The Shadow Knows: Part Two

Additional Economic Background

After last night’s introductory post, I had originally planned to launch straight into a more detailed analysis of one of the seven shadow functions. However, based on some of the comments that appeared on the post, further background material is necessary to help explain the main thrust of this topic.

Two general areas of explanation need to be covered. One is easy, and I’ll tackle that first: a reader named “TequilaKid” left a comment (and a challenge) for me. He posted it on the news feed by mistake, and many readers may not have seen it, so here it is in its entirety:

Dear Baron Bodissey:

I read your note in Gates of Vienna today and was inordinately puzzled by two broad historical claims you formulated:

1.		“The Western welfare state is built out of enormous, unthinkable quantities of debt. It is the greatest Ponzi scheme in history, and its demise is mathematically inevitable.”
2.		“… Socialism … weakened Western culture and allowed Islam to establish … a massive beachhead.”

I scoured my head for hours trying to guess what historical events had persuaded you of the accuracy of these peculiar notions. I strongly suspect they are random products of your imagination. I hereby challenge you to produce any sensible argument or fact in defense of these two remarkable theses, which I have no hesitation in qualifying even now as patently fraudulent.

Sincerely, TequilaKid

Since #2 is a considered evaluation, and therefore constitutes my personal opinion, I can no more prove it than I can “prove” a statement such as: “This country is going to hell in a handbasket.” (Which it is; I just can’t prove it.)

#1 is more susceptible to demonstration, since it depends on data which are readily available, although the material is quite complex. The current welfare state is the greatest Ponzi scheme in history, and its demise is mathematically inevitable within about a generation, at the outside.

Let’s review the definition of a Ponzi scheme. Bernie Madoff’s scam was an enormous Ponzi scheme, but a simpler and smaller model can be found in the standard chain letter. A recipient is asked to add his name to the bottom of a list of names and send an amount of money to the name at the top of the list, which he is instructed to cross off. He is then required to forward a copy of the new list and its instructions to ten more people. After that he sits back to wait for the money to flow in.

The earliest participants in a chain letter really can make a lot of money off the scheme, but as the number of recipients rises exponentially, the pool of potential new suckers rapidly dwindles. Those who are late to the game lose their money as they help enrich the earlier players.

A mathematical formula of moderate complexity — which includes parameters for the total population available, the estimated proportion of recipients who are willing to participate, and the average time it takes to receive and resend each letter — provides a rough guess as to when any given chain letter or other Ponzi scheme will collapse. But the math is not really necessary — common sense and a reasonable native intelligence leads to the intuitive conclusion that any Ponzi scheme must eventually crash. No population is infinite, so the supply of suckers must run out, and the last ones in are the big-time losers.

Bear all that in mind as you examine the graph below:


These figures only take us up to 2009, and we have added two or three trillion dollars to the national debt since then. The last figure I heard was that the debt currently stands at about fourteen trillion dollars — a sum that is scarcely imaginable to an ordinary schmoe like me.

The graph bears a remarkable resemblance to the progression of a typical Ponzi scheme, but instead of an ever-increasing pool of money being sent out by the suckers, it shows the ever-increasing amount of money borrowed by the United States government so that it can continue to give out all the free goodies that its citizens and corporate friends have come to expect.

In other words, instead of voluntary suckers — rubes who, although stupid, surrender their money of their own free will — the feds are forcibly extracting money from future taxpayers. When the scheme collapses, as it inevitably must, the citizens of that era will be de-pocketed of their money, and will receive little or nothing in return.

Congress is even now rearranging the deck chairs on its own fiscal Titanic, tinkering with the trivial edges of the gargantuan deficits that its serial profligacy has created. Defund NPR. A pay freeze for federal employees. Cut back on military expenditures.

Those are all eminently worthy goals, but they don’t touch the elephant in the room, which consists of three major entitlements: Social Security, Medicare, and Medicaid.

Consider this graph:


The above estimates don’t include all the effects of Obamacare, which is expected to increase Medicare costs significantly (even while reducing delivered benefits). I don’t know the full methodology behind the figures, but I presume they also don’t factor in fully the persistent stagflation which is now expected over the next few years. That will tend to erode the tax base, and will require even further tax increases.

