Government to the Rescue

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Published : January 20th, 2013
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It is entirely possible that in the months leading up to the so-called fiscal cliff, you spent time reading in-depth analysis of what going over the cliff was going to look like.

But if so, you didn't read it here.

That's because at no point in the months of media hand-wringing ahead of said cliff did we here at Casey Research believe we'd see any outcome other than the one that just came to pass.

Which is to say, at no point did we believe that the Republicrats and Demopublicans were going to let anything remotely looking like austerity prevail and so clip their ability to spend like the drunken frat boys they are.

While the details on the so-called compromise between the two ruling parties are available from a multitude of sources, I will sum the thing up by pointing out that the net result is roughly as follows:

  • Taxes are going to go up for about 75% of the nation's taxpayers, with the higher-net-worth categories especially hard hit. Of course, if you don't actually pay income taxes, this is of no concern to you.
  • What should be of great concern to everyone, but won't be, is that rather than actually reducing the deficits, let alone the debt, the legislation ensures that over the next ten years, the government's ongoing excesses will result in an increase in the debt load by at least $10 trillion – to a whopping total of $25 trillion. That's 150% of GDP, before taking into account unfunded liabilities.
  • Oh, and forget the bullet point just above, because the projections assume that interest rates remain at or around today's historic lows. When they begin to move up, as they must, the deficits and the debt will move higher, and explosively so.

Moving on to the next big hype fest, the nation's lap poodle media is now all atwitter with stories about the pending "big political fight" – over (yawn) once again raising the debt ceiling.

This time, yes, this time, the Republicrats will finally dig in their heels, just like Gandalf did when meeting the Balrog demon in Lord of the Rings, and, staff in hand, shout with firm intent, "YOU SHALL NOT PASS!"

Except, like Lord of the Rings, that scenario is pure fantasy. Despite the optics, when faced with a modest poking with a fatted pinky finger, the opposition to raising the debt ceiling will swoon and the running up of debt continue apace.

It's all part of the Continuum I wrote about a few weeks back.

Namely that the rapidly degrading Western democracies have now gone over the edge – not of a fiscal cliff but of a socialist Niagara Falls. That we are close to a free fall can be seen in the fact that despite ratcheting up federal government debt from $9.9 trillion to $16.4 trillion – a 65% rise – in a single four-year presidential term, the impact of the spending has been minimal.

(Click on image to enlarge)

"Hey, wait a second!" I can hear some of you saying. "Look at the pick-up in GDP growth in the third quarter of 2012" (the last reporting period).

Unfortunately, I must respond, according to the Bureau of Economic Analysis (BEA), a big chunk of that growth came from…

Real federal government consumption expenditures and gross investment increased 9.5 percent in the third quarter, in contrast to a decrease of 0.2 percent in the second. National defense increased 12.9 percent, in contrast to a decrease of 0.2 percent.

Priming the election pump? Hmm.

Meanwhile, what about a data point reflecting the health of what might be called the "real economy" and not the actions of the bloated, blood-sucking state?

For instance, how did the much-vaunted US export sector do in the third quarter? Again, according to the BEA…

Real exports of goods and services increased 1.9 percent in the third quarter, compared with an increase of 5.3 percent in the second.

Not exactly all ships at sea, eh?

In fact, ignoring the US government's share of GDP, now at 45.6%, the real economy is barely limping along.

As a writer, it is usually a good idea to keep things simple. To that end, we can move on from this topic of debt and deficits with a quick summing-up into five easy-to-digest points.

  1. The American people (and the citizenry of the other big, degraded democracies) have become adept at voting themselves sustenance from the public trough and will continue to do so. It's just human nature.
  1. This shift to socialism ensures that the country's massive deficits will continue and, for reasons I'll explain a bit further on, grow worse.
  1. Government debt, already unpayable, will only get more unpayable.
  1. Because the government is on the hook to deliver on #1 above, and because it produces little other than war and business-hampering regulations, it will fall back on tired old socialist policies that have failed in every instance in history.
  1. When the productive classes become so weighed down by said policies that the economy essentially becomes a government operation – and we are precariously close to that point – the remaining wealth of the nation will be dissipated and the house of cards will begin its collapse, with social chaos on its heels. At this point, the militarized US constabulary will pull on the leather gloves and get to work.

