U.S. going the way of Soviet Union (in more ways than one)

An article I wrote for Amateur Economists:

First, Fannie Mae and Freddie Mac were seized—Communist style—by the federal government. Then Lehman Brothers—which was worth $45 billion as recently as November—announced plans to file for bankruptcy. And now AIG, formerly one of the largest companies in the world, has been taken over by the Federal Reserve.

In 2000, American International Group, an insurance giant, was worth $250 billion. As late as August of 2008, the market set the battered company’s value at $80.4 billion. But following heavy losses on “Black Monday” (September 15, 2008) and the following day, AIG’s market cap now stands at just $10 billion—down over 94% for the year.

What Austrian Economists Knew All Along

These losses may be unprecedented, but they’re not unpredicted. Theorists from the Austrian school of economics have been prognosticating the implosion of the fiat-money-fueled financial system for decades. And according to Cato Adjunct Scholar Dr. Robert Higgs, we haven’t seen anything yet.

Higgs, who’s also a Senior Fellow at the Independent Institute and an Adjunct Scholar at the Ludwig von Mises Institute, predicts that many more financial dominoes will fall, with the end game being the collapse of Social Security and Medicare. “The question is not whether they will fail, but when,” Higgs says, “and then how the government that can no longer sustain them in their previous Ponzi-scheme form will alter them to salvage what little can be salvaged with minimal damage to the government itself.”

Higgs compares what he sees as the impending collapse of the U.S. financial system to what happened to the Soviet Union. And he points out that Keynesian economists—such as textbook king Paul Samuelson—didn’t see the Russian collapse coming, just like they didn’t see the collapse of Fannie Mae and Freddie Mac. Austrian theorists, however, did.

Read the rest.