Our Highway To Hell

Monty Perlerin / EconomicNoise.com

The Role of The Government in The Economic Crisis

At this point, everything the government is doing – and not just the US government but governments everywhere − is not only the wrong thing but exactly the opposite of the right thing. They’re passing more laws, raising taxes, creating more currency and incurring more debt. They should be doing the opposite. We’re currently still in the eye of the storm. Their actions guarantee that when we go back into the hurricane − the trailing edge of the hurricane − it’s going to be much worse and will last much longer than what we saw in 2007 to 2009. Doug Casey

How nice it would be to argue that Mr. Casey is wrong. No matter how much I wish he were, that is unlikely. We are in for very tough times ahead.

Recently I wrote about the insolvency of the federal government and its upcoming default. Mathematically, it is impossible for government to meet its obligations. There simply is not enough income or wealth for it to confiscate. It cannot satisfy the spending path it is on and the promises made.

Cutting spending is a political non-starter. As Mr. Casey argues it is politically impossible:

… just as in Greece, or most of the EU for that matter, most US government spending is on entitlements and welfare programs of various types − mainly Social Security, Medicare, Medicaid, so-called Income Security and pensions. Those things are politically and legally impossible to cut; in fact, they’ll grow. Most of the rest of spending is on so-called “defense,” which alone is 25 percent of the budget. As much as Americans love their military, that’s not going to be cut; in fact, the Republicans, idiotically and unbelievably, want to increase it. The other functions of government − the police, justice and regulatory agencies − are really just a tiny portion of government spending.

Impossible might be a bit strong. There will be talk of cutting spending, but it will be token in nature. No politician can afford to truly cut spending. Even Paul Ryan’s “draconian” budget had debt growing over the next ten years.

The Ebbing Away of Freedom

The Constitution, the document upon which this country was founded and upon which it rose to greatness, is for practical purposes nothing more than a historical artifact. It is now a quaint part of our history. Unfortunately, it provides little constraint on government these days. To the extent that it has remaining significance, it is usually considered an unnecessary barrier, impeding government from what it wants/needs to do, at least in the eyes of the ruling class. The Constitution is mostly ignored with claims that it is no longer relevant to our “complex” world. As Casey put it:

Any part of the Constitution that deals with maintaining liberty for the individual against the state − which is to say the important parts of the document, the parts that made it unique − are now meaningless. In fact, anyone who quotes the Constitution now runs the risk of being jailed, in the interest of “national security,” as a subversive, a dangerous anti-government radical or perhaps sent to an institution for psychiatric procedures.

What has not changed over time is human nature. The Founders and the document they presented recognized man’s insatiable desire for power and willingness to abuse it. George Kennan described it thusly:

The fact of the matter is that there is a little bit of the totalitarian buried somewhere, way down deep, in each and every one of us. It is only the cheerful light of confidence and security which keeps this evil genius down. . . . If confidence and security were to disappear, don’t think that he would not be waiting to take their place.

The State Unchained

Addressing this problem and preventing it from corrupting the political class was the primary focus of the Constitution. Now the Constitution is considered outdated because it does not allow for an all-powerful State. Arbitrary power is what John Adams feared:

Nip the shoots of arbitrary power in the bud, is the only maxim which can ever preserve the liberties of any people. When the people give way, their deceivers, betrayers, and destroyers press upon them so fast, that there is no resisting afterwards. The nature of the encroachment upon the American constitution is such, as to grow every day more and more encroaching. Like a cancer, it eats faster and faster every hour. The revenue creates pensioners, and the pensioners urge for more revenue. The people grow less steady, spirited, and virtuous, the seekers more numerous and more corrupt, and every day increases the circles of their dependents and expectants, until virtue, integrity, public spirit, simplicity, and frugality, become the objects of ridicule and scorn, and vanity, luxury, foppery, selfishness, meanness, and downright venality swallow up the whole society.

The deterioration in our governmental educational system has dumbed-down the electorate. Most have little sense of history or understand the issues of the day. The capacity of the average voter appears to be limited to voicing opinions on who will win American Idol or Dancing With The Stars.

