Debt Crisis 101

debt crisis 101

This is sub-chapter #14, of Chapter #4, Economics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the full PDF of the book, then you can download it by clicking here—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published. If you wish to read the previous chapters in one convenient place online, follow this link.

 


DEBT CRISIS 101

Imagine an eighteen-year-old rich college kid named Jack whose parents are rich. He goes to an Ivy League college with a credit card, and spends his college years buying everything he needs and wants: big screen TV’s, nice furniture, etc. He has his share of parties and his generous parents pay for all of it, no questions asked because their emotions get in the way of their rationality.

Four-to-six years later, he graduates college and becomes an apprentice lawyer, not earning much money at the beginning, though now he has his own credit card and is on his own. What do you think his spending habits are going to be like?

We all realize that most young kids would continue their spending habits as before, and rack up a bit of debt. Even adults do it now. “Oh, he’s just trying to keep up with the Jones, lame.” So Jack racks up a bit of debt, but because he wants to seem independent and show his parents he can take care of himself, he makes the minimum payments each month, which is all he can afford.

Now after a payment or two, he might think his debts are under control; he’s confident and proved that he is independent (to himself.) Jack goes on another spending spree to celebrate. Same process—he might make the minimum payments again or get a second credit card and pay off the first credit card. Rinse and repeat.

Eventually, his initial debts, still accruing interest each month, will no longer be affordable, and he won’t be able to make those minimum payments. Or he might not be able to get a third card due to bad credit. He is not yet making enough money and might not for a few years, but he’s confident that one day he will, so there’s no immediate problem, and he maintains the status quo. Imagine that…

Now look at the American and European governments and ask yourself, what’s the difference? You will realize there is very little difference in how fiscal responsibility works in an individual or in a government. In order to lend to governments; investors, other countries, central banks, or big institutions, need some assurance they can get their capital back with a bit of interest above inflation to turn a profit. If there is no assurance, foreign capital will slowly dry up, as is beginning to happen today.

The credit crisis we found ourselves in a few years ago was, of course, the precursor to this debt crisis we find ourselves in now. As during the credit crisis, all that toxic debt carried by private companies was going to sink the ‘too big to fail companies,’ and so governments bought it all up and carried it onto their books, increasing their own debt portfolio dramatically. But these governments were swimming in debt to begin with and were already running deficits every month of every year, and of course, paying the minimum repayments on their interest and paying off existing debt with new debt. At the prior levels, however, it was manageable, and there was no cause for immediate concern.

Then the constant stimulus and bailouts began, and they continued to accrue ever more debt. When they couldn’t sell enough debt, they printed it. Even money printed out of nowhere is loaned at interest—right now from the Federal Reserve at between 0 and 0.25% and in the EU at 1.5%, as of Jan 2013—and that extra money inflates the currency, robbing people who had the prudence of saving of their purchasing power, and worsening income inequality.

So with all this extra debt streaming in, plus the already running deficits that governments were, and still are running, you begin to see how similar they are to our dear and stupid Jack. Eventually, they will not be able to repay even the minimum repayments as interest rates eventually rise. And then what happens?

This moment could be happening soon. Japan is over 225% debt-to-GDP ratio, the USA is above 100% and climbing each month, and some of the European ratios are well over 100%. What’s going to happen when these governments can’t pay back their debts? That will be a major strike in the confidence of the global economic system, where trillions of dollars of government debt are held around the world in pensions and other benefits.

Trillions upon trillions of dollars are invested in these government debt traps, and the global economy is going to sink if anything ever happens to them. That capital needs somewhere to go, and when it doesn’t have any place to go to, bad things are going to happen (and a lot of it will disappear).

I’m sure that politicians know this; they have legions of economists and other smart people working for them. There is no way for them not to know. Yet, because the global financial system is based on confidence, no politician can tackle any of these problems for the following reasons:

1:

An electorate that will immediately vote them out of office. People know cuts have to be made—well some do—but no one can touch their entitlements, so of course nothing is cut.

