Sunday, November 27, 2011

Forgetting Foreign Policy

In Courting Disaster, Marc Theissen offers a frank defense of the Bush administration's policies in the War on Terror. Specifically, he maintains that the enhanced interrogation techniques—including, but not limited to, waterboarding—helped save countless lives. President Obama's reluctance to utilize these same procedures endangers the country, hence the title of his book.

In a superficial sense, his book is thorough; he quotes from a variety of different people to make his points. However, because the vast majority of his sources are merely defending policies which they implemented, his apologetic comes across as self-serving. Asking Dick Cheney whether or not waterboarding is meritorious is akin to asking Joe Biden whether the stimulus program worked. We know what we will be told, but we remain unsure as to the real answer.

Theissen offers a cursory defense of the morality of enhanced interrogation techniques, to wit, it's not torture, and anyway, there are different rules when dealing with terrorists. Yet the thrust of his argument is utilitarian: "We should be grateful to, and proud of, those who took on the difficult job of interrogating captured terrorists. They elicited information that saved countless innocent lives."

The danger of his approach should be obvious: if safety becomes the only test of morality, it is difficult to see which of our rights are inviolable. That some of our freedoms remain is beside the point: once this test has been admitted, there is no logical reason why government may not strip away our rights—one by one.

There is a greater flaw in Theissen's book, however. Until the very last chapter, he does not so much as examine why it is that terrorists may be attacking America. Then, he flippantly insinuates that terrorists are simply evil. He quotes Peter Rester, the director of the Joint Intelligence Group at Guantanamo, who notes that critics cite: "America's support for Israel; America's occupation of the Holy Land; America's occupation of Saudi Arabia" as policies which give impetus to terrorism against the United States. But for Theissen, discussions about policies are excuses, irrelevant to the discussion.

Nothing could be further from the truth. Theissen insists that if the terrorists attack again, the Obama administration will have blood on its hands, since the attacks could have been prevented had we continued to use enhanced interrogation techniques. Yet it is truer to say that American policies—indiscriminately bombing Middle Eastern countries, insistence on occupying these same countries, and unquestioning support for Israel against the Palestinians—produce what our CIA calls blowback. Terrorists attack us because of these policies; we know this because they have told us as much. This does not excuse the behavior of those who kill innocents, but it does make it partially explicable.

This does not necessarily mean we need to reverse our policies. But we need to accept that there are costs for our Empire—just as there are costs for refusing to utilize enhanced interrogation. A prerequisite to Theissen's book is an understanding of our foreign policy, and the role it plays in fomenting terrorism. It is puzzling that he considers something so essential to be of so little consequence.

Friday, November 25, 2011

Revolution watch

Recently, I've been reading The Degradation of the Academic Dogma by Robert Nisbet. Therein, he argues that the academic dogma--that knowledge is important--has been degraded by a slew of changes to the university system between 1945 and 1970. The former date marks the moment at which universities began to accept large amounts of grant money for research from Federal and even State governments; the latter encompasses the student revolutions, which started at Berkley in 1964.

Today, I don't think that many would challenge the notion that the academic dogma has been swept aside in favor of other dogmas. As I've written before, modern universities are, with very few exceptions, at best, glorified trade schools. At their worst, they allow enfeebled middle class minds to hobnob about for half a decade in quasi resorts, without bestowing more than a modicum of knowledge upon the students.

What concerns me here, however, is not the death of the universities, but the prospects for revolution. For Nisbet offers ten criteria by which one may know whether or not a revolution may be imminent. We can use these criteria to apply the test to America as the year 2011 draws to a close.

I should not have to explain that such an examination has nothing to do with whether or not I desire a revolution. Being a hopelessly reactionary, on the whole, I think revolutions do much more harm than good. However, if a system is corrupt and unjust, and makes no motion to better itself, history testifies that if it is not satisfactorily reformed, at some point, it will be overthrown.

1) First, there must be a preceding period of sharp, almost convulsive changes in society, especially in the economic and social spheres.

