Image: James Dale Davidson: Put Blame for Shutdown Where it Belongs — on LBJ and Nixon
In this Nov. 6, 1968 file photo, Richard Nixon, left, greets the press with President Lyndon Johnson at the White House in Washington. (AP Photo/Charles Tasnadi, File)

James Dale Davidson: Put Blame for Shutdown Where it Belongs — on LBJ and Nixon

Wednesday, 09 Oct 2013 05:10 PM

By James Dale Davidson

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No matter your political perspective, the federal government shutdown due to the inability of Congress and the president to agree on a budget is hardly a bullish indicator. It reflects the inability of those controlling the U.S. government to come to grips with fatally unbalanced federal fiscal conditions.

As Newsmax reported, "Pres. Barack Obama laid the blame for the government's partial shutdown at the feet of House Speaker John Boehner, escalating a government-shutdown confrontation that was leading headlong into a potentially more damaging clash over the nation's borrowing authority."

Even if you take Obama's partisan posturing at face value, it still does not explain the striking indifference of America's political class to the long-range sovereign solvency of the United States.

Editor’s Note: 5 Phases of a ‘Retirement Heist’ Exposed (See Video)

Various presidents have been aggressively contracting unpayable obligations for decades. I argue below that the lion's share of the blame for the bankruptcy of the United States lies with presidents Lyndon Johnson and Richard Nixon. The current cast of characters are pikers by comparison.

Indeed, the spectacle of Republicans and Democrats in Congress squabbling over competing schemes to reduce the fiscal gap by a mere $2.1 trillion over the next decade shows how far removed public discourse is from reality. The deficit reductions so bitterly disputed in the Congress amount to less than 1% of the total fiscal gap of the federal government. A spit in the ocean.

According to Prof. Lawrence Kotlikoff, former senior economist in president Reagan's Council of Economic Advisers, the true present value of the gap between future U.S. government obligations and revenues is $222 trillion, or $1.9 million per household.

This makes the United States the most thoroughly insolvent government in the history of the world.

When the total of promised spending in the future is compared with current best estimates of future revenues, the present value of the difference between the two – the fiscal gap – is more than 13 times greater than the nominal national debt of $16.7 trillion. That is the true measure of the country's indebtedness.

Between fiscal year 2011 and FY 2012, the fiscal gap of the U.S. government increased by an astonishing $11 trillion. Remember, at that time President Obama and other politicians were posturing about protecting national solvency by trimming the deficit by $2.1 trillion over 10 years.

While they talked about strengthening the long-term finances of the U.S., they were really ignoring The First Law of Holes (namely, if you find yourself in one, stop digging).

Looking back over the past several years you can see that Congress and President Obama have increased the fiscal gap by $38 trillion – twice the nominal national debt. Kotlikoff explains that in 2009 the fiscal gap “was $184 trillion. In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.” Part of this huge surge in the fiscal gap reflects the passage of “Obamacare."

"This is not a partisan issue," Kotlikoff reports. "One administration after another" has attempted to buy votes "while appeasing the young with the prospect of taking their turn at generational theft." Kotlikoff cites Congressional Budget Office (CBO) projections of the government's finances to calculate the "fiscal gap."

In order to minimize financial misreporting and fraud in the accounts of public companies the government requires that they adopt generally accepted accounting principles (GAAP) ,which mandate, at least in principle, the full disclosure of future liabilities.

But guess what? The politicians in Congress still keep the government's books according to Mickey Mouse cash accounting.

If cash accounting ever made sense it was in the long lost era of limited government in the early days of the Republic. As hard as it may be to imagine now, government then did not grow automatically as entitlements swelled from year-to-year. There were no future liabilities to speak of, no Social Security pensions, no Medicare, no Medicare part B, no Medicaid.

Given that there was no reason to expect future outlays to balloon, as more and more people qualified for government handouts, monitoring the fiscal health of the federal government according to its "cash deficit," made for a tolerable approximation of the real picture.

But no longer. Thanks to the proliferation of programs promising aging voters benefits in the future, the cash deficit, (along with its counterpart - the nominal national debt), is no longer a meaningful indicator of the government's true financial footing.

As Kotlikoff explains, the government becomes more insolvent on a present value basis with each year that passes. "When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value."

Of course, as currently calculated the deficits "don't matter." That is not because fiscal solvency does not matter as the "Keynesians with a vengeance" pretend. To the contrary, the government’s solvency is crucial, so crucial that it must be accounted for realistically. Hence Prof. Kotlikoff’s seminal paper, “Deficit Delusion,” published in the Public Interest in 1984. In that paper, Kotlikoff showed that the number politicians choose to highlight as the deficit is an arbitrary figment of language rather than a well-defined economic concept.

In a later paper, "On the General Relativity of Fiscal Language," co-authored with Harvard economist Jerry Green, Kotlikoff provided a proof that "deficits" are arbitrary artifacts of language that can easily be manipulated by politicians.