2:

Their comrades won’t support them for fear of their electorate voting them out of office, too, which again shows the self-serving nature of politicians. Rather than taking one for the team, they pretend they don’t know.

3:

The global economy and all the stock markets in it, are based on confidence. A company can have great financials, profits to earnings (P/E), and other good financial indicators but still have a poor stock price. Or it can be the other way around; Enron, Lehman Brothers, and Facebook (when it first IPO’ed) make fine examples. Stock earnings and prices are based on future expected growth, so today matters less than tomorrow, or in economic parlance, the (theoretical) present value of discounted future cash flow. The same goes on an international basis and for fiat currencies. The value of a dollar today is based on future value it can bring, with next year’s expected tax revenue to repay that borrowed dollar with interest, along with demand for its bonds; and to make matters worse, emotion plays just as large a part, if not larger, than logic, which throws common sense even further into the black hole of financial markets.

This is a fundamental flaw in fiat currencies and the stock market; confidence is essentially a zero-sum game. There are very few things that we can remain confident in over a long-span of time: the moon, the sun, the stars, the comings and goings of the seasons, our need of food and water and sexual urges. What else can you say with absolute confidence will be around for all time?

So when confidence disappears, and the biggest economies are unable to borrow enough money to fund themselves and their entitlement programs, what will happen?

Look what happened in 2008. Lehman Brothers, which insured America’s mortgages, went belly up, and the global economy was brought to its knees because all the fancy derivative packages they sold couldn’t cover the payouts when growth in the housing market stopped, because the price of oil was too high.

Then western governments picked up all that debt, so what will happen when the government stops being able to absorb that toxic debt? Currently the US government pays $220 billion in debt repayments per year (six-percent of the government budget), and this number may rise to $1 trillion by  2020. (Note: the repayments are artificially small because the Federal Reserve has set its interest rate between 0 − 0.25%. If these rates ever rise, and they must once, or perhaps if, the economy starts recovering, the repayments will become even larger. Keeping interest rates at 0% is not possible forever, so sooner or later, those rates must rise.) In such a scenario, that of the government being unable to finance its obligations; stock, bond, and derivatives markets will tank everywhere. Politicians have shown us repeatedly that they will do everything to keep the status quo going. History is replete with such examples. Thus, we can almost be assured that no course of action will be taken to prevent this calamity until it’s too late to do anything, not that they have many options at this point anyway, short of political suicide, and an economic reset.

At the end of the day, it’s not the government’s fault alone. While they hold their fair share of blame in this circle of madness, we are equally to blame for allowing them to do as they please. Politicians are an extension of the society they represent. They are paid too much, get freebies others slave for, are put on a pedestal, are allowed to receive bribes in the form of lobbying, and are rewarded by the masses for saying what they want to hear instead of the hard truth they need to hear (this is really the only problem that needs fixing). So at the end of the day, the types of people who are attracted to these positions tend to be more leeches than public servants, paint rosy pictures where roses don’t exist and aren’t afraid to lie for the perceived “public good.”

All lies and half-truths eventually see the light of day; it is inevitable (especially with the internet). Lying for the sake of short-term stability forsakes the long-term march of human progress. This is what our civilization is seemingly transforming into: a self-serving, shortsighted engine of crony capitalism barely capable of thinking past the next quarter, long-term prosperity be damned. Our economics, so rooted in political dogma and ideology can, and should do better, but only if politics loosens it grip. As in the past, the separation of Church and State heralded a new era in human civilization, so to will (for the second time no less), a separation of Bank and State. (You’ll notice that the conjoining of Bank and State abbreviate neatly and poetically to BS. Indeed, BS is exactly what follows when the orgy of political malfeasance meets the relentless greed of Wall St.)

If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours” ~ John Maynard Keynes (Economist)


Are We Responsible?

are we responsible?

This is sub-chapter #9, of Chapter #3, Politics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World.

Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the MOBI, ePub, or PDF, then please let me know in the comments—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published.


ARE WE RESPONSIBLE?