Check. The Greatest Depression shows no signs of abating. This time, there are no soup lines because, unless one cashiers at a grocery store, it is not apparent which Americans are using welfare money to feed their families. Suffice it to say that these numbers are not insignificant.

The real crisis is still to come, however. By forcing down interest rates, Bernanke encouraged retirees to speculate in the stock market. When the stock market plunges, pension and 401Ks will lose value; those depending on them will be in for a rough ride.

2) Second, there must be a strong feeling of the breakdown of established authority.

Check. For all their infantile ignorance of, well, most things, the Occupy Wall Street protestors are right about this. In Washington, the rules are being changed almost weekly. Whether it was allowing investment banks like Goldman Sachs to act as commercial banks to receive money from the Federal Reserve, or whether it is the refusal to investigate fraud by the banks, in the economic realm, certainly, there is no authority. But the problem is not so much that banks police themselves as that they make bets with taxpayer money, paying executives nice bonuses if the bets work out, and coming to the taxpayer for more money if they do not.

The Republican Party Presidential debates further reinforce this breakdown in authority. With President Obama owned outright by the banks, a Republican candidate could capitalize by insisting that, as President, he would investigate all serious allegations of fraud. Instead, the candidates are telling the hippies to get jobs, which is utterly beside the point.

3) Third, there must be a considerable degree of affluence.

Not yet. This is a paradoxical point: one assumes that the poor would rise up in a revolution, but it is always someone with comparative affluence who leads them. Many of the Founders were merchants; Robespierre and Marat weren't exactly impoverished.

The candidates here are the recently unemployed finance workers. While much of the middle class is faced with the prospect of making due with less money, or else postponing retirement, finance workers--the best and brightest; follow the money--are being forced to come to terms with the fact that they went into the wrong field. You can bet your Goldman stock that those who have been booted off the gravy train are none too pleased about it. My suspicion is that the leaders of the revolution will come from the displaced finance sector.

4) Fourth, there must be a substantial measure of liberalization achieved during the period before the revolution.

Not yet. If anything, the police state has been trying to assert itself all the more readily as of late. And the War on Drugs continues apace. Yes, the Internet has provided a liberalization of sorts--which is why the Congress is hoping to impose a Great Firewall. Still, Nisbet demands that this take place "in political and legal as well as customary terms." So I would say we have a ways to go.

5) Fifth, there must be a striking politicization already going on.

Check. I would say that the Tea Party and the Occupy Wall Street movement have demonstrated that pretty well everything is heavily politicized. That the former has been co-opted by the Republicans, and that the latter will almost assuredly become co-opted by the Democrats is, I think, beside the point.

6) Sixth, there must be power-sensitive, power-eager, intellectual elites.

Unsure. Does a civilization which is degraded as ours produce elites anymore? Comparatively, perhaps. Again, I think the displaced finance workers are the group to watch. For decades now, the sharpest and most well-connected students went to Ivy League schools after which they proceeded into finance. If the establishment can't find a way to place these recently unemployed, there are going to be some very bright people, who--and this is important--know the system very well. So far, the rhetoric of Occupy Wall Street has been unimpressive. But if the former-bankers get involved, the criticisms of Wall Street will become much more pointed.

7) Seventh, there must be some precipitating incident or event, one that, while in no way necessarily related to internal conditions, succeeds in bringing passions to ever greater boil and, with this, potential mobilization of numbers.

Not yet. It is tempting to claim that police brutality against peaceful protestors has helped mobilize the Occupy Wall Street movement. And this is true to some extent. But it remains a fringe movement, for the time being. I suspect that this event lies somewhere in the not too distant future.

I should note, too, that some of these protestors have turned violent. So not all of the police violence has been unprovoked. But there is no excuse for shooting people in the head with rubber bullets or pepper-spraying innocents. The police are losing the PR battle, which is why I suspect that an over-reaction by the men in blue will facilitate a much more significant uprising.

8) Eighth, the moral issues must somehow be made appealing to substantial numbers.

