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Anticipating the Devolution of Big Government

Expect destructive feedback loops
Monday, October 29, 2012, 6:44 PM

With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we asked contributing editor Charles Hugh Smith to revisit his earlier work on how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability. In this updated installment, we will examine six critical dynamics that will lead to the devolution of Peak Government.

Massive Borrowing

In a misguided attempt to maintain an unsustainable Status Quo, the Federal government is borrowing unprecedented amounts of money that then must be serviced.  And the Federal Reserve is expanding its balance sheet by trillions of dollars (“printing money”) and intervening in stock, bond, and other markets for the purposes of managing perception (“the recovery is here!”)

These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.

Guarantees and subsidies both incentivize what is known as moral hazard: the separation of risk from consequence.  This can be summarized very simply.  People who are not exposed to risk act completely differently than those who are exposed to risk.  When risk has been transferred to the taxpayers by guarantees, give-aways, and subsidies, then speculation and mal-investment are incentivized.  If the bet pays off, I get to keep the gain, but if it loses, then I personally lose nothing, as the loss is transferred to the taxpayers.

Institutionalized Mal-Investment

The net result of these policies – borrowing immense sums to prop up an unsustainable Status Quo and institutionalizing moral hazard – leads to misallocation of scarce capital on a grand scale.  In effect, the money borrowed by the federal government and electronically printed by the Federal Reserve is mal-invested, because those receiving the funding are personally not at risk and face no consequence if the money is squandered on speculation or unproductive programs. Once moral hazard has been institutionalized, it becomes a positive feedback loop.  Since everyone in the system faces little personal consequence from mal-investment, the institution loses the ability to police itself.

Even worse, concentrations of private wealth readily influence public institutions via lobbying and political contributions, exacerbating moral hazard and mal-investment of the publicly borrowed money.

Erosion of Trust in Government

Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies.  This “perception management” is driven by political expediency, as public outrage at failed policies and unproductive spending would eventually lead to a political price being paid by the leadership.  So failed policies are declared great successes, negative data is massaged into positive data, and unflattering frauds involving public funds are buried or transformed into pseudo-realities.

This institutionalization of mal-investing borrowed funds and the politically expedient falsification of fact to manage perceptions have a destabilizing consequence: The public loses faith in public institutions.

Diminishing Returns on Public Debt

Massive borrowing also has a consequence.  Interest on the immense sums being borrowed squeezes out other government spending.

This triggers two self-reinforcing feedbacks.  Public spending that is not rewarding moral hazard is cut, as those in charge protect their perquisites, and taxes on what’s left of the productive economy increase, reducing the private investment that is the bedrock of capitalist growth and innovation.

This institutionalized mal-investment leads to diminishing return.  Where each dollar of additional public debt generated nearly a dollar of additional GDP in the early 1960s, now borrowing a dollar generates negative growth, as the cost of servicing the debt exceeds the meager yield.  Thus the Federal government borrowed and spent a staggering $6 trillion in a mere four years (2008-2011), while the GDP has yet to return to 2007 levels when measured in real (inflation-adjusted) dollars.

All these forces reinforce each other in a death spiral.  As trillions more are borrowed, interest payments crowd out spending, causing the Central State to borrow even more, which generates even more interest costs, and so on.  As moral hazard infects the entire government and its numerous private contractors and beneficiaries, there are few constraints on rising public debt and mal-investment of public funds.  As trust in institutions that increasingly depend on perception management rather than real solutions declines, public faith in government deteriorates further.

The Hidden Tax of Inflation and the Institutionalization of Falsification

The government has one trick to create the illusion that it is “keeping its promises.”  It prints money to meet its obligations, depreciating the nation’s currency by expanding the money supply.  Creating money out of thin air does not create wealth, productive assets, or prosperity.  What it does is lower the purchasing power of money, which we call inflation.

Inflation robs every holder of the currency and is effectively a form of government-sanctioned theft, or if you prefer, a hidden tax on productivity, as productive people and enterprises are taxed to support crony-capitalist, unproductive mal-investments and the rising interest on public debt. In effect, inflation is a way of transferring wealth from the productive to the unproductive, which then leaves the productive with less capital to invest in innovation. This starves the economy of capital while robbing purchasing power of every citizen, establishing a positive feedback loop of lower income, lower capital formation, and lower productivity.

Since the government has obligated itself to adjust Social Security payments to inflation, the culture of understating inflation (i.e., falsifying data) has been institutionalized, for the Central State has the impossible dual mandate of increasing inflation so that it can meet its obligations with cheaper money while keeping the inflation-indexed cost-of-living adjustments low, lest program costs balloon out of control.

A “modest” rate of 3% inflation will, in a decade’s time, reduce the purchasing power of stagnating paychecks by a third, while setting the “official” rate of inflation at 2% or less will inexorably reduce the purchasing power of Social Security payments.

If the rate of inflation was to rise at a rate similar to that of the late 1970s, i.e., 10% to 12% per year, while the “official” rate was held to half the real rate, all those whose incomes did not rise by 10% a year would be impoverished as the purchasing power of their incomes evaporated. Meanwhile, even as its policies impoverish most of its citizens, the Central State would assure everyone that it was meeting all of its obligations as promised. This is how trust in government is not just eroded but ultimately destroyed.

