going to sti the re-
tirees. Tose retired state or local em-
ployees who think they will still be col-
lecting their money in 2020 are living in
a fantasy world. Teir children will have
to pick up part of the tab. Tis may be
a large part.
Default will not take any single
form. Te killer is Medicare. Te gov-
ernment spends about $11,000 a year
per Medicare beneciary. Te boomers
are going to come on board in 2011.
Tey were born in 1946 to 1958.
By law, the rst wave of them become
eligible in 2011. Tey will automatically
lose their private health insurance cov-
erage. Tey have no choice but to enroll
if they want coverage. Everyone wants
it, especially when it is mostly free. Tey
fear being without coverage.
Te decision to hike the retirement
age to receive full benets for Social
Security was made in 1983. Tere is no
way that there will be a similar decision
in todays political environment. Tere
are too many oldsters coming on board.
Te boomers vote. No politician is going
to get elected who says cut Medicare.
Not yet, anyway. Ten years from now,
yes. But it will take a crisis in Federal
funding to make such a proposal politi-
cally acceptable to enough younger vot-
ers to push up the age of eligibility to
anything like high enough to save the
system until 2030.
If things cant go on, they have a
tendency to stop. But the political set-
ting of that end of the line decision is
not yet clear.
If the default comes through Feder-
al Reserve ination, the entire economy
will suer. Anyone seeking health care
will line up. Tis will be everyone who
does not have enough money to buy a
high-fee private physician who opted
out of Medicare, or else buy the services
of an Asian or Latin American physi-
cian outside the United States.
Te default will come. It may come
piecemeal: hiking the age of eligibility,
or imposing means testing (sticking it
to the rich), or reducing benets, or in-
ating. It may come through an open
default by Congress: a refusal to pay for-
eign holders of Treasury debt. Tis will
be the preferred approach of Tea Party
voters, whose ranks will swell as the de-
cits swell. Central bankers in Japan and
China do not have large, well-organized
constituencies in the United States.
Te politicians dare not publicly
identify which special-interest voting
groups will have their benets cut. Te
politicians will delay the day of reck-
oning. Tats what most voters want
Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
them to do: lie and delay, lie and de-
lay. Tey get re-elected for kicking the
can. Tey know what they must do to
get re-elected, and they will do it until
voters nally decide to throw them out.
But voters are not willing to identify
which constituencies must be the rst
to lay their heads on the scal chopping
block. Tat is why nothing will be done
to solve the problem until the can is too
large for Congress to kick.
Tink of the United States without any
of the following:
1. Medicare debt
2. Social Security debt
3. Federal employee pension debt
4. On-budget debt to foreigners
5. On-budget debt to domestic investors
6. State or local pension obligations
7. Interest expenses
Tink of how the United States politi-
cal order would have to be run if all po-
tential lenders would refuse to lend to
any government because of the Great
Default that had just stripped previous
lenders of 100% of their investments.
Tis is utopia. It will never hap-
pen. Why not? Because lenders always
return to the scene of the crime. Tis
time, its dierent. European kings de-
faulted for centuries, over and over. Te
suckers just kept coming back. Latin
American nations have repeatedly de-
faulted since about 1810. Te lenders
always come back.
So, politicians know that a default is
not going to close o the ow of future
funds. If the default is open and total, the
restoration of credit is rapid. Look: they
are debt-free. Tey will not default for
another 20 or 30 years. Lets lend!
Te way to default on all debts is
hyperination. But this is devastating
for commercial banks. Tey get paid o
by creditors without mercy. Tis is why
hyperination does not come to large
modern nations that have not suered
a military defeat. It has happened to
29 Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
no Western nation since 1945. Bankers
run the central banks. Tey do not al-
low central banks to hyperinate. Tey
allow them to bail out failed banks, or
swap assets at face value to keep big
banks solvent. But hyperination is the
debtor classs friend and the bankers
enemy. Bankers simply do not allow
central banks to hyperinate. Hyperin-
ation is not in their self-interest.
Large commercial bankers will pro-
mote ination by central banks in order
to keep governments solvent. Tey want
to maintain the illusion of solvency.
Tey hold government debt. But they
will unload these obligations on central
banks before the day of default comes.
Ten they will pressure central bankers
not to inate any more. Tey will take
steps to protect themselves from the
coming open default by governments.
Ten Great Depression 2the prod-
uct of central bank stable money poli-
cieswill not take them down. It will
take down local banks that do not have
protection from the central bank and
national politicians.
Te system is run for the largest
banks. It is not run for local banks. Hy-
perination will ruin all commercial
banks. So, the central banks will selec-
tively save their nations biggest banks.
