Posted on 12/06/2010 8:31:32 PM PST by sourcery
“The trouble with socialism,” Margaret Thatcher once famously said, “is that sooner or later you run out of other peoples’ money. This observation is the key to understanding the wave of government bankruptcies that has already begun to break over us.
The state of California was a leading indicator in the U.S., so broke that it has started issuing IOUs to its suppliers in lieu of cash. The state governments of Illinois, New York and New Jersey are in straits almost as dire. Before I checked, I thought 39 of 50 states were running deficits, but according to this visualization of 2010 estimates, 46 states are now in deficit. A massive selloff of U.S. municipal and state bonds is getting underway as investors run for the exits.
From overseas, we hear endlessly of the threat of sovereign default in Portugal, Italy, Ireland, Greece and Spain – the so-called PIIGS countries. The financially stronger EU countries (by which I mean, basically, Germany) have organized bailouts designed to give bond investors confidence that the PIIGS merely have a temporary cash-flow problem, but the markets aren’t buying it; the rush to unload Irish paper wasn’t even slowed down by the loan to Ireland. Analysts are now wondering if Belgium might be next.
What’s actually happening here is that bond investors are catching wise about the largest political truth of the post-Cold-War era: government is bankrupt. It’s not just individual governments that are headed for financial collapse, but the entire model of ever-expanding statism that began with Otto von Bismarck’s Prussian state-pension system in the late 1800s.
This bankruptcy was inevitable from the moment governments got on the treadmill of buying their legitimacy with entitlement spending. As I observed in Some Iron Laws of Political Economics, in any democracy political demand for income transfers, entitlements and subsidies always rises faster than the economy can generate increased wealth to supply them from; this is backed up by a recent study showing that each additional dollar of tax revenue collected in the United States has produced $1.17 in additional government spending.
Thus, raising taxes never helps. All it does is increase the system’s run rate towards collapse, and increase government appetites for borrowing to cover the ever-widening gap between revenues and political commitments. This is why EU governments are trying to bail out their weaker members – what they fear most is that they’ll lose the ability to paper over that gap using the bond markets, at which point the entire edifice of Eurosocialism will irretrievably crash.
American conservatives who want to blame pet villains like the public-employee unions for the insolvency wave in the U.S. are missing the forest for the trees. Those unions are doing nothing but rational minimaxing within a system where the incentives are broken at a much deeper level. And it’s no coincidence that the same problems are becoming acute simultaneously nearly worldwide, because the underlying problem transcends all details of any individual democracy’s history or particular political arrangements.
Between 1880 and 1943, beginning with Bismarck and ending with Roosevelt’s New Deal, the modern West abandoned the classical-liberal model of a minimal, night-watchman state. But the redistributionist monster that replaced it was unsustainable, and it’s now running out of other peoples’ money. We are living in the beginning of its end.
UPDATE: From the day after I wrote this Europe Debt Fears Hit More Secure Countries. Mene, mene, tekel, upharsin!
bump
And the faster we can kill the monster, the better off will be.
what is the answer? how do we hold on to the money we have worked for?
The acronym for Other Peoples’ Money aptly illustrates the addictive and destructive downward spiral it induces.
I want my COLA in my federal retirement check. I have not had a raise in 2 years. I do not get SS but my check is impacted when the SS people do not get COLAs. The govt knows there is inflation but they refigured the computation so they could say there is no inflation and thereby deny us a COLA. Why should I bite the bullet when the govt uses that money to buy the votes of welfare recipients, illegal aliens, Wall Street bankers, one half the population who do not pay taxes when the govt taxes me on my pitiful CDs. Merry Christmas to everyone as we buy three dollar a gallon gas and Christmas dinner costs 18 percent more this year, and the Prez wants to raise my heating bill with cap n trade.
The US is bankrupt. It cannot repay its debts. When that becomes clear, and the public moves from denial to anger, they will seek any justification or excuse to disavow the debt. Such will not be hard to find:
Most Federal spending since the 1930s has been Unconstitutional. Progressive (non-uniform) tax rates are Unconstitutional. Fiat money is Unconstitutional—the Constitution forbids anything other than gold and silver coins being used as “Tender in Payment of Debt.”
So the US could simply revert to the Gold standard, issue a new gold-backed currency, repay its bond holders using the old currency (which the government disavowed as redeemable for gold or anything else back in 1972,) and inform any who object to that it’s their own fault for lending money to an illegitimate government borrowing and spending in violation of its own Constitution, using a currency prohibited as being used as legal tender by that same Constitution.
It won’t be long before this end-game becomes obvious to everyone. It’s the only way out. And it doesn’t even matter whether the rationale for disavowing the debt is valid. People believe what they want and need to believe, and will seize on whatever rationalizations they can find to justify what they want to do. When that happens, the bond market will stop lending any funds whatsoever to the US government, and progressive socialism will die.
Government here thinks your money is already their money. They just tell you how much of their money you get to keep. You are a wallet to them.
Our only path to freedom is if the US dollar collapses. Without the power of the dollar, the government will vanish into irrelevancy.
But it’s going to be a terrible time getting there.
Suppliers should be sending CA backorder invoices until
their accounts are current in real money. Sending
monopoly money doesn’t cut it. Sitting on an IOU
at the rate the dollar is depreciating is insane.
we are invested in gold. will that be safe? wew also have money saved... will that be safe? if not, what is left?
Nothing is safe when Rome falls, and the barbarians have broken through the gates.
How very true. Spending another person’s money is always much easier, much cheaper, and MUCH faster.
In my opinion, the flat tax is the answer
Writing this spot down.
Give everyone a personal exemption of say $5,000, so a family of four would pay nothing on the first $20,000 of income, then Tax the rest. Equal Protection under the law including the Tax Code.
All we need is the magic number, 10%, 15% or?
Add a part time Congress and I'm in heaven.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.