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Anticipating the Devolution of Big Government
Authored by Charles Hugh-Smith via Peak Prosperity,
With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we asked contributing editor Charles Hugh Smith to revisit his earlier work on how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability. In this updated installment, we will examine six critical dynamics that will lead to the devolution of Peak Government.
Massive Borrowing
In a misguided attempt to maintain an unsustainable Status Quo, the Federal government is borrowing unprecedented amounts of money that then must be serviced. And the Federal Reserve is expanding its balance sheet by trillions of dollars (“printing money”) and intervening in stock, bond, and other markets for the purposes of managing perception (“the recovery is here!”)
These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.
Guarantees and subsidies both incentivize what is known as moral hazard: the separation of risk from consequence. This can be summarized very simply. People who are not exposed to risk act completely differently than those who are exposed to risk. When risk has been transferred to the taxpayers by guarantees, give-aways, and subsidies, then speculation and mal-investment are incentivized. If the bet pays off, I get to keep the gain, but if it loses, then I personally lose nothing, as the loss is transferred to the taxpayers.
Institutionalized Mal-Investment
The net result of these policies – borrowing immense sums to prop up an unsustainable Status Quo and institutionalizing moral hazard – leads to misallocation of scarce capital on a grand scale. In effect, the money borrowed by the federal government and electronically printed by the Federal Reserve is mal-invested, because those receiving the funding are personally not at risk and face no consequence if the money is squandered on speculation or unproductive programs. Once moral hazard has been institutionalized, it becomes a positive feedback loop. Since everyone in the system faces little personal consequence from mal-investment, the institution loses the ability to police itself.
Even worse, concentrations of private wealth readily influence public institutions via lobbying and political contributions, exacerbating moral hazard and mal-investment of the publicly borrowed money.
Erosion of Trust in Government
Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies. This “perception management” is driven by political expediency, as public outrage at failed policies and unproductive spending would eventually lead to a political price being paid by the leadership. So failed policies are declared great successes, negative data is massaged into positive data, and unflattering frauds involving public funds are buried or transformed into pseudo-realities.
This institutionalization of mal-investing borrowed funds and the politically expedient falsification of fact to manage perceptions have a destabilizing consequence: The public loses faith in public institutions.
Diminishing Returns on Public Debt
Massive borrowing also has a consequence. Interest on the immense sums being borrowed squeezes out other government spending.
This triggers two self-reinforcing feedbacks. Public spending that is not rewarding moral hazard is cut, as those in charge protect their perquisites, and taxes on what’s left of the productive economy increase, reducing the private investment that is the bedrock of capitalist growth and innovation.
This institutionalized mal-investment leads to diminishing return. Where each dollar of additional public debt generated nearly a dollar of additional GDP in the early 1960s, now borrowing a dollar generates negative growth, as the cost of servicing the debt exceeds the meager yield. Thus the Federal government borrowed and spent a staggering $6 trillion in a mere four years (2008-2011), while the GDP has yet to return to 2007 levels when measured in real (inflation-adjusted) dollars.
All these forces reinforce each other in a death spiral. As trillions more are borrowed, interest payments crowd out spending, causing the Central State to borrow even more, which generates even more interest costs, and so on. As moral hazard infects the entire government and its numerous private contractors and beneficiaries, there are few constraints on rising public debt and mal-investment of public funds. As trust in institutions that increasingly depend on perception management rather than real solutions declines, public faith in government deteriorates further.
The Hidden Tax of Inflation and the Institutionalization of Falsification
The government has one trick to create the illusion that it is “keeping its promises.” It prints money to meet its obligations, depreciating the nation’s currency by expanding the money supply. Creating money out of thin air does not create wealth, productive assets, or prosperity. What it does is lower the purchasing power of money, which we call inflation.
Inflation robs every holder of the currency and is effectively a form of government-sanctioned theft, or if you prefer, a hidden tax on productivity, as productive people and enterprises are taxed to support crony-capitalist, unproductive mal-investments and the rising interest on public debt. In effect, inflation is a way of transferring wealth from the productive to the unproductive, which then leaves the productive with less capital to invest in innovation. This starves the economy of capital while robbing purchasing power of every citizen, establishing a positive feedback loop of lower income, lower capital formation, and lower productivity.