Not yet. The right remains oblivious to the wrongs done by the banks; the left remains equally oblivious as to the role played by the government in facilitating theft by the banks. Someone will need to connect the dots so that the outdated left-right divide can be thrown out in favor of a dichotomy that makes sense. There are those who try to do right by serving one another without compulsion, and there are those who become rich through government force. That is the real division. Too few realize this--as yet.

9) Ninth, it must be easy to contrast an existing scene of declared corruption, hypocrisy, and insensitivity to human rights with a utopia summoned up either from the romanticized past, some primordial Garden, or from the imaginary future.

Not yet. The continued economic contraction should make this more plausible. When the rationing begins--for the people of course, not the elites--making the case for utopia will be trivial. Before then, it will require a bit more imagination.

10) Tenth, there must be a certain reservoir of guilt in the Establishment of a social order or institution if revolt is to be gotten off to a good start.

No. The elites don't seem to care one bit. Obama has expressed some sympathy with the protestors, but this has been mere rhetoric. Likewise, the entire Republican field, as well as most of Congress, expresses no guilt for what has been done to the people. More importantly, nothing has been done to show that Washington is not run by the bankers. In fact, Obama wishes to give the banks a get out of jail free card in exchange for a fine. That's just not going to be acceptable to the masses--once they figure out what has transpired.

Thus stands the revolution. We shall continue to watch carefully in the months and years to come.

Thursday, November 17, 2011

The regulation distraction

The topic of regulation has poked its head into what passes for political discourse in our country. The Democrats insist that deregulation caused the economic crisis; it follows then that tighter regulation is needed to ensure no future crises occur. Meanwhile, the Republicans maintain that regulation restricts growth; that various pieces of legislation which Obama has signed into law--including his eponymous healthcare bill--ensure that the economy will not add jobs at a rate sufficient to bring about an economic recovery.

All this talk about regulation is little more than a curious canard. For what occurred during the housing bubble was no less than grand scale fraud by the banks. Fraud is not something one regulates against. It is prosecuted, not because it is a violation of some arcane minutiae buried in some back page of a manual at a regulatory agency, but because it is a provision of common law. Prohibition against fraud is an integral part of the western tradition. It has also been written into the United States Code of Law:

Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

No one knows how much fraud the banks have committed. We know that there has been some. There are probably more guilty bankers out there, which is why, despite their economic ignorance, the Occupy Wall Street movement is still by and large a good thing. The protestors realize what many of the Republicans and President Obama deny: the rule of law is not being applied fairly to those who are rich and well-connected.

Indeed, just this week, a story was published in which President Obama alluded that the actions taken by bankers were "not necessarily against the law." Yet he has no way of knowing to what extent the law has been broken. But rather than investigate banks to determine if fraud has been committed, he wants the banks to pay a measly $20 billion fine to handle the mortgage mess. That may seem like a lot of money, but it's not to bankers. If they have committed no crimes, this fine is unjust, but if they have broken the law, the people have a right to know about it--and for the criminals to be punished accordingly.

This focus on regulation is distracting us from a very discomforting fact: the rule of law no longer applies in America. Bradley Manning is being held indefinitely, without charges; an American citizen was assassinated by our own government; banks commit fraud, pay small fines, and get bailed out. We should hear no more talk of regulation from presidential pretenders. What the American people need to hear is whether or not the rule of law will again apply, or whether we shall continue to be ruled capriciously by despots. Bromides to American greatness may convince the willfully duped, but those with eyes to see are beginning to notice that the image projected by politicians bears little resemblance to the reality: that we can no longer be considered a great country.

Wednesday, November 16, 2011

Generational breakdown

During the last few years, America has witnessed the birth of two seemingly dissimilar movements: Occupy Wall Street and the Tea Party. Indeed, one is only supposed to compare the two to disparage the other. To the Tea Party, Occupy Wall Street protestors are dirty hippies who ought to find jobs; the protestors see the Tea Partiers as stodgy old Republicans, out of touch with the world. Yet there are similarities between the two groups. Both represent dissatisfaction with present realities and the total absence of political will to improve matters.