Now that the ‘facts nonsense’ is over with, I can start with the rhetoric, where any opinion can be made to sound right. But before we begin, I’d like to apologize in advance for the overabundance of negativity in the next 8 sub-chapters. I am only calling it as I see it, but it might be difficult to slog through. If you can make it through the seven hells, plus the free bonus hell, then you will be rewarded with an overabundance of positivity in the last 4 sub-chapters, as I’m saving the best for last. With that out-of-the-way, let’s talk about responsibility, personal as well as social responsibility in the context of the question, are we responsible enough to govern ourselves?

Let’s begin with social responsibility. The majority of us are part of the collective called society. We enter into a social contract with our fellow citizens and our government to give up some of our liberties in exchange for certain conveniences—usually by accident of birth.

For example, we allow the government to tax us in exchange for them to build infrastructure. We expect them to pass laws, regulations and statutes that protect us from those who would do us harm, to enforce the rule of law, and to look out for our best interests on the international stage. So while we lose some freedoms, we gain greater freedoms in the form of convenience; that’s the theory anyway, and generally how governments function at a democracies inception, when everybody is an idealist.

Onto responsibility: there was a study some time ago titled, The Bystander Effect. It aimed to clarify what, if any, difference occurred in the response time of normal people giving aid to complete strangers who were in the process of getting, or were hurt, depending on how many other bystanders were present. The final result was quite interesting: the more people watching, and as long as they could see each other watching, the less likely help would be rendered in any form.

What? Common sense should dictate that help be rendered faster, but as usual, the truth flies in the face of common sense. The theory was that because everybody could see everyone else also watching, subsequently assumed that somebody else would dial the police, ambulance, or render aid. Another study take a different approach to the same problem. They put a lone person in a room, and started pumping smoke into the room. Seventy-percent percent of people reported the smoke within seconds. When other subjects  (actors told to ignore the smoke) were present, the number of people reporting the smoke declined significantly, to ten-percent in one scenario.

So what does this have to do with society?

Think, by and large, of Western governments that a lot of us are in this contract with. By now, most of us know that something is wrong. Spending is too high, government meddling in the economy is distorting the marketplace causing the misallocation of capital, we are being endlessly manipulated, and corporations employ armies of lobbyists so democracy is swayed their way, at times, regardless of the social cost.

At times, greater liberties than are required to be removed are being removed, seemingly with no immediate benefit to us, along with an anthology of other seemingly small inconveniences that, when added up, paint a confusing, perhaps disturbing picture.

No one, however, does much of anything to protest it, if they even know at all. We all assume that someone else will do it, and yes, there are those who stick it to the man, but they are few and far between.

The world sits atop a precipice, most importantly, a financial one. (I will goto in more in the chapter Debt Crisis 101.) The Western world is in so much debt that any day now we could plunge into another depression. And if that was our only problem we might be so lucky:

  • Online privacy is a thing of the past. Governments and corporations are increasingly intruding into our private lives, both offline and online.
  • Inflation is accelerating around the world. That is, your purchasing power is being slowly eroded, and the Consumer Price Index (CPI) which tracks inflation often tracks novel and unimportant price increases to underestimate inflation
  • Too Big To Fail’ banks are getting trillions—not a typo, trillions—of free dollars because, apparently, socialism is now ‘in’ for friends of the government
  • The mainstream media seems to be getting more biased by the day, sometimes outright trying to misinform us. Accidentally or not, who knows. (Cough fox news cough.)
  • US politicians are domestically passing draconian laws that other countries might, and usually do, emulate such as the National Defense Authorization Act (NDAA)

The Bystander Effect is also known by another phrase, the diffusion of responsibility. So it’s quite obvious that when it comes to social responsibility, we’ve dropped the ball there, and in most cases, we demand that governments continue on the path to fiscal disaster, which I’ll explore soon.

Onwards and forwards to personal responsibility. We like to think of ourselves as responsible, more so as we age, yet are we really? Using the populations of Greece, Italy and Spain as examples, are they really acting responsibly by protesting the governments’ austerity measures in 2012 that are removing unsustainable programs that can’t be paid for?