Self-Reinforcing Feedback Loops of Self-Interest

Government at all levels responds to shrinking tax revenues from a declining economy and budgets squeezed by higher interest payments by seeking additional revenues by whatever means are at hand. Tax rates are raised, junk fees are imposed, fees for minor infractions are jacked up, and deductions and exclusions are eliminated.

The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling. 

Unfortunately, there is a great divide between those who work (or worked) for the government and those who work in the private sector.  Those in government service understandably view the promises made to them in good times, eras that we now understand were brief speculative bubbles, as sacrosanct. 

The promises were based on the abnormally high returns earned by pension funds in the brief windows of speculative frenzy, and even supposedly conservative pension funds based their projections on annual yields of 6% to 8%.  As the Federal Reserve has attempted to reignite borrowing by lowering interest rates to near-zero, low-risk yields have fallen to 3%, less than half the expected returns.

As a result, there is a massive and sustained shortfall of public-employee pension funding, a shortfall that must be paid out of general tax revenues at a time when those revenues are declining as employment and business activity stagnate. 

The net result in many communities is that schools and other local services are falling apart as budgets are slashed to meet skyrocketing pension obligations.  From the point of view of parents, the pension promises that government employees hold as sacrosanct were unrealistic, and what should be sacrosanct (but is not) is the education of their children.

Those of us in the private workforce with spouses, relatives, and friends in government service understand the frustration of those who work for government, but should the self-interest of the few dominate the public budget and chart the course for the many?

The key difference is that the government holds the power of coercion and the citizens do not. Thus those in government who seek to serve the interests of their unions, colleagues, departments, and agencies can impose fees and taxes on all citizens to fund their own perquisites and power.

From the point of view of those inside government, sharply rising parking tickets, higher property taxes, and so on are small prices to pay for essential services. But as citizens observe government services degrading even as fees and taxes increase, they see little value being added, even as self-service and moral hazard remain in institutionalized abundance.

Two destructive feedback loops are generated by this divide: Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public.  And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.

In Part II: Understanding the Economic Impact of Peak Government, we explore how these self-reinforcing feedbacks lead to the devolution and eventual collapse of government institutions. In particular, we analyze what the likely economic fallout will be, as there is simply not enough purchasing power to distribute between those in power and the needs of the general populace.

Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

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24 Comments

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 263
Peak Empire

It’s all the gub’rnment’s fault. Because, since the public and private sector have now merged into one central state, it’s the gub’rnment’s fault. It’s not the fault of the increasingly unregulated private sector that took over the people’s gub’rnment and money supply. No, it’s the gub’rment’s fault.

By contrast, the private sector operating in the free market is efficient at allocating capital, and if we just let it do what it needs to do in response to the incentives provided by the supply / demand chart, then the problems will sort themselves out! Right?

This attempt to blame everything on the gub’rnment seems to be missing the obvious point that everyone is in debt, both the public and private sector. This death by money printing is the same pattern that’s repeated itself thousands of times throughout history whenever private banks get ahold of the people’s money supply and turn it into a privately owned, debt-based fiat currency. There’s really nothing new or surprising about this. It’s an exponential system that requires perpetual growth, in a real world that’s actually declining.

So what else would one expect? Of course the system’s going to drown in debt! How else could it end? People actually believe that simply cutting some government spending is going to solve the problem? They actually believe that doing this will provide an incentive for “private investment” to pick up the slack and create real wealth?

The difference between today’s financial system and the thousands of previous failed privately owned currencies is that the majority of the people haven’t been through a monetary collapse (the US could historically grow its way out of the debt monster for the last 100 years due to continually increasing resource extraction), so they by and large remain duped into holding their wealth inside that system – because they just don’t understand how it works, and they trust authority. Otherwise, it would have collapsed long ago. It’s all a con job.

Governments, both national and local, have been expanding for decades

As I’ve explained here before, if one uses the same Shadowstats statistics that the libertarians use to show how inflation is grossly understated, then on a per capita, inflation-adjusted basis, the US government has actually decreased in size around 30% since 1970. Per capita US government spending is near the lowest in the industrialized world. Of course, as a percent of GDP, US government spending has gone up since 2008 in a desperate attempt to keep the ponzi scheme going after the private sector almost totally collapsed.

private investment that is the bedrock of capitalist growth and innovation.

No. Growth comes from one thing and one thing only: burning dead things that used to be alive. Always has, and most likely always will, since we seem unwilling to embrace alternative energy. About 97% of global energy supply comes from burning complex carbon molecules created by plants from sunlight. With regards to innovation, all it does is increase the efficiency by which that vegetation is burned (but we are now basically at the thermodynamic limits for that efficiency). Innovation also does fun things with Information Technology – which I’d argue doesn’t contribute to wealth beyond a certain point that we’ve already passed. I think the internet now does everything we'd ever genuinely need IT to do.

It’s not about “Peak Gub’rnment”. It’s about “Peak Empire”. That empire has sustained and grown itself through imposing its worthless dollars throughout the whole world for the last 40 years using military might to fuel a river of vegetation resources running back into that empire -- 13% of global oil extraction goes to filling the river of the US oil trade deficit. Without that worthless money printing that trade deficit would be no more, and then Americans would have to contend with much higher energy prices. Then we’d see the dreaded deflationary collapse (or rather, hyperinflationary), unemployment would shoot up over 50% and we would see a bloody revolution. More like we will see a bloody revolution.

