Everyone knows that the US government is bankrupt and has been for many years. But I thought it might be instructive to see what its current cash-flow situation actually is. At least insofar as it’s possible to get a clear picture.
As you know, the so-called Super Committee recently tried to come up with a plan to cut the deficit by $1.5 trillion and failed completely. To anyone who understands the nature of the political process, the failure was, of course, as predictable as it was shameful. What’s even more shameful, though, is that the sought-after $1.5 trillion cut wasn’t meant to apply to the annual budget but to the total budget of the next 10 years – a fact that is rarely mentioned.
Now whenever the chattering classes talk about cuts, it’s always about cuts over the course of 10 years. Which is a dodge, partly because most of the supposed cuts will be scheduled for the end of the period, but also because new programs, new emergencies and hidden contingencies will creep in to offset any announced cuts. So the numbers below aren’t a worst case; they’re the rosiest possible scenario. People have thought I was joking when, asked how bad the Greater Depression was going to be, I answered that it would be worse than even I thought it would be. But I haven’t been joking.
To sum up the situation, given its financial condition and the political forces working to worsen it, the US government is facing a completely impossible and irremediable situation. I’m going to try to illustrate that here. But because I’m a perpetual optimist, not a gloom-and-doomer, I’m also going to give you solutions to the purely financial problems – albeit with some good news and some bad news. The good news is, there actually are solutions. The bad news is that there is zero chance that any of them will be put into effect.
The problems are one hundred percent caused by the US government, not by bankers, brokers or the real estate industry – although they have been complicit. Recall what government is: an organization with a monopoly of force within a certain geographical area. Its purpose is, ostensibly, to protect the inhabitants of its bailiwick from the initiation of force. That implies three functions: an army to protect against aggressors coming from outside of its borders; police to protect citizens from aggressors inside its borders; and a court system to allow citizens to adjudicate disputes without resorting to force. Assuming you’re going to have a government, it’s important to limit it strictly, lest it get completely out of control – it’s got a monopoly of force, after all – and overwhelm the society it’s supposed to protect.
Here I want you to distinguish government from society. They are not only two totally different things, but are potentially antithetical to each other. This is because the essence of government is force, not voluntary cooperation. Everything that people think the government provides (beyond some forms of protection) is really provided by society or with resources the government has taken from society. It’s critical to understand this, or you won’t see the slippery slope the US is now sliding on.
Is there any chance that the US government can reform and go back to a sustainable basis at this point? I’d say no. Its descent started in earnest with the Spanish-American War in 1898, when it acquired its first foreign possessions (Cuba, the Philippines, Puerto Rico, etc). It accelerated with the advent of the income tax and the Federal Reserve in 1913. It accelerated further with World War I, when the government took over the economy for 18 months. The New Deal and World War II made the state into a permanent major feature in the average American’s life. The Great Society made free food, housing and medical care a feature. The final elimination of any link of the dollar to gold in 1971 ensured ever-increasing levels of currency inflation. The Cold War and a series of undeclared wars (Korea, Viet Nam, Afghanistan and Iraq) cemented the military in place as a permanent focus of the government. And since 9/11, the curve has gone hyperbolic with the War on Terror. It’s been said that war is the health of the state. We have lots more war on the way, and that will expand the state’s spending. But the Greater Depression will be an even bigger drain, and it will likely destroy the middle class as an unwelcome bonus.