Last week, the nation learned that Mitt Romney, at a private fundraiser in Florida earlier this year, suggested that 47 percent of the American electorate consider themselves “victims who believe that the government has a responsibility to care for them” and “believe that they are entitled to health care, to food, to housing, to you-name-it.”
That, most certainly, was not the best way to make a point about the rise of our nanny state, and Romney has since conceded that his comments were “not elegantly stated.” But it is true that between 46 and 51 percent of the American people pay no federal income tax. And since this group receives much more in federal benefits than they pay in taxes, there is no reason to expect that they would vote to change their position for the worse. Nevertheless, labeling half of the electorate as “victims” was not the best choice of words. Chalk this up as Romney’s “bitter clinger” moment.
Not surprisingly, the Obama campaign—eager to talk about anything but Barack Obama’s record as president—quickly rebuked Romney’s flub, finding it “shocking” for a presidential candidate to be so divisive. (Never mind the divisiveness that is regularly fomented by our current president and his campaign.) As a consequence, the political focus momentarily shifted to this faux controversy that has almost no relevance to the presidential election—Romney’s gaffe does not change the fact that our nation is on a path toward fiscal insolvency (an “unsustainable” path, as twice described by Obama’s Treasury Secretary, Tim Geithner).
Amid all the hype over this “shocking” statement, however, there was something lost in Romney’s private comments that should shock us all, or, at the very least, wake us up to our frightful economic reality. In his remarks, Romney identified a financial calamity that is drawing near on account of the federal government’s massive deficit spending and the Federal Reserve’s incessant debt purchases in the last few years. Describing a conversation he had with John Whitehead, the former head of the New York Federal Reserve, Romney said:
[Whitehead] said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.
Some frightening facts: When President Obama took office, our national debt totaled $10.6 trillion. And in the 3 ½ years since then, the national debt has passed $16 trillion and continues to rise. So who is lending us this enormous amount of money? According to a Wall Street Journal opinion piece, foreign Treasury bond purchases since 2009 have fallen almost 70%—countries like China and Japan are no longer willing to fund our government excesses. And in the same timeframe, private sector Treasury bond purchases (those made by U.S. banks, mutual funds, corporations, and individuals) have dropped by 85%. In truth, most lenders and foreign nations think that buying our debt is much riskier today, and many ratings firms agree. S&P downgraded U.S. debt in August 2011; Egan-Jones downgraded U.S. debt in April 2012 and again in September 2012; and Moody’s has threatened a downgrade in 2013 if the U.S. debt continues to rise.
If so few financiers in the real world think that buying our debt is a safe bet, then how can we continue to increase our debt at record levels? The answer, as Mitt Romney pointed out, is that the Federal Reserve is printing money to buy U.S. Treasury bonds.
Former U.S. Treasury official Lawrence Goodman observed that, in 2011, “the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.” In effect, the Fed has filled the void left by market participants who are no longer willing to lend money to the U.S. Treasury. And because the Fed’s large debt purchases have kept interest rates artificially low, there exists no pressure on the U.S. government to curtail its massive spending—the low rates make deficit spending relatively cheap, and they give the appearance that there is a high demand for Treasury bonds when the exact opposite is true. Goodman wrote, “This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”
By its actions, the Fed is aiding and abetting an impending financial crisis in the United States. And this is nothing new. As I wrote in my new book, The American Ideology, the Federal Reserve has worked alongside the federal government to encourage or exacerbate the greatest financial crises in our nation’s history. So if the Fed today will once again do nothing to pressure the U.S. government to amend its excessive ways, then we must be that force.
Mitt Romney understands this. In his private remarks, he also stressed the need to reform Social Security and Medicare—the two biggest expenses for the federal government. He said:
If we don’t change Medicare or Social Security, the tax rate—you know what the payroll tax is now, it’s 15.3 percent—if we don’t change those programs, that tax rate will have to ultimately rise to 44 percent. The payroll tax. Then there’s the income tax on top, which the president wants to take to 40 percent. Then there’s state tax in most states. And sales tax. So you end up having to take 100 percent of people’s income.
If the federal government does nothing to change its ways that have fostered our rising nanny state—if, as a nation, we continue to blindly march “forward” down our current path, as President Obama encourages us to do—then a more devastating economic crisis looms in our future. Our current monetary and political policies are setting us up for failure, and if unchanged, they could trigger a dramatic market collapse. And that is truly shocking.
UPDATE: Recent and relevant article on the Fed: Fed Virtually Funding the Entire US Deficit