The Tea Party is concerned--and rightly so--with government growth. Yet this problem is not exactly a new one. It is true that Obama has added more to the debt than all of his predecessors combined, but this has far more to do with the machinations of fractional reserve banking and the compounding of interest than any especial radicalism of the President. Had McCain been elected, he too would have "stimulated" the economy, probably by bombing Iran and cutting taxes--which also would have increased the national debt substantially.

It is distressing then, that so many former Republicans--despite the re-branding, Tea Partiers are still, by and large, GOP faithful--took so long to notice that government was getting bigger. Ironically, it was Republican presidents--chiefly Reagan and George W. Bush--who added most of the pre-Obama debt. Charges of hypocrisy then, are fair. But they are also beside the point. We cannot undo past profligacy. Any movement which seeks to curb spending is acting in the interests of the American people, however ineffectual it may be.

There is another arresting fact about the Tea Party. It is made up largely of older citizens. This leads to the second great irony of the movement: these supposed opponents of government depend upon it continuing to function as it has. Many members of the Tea Party are retired. They have worked hard and expect to enjoy the fruits of their labors in their golden years. Yet in this they are--however begrudgingly--dependent on government programs, namely Social Security and Medicare. Alas for the retirees, the money they have paid in has already been spent. These programs must now be paid for out of the general fund. As our debt climbs, it becomes increasingly unlikely that these programs will continue to be funded. No politician is insane enough to propose major cuts now, but through a combination of means testing and rationing, the programs will invariably be reduced.

Which brings us to Occupy Wall Street. Since the movement is newer and has not--yet--been co-opted by one of the major parties, it's a bit difficult to discern the agenda of the group. We know that, to their credit, they are mad at Wall Street and the bankers. For while envy of the rich is not virtuous, demanding that those who committed crimes be brought to justice is. Indeed, not only have the banksters escaped jail, they have been bailed out. It's true that some of the protestors are youthful idiots, whose mushy heads are receptive to socialist nonsense; this should not cause us to forget that they are largely correct about the banks.

The most obvious difference between the two groups may be the age disparity. This is significant. Our entitlement programs are Ponzi schemes. Since Occupy Wall Street types tend to be younger, there is no chance that they will receive any of the benefits of these programs. No one knows when the insolvent programs will be abandoned; retirees are hoping that it will be after they die; young people know that it will be before they retire. In any event, some retirees will be left without any money, which is why one should think carefully about retiring, if one retires at all

Much of the criticism against the Occupy Wall Street movement has focused on the entitled nature of the protestors. Certainly those who demand a free college education seem to fit the bill. But youngsters will not be able to act entitled for long. Just today, the national debt surpassed the $15 trillion mark. No one can fathom these sorts of numbers; still, the message is clear: the US Government will go bankrupt fairly soon. Younger people will have to do without the nanny state--but so too will older people.

Political prophecy is a tricky thing, but I think the end result is pretty obvious. Old folks vote in large numbers. For awhile, they will ensure that no politician dares upset the Social Security and Medicare gravy train. But the State will not be able to continue to force taxpayers to pony up in perpetuity.

In their own clumsy way, the Occupy Wall Street protestors are adumbrating the coming generational clash. If we are governed by responsible adults, the transition will proceed peacefully. If we continue to be governed by children in thrall to the banks--and I see no indications that this will change--the transition will take a violent turn.

The details are murky; this is a topic to which we shall have need of returning in the upcoming months. The police may have sent the protestors scurrying for cover, but the problem remains. The young and the old have been pitted against one another by a government that takes from the former to give to the latter. This is a problem that must and will be solved.

Wednesday, November 09, 2011

The Costs of College

I threw this together with the tentative plan of presenting the information to students at my former high school. As it turns out, I know very few of the teachers who still teach at said school, so I'm left with an essay in presentation form. Enjoy.

"There's no such thing as a free lunch."