Then, as a way to both 1) alleviate unemployment, and 2) provide domestic energy, that wondrous “private investment”, or government investment, either / or will do, will turn to the remaining coal and gas reserves to use up the last bits of wealth (vegetation) the US has left. This will provide some real job opportunities for a while because the dropping EROEI will require ever more labour to get the energy out.

Then, if we don’t develop alternative energy using that remaining coal and gas, we will die.

Jbarney's picture
Jbarney
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Posts: 90
Don't Blame The Workers

This is a good article, although I disagree with the idea near the end of it that public employees seem to put their own interests ahead of those who receive services.  The reality mentioned here, of diminishing tax returns and unfunded pension obligations, is scary, but public employees can't take all of the blame for this situation.  Teachers, policemen, city employees, members of the military....they all engage in labor which is necessary in a complex society.  Sure money is tight but those workers, in most cases, are performing valuable services for everyone else.  The article does reinforce the thinking we should all be preparing for a time when the government will not be providing as much in the past.

treemagnet's picture
treemagnet
Status: Gold Member (Offline)
Joined: Feb 13 2011
Posts: 344
Do blame public unions!

Unions have long ago achieved their goals and now throw tantrums like a petulant child in a candy store demanding more.  More because more is better than less or the same.  Everyone else has to provide for themselves and these economic children.  But heres the rub, the people who are supposed to act on behalf of the people are in cohoots with the unions.  The public has no voice but is stuck with the bill.  A bill that assumes 7.5% to 8.0% returns!  With savers being punished with 25 basis point returns the net present value needed to pay out a high five figure or low six figure yearly income stream PLUS cadillac benefits AND COLAS, is astronomical.  Private unions have no such "buddy system" so while I deplore their tactics and rhetoric, its a non-issue.  Back to the issue, when meter maids are making six figure incomes - the game is in its final hour.  Unions support the weak, and reign in the strong.  They crush the souls of the best players and elevate the status of the lowest, weakest, dumbest, slowest, and most stupid.  Are they any good ones, sure - their has to be, right?  I'm sure there are, but unless you can suffer a consequence for even good performance.....you've no idea what the real world is about.  The states on sites like TBP, zerohedge and others have posted and posted on this subject with the charts, graphs, and such that make it clear to all the growth in public sector wages, benefits, and retirement packages have grown out of control.  Don't blame the workers didn't work for the nazi guards and it won't cut it here either.  This is how I feel, right or wrong to you.  You're as free to your opinion as I am to mine.  Public servants, yeah right.

RJE's picture
RJE
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Posts: 1369
Government Employees...

Simply: If we do not have the funds to pay for our expenses then expenses must be reduced or make (not create out of thin air) more funds. No debt should be incurred to pay for expenses that taxes cannot pay. It is household living 101 and we need to get back to the fundamentals and responsibilities of being frugal.

Regardless of your special interests, if the funds are not their through tax collection then the entity is insolvent. So, bankruptcy is the only recourse, and if it gets there then all tax payer liabilities for pension funds, etc...will be wiped away. It is better to negotiate in good faith than to lose it all, and lose it all that entity will. Guaranteed, and rightfully so. This is one argument I no longer participate in as these times we live in will just make this so.

If the teachers union cannot figure this common sense argument out then it is no wonder we rank as a failed society when it comes to our kids even after we spent more on education than any country on earth. Now, if we were number one I may do without a few things at home like cable to reward our educators. That isn't the case so I keep cable. Again, that simple.

Note: My son is a teacher/administrator and his wife a third generation teacher and they are terrific teachers. I speak as a business man and if I cannot pay my vendors and workers then I go out of business. If I go into debt and can't pay it back then I bankrupt, reorganize, and live to fight another day. That's it.

Respectfully Given

BOB

Nate's picture
Nate
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Posts: 461
well said

RJE wrote:

Simply: If we do not have the funds to pay for our expenses then expenses must be reduced or make (not create out of thin air) more funds. No debt should be incurred to pay for expenses that taxes cannot pay. It is household living 101 and we need to get back to the fundamentals and responsibilities of being frugal.

If the teachers union cannot figure this common sense argument out then it is no wonder we rank as a failed society when it comes to our kids even after we spent more on education than any country on earth.

Nice post, Robert. Couldn't agree more.

Recently I have been walking teachers through the impossible math of pensions.  Their eyes glaze over.  You are spot on regarding why we are losing the education race - and as you point out, it's not money.

And for the record, my kids have had teachers worth 2x their pay and others unfit to clean toilets.  Can anyone explain why they are rewarded with the same pay?

Nate

tricky rick's picture
tricky rick
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Posts: 80
everybody gets an award!

Here's an off the cuff explanation for why the incompetent are awarded the same pay as the qualified?

Because, somewhere we got off track from calling and spade a spade. 

Some people are idiots... some people smell bad...  some people have bad teeth, haircuts...my god, you seen the Walmart pictures?

But our culture just prefers to look the other way and let the odd balls blend.  We, as a people, shy away from confrontation.  We prefer to let others do our dirty work.

We are a nation of pussies!

I think we need to welcome back some discrimination ...  can't wait for this firestorm -
Bring it on... 

I'm a 100% commission salesman... I get exactly what I deserve.  think I have a body full of tattoos?  Think I don't take a second to CARE what others think?  Think I don't do anything without being mindfull of how it will play out...how will affect my job? 

Why do you think more people aren't 100% commission sales people?