‎”It is not the function of our government to keep the citizen from falling into error; It is the function of the citizen to keep the government from falling into error.” ~ Robert H. Jackson (US Supreme Court Justice)

These programs will only make their own eventual situation worse by accelerating their countries’ economic downfall. Sounds silly protesting to keep entitlements that are damaging to your economy, and by extension, your future personal well-being, does it not? We are predisposed to future short-term thinking, and it seems our educational systems are not preparing us to see past this default mode.

Of course, those protesting don’t know this, but it is part of their responsibility, their social contract, to be informed on what does and does not work economically. It’s not good enough to demand something just because it benefits you. Ignorance will eventually hurt you, your fellow citizens, and in a globalized world, the entire region or planet.

It is often said, “Ignorance is bliss,” though it should be said, “Ignorance is temporary bliss.” Those who live this way are leaving their future well-being to chance, or to other less-than-savory characters—in many cases, the politician.

All three of the just-mentioned countries are in so much debt, they run the risk of outright default. In the case of Greece, they can’t even sell debt on the private bond market, relying solely on bailouts from the IMF and ECB. So why are they, and many others, drowning in debt?

One of the reasons is that the majority vote for politicians who bring the most benefits to them, without asking simple questions such as, “Where is the money going to come from to pay for this program?” Or anything remotely resembling a sensible question. And the recently elected politician can’t just raise taxes as soon as they’re elected to pay for their promises, so what is a politically expedient way of getting the necessary money to keep these promises without attracting the ire of voters? Thanks to Keynesianism, the answer is simple: borrow it. Problem solved! Of course, it’s only solved on a short-term basis, and we will be finding out just how shortsighted it really was in the coming years globally, though locally it is being felt in certain areas, as it is in Spain, where the youth have fifty-three percent unemployment, regardless of educational attainment.

There’s yet another reason government debts have spiraled upwards around the world. It’s not just limited to those three countries mentioned above, they are merely the top 3 examples! It is because previous government programs rarely, if ever, get cut as there are people who rely on those programs who won’t or can’t, give them up, and this affects a politician’s chance of re-election, no matter how small a minority it benefits. Just look at corn subsidies in the USA, corn farmers make up less than two-percent of the voting block, yet they receive billions in subsidies that simply isn’t economically necessary (and actually is economically destructive), while also contributing destructively to the entire planet, essentially raising the cost of corn, tying it to the price of fuel (converting it into biofuels with only a trivial 50% energy gain, compared to oil at 500%, i.e., one barrel of oil gets us 1.5 barrels of corn bio-fuel, while one barrel of oil gets us five barrels of oil out of the ground). This negatively affects food prices around the world, thereby increasing world hunger. But they still get their billions of dollars of subsidies without a care in the world, and no politician can touch that subsidy. Democracy was at first, the tyranny of the majority, though it has seemingly evolved into the tyranny of the minority, thanks to the art of lobbying. I need not even discuss the stranglehold of Wall St. Human intuition and shortsighted thinking is becoming so overwhelmed, that in a data-abundant world, it should no longer be used as the basis for democratic decision-making, an important part of it yes, but not the basis or foundation, as we are inherently bias and shortsighted (more on this in Fixing Politics and Chapter 5: Technology).

Thus, the upward thrust of government programs and the bureaucracies that goes with them, which history has shown happens time and time again, happens yet again in the modern-day where apparently we know better. This leads to ineffectual decision-making and government. Politicians are so concerned with keeping their jobs that they don’t do their jobs to the full potential and benefit of the nation. And people are so concerned with their own benefits or entitlements, or self-absorbed ideas that their socioeconomic system is the right one that they won’t allow politicians to do their jobs to their full potential either, even when a change of direction is required, or demanded to avert disaster! Responsibility? More like populist ignorance, with a serving of political cowardice, and a sprinkling of stupidity on both sides. (By stupidity, I mean the inability to recognize the long-term effects of actions.)

