Monday, January 16, 2012

Another plain-spoken lesson in economics

Yesterday I linked to an excellent economics tutorial from John Mauldin. Today there's another one that I highly recommend to your attention. This one's from the always trenchant Karl Denninger. Here's an extract.

The problems facing Greece, and the imminent default there, should be a further wake-up call. It's not. Yet Greece is not the issue with its relatively small stature in the world economy. Rather, it's everyone else. Italy, Spain, Portugal, Ireland (again) and more -- they're all next. And behind them is Britain and the United States, both of which have made ridiculous political promises and are sustaining them with federal spending they are unwilling -- or unable -- to collect in taxes.

This must, mathematically, end. It will end. And when it does you're going to hear much wailing and gnashing of teeth, along with the predictable complaints that we must do something "for the children" or that we must "correct the imbalances by taxing the rich!"

But there isn't enough money held by the rich to correct the imbalances by taxing them. The rich, for better or worse, simply don't have it. Nor does cutting defense spending solve the problem. Nor does eliminating "fraud, waste and abuse" resolve the issue, never mind the obvious question -- since all politicians are always against "fraud, waste and abuse" why is it still taking place and why haven't they stopped it?

The truth is much more sobering than anyone wishes to accept: We made political promises on a global scale that we cannot keep. We must accept this and each nation and her citizens must have a public and honest discussion and debate about the scope of government limited to that which the people of that government are willing to pay for with current tax revenues.

. . .

Those who argue they "paid into" some government program are simply wrong. You did not. You paid a tax. I know you think you did something else, but what you think you did and what really happened are two different things. It doesn't matter what you think happened; what matters is the truth.

The truth is that you paid taxes and they were immediately spent on other things -- things you demanded and voted for. The argument that these funds were "stolen" is specious -- you demanded the immediate spending and you got what you voted for. The money was diverted with your explicit consent and by your explicit demand and as a consequence what is to come is your responsibility.

I know you don't want to hear this, but it doesn't matter what you want to hear. What matters is what is, and this is the truth.

There's more at the link, including a sobering assessment of how unprepared most of us are to meet an imminent crisis. Worthwhile reading.

Mr. Denninger doesn't pull his punches, and isn't interested in being 'politically correct'. He tells it like it is. The only thing that can change the outcome he foresees is if the Federal Reserve prints money like there's no tomorrow. That would spark massive inflation, which would mean that we could pay off old debts in newly-inflated currency . . . but then our savings, pensions, etc. would be worthless and meaningless. What we'd win on the swings, we'd lose on the roundabouts, to use an old expression. As for his statement that "you" (meaning "all of us") demanded and voted for the current mess, he's speaking of the entire electorate, of course. We, the people of the USA, voted collectively to have our government do as it did. Those of us who voted against those things as individuals nevertheless form part of the collective electorate: and since that electorate voted for those things, we, along with the rest of that collective body, will have to bear the consequences.

Mr. Denninger is quite correct. We've got to get real, and "cut our coat according to our cloth" by adjusting our spending to match our income. If we don't, either our economy will collapse, or we'll inflate ourselves out of house and home. Neither alternative is appealing, or offers any sort of future we'd enjoy.



raven said...

If you can point out an example of a politician electing current pain instead of future disaster, who got his party and people to go along, I would love to hear it. I am aware of no such example. Therefore, we will continue on the present path until we either default or inflate.

Don said...

I second Raven. What's more worrisome is what happens after a hyper-inflation. Remember the Weimar Republic?