Since the government has obligated itself to adjust Social Security payments to inflation, the culture of understating inflation (i.e., falsifying data) has been institutionalized, for the Central State has the impossible dual mandate of increasing inflation so that it can meet its obligations with cheaper money while keeping the inflation-indexed cost-of-living adjustments low, lest program costs balloon out of control.
A “modest” rate of 3% inflation will, in a decade’s time, reduce the purchasing power of stagnating paychecks by a third, while setting the “official” rate of inflation at 2% or less will inexorably reduce the purchasing power of Social Security payments.
If the rate of inflation was to rise at a rate similar to that of the late 1970s, i.e., 10% to 12% per year, while the “official” rate was held to half the real rate, all those whose incomes did not rise by 10% a year would be impoverished as the purchasing power of their incomes evaporated. Meanwhile, even as its policies impoverish most of its citizens, the Central State would assure everyone that it was meeting all of its obligations as promised. This is how trust in government is not just eroded but ultimately destroyed.
Self-Reinforcing Feedback Loops of Self-Interest
Government at all levels responds to shrinking tax revenues from a declining economy and budgets squeezed by higher interest payments by seeking additional revenues by whatever means are at hand. Tax rates are raised, junk fees are imposed, fees for minor infractions are jacked up, and deductions and exclusions are eliminated.
The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling.
Unfortunately, there is a great divide between those who work (or worked) for the government and those who work in the private sector. Those in government service understandably view the promises made to them in good times, eras that we now understand were brief speculative bubbles, as sacrosanct.
The promises were based on the abnormally high returns earned by pension funds in the brief windows of speculative frenzy, and even supposedly conservative pension funds based their projections on annual yields of 6% to 8%. As the Federal Reserve has attempted to reignite borrowing by lowering interest rates to near-zero, low-risk yields have fallen to 3%, less than half the expected returns.
As a result, there is a massive and sustained shortfall of public-employee pension funding, a shortfall that must be paid out of general tax revenues at a time when those revenues are declining as employment and business activity stagnate.
The net result in many communities is that schools and other local services are falling apart as budgets are slashed to meet skyrocketing pension obligations. From the point of view of parents, the pension promises that government employees hold as sacrosanct were unrealistic, and what should be sacrosanct (but is not) is the education of their children.
Those of us in the private workforce with spouses, relatives, and friends in government service understand the frustration of those who work for government, but should the self-interest of the few dominate the public budget and chart the course for the many?
The key difference is that the government holds the power of coercion and the citizens do not. Thus those in government who seek to serve the interests of their unions, colleagues, departments, and agencies can impose fees and taxes on all citizens to fund their own perquisites and power.
From the point of view of those inside government, sharply rising parking tickets, higher property taxes, and so on are small prices to pay for essential services. But as citizens observe government services degrading even as fees and taxes increase, they see little value being added, even as self-service and moral hazard remain in institutionalized abundance.
Two destructive feedback loops are generated by this divide: Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public. And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.
In Part II: Understanding the Economic Impact of Peak Government, we explore how these self-reinforcing feedbacks lead to the devolution and eventual collapse of government institutions. In particular, we analyze what the likely economic fallout will be, as there is simply not enough purchasing power to distribute between those in power and the needs of the general populace.
Click here to read Part II of this report (free executive summary; paid enrollment required for full access).
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Downsizing on 'american' governments? More exactly downsizing on the 'american' middle class that thought themselves entitled forever to the benefits of an 'american' government.
It is like peak oil. It does not mean that people will stop consuming oil. It simply means that certain people who are used to consuming a lot of oil are going to consume less of it, while some others will keep consuming the same or even more.
See the US army for example. They will keep consuming (by 'american' popular demand) oil in substantial quantities)
Peak 'american' government only means that a certain pc of the 'american' middle class has to be pushed under the train so that the remaining middle class can prosper.