In my view, those five points serve as a preview of what's coming on the big screen for the debt and deficits.

Unfortunately, that scenario doesn't take into account a host of other endemic, immutable fiscal toxins that have already been injected into the anemic lifeblood of the economy. These "others" threaten to compound, exacerbate and eventually macerate what's left of the government's ability to function.

The Others

Continuing to keep things simple, I have pasted here a picture showing with great accuracy the mechanics of today's government-dominated economy.

When I refer to "the others," I refer to the spinning plates that don't get nearly as much attention in the faux reportage otherwise referred to as the mainstream media, but that pose problems of sufficient scale to bring the show to a close in a crescendo of breaking and crashing.

Let me share with you just a few examples of what I am talking about, starting with…

US Student Loans
Dude, seriously, you want me to pay that back?

Without even grabbing for your bifocals, you can see that, as bad as the credit card picture is in the US, the student loan picture is worse – and together we are talking on the order of $1.7 trillion in outstandings.

The current setup for student loans is untenable. That's because a significant share of the individuals who took out the loans didn't use them to purchase careers paying them near enough to pay the loans back. Worse, they can't just walk from their student loans – not when, for the vast majority of these loans, Big Daddy Sam is holding your paper. The law says you can't wipe your loan away with bankruptcy, and because Big Daddy has his mitts in every cookie jar and has access to data on every part of your life, you can't simply ignore him. He'll just keep on coming… putting liens on your stuff, garnishing wages and otherwise doing whatever it takes to get his money.

I have a hard-working young friend in her early twenties with a very modest income who owes on the order of $100,000 in student loans for a career she will never work in. I well recall from my own youth owing around $3,000 on a student loan and it taking years to scrape enough together to pay it off. I can't fathom the sort of pressure having a debt of $100,000 hanging over my head would cause, but I assume it would be considerable.

Ultimately, the ticking time bomb of student loan debt – of which about 25% is in some state of delinquency – has to be resolved either through repayment or default, and either the borrower or the lender has to pony up. As 80% of those loans are guaranteed by the US government, there's little question the shrinking population of US taxpayers will be called to the fore.

The Unfunded Liabilities of States
Whoops, our bad!

(Click on image to enlarge)

Woe is to the long-suffering states, the frontline of the statist campaign to run (and ultimately ruin) the country. It is the states who field an army of bureaucrats, police, firefighters, social workers and so forth to "service" the public before someday hanging up the tools for a long and much deserved retirement. And when they do, they can count on the sort of life-long, guaranteed pension that the privately employed have only heard about from grandparents.

As a consequence, the states have run up massive unfunded obligations, obligations that, according to State Budget Solutions, could run as high as $2.8 trillion. California's shortfall alone is closing in on $200 billion.

Not that you'd know it, because as with so many aspects of our Orwellian world, the government gets to play by different rules, in this case those having to do with accounting. This also from State Budget Solutions:

According to the study, states with the largest pension liabilities are California, Illinois, New Jersey, and Ohio. State governments use a special accounting method, known as GASB, which differs from that of the private sector. "Under GASB, government pension funds have not accurately portrayed the real value of the pension funds. If states were required to use private-sector accounting rules, like those used in the Novy-Marx & Rauh studies, the liabilities are much more dramatic," said Williams.

Once again, in the end someone is going to have to pay up. Look no further than the mirror to see who.

The Demographic Cliff
Where have all the children gone?

The chart is pretty self-explanatory, showing as it does the rather dramatic fall-off in the number of workers per retiree in the US. By 2030, it is expected that the ratio will reach just two workers per one Social Security beneficiary.

The essence of this problem is that the government won't be able to suck enough blood out of the two remaining workers to cover the cost for the third. And as far as the actual Social Security Trust Fund, at this point all that's actually in the fund is a ledger entry recording Treasury I.O.U.s… (and don't forget, they I.O. everyone else, too). The actual money is long gone, and it's not coming back.

At this point, using the most optimistic scenario, there is on the order of $20 trillion in unfunded Social Security liabilities, to which you can add another $40 trillion in the unfunded obligations of Medicare, the other big program affected by shifting demographics.