This phrase has been popularly attributed to the economist Milton Friedman. Although he believed in the wisdom of the saying, he never claimed to have been the originator of it. Instead, he utilized it to illustrate an important economic concept. Every action costs something. Often this is denominated in dollar terms: a pop costs a dollar. Other times, the terms are different: the cost of writing this piece is reading a book. Economists refer to this as opportunity cost. It's a very good habit to account for this when contemplating any significant decision.

We'll come back to opportunity costs in a bit. For now, I'd like to talk briefly about the benefits of a college education. The primary benefit is that possession of a college degree increases the likelihood of employment; it also, on average, enhances earning potential, as college graduates can out bid non-graduates for preferred jobs. The latest numbers from the Bureau of Labor Statistics1 suggest an unemployment rate of 4.2% for American citizens with at least a bachelor's degree as compared with a rate of 9.7% for those who possess only a high school diploma. Other numbers, also from the BLS2, place take home pay at $1038 per week for college graduates as compared with $626 per week for those who have only completed high school. There are exceptions, of course: despite never completing college, many founders of businesses—Mark Zuckerberg, Bill Gates, etc.—obtain remuneration which far exceeds that of the average college graduate. Nonetheless, these general truths do hold.

This does not necessarily imply, however, that the college education is the cause of the benefits. This would be an example of the post hoc ergo propter hoc fallacy, Latin for: "after this, therefore because of this." Typically, the best and brightest high school students are encouraged to attend college; it should not surprise us if this same group has more success in the job market. This is not to say that college education has no influence on the employment prospects of graduates, only that this influence is not necessarily causal. Intelligent, hard-working people tend to succeed in relatively free societies such as ours.

As an aside, I should add that data gathered during our current recession suggests that the job picture has darkened, though this holds for both college graduates as well as those without college degrees. In many cases, the former are displacing the latter and squeezing them out of the labor market.

Since we haven't really proven that college education makes a difference, it's worth examining some of the reasons it might do so. To do this, we have to separate the two disparate functions of education: that of providing a classical liberal arts education, and that of providing training for a specific vocational function. The former was the traditional aim of all institutions of higher learning. So a student would learn Greek and Latin; he would read Virgil and Homer in the original, and provide his own translations. As our educational system began to let in more students, the emphasis on the classics faded. This is an important development for our civilization, but it's not terribly relevant here.

The second function of education, and, for all intents and purposes, the only aim of education today, is to provide training for employment in specific fields. I received a degree from Michigan Tech in Computer Engineering; so I received instruction in physics and math, circuits, software design, computer hardware, etc. Elementary education majors learn how to teach classes, accounting students learn how to keep books, and so on and so forth. Schools will still require a handful of general electives, but it's basically correct to say that modern universities are glorified trade schools.

Earlier, we looked at some statistics comparing college graduates to high school graduates. Yet when we see universities as trade schools, we should also see that lumping all college graduates together doesn't make a lot of sense. In economic terms, the BLS is aggregating dissimilar goods. The market is prepared to pay software developers different wages than teachers. This may or may not be just, but it is reality. So when one hears statistics that suggest that college graduates make more money, be sure to compare remuneration across degrees. When doing so, it's interesting to note that professions which pay well are thoroughly documented. Finding any sort of data on Women's Studies majors proves difficult, but implicitly tells us something about the wages such graduates command.

Even after we've accounted for varying fields of discipline, we need to account for the quality of the institution. Possessing a business degree from Harvard is going to be worth more than possessing a business degree from St. Cloud State—even if my brother refers to his alma mater as the Harvard of the Midwest. This isn't to say it's imperative to get into the best college; certainly Michigan Tech is a far cry from MIT, and yet I'm gainfully employed. But at the high-end, a degree generates some extra pull, and at the bottom end, that is, at the for profit colleges, the degrees may not even be worth the paper on which they are printed.

