Sunday, April 25, 2010

Insolvency, Monetization, Redistribution, Nationalization

Barring the secession of states from the Union or a general civil uprising, the eventual outcome of our government's policies in dealing with current financial mess is pretty easy to predict. The Federal government is on course to take control of the economy, and to end the independence of state and local governments.

Insolvency

The simplest way to summarize the global economic crisis is this: We've been spending more money than we have and promising future payments that we can't afford, and we now find ourselves unable to pay off the debts and obligations that we've incurred. A couple of years ago in the U.S. the problem first surfaced with banks and financial/insurance companies being hit with more defaults and payout obligations than they were prepared to absorb. This was solved temporarily by taking out new trillion-dollar Federal loans and using the borrowed money to bail out or nationalize several large companies. (Fannie May and Freddie Mac, AIG, GM) This didn't solve the underlying problem, and today it has simply propagated to new areas: a growing number of delinquent home mortgages, states which are unable to meet unemployment, pension and bond obligations (California, etc.), and entire nations which suddenly find there are no more buyers for their bonds (Greece).

In a nutshell, private debt and state and local public debt is being transformed into national debt, with the main beneficiaries being homeowners who bought larger homes than they could afford, union and public employees whose generous benefit packages have bankrupted corporations and states, and certain favored Wall Street players.

Monetization

When our Federal government has to pay more money than it collects in taxes, it has to either sell bonds to Americans or foreigners, or create new money through the Federal Reserve Bank. Given the financial mess that we're in, investors are understandably nervous about loaning even more money to the government by buying government bonds. Not only does it seem less likely that a $14 trillion debt can ever be paid off, but the average U.S. investor today has less money to invest in bonds anyways.

Thus our government, which insists on spending even more money on new and enlarged social programs, is left with no choice but to make up the difference in the short term by creating money and risking wealth-destroying inflation. However, in the longer term, since Congress and the White House can't convince people to willingly buy debt, they are proposing to raise tax rates and create new taxes to boot.

Redistribution

A significant majority of the Federal budget is now devoted to social programs; i.e., taking money from those who can "afford it," giving some of that money to people who "need it," and spending the rest on the cushy salaries and benefits for the bureaucratic middle-men who distribute it. Social Security, Medicare, Medicaid, Welfare and Unemployment insurance constituted approximately 60% of the total Federal budget before all of the trillion-dollar bailouts and buyouts. Given the trend towards monetization, higher taxes and more-and-larger social programs, the entire enterprise ends up being a simple redistribution of wealth from people who save money and produce goods and services to those who don't produce or don't save - or to those who are currently favored by the Democrats.

Nationalization

So far in the first 15 months of his Presidency, Obama's solution to every single economic issue has been to increase the size of government by creating a new program, increasing the size of an old program, or nationalizing a company or industry. In not one case have Obama or the Dems proposed shrinking, eliminating, or privatizing some part of the bloated Federal government. Quite simply, every corner of the American economy will eventually be nationalized/socialized if Obama and the Democrats are given enough time. Thus far, the largest car company, the largest insurer, and the vast majority of home mortgages have been handed over to government control. The 2000 page health care bill has set the stage for nationalizing every aspect of medicine, and now Obama and the Dems have set their sights on nationalizing the energy industry (cap and trade). In addition, the Federal government now seems willing to bail out states when they run out of funds for unemployment or public worker pensions, and this obviously opens the door to new Federal meddling in the state budget processes.

Given the ability of the Federal government to print money, there's no mathematical limit to how quickly it can buy up the entire private sector. The most important limit is a political one, and oddly enough the drive towards nationalization is helped by economic turmoil. Any time a state, corporation, or interest group reaches the financial brink, the government can step in, take over and be seen as a hero. Were the Dems to try nationalizing GM during good economic times, it would probably be seen as the frightening power grab that it is instead of a rescue mission.

If I didn't know any better, I'd be concerned that the Dems might purposefully harm the economy in order to speed their nationalization agenda to a rapid conclusion. It's a good thing I know better.

Regardless of the of the Dems' intentions, it's becoming preferable to be a member of the "poor half" of the country who can sit back on his couch in the house he can't afford, watch the big-screen TV that he can't pay for, and let Big Bro the government take care of all of his basic needs. Work too hard or live frugally and save, and you risk becoming a member of the vilified rich, only to see most of your income taken away so that those who deserve it can enjoy their less stressful lifestyles. Yes, the new world order increasingly rewards the grasshoppers and punishes the ants - but how many grasshoppers can we afford before the ants say "enough?"


1 comment:

Cathy said...

Jody. This post did help me understand the scope of the problem of government intervention in the economy.

Like you - I just don't want to believe that the democrats are using this crisis - even enhancing it- for their ends.

Pretty grim.

And apparently the EPA is re-visiting some legislation that if not properly defined - gives the government control over all US water down to the mud puddles in your back yard.

Interesting times.