“How fortunate that men do not think.” ~Adolf Hitler (Sociopath)

This lack of personal responsibility lies solely at the feet of the populace. Yes, politicians have run up the debt making things unsustainable. They have spent and spend too much, borrow and borrowed too much, and printed and print too much new money—and we are right to blame them for their part in these problems.

But we blame them for the whole problem when we are part of the problem; we, or at least the majority, voted them in based on what they would provide to us. We are to blame for not asking basic questions on how they will fund these generous entitlement programs, and are at fault for not understanding basic economics. We are to blame for leaving to others the responsibility of keeping their actions in check because we were too busy watching American, British, or French Idol. Being social mammals evidently has its drawbacks. Consider the Asch Conformity experiments conducted in the 1950s, and repeated many times since. Seven-to-nine participants (all but one being actors designed to fool the one real participant), when accessing two pictures on a card; the picture on the left is of a straight line, compared to the picture on the right with three straight lines, one of which matches the length of the left line. Cycling through variations of the cards, the actors were on some occasions told to purposefully give the incorrect answer as to which line from the right-side matches the line on the left. The lonely real participants answer, who was made to judge last, was recorded. In one-third of cases, the real participant overrode his gut intuition (the answer was exceedingly simple) and conformed to the crowd. This experiment was repeated over many years, many universities, and hundreds of people. It also found that the more ambiguous a situation, that is, the more uncertain (as we find in public knowledge of politics, economics etc), the greater the conformity effect. Now all those political pundit TV shows begin to make sense on Fox News and others.

We are the instigating factor in the crux of this huge worldwide issue that will come to bear down on us in the ensuing years. There is currently fifty-trillion dollars in debt worldwide, with a global economy of seventy-trillion dollars. (By the way, this is just government debt, and doesn’t include institutional or household debt.) When you take account just the ten largest mature economies, debt-to-GDP is 350%. I’m not playing tricks on you…cumulatively speaking, for the ten most mature economies (Australia, US, UK, Japan, Germany et al), their debt burden is over three  and a half times larger than the size of their economies, and this spread is growing. (This figures does not take into account the derivatives and Wall St investments which notionally total $668 trillion, though they only carry a market value of $15 trillion.) Think about that for a heartbeat, for every dollar in a Westerner’s hand, there is three-dollars-fifty of debt. In a near future coming to you, many won’t get paid their $2. Will it be you? (The specifics of how there is more debt than money will be explained in the chapter, Infinite Growth.)

The USA, the cornerstone of the world economy, now has, at the time of writing, $16.5 trillion in debt compared to a GDP of $15.81 trillion, and that’s just government debt; it doesn’t include household debt, which raises that ratio many times higher. This doesn’t even begin to even image the entire problem. The unfunded liabilities of the US government: Social Security, Medicare, and federal employees future retirement benefits are on the order of $86.8 trillion, as calculated by Chris Cox and Bill Archer, who both served on President Clinton’s Bipartisan Commission on Entitlement and Tax Reform (drawn up in 1994), which of course was never acted on. (An unfunded liability is the amount by which the liabilities of the plan, in this case benefits, exceeds the plans assets at a given date. The reason why it has grown into such a huge problem, is the federal government does not do the same accounting as is legally required of public and non-profit firms.)

“If the economy isn’t growing, it’s not because the government isn’t spending enough to “stimulate” it. Government spending comes from: taxation, which is a burden on the economy; borrowing, which is a future burden on the economy; or printing money – inflation – which is an especially dishonest, hidden form of taxation makes people think they’re richer while they’re being impoverished. No. If the economy isn’t growing, it’s because the government has burdened it with heavy taxation, smothered it with excessive regulation, distorted it with false information (the Fed’s manipulation of interest rates), and replaced real money—gold—with paper.” ~ Doug Casey (Investor)