Welcome to an 'american' world.
What will come first? The Government's devolution or the hangings?
2027
here is what I see: sudden brief hyperinflation of the dollar, rest of the world is happy and enjoys the misery in the USA cuz our government has been busy...All in the USA who lack real assets become second rate citizens and those with become the new power brokers. We gradually return to a pre 1944 base line with most folks eventually re-establishing a middle class but the elite have changed to those who saw what was coming. they become the new assholes but never again is a country allowed the 'exorbitant privelege...the world settles into a new monetary system which is fairer and the bankers of old are poor because they really did not see it coming...because they are arrogant and not nearly as well coordinated as most at ZH think they are..amen
I'd see 3 options. Sadly which one will come true depends on sentiments of majority (with extra emphasis on troops, thier views will have huge impact)... that watches reality tv and went through public schools.
1. It all goes crashing down, Zimbabwe or Weimer Republic style. However the particular people that are in power are not so eager too lose it and possible lose their lives (banksters may yet hang) and try to cling to what they have. They can't rule with legitimacy anymore, so they rule with an iron fist. Credit runs dry so budget HAS to balanced and it is balanced by extreme hardship for taxpayers. Dissent grows and police crackdown fallows. Tanks roll on the streets and blood runs down the pavements in suburban USA (leaving alone EU or Japan for now). Rulers blame speculators and foreign manipulation for poverty and violence... and succed. Majority buys it, Great Leaders step in to rescue, "temporarily" curtail freedoms etc. Welcome to the United Fascist States of America.
2. All like 1, but majority doesn't buy it and blames government and collectivist type of coercive rule. They can comprehend at least the gist of long con of regulatory corporationist democracy. Loyalist eventually see that they support evil, recoil, desert and revolution wins. Some kind of better country emergers from the crisis.
3. It all goes crashing down, Zimbabwe or Weimer Republic style. However tptb don't have the guts, support in military or overall support to go thru with major crackdown. Tanks stay in bases, dissent, revolts and clashes with police continue. Rulers take the fall, lose a lot of influence maybe some of them die. Goverment crashes, but throu elections and without real physical confrontation. It ends with "reset". A little better currency, somewhat less corporatism and more constitution (probably a new one written for the occasion), bums are out but new breed of politicians starts their road to corruption, maybe government spending goes down for 40% GPD to 20% maybe 15%. Cycle starts again.
The hangings (preceeded by arrests and trials)... http://tinyurl.com/cd5cyjo/
Devolution of government is an internet pipe dream, like returning to a gold standard, and the rise of a viable Libertarian third party.
The current system will have to crumble dramatically and abruptly, like the old Soviet system. It won't go gently into that good night.
Science has found that that is exactly how evolution works. It is not a gradual increase or decrease in organisms that change and adapt slowly over time. Rather, there are marked, shall we say "quanta," that occur in evolutionary systems.
Wake up one day and everything has changed.
Orly
Interesting comment. I'm no scientist, but I've said to my family: one morning you will wake up and the world will be much different.
Finance is the tiny boat on the ocean of economics; a tsunami builds beyond sight and sound ... and then bam, it arrives.
I think that morning will be in 2013.
It is actually an evolutionary theory called Punctuated Equilibrium put forth by Stephen Jay Gould and it makes very much sense.
These ideas are contrary to the Gradualism Theory we were all exposed to in school.
:D
It is already in the work...Try here
And still only theory. Just because a proposed solution is pretty doesn't make it correct.
"Only" theory? Like gravity is only a theory? Please.
Anyway there is no place in comments to lay out all the evidence, you'll have to check it for yourself if you want to seriously evaluate it.
Certain pressures, or changes can have profound effects, in relatively short periods.
In the last 10,000 years we have selectively breed dogs to range from 1/2 pound up to 300 pounds, every shape and color. You could go out and find a weiner dog, doberman, and rott with identical color and markings but three very different bodies
Great writing. I did not reat part II. I found Part 1 to be very clear, concise and hard to dispute.
dna researchers state that the human population went through a bottleneck around 10,000 years ago, and the # of humans at that time was below 1 million
"dynamics that will lead to the devolution of Peak Government."