One of the more obvious examples of this definitional charade is provided by the history of the budget treatment of the U.S. Post Office. As you may remember from your high school civics lessons, the United States Post Office was originally a department of the U.S. government. Indeed, the U.S. Post Office preceded the Constitution. The first Postmaster General, Benjamin Franklin, was appointed by the Continental Congress even before the Declaration of Independence, on July 28, 1775.

Under George Washington, the Postmaster General was initially a sub-cabinet official. From the administration of Pres. Andrew Jackson until the Nixon administration, the Post Office was a cabinet level department of government.

Richard Nixon was not called "Tricky Dick" for nothing. In 1974 his Office of Management and Budget administratively removed the finances of the U.S. Post Office from the federal budget. This was confirmed by congressional act passed in 1989.

As a result, the newly rechristened "Postal Service” was treated partly as a government agency and partly as an independent corporation. For example, the Postal Service was ordered to pay postal workers for time served in the U.S. military in computing postal pensions – an obligation that was historically paid by the U.S. treasury. On the other hand, the Postal Service was purportedly required to operate at a profit..

Various aspects of the post office revenue and liabilities have been shuffled on and off the budget in recent decades merely to help disguise the deteriorating condition of federal finances.

In 2002, disaster struck when an audit by the Office of Personnel Management (OPM) uncovered what should have been good news in a rational world. It found that the Postal Service had been overpaying into its retirement fund.

How was that a disaster? The “found money” threatened to postpone a scheduled increase in the cost of stamps. Given that the Postal Service was running a huge operating deficit, it should have been simple to reduce future payments and utilize the extra cash from pension overpayments to offset the operating deficit of the Postal Service.

But it wasn't that simple. The CBO determined that because proceeds of the sale of stamps were counted as revenues within the unified federal budget, if the Postal Service used its surplus from excess retirement payments to delay an increase in the price of stamps this would have increased the government’s reported unified budget deficit by about $3.5 billion a year or a total of about $41 billion.

Editor’s Note: 5 Phases of a ‘Retirement Heist’ Exposed (See Video)

The shifting treatment of revenues and costs of the U.S. Post Office/Postal Service provide a blatant example among many of definitional flummery designed to disguise the dire state of federal finances.

Obviously, what really matters are not the totals in the artfully designed official "budget deficit," but the actual fiscal gap – the present value of the difference between what the Treasury is obliged to pay and its anticipated revenues.

All recent administrations have played definitional games to minimize the reported annual "budget deficit," even while they mortgage your future by increasing the actual fiscal gap.

But undoubtedly the two villains who bear the greatest responsibility for the long-term decline of U.S. solvency are Lyndon Johnson and Richard “We are all Keynesians now” Nixon. They, more than any of their predecessors set the tone of talking about fiscal responsibility but doing nothing about it.

But more importantly, they massively widened the fiscal gap while undermining and destroying institutional restraints on deficit spending. You could reasonably say that the heritage of outsize federal deficits, extreme monetary ease, and depreciation of the dollar are the joint policy legacy of LBJ and Nixon.

Remember, in the 1960s, unlike now, the United States really was the richest country in the world. When World War II ended, the United States held 65% of the world's gold supply.

With memories of the Great Depression uncomfortably vivid, the United States sponsored a new, world monetary system in which other currencies were pegged to the dollar while the dollar was pegged to gold at a rate of $35 per ounce. As a result, they used to say "the dollar was as good as gold."

And for decades it seemed to be, as dollar issuance was restricted by law to no more than four times the government's supply of gold. And the U.S. government was solemnly committed to convert dollars into gold for foreign central banks at a price of $35 an ounce.

The explicit objective of the Bretton Woods system (as it came to be called after the location of the international conference at which its design was proposed), was to eliminate "beggar your neighbor" trade policies. Economists believed that the Great Depression was deepened and extended by currency devaluations implemented to make tradable goods cheaper and thus improve sales at the expense of producers in other countries.

The U.S.-sponsored gold reserve system was designed to prohibit more than a 10% devaluation of any currency. Even then, under the rules insisted upon by the U.S. countries required IMF approval before devaluing.

This is why Nixon's abrupt termination of the Bretton Woods system on August 15, 1971, came to be known as "the Nixon shock." Contrary to the Bretton Woods pledge of currency stability, Nixon engineered a massive devaluation of the dollar against the German mark (by a total of 50% between 1969 and 1973) and a 28% devaluation against the yen between 1971 and 1973.

Nixon, like Johnson before him, was determined to destroy institutional restraints on printing money. He wanted no obstacles that could handcuff his ambition to buy votes with spending out of an empty pocket.

Both LBJ and Nixon eagerly betrayed the commitments of the U.S. government to fiscal responsibility. Even before Nixon reached the White House, Johnson had begun dismantling the monetary restrictions on deficits.

In the Coinage Act of 1965, Johnson repealed the Coinage Act of 1792, as signed by George Washington, that committed the United States to silver coinage for the first century and three quarters of American history.

LBJ's new alloy coins lacked the metallic value of the silver coins they replaced. Johnson soon disposed of America's silver stockpiles at discount prices and removed silver certificates from circulation.