So, what is the solution to this debt problem? There are no solutions, that I know of, except for a reset, which will happen all on its own as it stands, and anyone saying bailout knows not of what they speak. Creating more monetary debt to solve a debt problem is akin to giving heroin to a heroin addict and expecting it to solve his addiction problem; despite what politicians (pushers) will tell you. It’s only meant to buy them more time, not you. To show to you that is indeed the case: consider the fiscal cliff fiasco, where in 2011, the US budget passed by congress, factored in automatic budget cuts and tax increases (or expiration of tax decreases rather) to take effect by the end of 2012. This was done to ensure they had time to work out which cuts really to be made, with across the board cuts taking effect if no political compromise was forthcoming. At the time of writing this paragraph (Jan 2, 2013), they’d just passed an extension again for two more months while compromising on the tax increases. By the way, that compromise is projected to increase the national debt by four-trillion dollars over the next decade. (Doing nothing would have kept—theoretically at least—the debt-to-GDP ratio constant, but they managed to screw that up too! As journalist John Cassidy on the New Yorker, in an article concluding the deal wrote, “Congress is only buying time—and precious little of it.

So what are some solutions for these political problems that are so endemic? I will get to them in a later chapter, after asking a simple yet elusive question in the next chapter.

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.” ~ Unknown (Unknown unknown)


Note: the book is fully sourced, but because of the writing program I use, the links don’t transfer over to WordPress. At the conclusion of the twenty chapters, I may throw up a post with all hundred-fifty+ sources, but the final book will have all the relevant sources in the proper locations.

Are We Responsible Enough to Govern Ourselves?

I want to talk about responsibility. Personal as well as social responsibility.

Let’s talk about social responsibility. The majority of us are part of society. We enter into a social contract with our fellow citizens and our government to give up some of our liberties in exchange for certain conveniences. For example, we allow the government to tax us in exchange for them to build infrastructure such as roads, communication and utilities that we can use. We expect them to pass laws, regulations and statutes that will protect us from others who would do us harm, and to look out for our best interests on the international stage.

Has anyone ever heard of the Bystander Effect?

Continue reading “Are We Responsible Enough to Govern Ourselves?”

Debt Crisis 101

Lets imagine a 18 yr old rich college kid. His parents have tons of money, they send him to an Ivy league college with a credit card. He spends his college years buying everything he wants, big screen tv’s, nice furniture and having big parties and his parents pay for all of it, no questions asked.

4 years later, he graduates college and becomes some apprentice lawyer, not making much money at the beginning. He has his own credit card now, and is on his own. What do you think his spending habits are going to be like? I think we all realise that most young kids would continue their spending habits as before, and rack up a bit of debt. Hell, adults do it now; its called ‘Keeping up with the Jones’. So our college kid racks up a bit of debt, and because he wants to seem independent and wants to show his parents he can take care of himself without their help, so he makes the minimum payments each month.

Now after a payment or two, he might think his debts are under control and that he’s proved to his parents that he’s financially capable. Then goes on another spending spree to celebrate. Same process, he might make the minimum payments again, or get a second credit card and pay off the first credit card. Rinse and repeat. Eventually, his initial debts which are accruing interest each month, will no longer be affordable and he won’t be able to make those minimum payments, or he might not be able to get a third credit card due to bad credit. He is not yet making enough money and might not for a year or two, but he’s confident that one day he will so there’s no immediate problem. Imagine that…

Now look at American and European governments, and ask yourself what’s different. Seriously, there is very little difference in how the way fiscal responsibility works. In order to lend to governments, investors which are usually other countries, central banks or big institutional investors need some assurance they can get their capital back with interest also. If there is no assurance, people will stop lending to them.

The credit crisis was of course, the precursor to this debt crisis. As during the credit crisis, all that toxic debt carried by private companies (debt which was subsided by government) was going to sink these too big too fail companies, so the governments just bought it all up and carried it onto their books, increasing their debt portfolio dramatically.

But, these countries governments were swimming in debt to begin with and already running deficits every month and every year, and of course paying the minimum repayments on their interest and paying off existing debt with new debt. At the previous levels however, it was manageable and there was no cause for immediate concern. Then started all the constant stimulus and bailouts, the governments continued to accrue ever more debt. When they couldn’t sell enough debt, they just printed it. Even money printed out of nowhere is loaned at interest from a private central bank to its government. Right now at the fed, between 0 – 0.25% and in the EU, at 1.5% and that extra money inflates the currency robbing people who save their money of purchasing power.

