Ron Paul: America is Headed Towards the Mother of All Economic Crises

Violence, social unrest, and authoritarian movements

Predictions are always a tricky business and that’s not just because they often turn out to be wrong. Even predictions that are practically guaranteed to be true unfold on their own timelines. This is something people struggle with because we humans have a great deal of trouble with the whole concept of short-term vs. long-term results. You know what I’m talking about. “Cigarettes will kill you! But will the one you have in your hand kill you? Nope.” “Alcoholism can ruin your life and you have a drinking problem! But getting drunk with your friends tonight? That’s a fun idea!” “I don’t want to get fat, BUT, I do want to eat that pizza, wash it down with some coke, and eat some doughnuts afterward. I mean, I SHOULDN’T DO IT, but no worries. I will start my diet on Monday!” The world is full of people doing things they know are bad for them long-term, but that makes them feel better right now.

This same concept also applies to much larger entities like nations. For example, I used to have a professor in one of my college classes (not kidding) who advocated getting rid of the US military because he believed in non-violence and because it would save us a lot of money (which would certainly be true in the short-term). When I asked him how we’d defend the country if say, Cuba invaded, he said something like, “Via non-violent resistance. If Cuba invaded, we’d invite their soldiers in for soup and show them that we’re human just like they are!” Even as a naïve college student, I understood that this was an extraordinarily stupid idea for extraordinarily obvious reasons, but guess what? If we actually did that, there’s always a possibility that it might work… for a while.

Maybe other nations would think it was some kind of trick, would have problems of their own to deal with, or would take years to organize the manpower and resources necessary to invade our country. Maybe they might even take years negotiating with other nations that still have weapons over how they were going to divide up our country.

All of that is possible, but eventually, it would end in blood because human history has shown us what happens to weak nations that can’t defend themselves from their enemies over and over again. Either a nation better learn to defend itself, develop allies that can defend it, have nothing within its borders anyone wants, or prepare to be subjugated.  Those are the options all nations have, but the timeline it plays out on? That’s another question entirely.

This brings us to Ron Paul’s prediction about the economic crisis we’re in right now. Be warned, Ron Paul does not have a cheery forecast:

The Fed has been trying to eliminate price inflation with a series of interest rate increases. So far, these rate increases have not significantly reduced-price inflation. This is because rates remain at historic lows. Yet the rate increases have had negative economic effects, including a decline in the demand for new homes. Increasing interest rates make it impossible for many middle- and working-class Americans to afford a monthly mortgage payment for even a relatively inexpensive home.

The main reason the Fed cannot raise rates to anywhere near what they would be in a free market is the effect it would have on the federal government’s ability to manage its debt. According to the Congressional Budget Office (CBO), interest on the national debt is already on track to consume 40 percent of the federal budget by 2052 and will surpass defense spending by 2029! A small interest rate increase can raise yearly federal debt interest rate payments by many billions of dollars, increasing the amount of the federal budget devoted solely to servicing the debt.

The federal government’s fiscal picture is made worse by the fact that the Social Security “Trust Fund” will begin to run deficits by 2035 while the Medicare Trust Fund will run deficits by 2028. The looming bankruptcy of the two major entitlement programs, combined with the unwillingness of most in Congress to reduce either welfare or warfare spending, puts the Fed in a bind. If it raises rates to the levels needed to really combat price inflation, the increase in interest payments will impose hardships on individuals and businesses, as well as raise federal interest payments to unsustainable levels. This will cause a major economic crisis including a government default on its debt causing a rejection of the dollar’s world reserve currency status. Also, if the Fed continues to facilitate federal deficits by monetizing the debt, the result will be an economic crisis caused by a collapse in the dollar’s value and rejection of the dollar’s world reserve status.

The crisis will lead to social unrest and violence, as well as increased popularity of authoritarian movements on both the left and the right. This will lead to government crackdowns on civil liberties and increased government control of our economy.

First of all, Ron Paul’s meta-analysis of the situation is spot-on. Our debt is too large, our overly large government is a drag on the economy and increasingly we can only maintain a high economic output by flooding the market with “cheap” money. That’s why high inflation is such an enormous threat to a nation in our position. To fight inflation, the Fed has to raise interest rates to try to slow the economy. Yet, our economy and stock market tend to be overreactive to high-interest rates because they need “cheap” money to function, and our government has so much debt that it can’t afford for interest rates to go too high. So, does the Fed crash the economy and bury the government in more debt than it can handle, or does it let inflation hurt the rich while eating the poor and middle class alive? It’s a lose/lose situation.

Incidentally, as I have noted before, Ray Diallo essentially looks at things the same way that Ron Paul does:

…(W)hen there are very bad financial conditions and intense conflict, which leads to ...The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and nondebt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.

A classic marker is... that the government has large deficits that are creating more debt to be sold than buyers other than the government’s own central bank are willing to buy. That leading indicator is turned on when governments that can’t print money have to raise taxes and cut spending, or when those that can print money print a lot of it and buy a lot of government debt.

Those places (cities, states, and countries) that have the largest wealth gaps, the largest debts, and the worst declines in incomes are most likely to have the greatest conflicts. Interestingly, those states and cities in the US that have the highest per capita income and wealth levels tend to be the states and cities that are the most indebted and have the largest wealth gaps—e.g., cities like New York, San Francisco, and Chicago, and states like Connecticut, Illinois, Massachusetts, New York, and New Jersey.

Facing these conditions, expenditures have to be cut or more money has to be raised in some way. Who will pay to fix them, the “haves” or the “have-nots”? Obviously, it can’t be the have-nots. But when the haves realize that they will be taxed to pay for debt service and to reduce the deficits, they typically leave, causing the hollowing-out process.

History shows that raising taxes and cutting spending when there are large wealth gaps and bad economic conditions, more than anything else, has been a leading indicator of civil wars or revolutions of some type.

In other words, what’s happening to us economically right now is no great mystery, nor is it unpredictable. There are a lot of smart people who can tell you how this is going to play out up to a certain point. What we can’t answer are two of the biggest questions.

The first is, “WHEN is this going to happen?” It literally could be next year, but it could also be two or three decades from now because of a variety of factors, including that there really are no major economic powers that are financially responsible. They’re all playing this same game to one degree or another, which means there’s no obvious replacement for the dollar as the reserve currency… yet. Eventually, as we print more money and our debt continues to pile up, that will change. When it does, we’ll no longer be able to get loans at low-interest rates or print our way out of trouble and the whole house of cards our economy is resting on right now will come tumbling down.

The second question is perhaps the biggest of all. What happens after our economy implodes into a lasting depression, likely taking the rest of the world's economies with it, welfare and social security payments become insignificant or stop altogether, violence breaks out and no one has any easy or quick way to fix all of it? Wars of economic conquest? Revolution? Civil war? Secession? Dictatorship? A new Constitution? A move back to the gold standard followed by one of the biggest economic contractions in history? How did that old curse supposedly go?

No one may be able to tell you EXACTLY when it’s going to play out, but the United States is indeed headed for some “interesting times.”

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