As he contemplated reelection in 1968, LBJ consciously planned the largest nominal deficit since World War II, practically repudiating the gold reserve system. Johnson set the stage for Nixon's later actions to terminate the gold-dollar link, declaring, "The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."

On January 17, 1968 Lyndon Johnson called for making the U.S. dollar non-convertible. Then, on March 18 the U.S. Congress enacted his proposal to repeal the requirement that the dollar be backed by a 25% gold reserve. This opened the door to the unlimited issuance of fiat dollars, permitting deficit spending on a runaway scale.

Lyndon Johnson was an unrepentant big spender. He went far toward undermining the balance sheet of the U.S. government through his costly "Great Society" programs, including Medicare and Medicaid, that now account for tens of trillions in the fiscal gap.

At a time when the United States was wealthy and prosperous, it would've been a simple matter to keep U.S. government finances on a sound footing. All that would've been required was to refrain from creating costly new programs and avoid engaging in costly foreign wars.

Unfortunately, both Johnson and Nixon were ruthless, power-hungry politicians who would go to almost any length to gain and retain office. In Nixon's case, his role in the Watergate break-in led to his forced resignation from the White House in the face of probable impeachment for "high crimes and misdemeanors."

But Nixon may have been a Sunday School teacher compared with LBJ. Toward the end of his life, Nixon told his former aide, Roger Stone, "Both Johnson and I wanted to be president, but the only difference was I wouldn’t kill for it.”

Stone alleges in a new book that then-Vice President Lyndon Johnson did. He claims that LBJ masterminded the assassination of his predecessor John F. Kennedy, a crime which he subsequently successfully covered up.

Stone also provides chilling evidence that Johnson was no stranger to murder, having worked with a cold-blooded killer named Malcolm "Mac" Wallace to kill at least six persons, including his own sister Josefa, a prostitute whose frequent brushes with the law were causing Johnson political embarrassment.

Whatever else can be said of them, both LBJ and Richard Nixon were avid hawks who squandered American lives and treasure in the remote jungles of Southeast Asia. Even worse, the ill-considered U.S. wars in Vietnam, Laos and Cambodia had the consequence of unmistakably demonstrating that the world's most powerful and expensive military could not impose its will upon poor, backward countries.

This compounded the negative economic effects of excess spending by reducing the willingness of other countries to cooperate with the United States in holding dollars. Even before the formal end of the Vietnam War, the Arab oil shock quadrupled the world price of oil between October 1973 and January 1974. The soaring price of oil, directly attributable to Nixon’s ditching of the gold link, helped slow economic growth in the United States in the decades since 1971.

Editor’s Note: 5 Phases of a ‘Retirement Heist’ Exposed (See Video)

A close look at Nixon’s view of economic policy shows that his concerns were almost exclusively focused on using fiscal and monetary policy as instruments to buy votes. Nixon believed that his defeat in the election of 1960 was attributable to President Eisenhower's efforts to stabilize U.S. gold reserves, which he blamed for both the 1958 recession which cost Republicans seats in Congress, as well as for slow growth of the money supply during the run-up to the 1960 presidential election.

Nixon's feelings in this respect were reinforced in a conversation he had prior to the voting with none other than Arthur Burns, who had been the chairman of Eisenhower's Council of Economic Advisers. Burns, who was a conservative Keynesian, warned Nixon that he was likely to be defeated by Kennedy because of the austere fiscal and monetary policies favored by Eisenhower in the closing years of his presidency. A recession began in April, 1960, and Nixon was narrowly defeated.

In his book, "Six Crises," Nixon blamed his defeat, in part, on the anti-inflationary monetary policies the Fed implemented at Eisenhower's behest.

At the first opportunity, Nixon appointed Arthur Burns as chairman of the Federal Reserve Board, with the understanding that he was to open the monetary spigots to facilitate Nixon's reelection bid in 1972. Notwithstanding the fact that consumer price inflation averaged about 9% year during Burns' tenure at the Fed, Nixon was not satisfied that Burns had opened the spigots far enough.

In his diary, Arthur Burns recalled a 1971 meeting in the White House with Nixon: "The President looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task – apparently meaning me or [chairman of the Council of Economic Advisors, Paul] McCraken or both – for not putting a gay and optimistic face on every piece of economic news, however discouraging; propounded the theory that confidence can be best generated by appearing confident and coloring, if need be, the news.”

There you have the philosophy and practice that led directly to the government shutdown and will ultimately result in the bankruptcy of the United States. There is a direct line from Nixon's instructions to applaud bad economic news, or "if need be," lie about it to the Bureau of Labor Statistics report of 800,000 fake jobs supposedly created in the first year of the Obama administration.

Johnson and Nixon destroyed the institutional limits that prevented the government from creating money out of thin air to finance unlimited deficits. When they succeeded in detaching the dollar from its historic links to silver and gold, they opened the way for the financialization of the U.S. economy and the ultimate insolvency of a government with a fiscal gap of $222 trillion and growing.

Best-selling author and investment guru James Dale Davidson is a columnist for Newsmax’s Financial Intelligence Report newsletter and a member of Newsmax's Financial Braintrust Alliance (FBA).

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