Free Markets, Free People


King Eddie’s Funeral (Updated)

Let me clarify something in the previous post.  Some commenters are saying that they don’t understand how government will allow private money to be created, and relinquish the death hold they want to keep on the economy.  The short answer is, I don’t think they’ll have a choice.  We’ll concentrate  on the US here, but keep in mind that the rest of the developed nations are in even worse shape than we are.

What allows the government–any government, but democratic ones in particular–to operate as they do is the consent of the people.  Even totalitarian governments have to worry about that, ultimately, although they can keep the lid on for a time, even for a couple of generations. But even totalitarian regimes often run into explosions which topple them, eventually.

But the loss of faith in a liberal, democratic government is the kiss of death for that government.  It doesn’t take a full scale revolution.  it just takes people to stop cooperating.  India was liberated through non-violent action.  So was South Africa.  nce the people say, “You’re done.” the government is done.

Right now our economic system is built on nothing more than the “full faith and credit” of the US Government.  And that will last only as long as we, the people, have faith in it.

Now this particular recession may not be the one that kills that faith.  It may be just one of the warning signs of a coming collapse.  But a crash is coming, and, I think sooner, rather than later.  We cannot continue indefinitely to fund the spending of the richest country on earth with the savings of one of the poorest.

Consider:

The total debt and future obligation of the US government now exceeds, by a substantial percentage, the total with of the country’s assets.  We have a mountain of debt and payment obligations that exceeds our ability to  meet, even if we were able to liquidate the entire country.

If we wish to retire those obligations we have essentially two alternatives:  We can repudiate them, or we can pay them off through hyperinflation, which, as a practical matter, amounts to the same thing.

For instance, let’s take social security and medicare.  We simply don’t have enough money to pay those obligations.  We can slash benefits, or eliminate cost of living increases, which is nothing more than  repudiating the debt.  We can raise the payroll tax to 30% or more, but that will slow economic growth so much that the increase in revenue will be more than offset by the increased unemployment  and slower GDP growth that would result, which would make it even more difficult to pay off other obligations, such as Treasury Bonds.  Or we can simply print the money, and pay off the paper obligation with money that has signifigantly less purchasing power than the face value of the obligation.

However we go about it, it amounts to a repudiation of all or part of our obliations, and reveals that the government is both faithless and, as investors take note of the repudiation and decide not to buy government paper any more, creditless as well.  What paper they have, they will attempt to unload on any idiot stupid enough to take them.

The dollar will collapse to the point that imported goods, even cheap, shoddily made Chinese ones, might as well be made of unobtainium.

The life savings of million upon millions of Americans will evaporate overnight.

There will be serious hardship, and massive unemployment.

That’s the kind of hardship I’m talking about.

So, how much trust will there be in a government who, after all that, comes back and says, “We’ve learned our lesson.  Trust us now.  It’ll all be different this time.” among a people who’ve watched the government repudiate all of the promises made over the last 70 years?

And how much more will this be true if there is a feasible, private alternative, consisting of hundreds, perhaps thousands of independent sources of money, and credit?  One whose reliability can be publicly judged every minute of every day, and which has no coercive power?

It wouldn’t take a revolution to force the government out of the money and economics business.  Or the retirement or health care business.  All it will take is a lack of trust. Who will want to do business with an entity that has utterly failed to deserve any trust?

The collapse itself will be the revolution.

UPDATE:  By the way, the government’s repudiation of its obligations has already begun, in regards to Social Security.  If you are in my age cohort or younger, you are not allowed to retire at age 65.  Your retirement age is now 72.  The government changed the deal.  For us, we have to wait an additional 7 years to begin collecting our benefits.  Those of us who do not die before age 72, that is.

That wasn’t the deal we had when we started our working lives.  The government unilaterally changed the terms of our Social Security compact.  They didn’t call it “repudiation” but, that’s certainly what it was.

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12 Responses to King Eddie’s Funeral (Updated)

  • OK, so what is the individual to do NOW to prepare for this? If you know the problem and the method, perhaps you can tell us the solution for the individual.

  • By Roubini’s numbers, all of the ‘bailouts’ and ‘stimulus’ combined still leaves the American banking industry 400-600 billion short. Effectively, we are already bankrupt. The market will reflect that as a reality or as a rumor, but the more the numbers are real the lower the market will go.

    You’re exactly correct, Dale, when the confidence of its people is exhausted, revolution will occur. The entitlements are already doomed to insolvency by deliberate government actions, and when the private banking system falls to nationalization, perhaps the revolution begins. Confidence in paper money is matched by confidence in the future, and both are measured by confidence in the market.

    There is no government in the world smart enough to dig itself out of a collapse in confidence. So, where’s the breaking point? 5,000 Dow? 2,000 Dow? Whenever the market realizes that simultaneously expanding liquidity to ‘cure’ a too large expansion in liquidity is lethal to value and that stimulating more consumption to ‘cure’ too much consumption is also lethal to value, your prediction comes true. Let’s hypothesize: The Dow hits 1,000, unemployment hits 15%, and gold hits $5,000 an ounce, as the Republican socialists fall over the Democratic socialists trying to get out the way of a new suit of tar and feathers. 

  • but wouldn’t the collapse also effect the private institutions capable of a thing?  If money becomes worthless, what will the new companies have to back the value of their currency?