Seems to me we need more Fitz's and less Pollyannas...

Concobb2's picture
Concobb2
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Posts: 12
We have an alternative model of government

Phillip Bobbitt’s excellent work ,“The Shield of Achilles”, illustrates how states have and are constantly undergoing modification and evolution.  It is obvious to me that our government is dramatically changing under our feet.  Our executive branch is asserting unprecedented legislative-like power, imprisoned of citizens may be without warrant or public trial is being proposed (2013 NDAA), unelected bureaucrats are confiscating property and violating the privacy of our papers and effects, corporations are buying both legislators and legislation, and private bankers are obligating your children to debt burdens that can only be comprehended by referring to the physical size of the universe.

These abuses of power are more typical of tyrannies than liberal systems of government.  Please, be aware, this is how your system of govern is evolving.

The question, as CHS implies, is will we remain passive and continue to submit to be herded to the “fleecing” factory.  Or we will actively debate and shape our destiny as is our civic duty in a democratic republic – and our moral duty to our children.

The systemic strains that are apparent now have much of their causality rooted in federal overreach.   We are in the “lucky” circumstance that The Constitution of 1787 (with bill of rights in 1791) in conjunction with our pre-revolutionary war history, provides us with an excellent model for an alternative to the corrupt system that is currently the Federal Government of United States of America.  Taking into consideration the arguments throughout “The Federalist Papers”, I am sure that even A. Hamilton, J. Madison, and J. Jay would feel that the current Federal system is an abomination.

Having rectified the critical flaw of slavery in the founder's constitutional framework, I believe, and hope, that the federal system will rebalance, with the States regaining much of their original sovereign power and responsibilities.  

Compared to systemic collapse a few, relatively simple, modifications will, over time, likely achieve the pre-1920 Federal-State balance of power.

For consideration I offer a couple examples:

1. Return to a representative government with a limited enfranchisement.  Regretfully, the vast majority of the current electorate is demonstrating little to no capacity to comprehend the issues at hand, are not engaged,  and simply are not qualified to vote.  For example substantive service in NGO’s, military service, educational degrees, payment of taxes, or similar service in the interests of the public good might be reasonable qualifying accomplishments for enfranchisement.

2. We should consider repeal of the 17th amendment and return senatorial appointments to state legislatures.  This in itself would lead to a substantial shift in power back to the states. It would diminish cronyism and corperativism in the legislative process, return power to congress to declare war, gradually shift revenues back to the state and local governments. In effect, it diversifies and adds resilience to governance.

3. We should consider reversal of the supreme court findings that grossly distort the founders intent for regulation of interstate trade (Article I, Section 8, Clause 3, "commerce clause")

4. We should consider reversal of the supreme court findings that grossly distorts the Fed governments’ role in promotion of the "general welfare" (Article I, Section 8, Clause 1, and the preamble)

(NOTE: 3 and 4 are the basis for a significant percentage of federal governments current over reach.)

5. If we are to avoid being debt slaves, we must bring the Federal Reserve Bank into constitutional conformity on monetary policy and money supply actions.  Only congress can create and regulate the value of coinage (Article 1, Sec 8, clause 5)– For example, an act of congress should be required on any monetary issue that places citizens at risk for payment of contracts, debts, or other financial obligations.

I am often stunned at how far we have wandered from the intent and obvious limits the constitution places on the power of the Federal Government.

These are not the governments failings. It is OUR collective failure to meet the minimum standards of civic duty required to preserve a healthy democratic republic.

As we make progress in re-balancing the distribution of power closer to the individual citizen, perhaps we can also begin to restructure our unsustainable economic system.

Failing these sorts of managed, rational, modifications, it is my apprehension that mother nature will violently correct the imbalances in our current system of governance.

Respectfully.

charleshughsmith's picture
charleshughsmith
Status: Gold Member (Offline)
Joined: Aug 15 2010
Posts: 257
excellent comments

Hi everyone:

Those who took the time to present commentaries on this large and central topic--thank you. I for one learned a lot from the comments. I was unfamiliar with the The "Shield of Achilles"--the arguments for a reversion to a smaller state are compelling.

As Chris M. noted in our previous discussion on this topic, government can only expand (as Mark_BC notes) on expanding energy surpluses and increases in productivity (what's done with those energy surpluses).

I agree we have Peak Empire, but Empire requires a strong and expansive Central State--so Peak Empire=Peak Central State.  A handful of duchies don't create a global empire and 50 states wouldn't create a global empire without a centralized State that expands in a positive feedback with the wealth gained by Empire.

All of these dynamics are covered pretty well (IMO) by the books that address over-reach and diminishing returns on centralized power: The Collapse of Complex Societies by Joseph A. Tainter, The Upside of Down: Catastrophe, Creativity and the Renewal of Civilization by Thomas Homer-Dixon and Overshoot: The Ecological Basis of Revolutionary Change by William Robert Catton.

Jbarney's picture
Jbarney
Status: Bronze Member (Offline)
Joined: Nov 25 2010
Posts: 90
Police? Fire Protection? Librarians? Military?

Interesting that teachers became the punching bag for many of the posts here.  For what it is worth, I am willing to pay higher taxes to support having good police protection, solid fire protection, and support our other public institutions.  While I agree the discussion does focus on teachers and what their benefits/salaries are, the truth is, we get what we pay for.

