Great Letter (I think) to Congress

Hey everyone.

I'm an Economics and Finance major, and have studied Austrian Economics greatly. I took some time to write a 3-page letter addressed to a Congressman, briefly explaining Austrian Economic Theory and how it predicted this would happen and what it predicts for the future. Anyway, I'd like to email this letter to all 435 of em, but I could sure use some help :P.

I don't know how to attach files (or if it's even possible), so I'm just going to copy + paste the letter here. Do feel free to criticize it, but I'd like to make a couple of points first:

1) My intent is to remain respectful, not offensive
2) I have steered clear of conspiracy theories and coverups, I think our chances are much greater that way.
3) I tried to stay very basic (as most Congressman are ex-lawyers, not economists), but still explain all the economic concepts.

Here's the letter, enjoy!

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Dear Congressman,

Please do take the time to read this, if not for your own sake, then for the sake of this country. To further convince you to take this seriously, I point to a modern insanity: There was a person who headed a financial firm, overseeing the purchase of hundreds billions of dollars of bad debt and worthless assets, yet leaving the company shortly before the financial crisis was upon us. That company, Goldman Sachs, is now facing bankruptcy. And the man who is responsible for running one of the largest and most successful financial firms in the world into such a situation is the primary economic advisor to the United States Congress! And we're going to believe what he says to fix this economy? For the love of God, what are we going to do next: start reading Hitler's journals to solve human rights issues? Why does the latter sound insane if the former doesn't?

I write to you as somebody who is very educated in the history of Finance and Economics, and who would like to see the people of this country retain at least some level of their current standard of living as we plunge into a Global Financial Crisis that is unlike any other. I'm not sure what your education level is, so I will keep this at a layman level.

There are many different Schools of Economic Thought, including the Monetarist School (also known as the Chicago School), Keynesian School, Neoclassical School, and many others. What we have witnessed in this country since the early 20th century is the implementation of the Keynesian School, originated with John Maynard Keynes. What the Keynesian School teaches is that the Government should intervene in free markets through the arm of a central bank. By alternating the levels of interest rates and money supply, it is believed to be able to stimulate the market and the economy beyond its natural levels and thus spur economic growth. Many modern economists subscribe to the Neo-Keynesian School, believing just this, and Ben Bernanke falls into this category.

On the other side sits the Austrian School of Economics, one that is rarely talked about in the mainstream media. Austrian Economics teaches that free markets function best with minimal government intervention, meaning no central bank. Austrian Economist, Freidrich Hayek (1899-1992), got awarded a Nobel Prize for showing how the Keynesian approach (government intervention in interest rates and money supply) actually causes business cycles in the economy (aka booms and recessions/depressions). Many of Ronald Reagan's economic advisors were personal friends of Hayek, and Margaret Thatcher carried around one of Hayek's books like a personal Bible.

So let me break down very briefly the truth of our country's economy over the past 2 decades. We lowered interest rates extremely low (Go Greenspan!) and printed a bunch of money. What this did is create a bubble in the stock market, primarily the NASDAQ (tech sector). Now, there is a very logical explanation as to why excess money creates bubbles. You see, when there is no excess money supply, in order for a group of assets to go up in price, another group of assets must go down equally in price as the money moves from the latter to the former. In this scenario, people would buy up the cheaper group of assets because they are under priced and the scales would shift back to balance. However, this market equilibrium is lost if you introduce excess money into the system. Since there is no under priced assets in a functioning market, the excess money will always create an overpriced asset category, aka asset bubble. In the late 90s, this happened to be the dot.com bubble. Once this crashed, however, the Fed wasn't ready to let the artificial "good times" come to an end. This is mostly because of political pressures (although you could also cite conspiracy theories, I'm not that type). I put "good times" in quotations because asset bubbles make people feel wealthier than they really are. Extra dollars in the system don't create any real wealth (real wealth is goods and services), they just create the illusion.

Anyway, the story keeps going. The Fed pumps even more money into the system to prop the stock market back up. They're probably thinking "what's the harm; everyone loves it when markets go up!" But the problem is, you can't always control where the bubble occurs. All you can do is provide excess money and credit to the market and let the cards be dealt. Well, the cards were dealt. The NASDAQ never recovered. But people did start noticing their houses go up in value. They also found that they could suddenly get financing for a new home extremely easily. You see, the Fed's extra credit and money was flowing directly into the mortgage sector. However, unlike the tech bubble, this was one amplified by all sorts of government subsidies already in place. CRA, HUD, Fannie Mae, Freddie Mac, tax incentives (mortgage interest is deductible), etc... Before anyone knew it, the common truth was that “real estate prices always go up” and not buying a house was the stupid thing to do, regardless of financial situation. The next step, of course, was for people to start taking advantage of the perpetual rise in their “wealth” and start spending more. Home flipping, cash backs, home equities, etc; the list goes on and on. Individuals just kept borrowing more and more money against their illusionary “wealth”. And the banks kept packaging these loans into securities and selling them to the credit markets all around the world. We as a country actually started believing that consumption is the key to wealth instead of savings, investment, and production. Instead of building factories and highways, we decided that we had figured out the perfect economic model: just borrow the money from the rest of the world and then use that money to buy the stuff we want from them.

