China's Doom-Loop
The edge of recession has now progressed to a full-blown Chinese fire drill
I have written before that I believe the world is on the cusp of significant social, economic and political change. These changes will be driven by economic insecurity as the Marxist welfare state completes its cycle of failure with a corresponding increase in social unrest. We are already seeing evidence of how this failure is likely to come about – through government action.
For many decades governments across the globe have lived beyond their means. They have sought easy re-election by spending big today by borrowing from tomorrow’s taxpayers. In the process they have run up unsustainable debts and fed an entitlement mentality that has no parallel in modern history. Ultimately, the level of debt catches up with the nation state and things have to change. Sometimes bankruptcy is declared or taxes rise and/or entitlements are slashed. Whatever the path, the ultimate result is unhappy citizens.
We have already seen the City of Detroit declare bankruptcy as a result of its dire fiscal position. It has been reported that 50 per cent of Detroit’s annual tax revenue was earmarked for the payment of state pensions. Imagine the long-term catastrophe of this scenario. If a town has 10 policemen and five retire, the state hires five more and continues to pay the retirees. Thus there are 15 police on the payroll. Multiply that many thousands of times and you see where bankruptcy becomes the only solution.
The major question is: how could anyone see this as a sustainable process in the first place? The answer is that any level-headed person could identify the folly of such a system but reality was ignored in favour of immediate gratification.
However, the larger problem is that very few of our political leaders can see the inevitability of where their policies are taking us. Instead of admitting they have a spending problem, they insist that only more revenue is the answer. So they look for new ways to increase taxes. In Spain, they are now effectively taxing sunlight by declaring a tax on power generated by domestic solar panels. Cyprus has levied a 47.5 per cent tax on all deposits over $100,000 held at the Bank of Cyprus. Imagine if you had sold your house and deposited the sale proceeds in the days before the banking system was frozen. A deposit of $1 million would now be only worth $572,500.
But it is not just Europe where governments are raiding taxpayers for every penny they can get.
Barack Obama wants to raise another $1.6 trillion in taxes, thinking this will help the economy. It won’t and I suspect it will actually have the opposite effect. Raising taxes gives productive people less to spend and invest which slows the economy and leads to a spiral of deflationary forces. This forces unemployment up and disquiet among the populace. Even big governments’ favourite economist J. M Keynes recognised this fact.
History supports such a scenario and it is time we remind ourselves that those who do not learn from history are doomed to repeat it. Unfortunately, I fear we are now on an almost inescapable trajectory of seeing history repeat.
If my hypothesis is correct, as Europe implodes economically capital will flee to the deepest, safest pool available in the world today – the US dollar. As China slows and the flow-on effects impact the Asian economies (including Australia), the flight of capital will follow the European money. The result will be a meteoric rise in the US equity markets and dollar denominated private assets. This could begin later this year and last for several years.
Eventually though, the debt position of the US economy will not be sustainable and may implode. The government will continue to tax and spend because it is unwilling to take the necessary steps to stop the rot. Economic failure will result in protests, widespread dissatisfaction with politics and demands for change – economically, socially and politically.
History shows us that this is the path followed by nations and empires who have travelled down the road of propping up today at the expense of tomorrow. The only difference this time is that the problems are global rather than geographic. That suggests the consequences could be larger and more widespread than ever before.
In this instance, I sincerely hope that I am wrong but if I am not, it might be time to batten down the hatches.
Join 50K+ readers of the no spin Weekly Dose of Common Sense email. It's FREE and published every Wednesday since 2009