Thursday, April 23, 2009

Making sense of the mess we’re in (with help from Porter Stansberry)

Watching the government rack up debts that will be impossible to repay while narrowing the tax base (at least 50% of Americans pay zero federal income tax) at the same time is very scary. It seems more and more certain the deficit will spiral out of control. Not only has the government gone mad with spending and corruption, but it also expects about 10% of the population to pay for essentially all the costs. The math simply doesn't add up: 10% of the population can't (and won't) pay for all of the costs of a socialist federal government.

And, by the way, before you respond with the typical Democrat vs. Republican nonsense, this problem has nothing to do with traditional politics. Both parties have grown the size and responsibilities of government. Both parties have added to the national debt. And both parties support the narrowing of the tax base – because that's what makes good political sense in an unlimited democracy. Promise the voters they can live at the expense of their neighbors – and the next five generations.

Unfortunately, we know from history this kind of political system can't last for long – for lots of reasons. One important reason: The rich will leave. Or they will stop working. They will hide their incomes or only invest in tax-protected vehicles. And we know the political response will be tougher laws on emigration, taxation, more money printing, and eventually, capital controls that make it impossible to protect you from massive currency devaluation. That's the script. We've watched the same things happen dozens of times around the world following World War II and the introduction of a global paper currency standard, which allowed governments to run huge deficits and finance their activities through inflation and devaluation. We just never thought we'd see it happen here.

Today, the idea of leaving America in search of freedom and financial security seems like absolute madness. But it won't for long. And by the time most people wake up to the very real threats to their standard of living, it will be too late. Again, before you respond with some crazed invective about how this isn't OBAMA's fault, blah, blah, blah – save yourself the trouble. The trends I'm talking about are cultural and fiscal, not ideological. Read the original Communist Manifesto. It's nearly identical to today's government policies. Any politician who tries to oppose the landslide of modern entitlements is immediately labeled a kook and is unelectable.

Whether you think we ought to have free health care and drugs for retirees, more military spending than the rest of the world combined, a bankrupt retirement scheme based on government debt, government guarantees for the banks, etc. doesn't matter to me. I'm not interested in pie-in-the-sky ideas about how the world should work. I write about how the world does work. And I can tell you this with 100% accuracy: You cannot support the world's reserve currency when you are the world's largest debtor, when you plan to finance annual deficits exceeding $2 trillion with progressive income taxes and money printing.

Our economy is a charade. And when it falls apart, the consequences will be devastating.

1 comment:

lgstarr said...

Yes...Atlas will shrug ("the rich will leave or they will stop working")!