Fiscal Death by Welfare

Ironically enough, the medicine applied by our state as the antidote for our ills has proven to be poison.  The welfare state is killing our nation.  Today entitlement spending makes up nearly half of our budget.  Long term, we know that there will be no way to pay off our unfunded obligations — we will go bankrupt.  There will be three options ultimately, though ultimately can come quite suddenly: default, hyperinflation or abolition of the welfare state.

Default is considered by many to be an impossible option as it would likely lead to mass chaos given the necessary suspension of many government services, not to mention the practical reality that WE are the collateral in the event of default.  To default is to be honest, and to be honest is anathema to the state.

Hyperinflation in my view is the most likely outcome given the massive increase in the money supply, which is good for politicians until it hits because it allows them to kick problems down the road and impose a stealth tax.  Currently, government is toeing the line between monetizing debt and intervening to keep its borrowing rates down, while incentivizing banks to keep money in their vaults or pump it into the stock market.

I believe that as the downturn goes on the government will blame the banks for the lack of economic growth and force them to allocate credit to chosen political entrepreneurs and other bad credit risks, leading to massive inflation in prices which they will likely blame on evil speculators and greedy price gouging companies.  Hyperinflation would allow the government to pay for the welfare state –  by writing entitlement checks in worthless dollars and lead to economic paralysis as constantly rising prices would make economic calculation and thus commerce impossible.

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Tags: CPAC, default, entitlement spending, entitlements, George Will
Posted Feb 28th 2010 at 5:01 pm in Congress, Culture, History, Politics, Tax Reform, Tea Party, federal spending | 79742129 Commentshttp://biggovernment.com/amellon/2010/02/28/fiscal-death-by-welfare/Fiscal+Death+by+Welfare2010-03-01+01%3A01%3A46Andrew+Mellon

The Greek Tragedy…and America’s Future?

The fiscal crisis in Greece is fascinating political theater, in part because the Balkan nation is a leading indicator for what will probably happen in many other countries. The most puzzling feature of the crisis is the assumption in other European capitals, discussed in the BBC article below, that a Greek default is the worst possible result. It certainly would not be good news, especially for investors who thought it was safe to lend money to the government, but there are several reasons why the long-term pain resulting from a bailout would be even worse.

1. Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely. In a four-year period between 2005 and 2009, Greek politicians expanded the burden of government spending from an already excessive level of 43.8 percent of GDP to an even more excessive level of 51.3 percent of GDP. Subsidies are rampant, the public sector is bloated, civil service pay is way too high, and entitlements are wildly unsustainable. A fiscal crisis – with no escape options – is probably the only hope of reversing these disastrous policies. So why, then, would it make sense for Germany and other nations to provide an escape option?

2. Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers. Greece is in trouble because the the people riding in society’s wagon assumed that there would always be enough chumps to pull the wagon. In reality, Greece is turning into a real-world version of Atlas Shrugged. Government has become such a burden that the job creators and wealth generators have given up and/or moved their money out of the country. Should taxpayers in other nations reward the greed and narcissism of Greece’s interest groups by being forced to pull the wagon instead?

3. Bailing out Greece will encourage profligacy in Spain, Italy, and other nations. The hot acronym in public finance circles is PIIGS, which is shorthand for Portugal, Ireland, Italy, Greece, and Spain. Greece is getting all the attention now, but these other countries have the same problems of excessive spending, bloated and dysfunctional public sectors, and unsustainable finances. What happens in Greece will send a very clear signal to the politicians in these nations, much as a parent who lets the oldest child run rampant is sending signals the younger siblings. Does anybody doubt that a bailout of Greece will discourage the other PIIGS from undertaking needed reforms?

4. Bailing out Greece is not necessary to save the euro. This is the most puzzling feature of this Greek tragedy (sorry, I couldn’t resist). There is a pervasive assumption that a default somehow would cripple the common currency of most European Union nations. But why would a default in Greece undermine the euro? If California went under, after all, that would not cripple the US dollar. There are unpleasant things that would probably happen following a Greek default, but the stability and strength of a currency is a function of central bank behavior. And so long as the European Central Bank does not crank up the proverbial printing press to monetize Greece’s debt, the euro should be fine.

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Tags: bankruptcy, Big Government, debt, default, Deficit
Posted Feb 10th 2010 at 12:59 pm in Economics, News, Politics | 7328656 Commentshttp://biggovernment.com/dmitchell/2010/02/10/the-greek-tragedy-and-americas-future/The+Greek+Tragedy...and+America%27s+Future%3F2010-02-10+20%3A59%3A18Dan+Mitchell

Dubai Default Throws World Markets into Disarray

News from Dubai is rocking and rolling world markets today, as an $80 billion default could spawn a broad wave of activity and expose the tenuous status of the banking system. We’re talking global markets on the Black Friday edition of Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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Related Links:

FT: Global Markets on Selling Spree Thanks to Dubai Default
Bloomberg: RBS Led Dubai World Lenders, HSBC May Have Most at Stake in UAE
Business Insider: Stop Freaking Out, the UAE Can Easily Save Dubai

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Tags: banking system, default, Dubai, Dubai World, financial system
Posted Nov 27th 2009 at 10:39 am in Economics | 3757421 Commentshttp://biggovernment.com/newledger/2009/11/27/dubai-default-throws-world-markets-into-disarray/Dubai+Default+Throws+World+Markets+into+Disarray2009-11-27+17%3A39%3A50The+New+Ledger