When government is finally corrupt, the only dynamics that eventually matter are Control and an aversion to same.
There is your battle.
It requires few words.
Off topic but...anyone interested n the gold market should be alerted that gold lease rates just went negative....bigtime,even for the one year.
Go look at kitcos gold lease rate chart.
Looks like a trick for halloween.
Usually their is a big co-ordinated take down after this bullshit corruption.
When did that happen? Is it a sudden thing, or was it gradually building up?
www.jsmineset.com makes sense of the gold market.
Patience or courage is required for gold holders.
It takes neither if your average position is 485. (PS mine is about 1700, so I'm really nervious and chicken)
Meanwhile....in Flatland- -- --- --- ----- --------- ------ ----- http://www.youtube.com/watch?v=jadvt7CbH1o
CLICK IT!!!!
OR, I REpostE ITTTT!!!
Anticipating the Devolution of Big Government
by 20 MFYears
FUCK YOU KEVIN -- -- -- -------http://www.youtube.com/watch?v=jadvt7CbH1o
Nice try. No cigar. Meanwhile, the topic is how U.S. citizens will regain their independence.
I'm sorry for your troubles in Euroland, but do try to focus on serious matters instead of main scream media entertainment.
How the fuck high ARE YOU???
THE N.E.Patriots have NO CHANCE!
No chance, at all. Am I Eurocentrifical because EyE think.........?
How was it LOST?????
mal-investment of public funds
Mal-investment? Pshaw! A profit-seeking investor "invests". The state legally steals from individuals and spends the laundered "public funds" to buy mob popularity. Don't help the state steal the respectable vocabulary of honest tradesman who take true investment risks, engage in voluntary transactions and reject violence and the threat of violence.
Inflation hurts every holder of the currency?...no problemo..I just won't hold currency...lets see what should I hold?...any ideas?
Call me crazy, but...
makes me think it might be alright that: http://youmoron.org/wp-content/uploads/2012/08/SOMETIMES.jpg
The real group to blame here are the Rothschild zionists. Through stealing the right to issue money away from the people they have managed to make us slaves in our own countries. History shows that if the people own the right to create their own money and do so linked to productivity the result is general prosperity and that recessions and depressions are tools of the Rothschild zionists to strip assets away from the public rather than being natural economic cylical events.
'Americans' always make a special case of themselves.
It grows worse when these 'americans' are middle classers who are losing their 'american' middle class status.
There is no devolution of the 'american' type of government. On the contrary. It is simply the continuation of the expression of the 'american' government.
But 'americans' see themselves as special cases who are out of the reach of their 'american' government.
First paragraph title: massive borrowing. New trend? Absolutely not. The US government 'borrowed' massively from the Indians to fund its programs of affirmative actions toward 'american' indo europeans.
Second paragraph title: 'americanism' is what has led humanity in the current situation. Looks like heavy mal investments, especially for those who were forced in sacrifying their resources to sponsor the 'american' dream of 'american' liberty, freedom, truth and justice.
Third title: erosion of trust. The 'american' government governs by the consent of the governed, consent that comes from the 'american' middle class. Been a long time those who are on the wrong side of 'americanism' have learned to trust an 'american' government for its worth. Indians learned to trust that an 'american' government would not respect a treaty.
Reversely, the 'american' middle class has learnt to trust the 'american' government to get their share of the loot.
And it endures, entrenched 'american' middle class is solid in their entitlements whose the 'american' government keeps delivering and magnifying.
But 'americans' see themselves as special cases.
Here, less and less middle classers who thought their status should be engraved in marble (members of the master race, 'americans' for x generations, superior cultural breed with a work ethics etc) can put up with the fact they are less and less middle classers so they keep inventing fabled past, false rationalization, reconquest of promised land etc and there is a devolution in 'american' type of government.