So with all this extra debt streaming in, the already running deficits that governments are running and you begin to see how similar it is to that college kid. Eventually, they will not be able to repay even the minimum repayments and then what happens?

This moment is happening soon. Japan is at 200% debt to GDP ratio, the USA is around 100% and climbing each month, some of the European ratios are over 100%. What’s going to happen when these governments can’t pay back their debt? That will be a major strike in the confidence of the global economic system, where trillions of dollars of government debt are held around the world in pensions and other benefits.

Trillions upon trillions of dollars are invested in these government debt traps, and the global economy is going to sink. That capital needs somewhere to go, and when it doesn’t have any place, bad things are going to happen, and a lot of it will disappear.

I’m sure that politicians know this, they have legions of economists and other smart people working for them, there is no way for them not to know. Yet, because the Global financial system is based on confidence, no politician can tackle any of these problems for the following reasons:

Reason 1:

They will immediately be voted out of office by an electorate that refuses cuts. People know cuts have to be made, but no one can touch their entitlements, so of course nothing gets cut. There goes the myth of politicians being public servants. The majority are in it for themselves and nothing more.

Reason 2:

Their comrades won’t support them for fear of their electorate voting them out of office. Again, politicians are self-serving.

Reason 3:

The global economy, and all the stock markets in it is based on confidence. A company can have great financials , P/E and other good financial indicators but still have a poor stock price, or it can be the other way around. Think Enron, Lehman brothers before they collapsed. Stock earnings and prices are based on future expected growth, so today matters less than tomorrow. The same goes on an international basis and for fiat currencies. The value of a dollar today is based on future value it can bring, and next years expected tax revenue to repay that borrowed dollar with a wee bit of interest.

I think this exposes a fundamental flaw in fiat currencies, confidence is essentially a zero sum game. There are very few things that we can remain confident in being consistent over a long span of time. The moon, sun and stars, coming and goings of the seasons, our need of food and water, and the resources that power our civilisations. What else can you say with absolute confidence will be around for all time?

So when confidence disappears, and the biggest economies are unable to borrow enough money to fund themselves and their entitlement programs, what’s going to happen? I’m not looking forward to that day. Look what happened in 2008. Lehman Brothers, which insures America’s mortgages, went belly up. The global economy was bought to its knees, because all the fancy shmancy derivative packages they sold couldn’t cover the payouts when growth in the housing market stopped. The governments picked up all that debt, so what happens when the government stops being able to absorb that toxic debt, as they call it. The stock markets are going to tank everywhere. Even though stock markets aren’t a real world functional aspect of economies, and they are casino’s basically that are better traversed with human psychology than P / E and other financial jargon, they represent everything on the economic stage.

Politicians have shown us repeatedly that they will do everything to keep the status quo going. History is full of examples. Thus, we can almost be assured that no course of action will be taken to prevent until its too late to do anything, not that they have many options at this point, short of politician genocide.

At the end of the day though, it’s not the government’s fault alone. while they bear some of the blame in this circle of madness. We are equally to blame for allowing them to do as they please. The way our democracies are structured, it’s a recipe for corruption and disaster. Politicians are an extension of the society which they represent. They are paid too much, get freebies others slave for, are put on a pedestal, are allowed to receive bribes in the form of lobbying and are rewarded by the masses for saying what they want to hear, instead of the hard truth they should hear. Thus at the end of the day, the types of people who are attracted to these positions tend to more leeches than public servants, tend to paint rosy pictures where there aren’t any roses and aren’t afraid to lie for the perceived ‘public good’.

All lies eventually come out, it is inevitable. Lying for the sake of short them stability forsakes the longer term viewpoint. This is what our civilisation is transforming into. Short term capitalism, never thinking more than a quarter or two ahead. Long term economics be damned. Such a shame.