Flying to the Revolution

01/25/2012 9:15 am EST

Focus: MARKETS

When you take a look at where the US Government is, and where it’s headed, you’re better off making money while it heads down the drain and then stay out of the way, writes Doug Casey of Casey Research.

Everyone knows that the US government is bankrupt, and has been for many years. But I thought it might be instructive to see what its current cash flow situation actually is. At least insofar as it’s possible to get a clear picture.

As you know, the so-called supercommittee recently tried to come up with a plan to cut the deficit by $1.5 trillion…and failed completely.

To anyone who understands the nature of the political process, the failure was, of course, as predictable as it was shameful. What’s even more shameful, though, is that the sought-after $1.5 trillion cut wasn’t meant to apply to the annual budget, but to the total budget of the next ten years—a fact that is rarely mentioned.

Now whenever the chattering classes talk about cuts, it’s always about cuts over the course of ten years. Which is a dodge, partly because most of the supposed cuts will be scheduled for the end of the period, but also because new programs, new emergencies, and hidden contingencies will creep in to offset any announced cuts. So the numbers below aren’t a worst case—they’re the rosiest possible scenario.

People have thought I was joking when, asked how bad the Greater Depression was going to be, I answered that it would be worse than even I thought it would be. But I haven’t been joking.

To sum up the situation, given its financial condition and the political forces working to worsen it, the US government is facing a completely impossible and irremediable situation. I’m going to try to illustrate that here.

But because I’m a perpetual optimist, not a gloom-and-doomer, I’m also going to give you solutions to the purely financial problems—albeit with some good news and some bad news. The good news is, there actually are solutions. The bad news is that there is zero chance that any of them will be put into effect.

The problems are 100% caused by the US government, not by bankers, brokers, or the real estate industry—although they have been complicit. Recall what government is: an organization with a monopoly of force within a certain geographical area. Its purpose is, ostensibly, to protect the inhabitants of its bailiwick from the initiation of force.

That implies three functions:

  • an army to protect against aggressors coming from outside of its borders
  • police to protect citizens from aggressors inside its borders
  • and a court system to allow citizens to adjudicate disputes without resorting to force.

Assuming you’re going to have a government, it’s important to limit it strictly, lest it get completely out of control—it’s got a monopoly of force, after all—and overwhelm the society it’s supposed to protect.

Here, I want you to distinguish government from society. They are not only two totally different things, but are potentially antithetical to each other. This is because the essence of government is force, not voluntary cooperation.

Everything that people think the government provides (beyond some forms of protection) is really provided by society or with resources the government has taken from society. It’s critical to understand this, or you won’t see the slippery slope the US is now sliding on.

Is there any chance that the US government can reform and go back to a sustainable basis at this point? I’d say no.

  • Its descent started in earnest with the Spanish-American War in 1898, when it acquired its first foreign possessions (Cuba, the Philippines, Puerto Rico, etc).
  • It accelerated with the advent of the income tax and the Federal Reserve in 1913.
  • It accelerated further with World War I, when the government took over the economy for 18 months.
  • The New Deal and World War II made the state into a permanent major feature in the average American’s life.
  • The Great Society made free food, housing, and medical care a feature.
  • The final elimination of any link of the dollar to gold in 1971 ensured ever-increasing levels of currency inflation.
  • The Cold War and a series of undeclared wars (Korea, Vietnam, Afghanistan, and Iraq) cemented the military in place as a permanent focus of the government.
  • And since 9/11, the curve has gone hyperbolic with the War on Terror.

It’s been said that war is the health of the state. We have lots more war on the way, and that will expand the state’s spending. But the Greater Depression will be an even bigger drain, and it will likely destroy the middle class as an unwelcome bonus.

In all that time, from 1898 to today, there have been no substantial retrenchments of the US government, and the situation is getting worse, on a hyperbolic curve. Trends in motion tend to stay in motion until a genuine crisis changes them, and this trend has been gaining momentum for over a century.