As it is impossible to tax the two remaining workers to the degree needed to cover these liabilities, the only options are (a) outright default – leaving one of the most vulnerable segments of society out in the cold, or (b) destroying the currency in which the obligations are denominated. As said vulnerable segment are especially active come election time, it doesn't take any particularly deep thought to guess which it's going to be.

Interest Rates
Whistling past the graveyard

As challenging as all of the above are to the Washington, DC plate spinners, this chart of long-term interest rates from Barry Ritholtz's Big Picture shows what may be the biggest challenge of all.

Three things worth noting:

  1. Long-term interest rates, despite the massive debt, truly are at historic lows. And by that I mean literally the lowest in the history of the United States.
  1. When rates turn around, up or down, the trends tend to be long in duration, as in decades.
  1. The mean for US interest rates is significantly higher than today's 2.50% rate. Thus, when rates do turn around, and it could begin any day, it would not surprise in the slightest if they doubled to 5% on their way to doubling again because of the structural damage to the government's ability to sustain itself.

The reason that this question of interest rates pretty much trumps all the other "others" is because it directly affects all the others – as well as the core problems of debt and deficits. When the tide of rates rise, all the other problems will swell as well.

According to Erskine Bowles, absent any significant change in direction, the net interest on the government's debt – currently at $220 billion per year – will breach the $1 trillion mark by 2020, just seven years from now.

Frankly, given the scale of the problems facing the plate spinners, I think he's being optimistic.

Getting to the point, the economy of the US and most of the other degrading democracies are both numerous and intractable. To be clear on the meaning of "intractable," it is unsolvable. There is no way out of this mess, at least not without either a lot of pain or a shift in the paradigm… or some combination thereof.

Welcome to the Company Store

To better understand the situation today, a brief history of "the company store" may prove useful.

Here in Argentina, for example, much of the country used to be divided into large land holdings – estancias. While there was a central government of sorts, these estancias were of a size and the owners of sufficient wealth and political influence that, for all intents and purposes, they operated as autonomous states.

By tradition, these estancias established company stores on their land that provided the workers and their families with the basics of life. If for no other reason than geography, but also because the estancia owners banned competitors from setting up on their property, everyone who worked for these isolated estancias had no choice but to spend their money down at the company store.

The workers were paid relatively well on many of these estancias, but the prices of everything sold at the stores were also relatively high, making it hard for the workers to accumulate any significant savings.

The coup de grâce came on payday when the company store would roll out overpriced booze in abundance, encouraging a proper drink-up. Naturally, by the end of the payday weekend, the workers were tapped dry, leaving them no choice but to return to work, scraping by till the next payday on what meager savings might have remained. Or, lacking savings, to fall back on credit from the company store. When payday rolled around again, the cycle would repeat, effectively making the workers indentured servants.

This is the case with the state-dominated economy today. Other than a small percentage of the population who have managed to build enough wealth to break the cycle through diversified investment and income sources, the vast majority of the population lives pretty much hand to mouth.

Of the money you earn, close to a majority is now returned to the state in the form of taxes of all description (payroll, property, sales, income, etc., ad infinitum). Then, because it's a rigged game, just like the company store, the money you do manage is steadily debased.

And while the situation is bad, it hasn't yet gotten desperate. When the government begins to run out of other people's money in earnest, it will lay claim to your tax-deferred savings plans (if you are fortunate enough to have one). Perhaps not by outright confiscation, but almost certainly by requiring that some large part of it – or all of it – be replaced with the same Treasury I.O.U.s that now serve as collateral for the Social Security system.

If there is a sunny side of the street to all of this, that street is being strolled down by government pensioners whose $800 billion in annual payouts now represents about five and a half percent of the national economy.

(Click on image to enlarge)

Now, I wish I could leave you with a ray of hope about where things are headed, or why they are sure to turn around in our lifetimes. But, regrettably, short of a truly epic crash that causes everyone to rethink the wisdom of taking the path to yet more socialism, I just don't see it.

And with that rather long lead-in, here's the guest essay by Lew Rockwell I mentioned at the onset.

The Triumph of Socialism

Mises Daily: Wednesday, November 11, 2009, by Llewellyn H. Rockwell Jr.