Tere are limits to the expansion of
government debt. Voters will not allow
these debts to threaten their way of life.
We know that American voters will not
tolerate a ratio of more than 25% spend-
ing to GDP by the Federal government.
We are now at that limit. So, those who
lend the Federal government more
money will nd themselves left holding
the bag.
Te Great Default will not come
in one massive bankruptcy. It would be
easier if it did. But it will come. Tere
will be a battle over who gets his piece
of the action cut, but there will be losers.
Tere will be a default. Te expansion
of the state will not continue much
more. Americans are at their limit of
tolerance. We are not headed for na-
tional disintegration. We are headed for
a restoration of localism. Some sacred
cows will be slaughtered along the way,
but not the entire nation.
Tink of these four words: When
Washingtons checks bounce. Tat day
is coming. It will restructure the alloca-
tion of political power.
Te United States has some very
great advantages. Here are a few:
1. A tradition of entrepreneurship
2. Ease of starting a business
3. Geographical mobility
4. Occupational mobility
Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
5. English
6. Educated labor force
7. Dying trade unions
8. Widespread literacy
9. Freedom of the press
10. Internet replacing the press
11. Widespread gun ownership
12. Growing skepticism regarding
13. 50 separate states
14. Independent county governments
15. Facebook
16. Politicians who are on the defensive
17. Political gridlock in Washington
18. Talk radio
19. An escape hatch: bankruptcy laws
20. High charitable giving
Americans can declare bankruptcy and
start over. Tis is an important tradi-
tion. Te Bible had this system (Deut.
15:1-2). Tat which Americans have
retained as a fundamental right as in-
dividuals is going to be applied at some
point to all levels of civil government.
Te United States government is going
to sti the Asian central banks. It will
sti all of its creditors.
Tose who are economically de-
pendent on politicians promises are
going to take a hit. Tere will be lots
of maneuvering on this. Each special-
interest group will try to keep from get-
ting cut o. But they will all be cut o,
step by step.
Younger voters are going to escape.
Te American electorate can be suck-
ered by politicians promising security.
But when those promises threaten the
lifestyles of the voters, they will man-
date selective defaults.
I think that day has arrived. We
will see it in November. It will not go
away. From this point forward, those
who want to expand state spending will
face a wall of political resistance. Te
era of the tax-funded free ride is com-
ing to an end in the United States.
An era of economic stagnation is upon
the United States. Tis will make us
look bad in comparison to Asia. I see
Asian growth continuing, though there
will be a crash at some pointsooner
than most Asians think. Central banks
will have to stop inating, and that will
end the boom. But, over the next two
decades, Asia will surge ahead. Tey
started in poverty. Fast growth from a
small base is likely. Equally fast growth
from a large base is not possible.
Tere will be a slow strangulation
of the U.S. economy until such time
as the Great Default begins. When it
does begin, the state will be hampered
at every level. Te era of expansion of
the state will end. Te tax-funded gravy
train will not end overnight, but it will
be slowed to a crawl.
Governments in the USA have hit
the brick wall of taxation. Te Federal
government is using massive debt to get
around this brick wall. Tis can go on
for a time, but its end is sure. Herb Stein
was right.
31 Counsel of Chalcedon Issue 6 2010
Te Case for Americas Future
Tere will be great political battles
ahead over whose oxen will be gored by
the tax revolt. Oldsters will probably be
the last to have their budgets cut. But it
is sure that this will happennot just in
the United States, but all over the world.
He who drops out of the labor force will
live to regret it.
I do not see a dark future for America
as a nation. I do see dark days ahead for
those who have planned their lives on
the assumption that Uncle Sam is Uncle
Sugar. He who has extended credit to
any level of government is now skating
on thin ice.
When the Great Default sets back
the lenders who trusted government
promises, the United States economy
will recover. Tere is a long tradition of
American entrepreneurship and a com-
mitment to education which, when com-
bined, are greater than any other society.
I hope Asia will match this and even
extend it. Liberty is universally a benet.
Te Great Default will add to lib-
erty, even though it sets back those who
have trusted politicians promises.
Liberty will receive a shot in the arm
when this phrase provokes universal
laughter: Te full faith and credit of the
United States. Tat day is fast approach-
ing. Te credit rating of the United
States government will be marked down
from AAA to AA. It will then be marked
down to A. For every notch down that
it falls, the national day of deliverance
draws closer. American liberty is mea-
sured inversely to the credit rating of the
United States government.
Gary North [send him mail] is the author
of Mises on Money. Visit http://www. He is also the author of
a free 20-volume series, An Economic
Commentary on the Bible.
Copyright 2010 Gary North