Things fall apart

Interestingly, “everyone” except the data has been announcing a recession for months now. But, unless the guys with the current, huge stock market short positions get caught with their pants down, the stopped clock will be correct soon.

So, that raises a spector a lot more scary than a few broke house flippers, some failed banks, and a lot of Manhattan know-it-alls pounding the streets.

Specifically, the US government will be in a pickle when tax revenues drop off a cliff. It will be the equivalent of a real war. (Check out the Congressional Budget Office’s data on income and spending relative to GDP, by the way. Very steady numbers since the reports’ start in the mid-60’s.)

So, I’m curious what will happen in the next few years.

US government shortfalls are covered by some combination the following:

  1. Cutting government expenditures.
  2. Raising tax revenues.
  3. Printing money.
  4. Borrowing money.
  5. Forcing non-government entities to pay off-budget.
  6. Forcing other countries to pay.

The government workers party is now in control of congress. And, people who put there money where their mouths are have picked Obama for many months now. It may take Nixon to go to China, but I believe we can rule out #1.

Economic down times are not the time to raise taxes unless you want to make things worse. And down times don’t cause tax revenues to crank up with “natural” productivity increases. Anyway, history says the US government is on the down-slope side of the Laffer curve. As doing counter-intuitive things is not congresses’ strong suit, the word, “fees” will be heard a lot, soon. But reality rules out #2.

In the ’70’s they printed money to cover Vietnam and the Great Society – and had the “Carter inflation”. (Near the end of which, the same people who now control the airwaves satisfied themselves that stagflation was the normal state of any capitalist economy. Keep that in mind when you watch the 6 o’clock news.) Anyway, the whole world is caught up in the current financial follies. And, there is some indication that people outside the US are walking the safe-dollar path right now. Fire up the printing press and they’s run away like rabbits. #3 doesn’t look good.

In the last 3 decades the US government has replaced printing with borrowing. Borrowing works if someone is willing to loan you money at low interest rates. It works especially well if you’re investing that money in a way that pays off better than the interest rate. One might argue that the US government has been doing just that. But, baby boomers are getting older now, and supporting the old folks is not done as an investment. #4 won’t cover the tab.

That leaves making others pay.

How is this done?

I’m not creative enough to think of many ways.

That “regulation” is the current label given to offloading costs from government budgets is one clue, though. Regulation won’t keep the government lights on, though. But new regulations would be a good excuse for new “fees” to pay the regulators.

It appears a done deal that the social security age of retirement is going up. That’s always been the reasonable and effective “solution” to the social security funding problem, so this is truly a “Nixon/China” situation. A Republican would have zero chance of doing this.

Back in the 1990’s Bill (or was it Hillary?) floated the idea of raiding private pension funds for government use. (This was long before the Internet Bubble shot tax income up to the point of balancing the US budget.) So, congress might require private funds to “contribute” some fraction of their outlays to the “community”.

And, finally, what I predicted in the 60’s would happen when my generation got old: We baby boomers would go out to the world and force others to pay for our entitled retirement. Count on Iraq paying through the nose, for starters.

Odder things have happened.

But this is all if the bottom drops out. Little inherent in the world requires such a thing to happen.


Military cuts?

Military people don’t vote Democrat, so military cuts are politically safe. But the military doesn’t take much of the US government’s budget (close to zero of state budgets). And, it’s not clear how the headlines about a new arms race among other countries will feel.

Too, a good deal of military expenses goes to the secondary core Democrat group, “grad students”. (… for want of a better label. Though that secondary core group is out of school, they identify with the grad-student mentality.) Cutting academic research would be unthinkable to this group. — And they are the taxpayers paying the bills now. — Count on this money changing to “green” research. No net dollar difference.

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