Government has created dependency as a means to increase power and attract votes. There is little hope that the US can return to its Constitutional moorings through the normal political process. The number of dependents almost outnumbers the producers, ensuring that they vote for whomever promises them the greater gifts. Furthermore, dependents now believe they are entitled to live off government largess.

The reality is that no one lives off government. Government lives off the productive class and re-distributes a portion of what is confiscated to dependents in exchange for their votes. ”Vote for me and this is what I will give you” has become the slogan of both parties, although the Democrats have used it more effectively.

No Political Solution Possible

There is no political solution possible to the spending problem because any attempt to cut programs is equivalent to committing political suicide. The current spending path, nevertheless is unsustainable. So, how does it end? It ends as most failed countries end, in a dictatorship accompanied by martial law. The government will eventually run out of money. Markets will do the job politicians are unwilling to do. They will cut off government funding via a bond market rebellion and an economic collapse.

At this point chaos and civil unrest likely break out and a dictator arises to “rescue” the people from their difficult situation. The political class will be only too happy to accommodate, although there will be contention over which party and who ascends to the role of supreme leader.

Regarding the coming election, it does not matter much in the larger scheme of things. If Romney defeats Obama, there will not be much change. Perhaps the rate of decline slows temporarily, but not enough to avoid the ultimate outcome. Sadly, our political system has not offered the possibility of change for years. Just review the last five or so presidential elections. Does anyone believe that either party put up a truly qualified candidate?

Mr. Casey bluntly describes the situation:

… if you vote the bums out you are just going to get a new set of bums. What kind of people do you think want to be politicians? Primarily sociopaths. The elections are a ridiculous charade performed every four years. People imagine that if you vote for Tweedledum, that he will somehow be an improvement over Tweedledee. There is vanishing little difference between the left wing of the Republicrat Party and the right wing of the Demopublican Party; they’re really the same thing. They are both philosophical statists and collectivists.

Even if, by some miracle, a non-sociopath were elected and set about to change the course of the country, he would be removed from office either by voters or Congress. Neither will allow the drastic change necessary to alter the bankruptcy of government or the collapse of the economy. Politicians are like whores, willing to perform whatever trick the voter wants. Few politicians have either courage or integrity. Even for those who do, they will be overruled by their brethren.

So how does this end? Benjamin Franklin foresaw what would happen long, long ago:

… I think a general Government necessary for us, and there is no form of Government but what may be a blessing to the people if well administered, and believe farther that this is likely to be well administered for a course of years, and can only end in Despotism, as other forms have done before it, when the people shall become so corrupted as to need despotic Government, being incapable of any other.

I suspect the run of the US exceeded Mr. Franklin’s expectations. Once we dropped the notion of a Republic and began to act as a democracy, we were lost. John Adams commented on this outcome:

Democracy… while it lasts is more bloody than either [aristocracy or monarchy]. Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.

What Happens

Something, either a major war or a collapse of the economy, will occur that triggers chaos. The former likely ensures the latter, and the latter is likely the catalyst for dictatorship. When sovereign bankruptcy occurs, people will riot when they don’t receive their government checks. Stores will be looted and lives will be lost. It is this environment which will enable, in Hayek’s terms, the worst to reach the top.

Martial law and the suspension of whatever remains of Constitutional law, the Rule of Law and normal liberties will be ordered to “save” the country. The economy will cease to function. The military will be deployed to keep law and order and, likely, to deliver food and other necessities. At a minimum the military will be called out to protect whatever remains of our economic delivery system.

A sovereign bankruptcy means that there is no more money to pay out by government. Initially, the political class will try to keep things going by printing money. If so, matters will be made worse. The Depression will be preceded or accompanied by hyperinflation which will destroy the wealth and savings of the middle class, rather like Weimar Germany.

Presumably, these conditions may jolt enough people to their senses. But by this time, it will be too late because elections will have been suspended as a result of the “national emergency.”

That is the path we are on. The outcome of this next election may alter marginally the rate at which we decline, but not the ultimate destination. Sadly, I see nothing that will change our outcome.

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