Do you think ideas don't matter, that what people believe about themselves and their world has no real consequence? If so, the following will not bug you in the slightest.

A new BBC poll finds that only 11 percent of people questioned around the world — and 29,000 people were asked their opinions — think that free-market capitalism is a good thing. The rest believe in more government regulation. Only a small percentage of the world's population believes that capitalism works well and that more regulation will reduce efficiency.

One-quarter of those asked said that capitalism is "fatally flawed." In France, 43% believe this. In Mexico, it is 38%. A majority believes that government should rob the rich to give money to poor countries. In only one country, Turkey, did a majority say that less government is better.

It gets even worse. While most Europeans and Americans think it was a good thing for the Soviet Union to disintegrate, people in India, Indonesia, Ukraine, Pakistan, Russia, and Egypt mostly think it was a bad thing. Yes, you read that right: millions freed from socialist slavery — bad thing.

That news must lift the heart of every would-be despot the world over. And it comes as something of a shock twenty years after the collapse of socialism in Russia and Eastern Europe revealed what this system had created: backward societies with citizens who lived short and miserable lives. Then there is the China case, a country rescued from bloody barbarism under communism and transformed into a modern and prosperous country by capitalism.

What can we learn? Far from not having learned anything, people have largely forgotten the experience and have developed a love for the ancient fairy tale that all things can be fixed through collectivism and central planning.

As to those who would despair at this poll, consider that it might have been much worse were it not for the efforts of a relative handful of intellectuals who have fought against socialist theory for more than a century. It might have been 99% in support of socialist tyranny. So there is no sense in saying that these intellectual efforts are wasted.

Ideas also have a life of their own. They can lie in wait for decades or centuries and then one day, the whole of history turns on a dime. Especially these days, no effort goes to waste. Publications and essays, or any form of education, is immortalized, ready for the taking by a desperate world.

As for the opinion poll, we have no idea just how intensely these views are held or even what they mean. What, for example, is capitalism? Do people even know? Michael Moore doesn't know, else he wouldn't be calling bailouts for elite, Fed-connected financial firms a form of capitalism. Many other people reduce the term capitalism to "the system of economics in the United States." It is no more complicated than that. This is despite the reality that the United States has a comprehensive planning apparatus in place that is directly responsible for all our current economic troubles.

Now, let's take this further. Among the many people around the world who do not like the US empire, many believe they don't like capitalism either. If the US economy drags the world down into recession, that is a prime example of capitalism's failure. Even more preposterous, if you didn't like George W. Bush, his ways, and his cronies, and Obama is something of a relief, then you don't like capitalism and you do like socialism.

Another point of view misunderstands the idea of capitalism itself. It is not about creating economic structures that benefit capital at the expense of labor or culture or religion. It is about a system that protects the rights of everyone and serves the common good. Capitalism is just the name that happened to be identified with this system. If you want to call freedom a banana, fine, what matters is not words but ideas.

I do know that none of these messed-up definitions of capitalism follow. You know this too. But for the world at large, serious ideological analytics are not the animating force of daily life. Many people attach themselves to vague slogans.

Further, as Rothbard has forcefully argued, free-market capitalism serves no more than a symbolic purpose for the Republican Party and for conservatives. Economic liberty is the utopia that they keep promising to bring us, pending the higher priority of blowing up foreign peoples, jailing political dissidents, crushing the left wing on campus, and routing the Democrats.

Once all of this is done, they say, then they will get to the instituting of a free-market economic system. Of course, that day never arrives, and it is not supposed to. Capitalism serves the Republicans the way Communism served Stalin: a symbolic distraction to keep you hoping, voting, and coughing up money.

All of which leaves true capitalism — a product of the voluntary society and the sum total of all the exchanges and cooperative acts of people all over the world — with few actual intellectual defenders. They are growing, but the educational work we need to do is daunting, and we are facing the most powerful forces in the world.

There is nothing new in this. In the history of the world, freedom is the exception, not the rule. It must be fought for anew in every generation. Its enemies are everywhere, but the leading enemy is ignorance. For this reason, the main weapon we have at our disposal is education.

Education includes explaining that socialism is an unworkable idea. There is nothing better than Ludwig von Mises's 1922 book Socialism, a comprehensive presentation of the fallacy of the socialist idea. Another essential work is the Black Book of Communism. Here we have a wake-up call that shows that the dream of socialism is actually a bloody nightmare.

