Perfect-Worlders, Get Real!

By David Galland    Jun 30 2010 2:45PM www.caseyresearch.com

Scanning through a local newspaper this week, I came across a letter to the editor that speaks volumes about the popular misconceptions that are dragging this country, and the world, to its knees.

The letter writer, a retired public school teacher, unleashed a litany of solutions for making America’s children better citizens. Summarizing his list (the exclamation points are his, too):

• Give parents a livable wage!
• Provide excellent subsidized childcare!
• Guarantee parental leave with full pay and wage protection.
• Institute a single-payer health care system.

Regrettably, the gentleman’s perfect-world vision of how things should work is not his alone, but is widely shared. Unfortunately for him and his demanding ilk, it is a vision now made obsolete by the facts on the ground.

Simply, the nation – and most of the so-called developed world – is broke. As is the model that these modern-day economies have been built on – a model that foolishly assumed that politicians could be trusted to manage a currency in a responsible fashion.

Consider, in the 1940s central bank reserves were 70% gold. Today, official reserves are only about 10% gold, even though the price of gold is far higher. The balance of those reserves, for all intents and purposes, is nothing more than IOUs.

Out of a justifiable fear of being repetitious, I’m not going to belabor the point. But I am going to comment that it’s time for people to grow up… to get real about the situation we are in.

To believe that a government that produces nothing can paper over every crisis, as well as provide succor and sustenance to meet every human desire, and can do so infinitely and without a serious consequence, is to believe in tooth fairies and magical beasts that dance through distant woods.

Even so, like the letter writer, there is still a large block of Americans who persist in believing in such a fantastical world – a world where government’s largess should be extended even further. From this crowd you would get rousing cheers to the suggestion that the state should also provide a free and top-notch education to all, quality foodstuffs for both the domestic and foreign needy, high-quality computers (and free Internet connectivity) to every young student, housing subsidies, and open-ended unemployment benefits. And that’s just the short-list.

Back in the real world, the declarative statement “I want” has to now be followed with “and here’s how I’ll be able to save up for it.” That’s because even a casual glance at the nation’s finances confirms that the government’s fiscal, monetary, and social policies have been an abject failure… an unmitigated disaster.

While I could illustrate that contention with enough citations to fill a large book, in the interest of brevity I’ll point only to an excerpt from a Globe & Mail article today on the dire state of California’s finances, a fast-moving crisis that can be considered the off-Broadway version of the larger drama now playing out in these United States…

California on 'verge of system failure’ 

[…] It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

[…] None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

Naturally, we want to think of America as America the beautiful. Taking off the rose-tinted glasses, however, presents a different image altogether… that of a bankrupt, highly militarized, and hair-triggered socialist empire that is daily finding new ways to tax its struggling citizenry and tramp all over the Constitution.

Not to be overly dramatic, but the real face of America is increasingly like that of an early-middle-aged woman I saw the other day. She was wheelchair bound, with only one leg, her overweight body covered in poorly rendered tattoos. With a cigarette hanging from the corner of her mouth, she rolled out of a liquor store, a telling brown paper bag in her lap. In other words, the very picture of a life dominated by bad decisions.

While America hasn’t yet been laid so low, it would be a mistake to think it can’t – and won’t – happen. If its leaders and a majority of the population persist in their ignorance of the causes and effects of economic failure, it is all but certain.

And it’s not just economics. Over the weekend I re-read both the Declaration of Independence and the Bill of Rights, and it struck me that if the Founding Fathers were alive today, they would be considered terrorists and rounded up. Furthermore, because the Bill of Rights has been all but voided at this point, they might be dropped into the equivalent of a dark hole with no right to a speedy trial, or any trial at all, for that matter.

Trading our freedoms for security is a bad decision because, in the end, the nation will be neither free nor secure. Much in the same way that, to paraphrase one sage, a government that habitually saves all fools from their bad decisions, ultimately creates a nation of fools.

Fools that, like the letter writer, are clearly not self-made but rather look to the coddling nanny-state to guarantee an agreeable lifestyle. By virtue of the massive wealth that its post-WWII hegemony provided the United States, the nation’s finances could support – for a time – an increasing crowd of moochers. But that wealth is now gone, leaving in its place the world’s largest debtor.

And so it is that in the world now emerging, one where reality trumps fantasy, when talk turns to further stimulus, the conversation should no longer revolve around the ways that the government can prime the economic pumps with yet more borrowing and spending. That’s how we got here in the first place, and a sure road map to an even worse catastrophe.

The continued failures of the government’s misguided efforts can be seen in the latest bad news on the housing market – bad news we warned subscribers to The Casey Report to expect for months now.

Sales of U.S. New Homes Plunged to Record Low in May

June 23 (Bloomberg) – Purchases of new homes in the U.S. fell in May to a record low as a tax credit expired, showing the market remains dependent on government support.

Sales collapsed a record 33 percent to an annual pace of 300,000 last month from April, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

In the new world, the conversation should – must – turn to the proven ways that government can stimulate the economy; mostly by removing itself and its tax and regulatory burdens from as many areas of the economy as possible.  

The world is only going to get more competitive – witness Russia’s decision to eliminate capital gains taxes on foreign investment in that country – and an America dominated by a government lacking all fiscal restraint, urged on by a populace without even a basic understanding of economics, has little chance at remaining in contention. The situation is only made worse by a weakening of the rule of law, concurrent with a regulatory jungle that is only growing more tangled by the day.

Unfortunately, Paul Krugman, reigning champion of the crowd calling for saving the economy by pumping out yet more unbacked government stimulus, is now being trotted out as a possible replacement for the soon-to-be-vacated job of White House budget director. If he secures the position, then all may not be lost, but it soon will be.

The outlook isn’t rosy – but there are still things you can do to protect your assets.

David Galland,
Managing Director

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