  • Would an example like the liberty dollar be considered a private currency?  If so the government is already cracking down on such efforts.  Also just because the writing is on the wall as far as the need to address the debt, does not mean that the current collection of politicians will not do their darndest to pass the buck for a few more years.

    Could the current crisis survive 4 more years, sure…. in which case the likely hood of the current crop (in either party) addressing it is nil.  First we are more likely to see artificial price controls, (You will sell bread for $2.00 a loaf) and that chain of nightmares, to try to stem the inflation.  It will fall over for imports, but in a way that will temporarily help the US economy.   A GM car costing 1/10 what a honda costs is much more appealing even if it doesn’t last as long.

    It will be a scary scary right.  Of course about 1/5 of the way in they will implement stringent internet censorship (in the interest of fairness), and we will need to document this on incredibly durable rolls of toilet paper we find in our cells.

    GH

  • Does anybody know what the debt ratio / load of the United States was in 1783?

    While I subscribe in large part to the bleak predictions in the post, I also suggest that we don’t have to retire our massive debt overnight; “full faith and credit” can be sustained by an honest effort over many years to do it.  O’ course, I have NO faith that our politicians will make such an effort, but it COULD work.

    I also suggest that almost every country in the world is in the same boat.  Socialism (or its American equivalent, liberalism) is a drug that much of the world is hooked on.

  • Dale,

    You have succinctly put my thoughts into word.

    I’ve had the same feelings over the past few months.  How on earth are we to dig ourselves out of this mountain of unfunded debt?  We cannot tax, borrow or print our way out of it at this point.  Any of the three “solutions” would kill our economy.

    As Rick asked above,  what can we do as individuals and families?  And what comes after the crash?  I read articles about how the economy is going to crash, hyperinflation is coming, confiscatory taxes will be tried.  But then the articles all seem to stop at that point.  Is there a site that deals with what possibilities come after.  I kind of picture 300 million people standing around looking at each other and asking, “OK, now what do we do?”

  • If you have not done so already, I highly recommend ‘Empire of Debt’ By Bonner and Wiggin.

    “Empire of Debt reunites the team that conceived the international bestseller Financial Reckoning Day, and is the first in-depth look at how Americans abandoned their sound traditions of economic freedom, personal liberty, and fiscal restraint, favoring instead government control of the economy, unfettered deficit spending, gluttonous consumption, and fearless military adventurism, all of which have ravaged the business environment, devastated personal balance sheets, and led the global economy to the brink of its greatest financial crisis ever.”

  • There will be serious hardship, and massive unemployment.
    That’s the kind of hardship I’m talking about.

    If that’s the case, it’s going to degenerate into several small wars (or 1 or 2 big wars- maybe even an internal one) before the dawning of the 3rd age.  Because when we go belly up, I’m sure the rest of the world won’t be doing any better.  The conditions you describe are ripe for violence-  in fact, this:

    The dollar will collapse to the point that imported goods, even cheap, shoddily made Chinese ones, might as well be made of unobtainium

    Sounds very close to those stories I read in history class about Weimer-era Germans needing a wheelbarrow full of currency to get a lousy loaf of bread.

  • What can we do?  Well, what will it take for you to survive?  I’m hardly a survivalist, but it wouldn’t hurt to have some food, water and a gun to make sure you keep your food and water.  It’s not coincidence that guns and ammunition are selling like mad in an otherwise stagnant economy. 

    That $2 bread that costs $3 to produce – economics majors can tell you how much of that there will be to buy.   They’ll be glad to give you a rain check, but don’t hold your breath.  Plenty will be available on the black market, for barter or whatever will pass for money, like gold.  

    This country has everything it needs to support part of its population in what used to be known as poverty.  Who do you think is going to get the food?  Bureaucrats in DC or people living in farm states?  The DC bureaucrats, if they have enough minions willing to follow orders.  People in the farm states, if they resist and starve them out.  

    Trust is an easy thing to lose, and impossible to recover.   Some lessons just have to be learned through experience.      

  • Hmmm, well after all that we could welcome back the amish, cause we are going to need to live like them.

  • I don’t understand all this talk of “revolution.”  In what for would a “revolution” come?  This is a democracy.  The people could revolt through a complete wash-out of their elected officials at any time, yet they never do.  Going into the 2008 election cycle, Congress enjoyed a lovely 18% approval rating, yet more than 80% of them were re-elected.  Why?  Because the elctorate as a whole is stupid, and incapable of making calculated decisions as to their long-term best interests.  Gone are the hardy folks of our grandparents’ generation, replaced with a bunch of whiners who think it’s the government’s job to care for them – no matter how it’s done.  The only revolution that will happen in this country is a reversion to some form of autocracy. 

    The sourcing of this quote is highly contentious, but I think the quote itself stands nonetheless.  I can only conclude that we’re simply seeing it come to fruition at this point.

    A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been about 200 years.

    Alexander Fraser Tytler (1747–1813)

  • UPDATE: By the way, the government’s repudiation of its obligations has already begun, in regards to Social Security.  If you are in my age cohort or younger, you are not allowed to retire at age 65.  Your retirement age is now 72.  The government changed the deal.  For us, we have to wait an additional 7 years to begin collecting our benefits.  Those of us who do not die before age 72, that is.

    Actually I wish you were right. The max age for SSN is 67.  We need to extend it or face nothing at all.
    http://www.ssa.gov/retire2/agereduction.htm