Etc
There has been no change in terms of quality when it comes to 'american' governments.
What is changing is who is on the wrong side of 'americanism'.
A guillotine stays the same. What might change is whose heads are put under the blade.
Comically, these 'americans' like to claim that well, in their fabled past, the guillotine did not cut heads or something just because their heads are now being endangered just to sustain the 'american' middle class in their entitlements.
Dont worry, 'americanism' is the same and will come to get ya. Or worry, if you like. You could after all.
Just in time for the recent growing concern over the lack in quality of ZH comments, a ironclad expert on lacking in quality.
You can always trust this guy to flawlessly deduce evil of "Americanism" behind anything and everything.
It would be great feat to extract all of his comments from ZH database and create one huge page - the Litanny of Evil Americanism.
What are you talking about? Evil? 'Americanism' is the best thing to ever happen to humanity.
As long as you belong to humanity of course since as 'americanism' comes with, the Earth is peopled with humans, sub humans and non humans.
This site is packed with fine specimens of 'americanism'. You should not lack of 'american' quality in commenting. Do not worry about that. I dont.
We are all a bunch of fucking idiots. You included for not realized Americans are what happens when the corporations have freedom to shove consumeris down the throats of every man, woman and child every conceivable second of their wakign hours. buy buy buy .... the merchandise is substandard and they want it that way. buy it again and again and again. It's a fucking hamster wheel. Americans are exhausted and confused and fucking looking for a leader who can walk them out of this.
in 2008 were you cheering for Obama? He was the hero who could do it. Who would have thought he'd turn out to be ineffective. Educational system that is putting out children who cannot critically think, stress in the homes from debt and failing marriages, communites broken up by housing market collapse and now neighbors are strangers, isolating people from making connections with people whom they trust. The trillions of dollars of unable debt is no secret. The bankers shell game was widely and accurately covered, thousands of books, many of which won awards, covered the last decade and the failure of leadership to do the right thing. Followed the money and saw right happy politicians and rich happy investment bankers, All across the globe. And some very mean riot police.
So STFU - you'r probably a Canadian, the country that came into the game 10 years later, even in light of the shenanigans witnessed in the US and Europe, Canadians open their arms wide open. Look at us. We're are losing. All of us. And it's because we can't agree for more than a couple hours. It will not be a life worth living for anyone but the wealthy in 50 years. Taxes and lack of jobs will leave many simply destitute.
This is an intentional train wreck and there is nothing that is going to stop it but an army the size of America's. and I think America's army is working for the other side.
This is an intentional train wreck and there is nothing that is going to stop it but an army the size of America's. and I think America's army is working for the other side.
Do not forget the "NEW" one being assembled before our very eyes,made up of those same products of the public educational PC system.
Our current Emperor has kept only two promises,one is done,one (through a series of networks, gov directed of course)feverishly at work and getting far stronger.
(1)- Fundamentally change America.
(2)- Create a force in America equal to our military to protect the Homeland from terrorists(then they re-defined who is a terrorist)......sound familiar?.
Not me.
Ain't nobody shoving anything down my throat. I don't have debt and I don't buy what I don't need.
The only leadership I want or need is my own.
There ain't no fixing this shitbox car of an economy, they're just going to drive it til the wheels fall off. Then we walk for a while. Maybe a good long while.
No problem for me...I got good boots and I'm used to walking anyway. My income is a cash business and is only dependent on what I do. Clients may change but they're always there because they get good value.
I've got my own water but I'm really going to miss that sewer line if the town gets too broke to keep the pumps running.
Composting human waste is somewhat aromatic if the breeze is right. I might have to bootleg a septic tank out yonder.
The end of civilization doesn't mean it has to be uncivilized for the few that bothered to pay attention to what is going on around them.
All I need is a silent rooster. I hate those noisy bastards.
if you end up doing the humanure thing, try layering with spent coffee grinds. works like a charm on keeping the smell down and the vermins out.