One of the things I have thought about is the coming crisis/decline.  When we start going after police pensions and the benefits of those in the armed forces, we most certainly will be in decline.  Just think about this and accept that when the discussion broadens beyond teachers, and we talk about other public sector employees....lack of support for those positions is a dangerous, dangerous discussion.

I'd rather pay the pension and have a good police force than not.

Same with fire protection.

Same with members of the military.

Yes in the coming crisis, everyone will be hit.  But limiting the discussion to teachers is a short cut that eliminates more popular public services from the discussion. 

Social Security?

Everyone is going to be hit. 

Happy Halloween.

DurangoKid's picture
DurangoKid
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Joined: Oct 25 2008
Posts: 173
Inflation/not_inflation

Our money supply is debt. In 2007/2008, when CDO's cratered, a big hole appeared in the supply of money capital. The government could have done one of two things. It could have told the initiators of bogus investments, "Sorry, we believe in free markets. You were free to concoct this nonsense. You are now free to live with the consequences. Now, go away and stop bothering us." Intuitively, this approach makes a lot of sense. Why not let the grifters who made the mess suffer the consequences? But, it's not that simple. All of this junk is part of the money supply or collateral that supports it. That's just the way debt based currency works. The fallout from that approach would be a disaster. The bankers and other hucksters were partially right. The system was in trouble and the private sector was paralyzed and unable to mount a collective response. Remember that in a free market system, people are more interested in working against each other than cooperating. It's just not in their nature to work together for the common good. So, enter the government. They borrow huge piles of credit to fill in the divot left by all the defaults. Yes, it's more debt and yes, someone will have to pay the interest on it. But, that's no different than what happens when the system is working! It's all just bank credit backed by some promise by someone somewhere to service their debts. So, what's the diff?

On the question of inflation, a more nuanced approach might be helpful. When investments and loans crater, money leaves the system. That is deflationary. If some entity steps in to replace that money, one is simply back to where one started with the exception of who pays the interest on this infusion of credit. In the case of private individuals, it's up to Joe Schmo to keep up with his payments. In the public case, it's every Joe Schmo who pays taxes and expects services from Uncle Sugar. This is where the free market ideologues like to blur the line between public and private. If Mr. Schmo is a high roller on Wall St. it might be possible for him to convince the government that all hell will break loose if his particular obligations or assets are not made good a public expense. Joe will usually site a loss of jobs or your mamma living on cat food as a justification. Joe isn't interested so much in systemic issues as he's interested in getting his accounts in order and resume raking in the profits. If the stock of money remains stable, Joe is happy and inflation is not a problem.

Deflation, on the other hand is a disaster. If the stock of money diminishes to the point where collateral doesn't move, the system is in trouble. A knock-on effect will be that commodities will also stop moving. That means no Fruit Loops for Joe's kids and Joe's kids really like Fruit Loops. It also means lay-offs, fewer cars sold, fewer housing starts, and cat food casseroles. Government bailouts to crooks are unfortunately preferable to deflation.

The elephant in the room is the systemic question of who controls the stock of money. The stock of money is in the private sector. That's why "Federal Reserve Note" is printed on every dollar bill. It's no more federal than Federal Express. The Fed is a kind of chimera of public charter and private interest. It's called the lender of last resort and in a system of private bank credit currency, it kind of makes it the ultimate source of our money. The Treasury just issues bonds which are almost like money, but not quite. So, what can we expect from a quasi-private system that operates for private interest? Pretty much what we have. The very form of money itself is a profit center! Okay, the Fed doesn't make a profit, but you can bet all the member banks aren't in the money business just for fun and games. The Federal Reserve System is their hook on the sovereign power of the state. It's their fix on the system. It's the same old story. Money was once a commons. Private interests covet the commons. That commons is no more.

There are several things we could do to reform the system. One would be to put the Treasury in charge of issuing currency instead of banks lending it into existence. The government could spend new money into the economy as the purchaser of last resort. Conversely, it could tax money out of the economy to regulate prices. The government could also tax speculation. A lot. We could "de-financialize" the economy and return to a system of making things people need to get by rather than having an elite coterie of parasites siphoning off profits ever couple of microseconds.

The free-marketers will attempt to point out that the hand of government will just get in the way, quash the entrepreneurial spirit, and generally make a hash of everything. But, as we can see, the free-marketers are talking out of both sides of their mouth. They're kind of like the schoolyard bully who torments his classmates and then goes running to the teacher when his victims punch him back. They are like courtiers scrambling for advantage and favors from a monarch. If you wonder how much they believe in the common good, just check their bank accounts. They make up all sorts of fairy tales about how their greed will somehow benefit everyone. It never has and it never will. What we need is more democratic control over all aspects of the economy from the workplace to the bank vault. We're in a situation where the money price of a commodity conveys no information. Is the price low because costs of production like pollution or impoverished workers can be externalized? Or is it high because of speculation or hedging strategies or marketing hype or debt service? The economy has become decoupled from the physical environment as if reality is just a subset of the overall economy.

We've entered an era of limits. The atmosphere is a limited sink for carbon. The oceans are a limited sink for nitrates and limited source for protein. Every year 37,000 square miles of cropland goes out of production due to soil depletion. Global oil production has stalled. At $95/bbl. production is not significantly higher than it was at $40/bbl. And yet, the elites still think of these systems in only financial terms. Don't worry they tell us. If we run out of copper, we'll just make it out of something else. Like what, silver?