Allow me to illustrate the problem on a microeconomic example. Say you have Jack and Jill, married. They have a combined monthly income of $3000. However, every month they spend $5000 instead, putting the remainder on their credit card. Over the course of several months, they purchase a new car, a plasma TV, install a swimming pool, and hire a maid to clean their house. Bob, their neighbor, watches them carefully and concludes that Jack and Jill are doing very well financially. However, they are clearly not. Sooner or later, the credit card companies will realize that Jack and Jill can’t pay back what they owe. They will cut off their credit, raise their interest rates, and repossess their belongings.

Here’s the problem: The United States of America is Jack and Jill on a macro scale! We’ve been spending more than we’ve been producing, and we’ve been putting the difference on a “credit card”. Once the rest of the world, our creditor, figures out that we can’t pay back what we owe, they will cut off our credit, raise our interest rates, and buy up all our assets with our own money!

So how does this grim picture apply to the choices before us today? Well, if you’re Jack and Jill, and the credit card companies haven’t caught onto you yet, which of the following is the obvious choice of action: (a) Cut spending and start working harder to pay back your debt, or (b) borrow even more money to buy the newest plasma TV? If we, as a country, keep borrowing and spending more, we’re only walking further down the road of no return. And that is precisely why this bailout package is a terrible idea. It will only make worse what inevitably has to happen: We as a country have to take a cut in our standard of living and start working harder. We have to cut our spending, we have to reduce our military empire, and we have to start paying down our debt.

The reason that we as a country have been able to sustain this for so long without any consequences is because we are in a very unique financial situation compared to the rest of the world. After the collapse of the Bretton Woods system in 1971, the United States dollar became the reserve currency of the world. Over the past 4 decades, our money has taken the place of gold in many of the vaults of central banks around the world. As we printed more money, there was a partial offset due to foreign governments buying up our dollars and storing them in vaults, effectively taking the money out of circulation. However, they still have the option on any given day to sell all those dollars back onto the market and trade them for something more reliable, such as euros, yen, silver, or gold. And we’re talking about a lot of dollars (China alone has over a trillion dollars in reserves!)

I urge you to not take anything you read here as blind truth. Please pick up a book at your local library written in the past 5-10 years by an Austrian Economist. It doesn't matter which book, or which Austrian Economist, they had all make the same prediction - there would be a major depression hitting this country as a result of the loose credit and money policies of the past two decades. The Austrian School of Economics precisely predicted the crash of dot.com bubble, the real estate bubble, the sub prime mess, and the financial crisis we are currently in.

So, please, ask yourself, why are we as a country not listening to these wise people? Instead, we listen to the people that have no idea what they are talking about! Wasn't it just a year ago that Ben Bernanke was testifying about how strong our economy is? Wasn't it just 6 months ago that Bernanke and Paulson were talking about the sub prime crisis being "contained"? The only credibility that these guys have established is that they are consistently wrong. Why do we insist on making the same mistakes over and over again? I know the political pressures are great, but I do assure you that the Austrian Economists are not finished with their predictions. They do predict what will happen if we stay on the same course, if we keep spending more money, keep printing more dollars, and keep providing more artificial credit: we are about to experience a Depression unlike any other we've ever seen.

Forget the Great Depression of the 30's, that was a joke compared to what we are about to thrust ourselves into. During the Great Depression, at least we owed all the debt to ourselves. Every dollar of interest paid was a dollar of interest earned for another American. This time around, the situation is much direr. We owe this money to the rest of the world. And I’m not just talking about the $10 trillion on the government’s books. I’m talking about hundreds of trillions of dollars in credit card debt, mortgage debt, car loan debt, etc…

So now we as a country are faced with two choices. We can bite the bullet, take the hit, go through an economic correction over the next year or two, and emerge wiser and more determined to work hard and earn back our place as the economic superpower we used to be.

Alternatively, we can print more money, provide more excess credit, and implement more government programs and agencies. This just might keep the charade going a bit longer. However, the correction has to come eventually; when it finally does, governments all over the world will dump US dollars onto the market, doubling our money supply. Our interest rates will rise sharply to double digits as the world begins to realize that we are unable to pay back our obligations (guess what the annual cost of maintaining $10 trillion worth of debt at 20% interest is?) Our government will no longer be able to provide the most basic services (roads, infrastructure, and defense) without resorting to printing more money. We will go into a Depression longer and deeper than we have ever imagined. Hyperinflation and unemployment will be the norm, not just something we read about happening in Zimbabwe.

If we don’t turn this around soon, there might not be a turning point at all. And if you have read this letter through and still vote “yes” on the bailout package, you can no longer claim ignorance years from now. You have been educated. You have been warned by the one and only Economic School of Thought that has been proven consistently correct. What happens now is on your shoulders.

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