We are witnesses the collectivization of greater and greater risk! NO ONE is liable because we are ALL liable! All it does it increase the risk and the calamity of the consequences when that risk eventually, but inevitably, collapses. The artificiality of the "wealth effect" will gradually create greater and larger imbalances until one day, suddenly, there will be what Reinhart and Rogoff 9"This Time Is Different") call the Bang! moment, and that hidden undertow reaches the surface (a Lehman Bros.), and the house of cards will come down. We are being told that "all is well", when all it NOT well! We must plan and prepare accordingly!
But, but, but, if we would get the "right" people in government, everything would be sooooooooo wonderful. You know, people who are more concerned with the well being of society, rather than their own, personal interests.
(Yeah, I was loling while as I was typing)
Such fraud examples are helpful to people to learn and alert from such hidden cost.most of banks also implement hidden cost which people ignore sometimes.
pests of stored products
When I have a few friends paying property taxes that are 50% of the mortgage payment...........I'd say peak gov't is a good phrase. Fuck public unions.
Ever notice all the gov't buildings look like piece of fucking artwork and 2 blocks away people's houses are falling down? As far as im concerned the courthouse should be a metal pole barn with 4 people in it. Anything requiring more help the gov't shouldn't be involved in. Fucking crazy.
Great article, as usual Charles. But;
*The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling.*
Are you sure about that? My eyes see a very different picture. If you count everyone (contractors, state employess, welfare recipients, etc.), I think it's considerably less than "five-sixths" of us.
Citation, maybe?
Edit: "less than"
No lie there.
Before I unplugged from the Govt. extortion system and had a "real" business in the semi-rural area that I live in, my business rose and fell like clockwork.
Up the weeks of the 1st and 15th., down the other two.
Govt. workers or dependents. Right down to the nursing home and hospital employees.
The Fed is buying bonds to get them off the balance sheets of the owners of the Fed. There are plenty of ways to spin this. Pure and simple. They have divested from the US. They played it as long as they could. Once taxes were cut in 1982 and again in 2001, there was not going to be enough money supply captured to service this debt. It was a setup for collapse. They will clean up with the natural resources and slave labor here. The system was doomed the minute profits could be declared as income cheaply and diverted from the productive economy to real estate and other speculative asset markets. A debt-money system requires adequate flows to service debt. It was a divestment from America by the 0.1% controlling families pure and simple.
Ever since government was captured by the money of multi-national corporations, defense industry and billionaires, it has forgotten that one of its major purposes is the general good of society. Money has stolen our government producing the destruction of all sensible regulation which held in check predatory capitalism since WW2. It also produced all these malinvestments rewarding those that have bought our government. Money has stolen our democracy.
We now have a corrupted democracy of money. If you have huge wealth, America is the greatest country on the earth. If you aren't massively wealthy, we can only recapture our government and have it devoted to the general good by taking money out of elections. The government must be devoted to the general good of society rather than the predatory capitalism of the wealthy and powerful.
More evidence that The South was right!
Great article thanks ZH for posting it. Honestly what can you do? Thanks to ZH and commenters here I no longer play the debt game at all. There is not alot I can do as an individual to hurt any of TPTB. Until people learn they can live and be happy without keeping up with the Jone's or buy the latest and greatest gadget nothing is going to change. Nothing.
I think the comments section of ZH will most likely go back to somewhat being normal once the elections are over. Some want Tyler to censor the comments and I prefer to be honest, that never happens. I know who usually is going to make remarks that really have no relevance to the posted article or who is here to just be an idiot. No need to censor them. Some come here to educate, and some come here to repudiate the article, and some come to be a pain in the butt or spout off the party line. Who cares.
The key is to read and digest whatever is posted and go from there. If one person learns from the reading ZH and the comments that is the goal of all of this. I think as time moves along more and more people will wake up to whats happening to them as they get more and more disgusted with seeing how they are being squeezed and lied to. I too think we are going to be looking at larger government for younger people and smaller government for the elderly to be honest. As long as debt is the base for the whole system nothing will really change as more and more people realize voting themselves wealth on the backs of others is the way to go.