Or the government can borrow even more money — assuming it can still find governments that are foolish enough to lend it to us.

Finally, take a look at this graph:


This is why the other graphs rise so steeply — all those Beautiful People from my generation who are about to enter their Golden Years and cash in on all that retirement “insurance” that they’ve been paying the feds for the last forty years or so.

This is why the government has to continue its borrowing spree — for all those years it took in all those FICA payments and spent them, “borrowing” the money from itself using accounting tricks to keep the debt off the federal balance sheet and thus conceal the extent of the real deficit. Now the bill is coming due, and it can only increase in size over the next few decades.

And while the Baby Geezers suck their “fair” share out of the system, the missing children — the ones that so many of them didn’t have — are not around to pay their sucker’s contribution into the scheme. We are near the peak of the Ponzi graph, and it will begin its collapse relatively soon.

Let’s be conservative and assume that the national debt is now only $12 trillion.

Let’s be hallucinatory, and assume that that Obama will tighten the country’s belt far enough to keep the debt from rising any higher.

And let’s suppose we’ll be able to take a hundred years to pay it off — without taking into account the additional interest that would accrue in the meantime.

This repayment schedule would require us to remit $329 million per day. For a century!

It’s glaringly obvious that we will never repay this debt, not ever. It doesn’t matter if we start rutting like rabbits tonight and produce a whole new crop of compliant taxpayers — those little rugrats will be unable to contribute their “fair” share for another quarter century.

It doesn’t matter how many illiterate mestizos we import from south of the border — they cannot possibly provide enough tax revenue to fill in the gap, even assuming they were somehow able to start contributing more to the system than they take out of it.

The welfare state is done for. It’s a dead man walking, and it doesn’t even realize it. The Ponzi scheme will soon collapse, and the bill will come due for those of us who are left holding the bag.

If the debt cannot be paid, there are only two choices: sovereign default or massive inflation.

The Chinese are rumored to have the hacking capability to take out most of our major computer systems — banking, the defense networks, utility command and control operations, and so on — and China holds a huge portion of America’s paper. For this reason (and others), I consider sovereign default very unlikely.

So inflation is the way to go. This may happen gradually or suddenly, and the longer it is postponed, the worse it will be. To drain the debt pond, the dollar will have to lose somewhere between 80% and 95% of its current value. This will deprive the average citizen of most of his wealth. Since the very rich generally have the knack of avoiding the catastrophic effects of inflation, we must presume that the ordinary taxpayer will bear the brunt of the damage. People will effectively lose their savings, their 401(k)s, and the bulk of their pensions. We will become very poor in a relatively short period of time.

This is the easiest way for the government to take care of the problem. It doesn’t have to pass a bill and raise taxes. All it has to do is print more money continue with “quantitative easing”.

How this catastrophe will play out in detail is anybody’s guess. With the inevitable mass discontent it will engender, it seems unlikely that the existing political system can survive in its present form.

Whether it happens slowly or quickly, violently or peacefully, the Ponzi scheme will collapse. The end of the welfare state in its current form is inevitable.

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The cheerful outline above applies to the United States, but the same general process will have to unfold more or less simultaneously in Canada, Europe, Australia, and Japan, all of which have similarly unsustainable Ponzi schemes. The euro and sterling are facing the same bleak future as the dollar.

The rest of the world is heavily dependent on the prosperity of the Western democracies. Trade, foreign aid, military protection, technical assistance — all of these will be hard-hit when the crisis finally arrives. The catastrophe will truly be a global one, and no country will be immune. Those at the margin — impoverished countries like Bangladesh or Haiti — will fare the worst. The consequences are frightening to contemplate.

Despite the fact that various countries have been through massive inflation in the past — Revolutionary France, Weimar Germany, Argentina, Zimbabwe, and others — the coming crisis will be unprecedented. There has never been a global currency collapse before; there have always been nations outside the inflationary economies whose systems were unaffected. In this case, no political entity is likely to escape unscathed.

We have never been down this road before, so no one can do more than guess how events will actually unfold.

This is the full background on the economic situation as it pertains to the Shadow. The next background topic is why this issue is about much more than survivalism. I’ll leave that for a later post.

Many thanks to all our commenters and emailers for their input.