Heads We Lose _ Tails We Lose

Posted on April 20, 2011

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Monty Pelerin, in his article It’s All Coming Apart published yesterday in American Thinker,  shares his views on our current debt crisis. If you have never read Pelerin, you are in for a treat. You may not like what he has to say; but you will love the way he says it. This article and the one Pelerin links below should be considered must reading.

After blowing away the smoke that the political elite use to obscure the gravity of the current economic situation, Pelerin tells us, in no uncertain terms, that America and many other countries are in a debt death spiral and there is no escape, in his opinion. i want to share with you  five considerations that Mr. Pelerin thinks should be of concern to every American. Then I will offer up some thoughts of my own.

1. An Incompetent President – The President is inexperienced and incompetent.  He is likely a fraud, as evidenced by his guarded and unknown past.  He is incapable of leadership, honesty, or management.  Virtually every one of his policy initiatives has been harmful to the economy and country.  His intentions are clear; the degree to which he will be able to drive us further down the Road to Serfdom is not.
2. An Incompetent Political Class – The political class attained power via Santa Claus economics, providing gifts to constituents in return for votes.  Both parties are guilty.  Politicians have conditioned themselves and their constituents to “free-lunch” governance.  Few know how to govern in any other fashion.  Most are indistinguishable from prostitutes — vote for me and I will do “that” for you.  Both parties want to preserve the welfare-warfare State, disagreeing merely on the means of doing so.

 

3. An Incorrect Paradigm – The Keynesian model of spend and spend has been good for politicians but disastrous for the economy.  Over time, it has encouraged loose credit, overspending, and living beyond our means.  The failures are obvious to all but Statists and so-called Keynesian economists.  The political class cannot stop “free lunches” without suffering severe political consequences.  Hence, the abuses will continue until resources are exhausted.  Like Rome of old, we will soon run out of bread and circuses.

 

4. An Unhappy Ending – Current economic problems cannot be mitigated or solved without incurring another Great Depression.  Whether it is preceded by a deflationary collapse or a hyperinflationary blow-off is moot.  The ending is inevitable and as more people understand this ending, they take more extreme steps to protect themselves — spending ratchets back, savings increases, and businesses refuse to engage in new investment or hiring.

 

5. A Dangerous Prelude to the Ending – Government is insolvent.  It would be bankrupt without Federal Reserve Quantitative Easing.  As a cornered, wounded animal will do anything to survive, so will Government.  Does that mean confiscatory tax rates, capital controls, IRA investments forced into Treasury Bonds, “excess profits” taxes, a national sales tax, etc., etc.?  It could mean any or all of these and more.  Government will not roll over.  It will do whatever it can to continue, regardless of how illegal, immoral, unethical, or harmful it may be for the country.
Please do follow the link in item two. It is an article from The Freeman, where the author argues very convincingly that the Republican plan (Ryan’s plan) and Obama’s plan have the same end goal in mind; to preserve the welfare – warfare state. The end of each plan is the same; only the means are different.
 
Okay. Now it is my turn. I’ve been looking in my crystal ball and I see two possible outcomes.  Well, what I actually see is one probable outcome and one improbable outcome. Let’s start with the improbable outcome.
 

Heads We Lose

In this scenario, the Tea Party conservatives in the House hold their ground and refuse to allow the debt limit to be raised.  ( Not Probable) The result would be that world markets would collapse, interest rates would shoot up and, hyperinflation would be the rule of the day. In other words, we would fall into utter chaos.  If the free market system were allowed to sort things out without any interference from government, the country could emerge from this chaos in maybe five years and we would have the remnants fo the America of our Founders to rebuild once more. However, the more likely result of not raising the debt limit and falling into chaos would be that the Takers would rise-up against the Givers and there would be tremendous civil unrest if not civil war.
 

Tails We Lose

Under this scenario,  The debt limit is raised every time we come up against it. Eventually S&P or Moody’s or both cut our AAA rating. Markets collapse, interest rates go through the roof and, we enter the world of hyperinflation. America becomes another third world country. Hyperinflation has happened many times to many countries and they somehow survive. Argentina and Brazil come to mind. I was in Brazil in 1985 when inflation was several hundred percent per year. It was amazing how people managed to survive. Wages became indexed on a weekly basis, if I recall right. People would take their pay and run around buying any thing that they could be later traded for something they needed. Brazil’s economy eventually stabilize. Today Brazil is booming. So, America could survive hyperinflation as well, right? Maybe. But it should be remembered that people in third world countries have a different mind-set than people who grew-up in America. My guess is that Americans would not respond well to hyperinflation conditions. I suspect that the Givers would rise up against the Takers and there would be terrible civil unrest and maybe even civil war.
 
Not a very pleasant outlook I know. But people need to prepare themselves. I suppose there is some finite chance that the coin lands on edge; but don’t bet your life on it.
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Posted in: Economic Outlook