Readers of these pages know that I have been predicting that there will be no national elections in 2012. I maintain that the economic system will collapse and martial law will be declared after the 2008 elections.
This is, of course, a pessimistic assessment and there’s an old saying that hope springs eternal in the human breast. In between periods of realism, I become somewhat optimistic but, inevitably I get stomped by reality. Over the past two weeks, I have read two articles that have confirmed my worst fears.
Steven Yates published an article at www.lewrockwell.com entitled,’The Coming Financial Train Wreck’. He cites frightening statistics and concludes that the 2008 will be the last chance for a critical mass of voters to unite and make some changes. He mentions the Constitutional and Libertarian Parties as offering hope. While I agree about the assessment, I don’t see any critical mass developing. It would require a massive change in the mentality of the body politic which would require some courageous, principled politicians, a contradiction in terms.
Don Smith has published an article entitled,’ The USA – Out of Business’. Smith makes some assumptions that are dubious such as federal spending holding constant (as if that will ever happen). Smith also assumes an average interest rate of about 5%. A 5% interest rate is low by the average of the past 25 years, or so. He then plots them on a graph and shows that at some time in 2011, the federal receipts and interest lines intersect. After that, receipts are no longer able to even meet the interest. At that point, the United States government is insolvent and can no longer function. Please note, that Smith makes some optimistic assumptions.
For many reasons, the interest rate is unlikely to average 5%. Expect it to increase gradually which will move the crisis point closer. If federal expenditures increase, as is the historic likelihood, the crisis point moves closer, also. Both of these are much more likely than not.
It is important to realize that Steven Yates, Don Smith and I are three people of very different backgrounds. I’m a physician, Steve Yates has a Ph.D in philosophy but I have no idea what Don Smith’s credentials are other than an astute observer, which is certainly a valid one.
With the federal deficit at $1/2 trillion, increased pressure will be put on the supply of credit. As the federal government seeks funds to make up for the deficit, it will put pressure on the interest rate. With a gross domestic product (GDP) of just $8 trillion, that means the feds will have to borrow approximately 6% of the GDP for this year alone. That is an awful lot of money to borrow. The interest rate has to go up OR the Federal Reserve cranks up the printing presses which means inflation. It must be one or the other or a combination of both. Either is a recipe for disaster.
The other assumption is that government spending will not increase. This is akin to saying that the sun won’t rise in the east tomorrow. Poised is the tsunami of Baby Boomers about to enter the ranks of social security beneficiaries. The benefits include not only the monthly stipend but also Medicare, a program barely keeping its head above water as it is. Add the new prescription benefit that is going to cost about another $65 billion a year to begin. By 2011, based upon past experience with government estimates, especially with regard to medical programs, I submit that the prescription benefit alone will surpass $400 billion per year, almost as much as the current annual deficit!
Several weeks ago, Alan Greenspan suggested cutbacks in Social Security benefits. Afterward, The Evening News with Tom Brokaw showed interviews with people across the country. Their reactions were a case study in the lack of information about the true nature of the program. Seemingly well educated young people said that they had paid and they felt they should get something back and almost all of them reacted the same. This bespoke the complete ignorance, on the part of the public, of how Social Security works. No one understands that there is no account with his name on it. There is only a ledger that records whether or not the worker has achieved any particular level of benefits BUT the benefits are to be determined by the Congress at the time they are distributed.
Most sobering is that the entire program is a Ponzi, or pyramid scheme, in essence a chain letter. Like all pyramid schemes, when it begins it works really well, at the top of the pyramid. But eventually, you reach the bottom of the pyramid and we are almost there right now. When Social Security started, there were twenty workers for each beneficiary. Today, there are barely more than three. This is why the program is in so much trouble. If you ask your congressman or senator if the Social Security System is a Ponzi scheme and he answers no, he is a liar.
The irony is that the federal government and every state government recognizes the fraud inherent in these scams and they are outlawed in every jurisdiction in the country. If anyone were to offer the public an investment opportunity based upon the principles of the American Social Security System, he would be arrested and prosecuted for fraud! This is not idle speculation. It has been done and will be done again. Cute, huh? The government exempts itself from the same regulations it applies to everyone else. And they wonder why resentment rises.
And so it goes. Social Security is huge, and probably the hugest example of runaway government costs but it is just one of many. The break point approaches and like Nero fiddling while Rome burned, our politicians spin their thin web of lies. Something can be done but the longer action is delayed the worse the collapse will be. 2011 is just seven years away.
“Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact.”