"For governments, crises are opportunities..."

This is an interesting writeup.

http://archive.lewrockwell.com/rozeff/rozeff338.html

The U.S. government is insolvent. Who says so? Timothy F. Geithner, the U.S. Secretary of the Treasury.

Geithner sent a letter to Congress on Jan. 6, 2011 asking for the debt limit to be raised. If it is not raised, he warned, the U.S. will default on its debt. In his words:

Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States."

He didn’t say that the government will be inconvenienced. He didn’t say that the government would be forced to muddle through by delaying payments, raising taxes, and cutting non-obligatory programs and services. He said the government will default. This means that the government doesn’t have enough cash to pay its obligations to the many and sundry persons to whom it owes cash unless Congress authorizes an issue of even more debt.

After the government issues the new debt, its overall debt will be even higher than before. Unless its obligations that require cash payments are reduced, or unless it finds new sources of revenue, or unless the interest rates that it pays decline, the same situation will surely occur again and occur even faster because its overall debt will have risen. It will run short of cash to pay its obligations.

...

Since yields are likely to rise as lenders demand higher default risk premiums and as they demand higher inflation premiums (when the Fed monetizes debt), with the Fed’s ability to keep rates down only a temporary and/or only a restraining phenomenon, and since these yield increases hasten the prospect of insolvency, the government can only avoid default by either slowing down its borrowing (and spending) or by raising revenues. Doing nothing means it will default.

If government borrowing slows down, its spending will have to slow down. Many Americans will find this very unpleasant as benefits, now and prospective, are cut, and as various other programs are cut. If government raises taxes, the impact of its gargantuan borrowing will come home to Americans, again in a most unpleasant way. Their disposable incomes will fall sharply.

Outright default on U.S. bonds is not in the cards because that immobilizes the entire U.S. government. The government won’t do that. It will look after itself and its own survival first. The American public comes last. Default upon promises made to Americans is the more likely course of action.

Thus, the government will slow budget increases, or stop them altogether, or cut its spending in absolute terms. Like any borrower, its borrowing capacity is not unlimited. Its borrowing capacity depends on its taxing power which, in turn, depends on the productivity of those whom it taxes. Causation runs in both directions. The productivity also depends on the tax and regulatory structures. It’s inconceivable that the government could double taxes. If it did, most of the economy would attempt to go underground. Whatever remained above ground would have vastly reduced incentives to produce.

Which groups and programs will be the object of government cutbacks? That is again a matter of speculation. It depends on which groups have the firmest control over the government’s purse, which groups make the largest protests, and which groups have the greatest influence on votes for key Congressmen and campaign contributions. I agree with Kotlikoff and Gary North that the most likely targets are the largest ones, and they are the social welfare programs.

Some groups are going to experience the brunt of the actions taken to avoid default. Others are likely to go relatively unscathed. Government bureaucrats will try to protect themselves. This is going to create domestic conflict, protests, and dissension. Life is going to be much harder for Americans in the future, unless increased productivity from some unknown sources of invention or technology offsets the impact of government promises that are going to be defaulted upon.

Congress has another option, which is to seize the assets of Americans. This is a form of taxation. Congress can force pension funds to take its bond issues. This would force down the prices of corporate stocks and bonds. It would devastate the economy. A large-scale program of bond cram-downs is almost tantamount to making the Fed absorb bonds. It puts pressure on the Fed to create more money so as to keep asset prices up. Such a program would be an act of desperation by the government that simply beggared the population. It would certainly not resolve the insolvency.

When, if ever, will Congress start to act in size, that is, with cutbacks large enough to avoid defaulting on its bonds? My answer is this: Not yet.

The prospect of rising yields is not yet felt in the minds of those in government. The prospect of a budget out of control due to a huge and rising bond interest payment obligation hasn’t yet hit home among government officials. They can’t see the tidal wave. They don’t believe it’s coming. The Fed’s purchase program is obscuring their vision. The slow economy is helping to hold down bond yields for the moment. The foreign central banks, as a group, are still supporting the U.S. bond market. People who are afraid of going back into stocks are still supporting the U.S. debt market.

Furthermore, the two parties are both enamored of big government. Nearly all politicians are sensitive to public demands for free lunches. That is one reason why the fiscal gap is so huge in the first place. America did not exactly fall all over itself in trying to stop a prescription drug benefit. Consequently, the government is postponing actions to close the fiscal gap.

One fine day, there will be a discontinuity. There will be a many-sigma event. There will be a fiscal earthquake or a market earthquake or some combination of both. This will not be a pleasant experience for Americans, but those in government have little reason to fear it. They can label it a crisis, as if we do not already have a crisis. They can use such a "crisis" as the excuse for more radical government action. The government can demand even more power or simply exercise it, even if the results are to make matters worse for Americans.

For governments, crises are opportunities, a fact well known among analysts of government. This fact is one reason why governments postpone taking actions to remedy what appear to the rest of us to be bad situations.

Unfortunately, the fact that governments batten on crises and see them as opportunities is not well known among the general population which still looks to government to handle crises.

Since the insolvency of the U.S. is a fact and a fact that implies hard times ahead for anyone who depends on government, it is prudent to take measures to make oneself as independent of government as one possibly can.

January 10, 2011​

 

"Don't let a good crisis go to waste".

Politics has become nothing but vitriolic "talking points", with no middle ground.

Each side creates the crisis, then blames the other side to justify the extreme measure they must take.

This is the Bootlegger and Baptist on steroids.