We need a monetary and financial system that is closely coupled to physical reality. It cannot depend on fantasies of endless growth to function. Arguments over inflation or deflation only cloud the issue as if the problem were only a matter of stable prices. The word radical comes from the Greek word for root. We need to get to the root of the disconnect between our monetary system and reality. That information does not exist on Wall St. It's on the shop floors, in the fields and rivers, on the shores and in the air. The tragedy of the trillions of dollars of bailouts is that it went to prop up a system that is by its nature unstable divorced from reality. The last 200 years was an anomaly brought about mainly by the use of fossil carbon to power heat engines. For various reasons, that era will come to an end in the lifetimes of our children and grandchildren. If we continue as we have, nature will choose the next economy and it will likely not be to our liking. Our only option is to choose first. 

RJE's picture
RJE
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Joined: Aug 31 2008
Posts: 1369
jbarney,it wasn't my

jbarney,

it wasn't my intention to deride your posting. I was merely stating that the public is in a state of extreme financial difficulties, and the tactics used by the (all) unions, and the opinions of the teachers smack as blackmail to those of us who work twice as long during the course of the year, and are taking cuts in pay because we are now part time workers, are receiving less benefits, and on top of that inflation is robbing us of the wage we do make. It is the greed and fear that unions represent that bothers me sometimes. 

This can be applied to all public services too so isn't focused on teachers.

As for defending our life and property then trust me, most of us our armed to the hilt and can handle that just fine. Current purchases of fire arms in the country is screaming that the citizens are well aware of what may lay ahead. As far as fire, well, we have a voluntary fire department here in our town and that seems to work out just fine.

In any case, the government sector should reflect the ability of the public sectors ability to pay taxes. Don't hire full time police, hire part time police, and teachers too. Fire all of them then rehire them part time. That is a true reflection of society. Naturally (?) I am kidding but honestly, it could happen, and if the teachers and their unions are smart they will negotiate for our current environment and frankly whistle past the grave yard and be happy they have the job they do. I know so many teachers and they have NO CLUE about what is happening in the economy. Frankly, when talking to a social studies teacher they have NO CLUE about world politics at all. They can speak generally but not specifically. 

If left up to us then the Department of Education would not exist. If left up to us then the Bankers would not have been bailed out. If left up to us we would cut the military and stop all this crazy crap we are doing with our cash. If left up to us we would support feeding the poor, and allow unemployment compensation BUT in return we would expect these folks to work for this assistance. I don't care what it is, clean the streets, cut lawns, tear down abandoned buildings, wear reflective vests and protect our streets at night. They must do something, and sitting on ones butt and smoking crack, weed, or consuming alcohol doesn't constitute something.

I have spoken in general terms too as this argument could be quite lengthy. Examples used could be lengthened but hopefully a quick muse by anyone here could fill in their own examples, but if the policeman wants me to believe he can protect me better than I can protect myself then I reject that out of hand as I only need to point up my hallway, with my pump action in hand, and if necessary, I could clear the hallway (s) of all debris, which by sheer force would probably take all debris outside, in flight, and comfortably landing the debris in my front yard. Now, as the police arrive they would be most helpful in gathering this debris up and carting it away. For anyone here offended by this description I apologize but calling 911 during a break in with people I assume have harmful intent towards my Lady, dog or property requires of me to be unpleasant. I prefer peace and love towards all but...I do have a theory however and I believe that no harm would come to my loved ones or intruders if I just sent a warning shot first in no particular direction as I believe most intruders would just then leave. That would be my hope.

Finally, these are general thoughts and I will not comment further and I respect all who prepare according to their needs or circumstance. For me it comes down to this: NO ONE will harm my Lady. My best friend (not my wife), and I have known this girl for over 40 years was raped by a policeman's son in her late 20's. The police chiefs son. This was back a few years before DNA anything or respect of a woman;s body meant as much as today, in other words the word NO didn't really mean NO. I have witnessed and seen enough in my life, cops smoking crack in uniform and in their squad cars!!!, that I'll take care of my own and just hope the bad folks don't push me to extremes. I am not a tough guy at all but...

Respectfully Given

BOB

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treemagnet
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You said it, not us

I don't believe teachers are the target of the term "public employees" and others.  Why is it the only response I ever hear is the tired old "firemen, police, school teachers will have to go and we'll all be doomed" line of crap?  Our schools sucks anyway, the teachers unions don't care about kids, crime is rising and when you need them like say during Katrina - 1/3 just don't show up.  If the fire is underway, most fire departments subscribe to the "never lost a basement" motto and spray the adjoining houses and just let 'er burn baby, OR proclaim its too dangerous to risk personnel and sit around eating Red Cross sandwiches.  BUT NEVER, do you guys offer up something like laying off the 20 or 30 percent of back office staff, supervisors, redundant positions and even the outlandish "'cause its the law and we gotta have a ________ staff member on site".  How many people get fired from government unions?  Like zero.  How many quit for a better position?  Like, next to zero.  So lets see now, overpayed and underworked......sign me up - actually no thanks.  I hope these clowns believe the pensions are real and look down the barrel of reality one day and see what the rest of us do.

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Human Nature and accountability

I like the thoughtful and lengthy posts, a lot of good thoughts.  Ultimately isn't about human nature and accountability.  Certain functions in society are best done by the private sector and other functions by are best carried out by democratic structures.  What should fall where I think would be an interesting topic for debate.  What frustrates us all though is the lack of personal responsibility exhibited by others (of course we are all perfect) and the ability of those affected by the corruption to call out the perpetrators.