Returning to Friedman's admonition—"There is no such thing as a free lunch"—and examine the costs. First, and most obviously, there is a financial cost. Financial aid and scholarships are available, often depending on one's race and socioeconomic status; still, as the Huffington Post reported just over one year ago, "The average cost of a four-year, non-profit private college is $35,000, while cost for four-year public college comes in at just under $14,000."3 However, these numbers come from data comprising the 2007-2008 academic year. Tuition has increased since then; over the last ten years it has gone up at a rate of six percent annually. An online resource4 that assists students and parents in saving for college suggests that students can expect to pay $119,400 for a four year degree at a private college, as against $33,300 for students staying in state to attend a public university.

These figures do not include the cost of room and board, books, and other living expenses; these are not insignificant costs5. This also assume that the student will graduate in four years, a prospect that has become increasingly dubious for a variety of reasons, not least of which is the creative scheduling undertaken by colleges to ensure a steady stream of income. A staggeringly high 47% of students fail to graduate within six years.6

These numbers are vital because they help us gauge how much debt students must take on in order to obtain that important piece of paper. Even though college graduates do, on average, make more money than those who possess only a high school diploma, the former are awash in debt, while the latter should be able to stay relatively debt free. Moreover, not all college students work while attending class, but high school graduates have four or more years of accruing work experience and earnings. These years, coupled with student debt, constitute the chief opportunity cost of a college education today.

I'm going to run though a simple calculation to try to better quantify this cost. Again, numbers vary based on school, financial aid, degree, and so on, so it's best to run some of these calculations on your own, with your own numbers. Regardless, the exercise should prove worthwhile.

We'll say our hypothetical student took found a job making $1,038. But, because he was such an average student, he had $25,250 in debt upon graduating.7 The average debt for Minnesota students is actually higher8. Calculating an average interest rate is exceedingly tricky; there are a variety of different loans, with the rate on unsubsidized Stafford student loans coming down to 3.4% shortly, and private student loans carry a much higher rate. We'll use 7%, but this number may be too conservative.

CNN has a nice little calculator9 that requires the amount of debt as well as the interest rate; we're just missing the monthly payment. We're going to select an aggressive $412 a month, which is the effective bump in salary our average student obtained by graduating from college.

Based on these numbers, it will take six and a half years to pay off this debt. During this time frame, the student will be forced to live the same lifestyle he could have had with his high school job. Moreover, the high school student would have had the four plus years of college during which he was earning an income. At a minimum, it will take our average student ten years to surpass our high school graduate in terms of one's standard of living.

Yet most college graduates are not willing to make these aggressive payments, so let's run the numbers again based on a monthly payment of just $200. This time, it will take our student over nineteen years to pay off his loans. Compound interest is a powerful force and making minimum payments is a recipe for permanent indebtedness. If our student had reduced his payment by just $50 per month, it would take him over fifty-seven years to pay off his student loans. Students who take on one-hundred or even fifty thousand dollars in debt will find it virtually impossible to pay off their loans.

At some point then, college is no longer a bargain: it is an outright ripoff. But the tale gets grimmer still, due to a series of reforms enacted by the Obama administration, as well as that of the second president Bush. It is all but impossible to receive debt forgiveness on one's student loans. Commentator Vox Day utilized data from collegescholarships.org10 to summarize11 the all too typical process:

  1. The private SLM corporation [Sallie Mae] provides a student loan.

  2. The student defaults on the loan.

  3. The federal government pays the balance of the loan and its interest to SLM.

  4. The government sends the debt to a collection agency which adds a collection fee and a commission totaling more than 50 percent to the total. The agency is owned by SLM.

  5. The collection agency garnishes wages, income and even Social Security checks. The former student, now a debt-slave, will literally be paying until he dies.

This holds true, even for those unfortunate students who never obtained a degree. This is deeply troubling, as there is very little economic value for attending classes without graduating. Real reform is imperative, but it will not be forthcoming since the universities and the private loan companies receive the money irrespective of the performance of the student; the government, meanwhile, has made things worse for students, while making sure that schools and corporations never suffer for enrolling students who cannot graduate. Regrettably, then, students will have to fend for themselves.

