Mises Wire

Reaping What You Sow: The American Regime in Chaos

The word “chaos” has been the buzzword this week in Washington, largely directed toward Rep. Matt Gaetz’s successful coup against former Speaker of the House Kevin McCarthy and the resulting void in Republican leadership. In an era where most outcomes in Washington are predictable, best illustrated by yet another kick-the-can-down-the-road continuing resolution on spending passed the preceding weekend, the first successful use of a motion to vacate the speakership in American history greatly shocked the system.

In hindsight, it should not have been. For more than a decade, there has been a constant tension between Republican voters and the priorities of its leadership. McCarthy similarly saw his previous two Republican predecessors resign from their positions after it was clear they lost the support of their conferences. Even Donald Trump, who maintains a strong hold on the Republican electorate, oversaw a government culpable for most of Red America’s frustrations with Washington: runaway spending, the devastation of covid tyranny, systemic corruption, and general impotency from the federal government in acting on conservative concerns from border security to the administrative state and the progressive capture of all levels of education.

Ironically, it was The CARES Act signed by Trump that provided $400 million in funding to help “fortify” the 2020 election.

In contrast, the Democratic Party has been the dominant federal force in achieving major policy wins. Obamacare was passed and then found to be unmovable. Enormous subsidies have been created to enrich loyal areas of support, including green energy sectors, Big Pharma companies, teachers’ unions, and a rainbow of various “minority empowerment” initiatives around the country. Even the military-industrial complex, once a reliable source of support for the GOP, has become a patron class of the American Left. A recent analysis of political donations from major sectors of the American economy illustrates the degree to which the most powerful interests in the United States view the Democratic Party as a better bet to forward their self-interests.

For those familiar with Murray Rothbard’s analysis of the Progressive Era, this would not be a surprise. As he illustrates, the success of progressive ideology resulted in the rise of cartelized trusts that benefited from the protection and support of state privileges. Protections on trade emboldened attempts to monopolize industries like sugar. The push for central banking was driven by large financial interests. The progressive capture of both American political parties led Rothbard to suggest that late nineteenth and early twentieth-century politics could best be understood as a clash between rival oligarch factions led by the Morgans and Rockefellers.

Yet, given the massive institutional advantages and relative unity enjoyed by the political left, the Democratic Party finds itself engulfed in chaos of its own, largely resulting from the consequences of its own political victories.

Violent crime is on the rise in deep-blue cities, highlighted this past week by the brutal killing of two left-wing activists in Philadelphia and New York who advocated for “criminal justice” reform that resulted in more criminals with violent records being released on the streets. In response, progressive advocacy groups have sought to further undermine private reactions to this loss of public safety, attacking attempts at private security solutions under their familiar complaints of “racism.”

Immigration, counted on as a powerful tool to ensure future political dominance for the Democratic Party, has also become a festering issue for Democrat politicians. As Republican state leaders responded to historic waves of border crossings with relocation programs to progressive “sanctuary cities,” areas like Chicago and New York are facing severe strains of public resources and growing hostility from residents. Meanwhile, left-wing cultural crusades have increasingly alienated nonwhite communities, resulting in situations like a Muslim-majority Michigan city council banning the transgender pride flag from government buildings.

In a remarkable pivot this week, the Biden administration this week expedited the construction of border walls in Texas, but the greatest threat to the regime’s stability, of course, is the economic system that has enriched the progressive political class at the expense of the productive sectors of the economy. The failure of the fiscally conservative Tea Party movement to capture enough political will to alter the trajectory of Washington spending has made a fiscal crisis inevitable, and that moment is quickly approaching. America’s debt clock currently rests at north of $33 trillion dollars and is due to pass the $34 trillion mark by the end of the month without factoring in the additional future costs of unfunded liabilities.

The greatest short-term threat to the regime’s stability is a threat few in Washington have yet to notice, the consequences of the Federal Reserve’s pivot away from its long role as a dutiful enabler of the Fed’s fiscal hedonism. As the recklessness of DC’s economic response to covid created an inflation shock even the carefully trained government statisticians couldn’t mask, the Fed has been forced to push interest rates well beyond its most aggressive projections. The true impacts of the hikes are just now starting to bear fruit. As the interest rates rise and rates for new debt insurances increase, the value of older bonds is being devastated.

This week US bond markets are hitting historic losses of over 40 percent. Total losses on the value of bonds are estimated to stand at over $1.6 trillion and growing. Similar dynamics fueled the collapse of Silicon Valley Bank this March and threatened more banks in the future. Moody’s recently downgraded 10 regional banks in August, with more expected.

The meltdown of US bonds threatens systemic insecurity in the financial system, threatening the balance sheets of insurance companies, pensions, and other nonbank institutions that sought security in the form of US bonds. The end of the era of low interest rates means that assumptions that guided the investment strategies of most of the world’s largest financial institutions were made with bad information. The size of the systemic risks to the system is currently unknowable, but the policy response to the great recession has sowed the seeds for the next financial crisis to be far larger.

Despite these seismic shocks happening in financial markets, the political class seems characteristically clueless. A few weeks ago, a Republican presidential debate featured no mention of the growing credit crisis. The Federal Reserve was not mentioned until the last twenty minutes and only superficially touched on by Vivek Ramaswamy and Ron DeSantis.

It would, however, be a mistake for Americans to confuse the cracks in the stability of the regime as a catalyst for its retreat. Weak regimes are particularly dangerous. Just this week, it was released that the FBI had made explicit what was long implicit, now categorizing supporters of Donald Trump as a unique category for potential “extremism.”

The modern regime successfully used the cover of the War on Terror to arm itself with powerful tools and weaponize nominally private client actors. As its own policy victories have planted the seeds of social unrest, it should be expected that it will unveil new tools of harsh power. Already, the governments of Canada, the United Kingdom, and Europe have escalated attacks on alternative media platforms that give average citizens the ability to out their crimes.

The political class may be more concerned about delayed Ukraine funding than the financial crisis brewing at home, but the regime is prepared to do what it does best: violently preserve itself at the expense of everyone else.

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