Human beings by nature are small minded, petty, greedy, frightened, liars who have occasional moments of love and generosity (of course not the writer or readers of this comment).  PD Ospensky wrote that the chief feature of the human being is that he/she is first and foremost a liar, but that is quite another long and complicated discussion.  But there is a lot of truth in it.

At one end of the extreme facscism awaits us and a the other, fudalism.  Extreme libertarianism leads to fudalism and extreme statism leads to fascism, and driving us towards either extreme is the idea that there is one idea, a one size fits all solution for everybody.

In the end I have come to believe that it is a matter of scale.  Cold evil is perpetrated by any system, governmental or private, that separates us from the consequences of our actions.  Where others become numbers in book.  When living natural systems become "resources" and human being becme sources of "labor" or consumers.  When we fail to treat others with respect and sweep them into broad catagories of the other, whatever it may be (bankster, union member), not like us, the enlightened ones.

In small communites, the "other" disappears, the consequences of our actions are visible in faces of those around us, and if we despoil the environment, we live in our own mess. Ultimately it depends on each of us to taking responsibilty for ourselves and having compassion for others, without that, regardless of the "ism" that we live with, we are all sunk.  As someone much smarter than me said, you are the world, it is your mirror.

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John Lemieux
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The Root of the Problem

DurangoKid,

An excellent, very well written and thoughtfull post I think. J.

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Mark, I was stoked through

Mark, I was stoked through your whole process and delivery. Folks, sometimes the truth just biaatch slaps you right in the face. Nice Mark.

Do you Folks know why people lie? Or tell you what you want to hear instead of what you need to hear? Because.....

BOB

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cmartenson
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A thoughtful post

John Lemieux wrote:

DurangoKid,

An excellent, very well written and thoughtfull post I think. J.

I concur!

One of the themes I have written on in the past is the size of government as a percentage of the total economy and total employment.

Given that the government distributes and consumes, and does not produce (with extremely limited exceptions too negligible to count) then as long as there is plenty of surplus to go around the government can be as big as it desires.

However, once the surplus begins to dwindle, as it is now, then the size of government becomes a very important consideration.  Given that there are ~22 million government employees at the Federal, state and local levels, this means that 1 in 6 employed people works for the government.

In a future of less this is just too many, regardless of what we think of the services provided.  Perhaps a better ratio might be 1 in 10, or even 1 in 15?  Hard to say, but the days of having 'one of everything' supported by ever-increasing levels of indebtedness and borrowing are drawing to a close.

An adult sized conversation on the subject would include some careful planning and scrutiny of priorities. However, the early throes of the dragon seem to mainly consist of the usual goonish tactics of threatening to terminate the most popular after school programs or firing police forces to dangerous levels.  I assume these tactics are designed to force public acquiescence to higher spending rather than spur useful discussions.  

Instead, we simply have to accept that we can't do everything, as much as we might want to, and really think through what our most immediate priorities are, where we are headed, and what resources actually exist.

Unfortunately, many past decisions, such as pension levels and putting off infrastructure maintenance and replacement, are going to bite deeply into the thinning pool of resources.  

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RJE
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John or Chris, I tried

John or Chris, I tried initially to download the article from John's posting and found one from April, 2012 but Durango Kid?...Would you please reference the article you are speaking of.

Thank you

BOB

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What you are discussing is not free markets...

Durango Kid wrote:

Remember that in a free market system, people are more interested in working against each other than cooperating. It's just not in their nature to work together for the common good.

This is just not true.  In a free market when there is no coercion, parties involved in trade both have to feel they are getting a fair deal.  If they can't agree then trade doesn't occur.  The free market is the voluntary interaction and because it's voluntary parties involved are working for their common good.

Durango Kid wrote:

Yes, it's more debt and yes, someone will have to pay the interest on it. But, that's no different than what happens when the system is working! It's all just bank credit backed by some promise by someone somewhere to service their debts. So, what's the diff?

But it is different.  It a true free market the participants are responsible for their own losses.  Make a bad decision and you have to pay the consequences.  Because of that "risk" you will take a lot more effort and care in what decisions you make.    Let's look at the housing crisis as a good example with a sound money system.  If you are a banker and you make a loan to an individual you have to have the funds to do so - either the banks or a depositor.  When you make the loan, if it's not paid back either the bank takes the loss and ultimately the depositor if the bank fails.  Because of this risk of loss, the bank, wanting to stay in business and pay salaries will strive to minimize default risk by trying to make loans to people that will pay them back at an interest rate that covers the defaults.  The depositor or investor will not store/invest money in a bank unless they have a pretty good idea that the bank is not going to make stupid decisions.  It's this self interest that keeps the system in check.  Compare this to our current system where a bank can take giant risks because they don't have to worry about the losses since they will be covered by the government or the Fed.

Durango Kid wrote:

When investments and loans crater, money leaves the system.

When loans are not paid back, that is inflationary because the paying back of a loan is what removes the money from the system.  Default is inflationary.  Now if the value of the backing asset falls because there is no purchaser (such as housing) then that is deflationary in the monetary sense because the asset can not be sold or used to collateralize more debt.