Let’s divide people into three classes—rich, poor, and middle class.

Continued…

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Rich people are going to be okay. They can bribe the politicians to change the laws, hire the lawyers to interpret the laws, the accountants to limit their liabilities, advisors to help them profit from distortions and travel agents to get them out of Dodge. They may get eaten later, but for the moment, don’t worry about them.

The poor don’t have much to lose, and the government is going to keep throwing benefits at them to keep them happy. That’s a shame because it cements them to the bottom as poor people—but that’s a topic for another day.

The real danger is to the middle class, and it’s a serious matter because the US is a middle-class society. These are people who try to produce more than they consume and save the difference in order to grow wealthier. That formula has worked well up to now—but almost everybody saves dollars.

What happens, however, if the dollars are destroyed? It means that most of what they saved disappears, and most of the middle class will disappear with it, at least for that generation. They’ll be very unhappy, and they’ll be up for some serious changes. I’ll come back to those later.

chart
Click to Enlarge

The Budget
Take a look at this pie chart of US government spending. It’s cut into ten slices, by function.

The government used to break down and report its spending according to agencies—Defense Department, so much; Department of Agriculture, this much; FTC, that much. They’ve de-emphasized that and now seem to prefer reporting by function, because most of the agencies do many things.

Actually, with thousands of agencies, departments, divisions, bureaus, units, and contractors, it’s impossible to figure out exactly who does what in the government. It’s so large, so irresponsible, and so unmanageable that the only solution is to abolish things wholesale. Bureaucracy naturally grows unless it’s pulled out by the roots; reform, or pruning it back, is doomed to failure.

My point is to make it very apparent that there really is no conventional solution to the US government’s financial crisis. It’s reached a stage where the government will have to start defaulting on some of its obligations. You decide which.

The only questions are political—the economics are quite clear. Nothing will be done, as the Super Committee showed. I believe they would have done something if they thought it possible and knew how.

So, the US government will go bankrupt. That’s not the end of the world. Lots of governments have gone bankrupt, some of them numerous times—like almost all of them here in South America, where I am at the moment.

In fact, there’s a temptation to look forward to it eagerly. After all, the state is the enemy of any decent human. One might hope that when they bankrupt themselves, maybe we will get to live in a libertarian paradise. But that’s not likely the way things will come down—rather, just the opposite.

Not all state bankruptcies are just temporary upsets. Most of the great revolutions in history have financial roots. Great revolutions are more than just unpleasant and inconvenient. They’re extremely dangerous.

The fact is that when a government collapses, especially when the government is providing all the things the US government does today, people want somebody to fix it—they want their goodies back. It’s well known that over 50% of the US population are net recipients of state largess.

And the degree of state support and involvement in the US is far, far greater than it was in France, Russia, or Germany. After a period of chaos, it’s always the people who are most political—who have the most rabid statist ideas—who get the public’s attention and rise to the top.

It seems highly likely that the US will get a savior, someone full of bravado, who assures the booboisie that he can straighten things out—if he is given sufficient power. Perhaps it will be an arrogant windbag like Gingrich, perhaps some general.

The government won’t wither away; it will reassert itself. I don’t see any way around it, actually. We are already moving into a police state (evidenced most recently by the Senate’s November 2 vote allowing the military to indefinitely incarcerate anyone they accuse of terrorism). But at least it’s a police state with a fairly high standard of living, one with Walmart (WMT), McDonalds (MCD), and SUVs—at least for the time being.

But rest assured that if the situation evolves the way I expect, the standard of living will drop steeply, financial markets are going to become chaotic, and the US will become a quite repressive place for some time—at least as long as the War on Terror lasts.

I will bet you money on this. In fact, I am betting money on it.

So what can you do about it? Well, actually, there is nothing you can do about it. At least as far as changing the course of history is concerned. The best you can do is to speculate intelligently on further, new distortions that will be cranked into the system, as well as others that are inevitably going to be liquidated.

Read more from Casey Research here…

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