Unfortunately, I am not capable of rendering an informed judgment as to whether or not someone should attend college. No doubt many of you are feeling pressure to enroll in a university and continue your education. For some of you, this is probably the right step to take. But for others, it would be a dreadful mistake. It would actually worsen your prospects by swamping you with debt. Before you make this decision, I encourage you to do all you can to determine the true costs of education. The benefits are well known, but the sometimes hidden costs are equally important.












Saturday, November 05, 2011

Sweet, sweet default

I recently read This Time Is Different: Eight Centuries of Financial Folly as part of my attempt to gain a better understanding of the ongoing economic crisis. It's a very fine book, with an impressive amount of data relating to the many calamities which have wrecked economies throughout history. There are many takeaways, but the one on which I'd like to focus is the frequency of sovereign default. It would be very easy to extract a libertarian lesson in sound money from the propensity of nations to default on their debts, but I wish to focus on another, albeit related, lesson from the book.

Sovereign default is not the end of the world. No doubt it causes great harm for those who were dependent on the state fulfilling its obligations, i.e. creditors and beneficiaries of government largesse. For America today, the former are mostly foreign governments, though most banks throughout the world are invested in American treasuries. The latter is made up of the recipients of social security and medicare payments, as well as retirees with government pensions, along with any company with its hands in the pockets of Uncle Sam, from military contractors to the large banks. If the United States defaulted, there would be significant and far-reaching consequences for a large number of disparate parties.

But this does not mean it's a bad idea. The alternative is to double down on an over-leveraged banking system in the hopes of spurring economic growth to get us out of this mess. There are a variety of problems with this approach, not the least of which is that with out present ratio of debt to GDP, growth is exceedingly unlikely. The authors of the aforementioned book note that 90% is the key ratio, beyond which default becomes all but certain. We passed that Rubicon some time ago.

Incidentally, default makes growth more likely, albeit after a painful period in which debt deleveraging can occur. Karl Denninger does an excellent job of explaining the details in his book, Leverage, but I can offer a short explanation here.

Under our system of fractional reserve banking, banks are only required to keep some portion of deposits on hand. The rest can be lent out. Credit is created when banks lend out these "excess reserves." This credit creation facilitates a boom, during which everyone appears to be making money hand over fist and the economy seems to be doing well. Yet this growth is largely illusory. When deposits dry up--usually due to a tightening of the money supply of the central bank--asset prices begin to fall. The over-leveraged banks, i.e. almost all of them, are in trouble, for leverage is a cruel mistress: it multiplies profits on the way up, and multiplies losses on the way down.

The various government bailouts were intended to shore up the accounts of the banks and stave off the deleveraging process. This has only served to postpone the process. Fortunately, here in the United States, the Tea Party and Occupy Wall Street movements make future bailouts less likely, unless the Federal Reserve surreptitiously gives money to various banks. On a related note, this is precisely why Ron Paul has focused on auditing the Federal Reserve, and why anyone who fails to see the necessity of such an audit--such as Herman Cain--merits no consideration as a presidential candidate by anyone who understands economics.

Although no one can be certain of the day nor hour, default is in our future. The sooner we embrace this solution, the sooner the bad debt can be cleared from the books and the sooner we can return to real economic growth--as opposed to the increase in GDP which is a direct result of taking on more debt and, therefore, does nothing to employ more Americans.

While Greece is contemplating whether to accept another "solution" which purporting restores solvency to a bankrupt country, the example set by Iceland is illustrative of the benefits of default:

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. The Washington-based fund expects Iceland’s economy to grow faster than the average for the euro area this year and next. It costs less to insure against an Icelandic sovereign default than it does, on average, to hedge against a credit event in Europe’s single currency bloc, debt derivatives show.

Since we have spent the last three years pretending to solve a problem by doubling down on our bad debt, 33 months is far too conservative for the deleveraging process. Yet this time period can only increase if we continue to delay the inevitable.