Then there is the issue of the positive case for capitalism. One can do no better than Mises's own Human Action, which is not likely to ever be surpassed as a treatise on the free economy. True, it is not for everyone. And that's fine. There are many primers out there too.

The fashion for socialism and the opposition to capitalism should alarm every lover of freedom the world over. We have our jobs cut out for us, but with numbers this bad, it is not difficult to make a difference. Every blow you can land for free markets helps protect freedom from its enemies.

Llewellyn H. Rockwell, Jr. is chairman of the Ludwig von Mises Institute in Auburn, Alabama, editor of, and author of The Left, the Right, and the State. See Llewellyn H. Rockwell Jr.'s article archives.

Friday Funnies

Paraprosdokians are figures of speech in which the latter part of a sentence or phrase is surprising or unexpected and frequently humorous.

1. Where there's a will, I want to be in it.

2. The last thing I want to do is hurt you. But it's still on my list.

3. Since light travels faster than sound, some people appear bright until you hear them speak.

4. If I agreed with you, we'd both be wrong.

5. We never really grow up; we only learn how to act in public.

6. War does not determine who is right – only who is left.

7. Knowledge is knowing a tomato is a fruit.. Wisdom is not putting it in a fruit salad.

8. To steal ideas from one person is plagiarism. To steal from many is research.

9. I didn't say it was your fault, I said I was blaming you.

10. In filling out an application, where it says, "In case of emergency, notify:" I put "DOCTOR."

11. Women will never be equal to men until they can walk down the street with a bald head and a beer gut, and still think they are sexy.

12. You do not need a parachute to skydive. You only need a parachute to skydive twice.

13. I used to be indecisive. Now I'm not so sure...

14. To be sure of hitting the target, shoot first and call whatever you hit the target.

15. Going to church doesn't make you a Christian any more than standing in a garage makes you a car.

16. You're never too old to learn something stupid.

17. I'm supposed to respect my elders, but it's getting harder and harder for me to find one now.

Weekend Reads

Before signing off for the week, I want to share some articles that hit my inbox this week.

  • Death by Drone. Recently, a Freedom of Information Act query to learn what the process is for Americans to be executed by the government without trial was denied. You can read the judge's decision in the link here, but what's most worthwhile is that she was clearly uncomfortable about the Obama administration's obfuscation on the matter, warning against the dangers of too much power being consolidated in the hands of the Executive. Thanks to Ed Steer for sending this along.
  • Congressional Ethics Office About to Be Shut Down? Despite uncovering all manner of chicanery within the halls of Congress, or because of it, the Congressional Ethics Office is being choked of funds. Just another footnote for the compendium I presented in my article Justice before the holidays.
  • Totalitarian Town? A town in Arkansas has alerted citizens that machine-gun-toting police dressed up like soldiers may soon begin patrolling their streets, stopping people they see to demand ID and to question them on where they are going.

With that, I will sign off by thanking you for reading and for being a Casey Research subscriber. As a quick reminder, be sure to check out Casey's Club… if you're an active investor, it's an unbeatable opportunity.

Also, watch the mails for an announcement and invite to the next Harvest Celebration and Casey Research Investment Conference, March 14 – 19 here in sunny Cafayate, Argentina.

Until next time!

David Galland
Managing Director
Casey Research

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David Galland is managing director of Casey Research,LLC., and the executive director of the Explorers' League. His career in the resource and financial services industry dates back to a stint working underground at the Climax mine in Colorado, following college. Over the course of his career, he has worked in a publishing and/or editorial capacity with Gold Newsletter, the Aden Analysis, Wealth Magazine and Outstanding Investments, among others. He currently serves as managing editor for Doug Casey's International Speculator, Casey Energy Speculator, BIG GOLD, Casey Investment Alert, Casey Energy Confidential, What We Now Know and Explores League. In addition to his work in financial publishing, David has served as the conference director for the annual New Orleans Investment Conference (1979 to 1987), as a founding partner and director for the Blanchard Group of Mutual Funds, and was a founding partner and executive vice president of EverBank, one of the biggest recent success stories in online financial services.
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