Durango Kid wrote:

In the case of private individuals, it's up to Joe Schmo to keep up with his payments. In the public case, it's every Joe Schmo who pays taxes and expects services from Uncle Sugar. This is where the free market ideologues like to blur the line between public and private. If Mr. Schmo is a high roller on Wall St. it might be possible for him to convince the government that all hell will break loose if his particular obligations or assets are not made good a public expense.

Sorry, but you don't get to get to claim a problem with free market ideologues and then use a very non free market example.  The second Mr. Schmo uses government to cover his risk, it's not a free market.  Mr. Schmo should loose - that is free market.  The fact that we have the government stepping in to cover the losses of so many Mr. Schmo is exactly the problem.  That is moral hazard because after you do it for one Mr. Schmo, many other will step forward for the same deal and the problem snowballs, just like what we have seen until one day the government can't cover all the Mr. Schmos losses.

Durango Kid wrote:

Deflation, on the other hand is a disaster. If the stock of money diminishes to the point where collateral doesn't move, the system is in trouble.

If the money system was sound and not required to continuously grow, deflation (lower prices) is not a concern, and is normal.  Prices should reflect supply and demand not the whims of those running the monetary system.

Durango Kid wrote:

The elephant in the room is the systemic question of who controls the stock of money. The stock of money is in the private sector. That's why "Federal Reserve Note" is printed on every dollar bill. It's no more federal than Federal Express.

This is exactly the problem and its the root of all the other problems that you name.  No one entity should control the money system.  That includes government.  A free market in money is the best way to stop shenanigans with money.  If you are free to choose what you want to use for money, then you have the option to change if you suspect funny business.    It should be up to those who wish to interact to voluntarily pick a medium of exchange.

Durango Kid wrote:

There are several things we could do to reform the system. One would be to put the Treasury in charge of issuing currency instead of banks lending it into existence. The government could spend new money into the economy as the purchaser of last resort

This is virtually no different than what we have today.  The government is the largest beneficiary of the Feds actions.  It allows the governments to make promises they could never keep if they had to actually tax the populace (transparency) to pay for them.

Durango Kid wrote:

The free-marketers will attempt to point out that the hand of government will just get in the way, quash the entrepreneurial spirit, and generally make a hash of everything. But, as we can see, the free-marketers are talking out of both sides of their mouth. They're kind of like the schoolyard bully who torments his classmates and then goes running to the teacher when his victims punch him back.

Again, you try to bash those of us that believe in free markets by pointing out behavior that only occurs when free markets do not exist.

Durango Kid wrote:

What we need is more democratic control over all aspects of the economy from the workplace to the bank vault

Agreed.  You should be able to choose any money you want to use.  That should be left up to you and with whom you voluntarily do business - the ultimate democratic solution.  However, you are advocating simply picking some new monetary dictator rather than a true system when you as an individual can make your own choice.

You are confusing so many things with free market in your post that are not free market.  if you are forced to participate or use someones product (money being a product) you do not have a free market.  in the case of money it is the foundation and if it's not sound nothing else based on it will be either.  That includes financial systems, investing, use of resources, government, ...

Jbarney's picture
Jbarney
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Take a look....

9b6b4ac6234a38d7f61757290055617d.png

Here is a chart showing defense expenditures by country.   I'd say in a world of declining government this might be a good place to start.

Jason

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John Lemieux
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Posts: 224
Hey Bob

Bob,

If you are referring to my comment on this thread (#14), I was simply responding to Durango Bob's post on this same thread;  Inflation/Not_Inflation (#10).

And I believe that CM was commenting/expanding on post DB's #14 post as well.

Hope that helps, John

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Durango Kid!!!, I knew I seen

Durango Kid!!!, I knew I seen this name somewhere! Honestly, call me a dumb ass but call me persistent too. I found your article!!! Cool.

So Relieved I Am.

BOB

RJE's picture
RJE
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Posts: 1369
John, I had left a note to

John, I had left a note to myself to come and look for a response so thank you. As I was scrolling down I seen his name and had that AHA! moment. Plus one of the posters commented on the Durango Kid and critiqued it, and I thought, "Man that sounds familiar". Anyways John, thank you so much for getting back to me. I hate missing anything that someone took the time to post.

BOB

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Robert8020
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Objection!

“These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.”

Objection your honor, pure speculation!  Entering default is not a certainty.

“Once moral hazard has been institutionalized, it becomes a positive feedback loop.”

Objection! Source citation requested, again speculation.

“Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies.”  Objection! 

O.K. OK I get it. This is inflammatory with out support of citation. It is all hearsay anecdotal conspiracy theory.  I mean  “…accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.” Really?

There is nothing here in this article “…we analyze”.  I am sadly disappointed.

My worry is that the present QE policies may jeopardize long-term growth by not addressing the underlying structural problems and the exploding debt of nations.  Such super exponential systems will reorganize, enter a phase transition, to accommodate its forced displacement from equilibrium, its increasing potentials forced by policy and supported by “dynamic stochastic general equilibrium” model miscalculations.

http://arxiv.org/pdf/0907.4290v1.pdf

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metametal
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Posts: 25
Perfect

Such super exponential systems will reorganize, enter a phase transition, to accommodate its forced displacement from equilibrium, its increasing potentials forced by policy and supported by “dynamic stochastic general equilibrium” model miscalculations.

This last sentence is too brilliant to go unnoticed.  I hope Mr. Smith (whom I greatly admire) will provide his own rebuttal smiley

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