Guest Post: Game Theory And The Unfixable Fiscal Situation

Tyler Durden's picture

Via Simon Black of SovereignMan blog,

In Game Theory, there's a famous hypothetical scenario called the Prisoner's Dilemma in which two criminal suspects are apprehended by police and given a choice: stay silent, or rat out the other guy. But there is a catch.

If both suspects stay silent, they both get off with a very light sentence. If they both turn on each other, they both get a longer sentence. And if only one of them rats out the other, the suspect who squeals goes free, while the one who stayed silent receives the worst sentence.


Naturally, the best choice is for both prisoners to stay silent-- they both get off with a very light sentence.

But imagine that your accomplice is in there being interrogated. You know that he's been offered the same deal... if he rats you out, he'll go free while you take the heat. When it's your turn, would you stay silent and risk a huge prison sentence while he walks?

The scenario points to an inevitable conclusion: each prisoner rats out the other, and they both do heavy jail time. It's clearly a sub-optimal outcome, known in Game Theory as the Nash Equilibrium.

We see examples of this all the time in the real world-- in business, financial markets, diplomacy. The recent fiscal cliff negotiations were almost a textbook case of the theory... resulting in the same sub-optimal outcome.

All the posturing and political strutting were more about trying to obtain personal advantage over the other players, not actually fixing anything. The fiscal cliff, in fact, stopped being about the US economy a long, long time ago.

The uncomfortable truth that nobody in officialdom wants to admit (save outgoing Congressman Ron Paul) is that the fiscal situation is unfixable.

The US government is currently sitting on a whopping $58 billion in cash... less than the $63 billion that Microsoft has on hand. And with that $58 billion in cash, the government (by their own calculation) will be posting yet another trillion dollar deficit this year.

Further, the US Treasury will have nearly $3 trillion in debt mature this year. So that's roughly $4 trillion (25% of the entire economy) of debt that must be newly issued or rolled over in order to avoid default.

Gee, do you think they'll keep printing money?

Meanwhile, the debt ceiling has already been breached, and the Obama administration is scurrying to seize federal pensions as a temporary fix.

Seriously, how long will it be before they start seizing private pensions, IRAs, etc.? How long before mutual funds and banks are required to hold a percentage of their assets in the 'safety and security' of US Treasuries? How long until everyone is involuntarily financing Uncle Sam?

This is why it's so important to consider diversifying internationally... holding a portion of your savings, precious metals, retirement funds, etc. in a jurisdiction that isn't controlled by your home government.

As the next phase continues to play out and the options become scarcer, the real prisoner in this dilemma is going to be the people who chose to ignore the writing on the wall and have everything they've ever worked for locked up by an insolvent government.

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redpill's picture

The problem is that at the same time the US Federal Government is taking steps to ensure there is no where to hide.  Increased reporting requirements for foreign accounts, etc.  And don't think you can just up and renounce your citizenship, that's more difficult and more expensive than ever.  The noose is closing, and the world is no longer big enough to have places to hide.  Welcome my son, welcome to the machine.

Cognitive Dissonance's picture

In baseball they call that the squeeze play.

<Today it's just called the new normal.>

DoChenRollingBearing's picture

The IRAs and the 401k's are the last plump targets out there waiting be seized (DoChen learned this by cashing out HIS IRA in 2008).  That happened in Argentina.  Are we better than Argentina (having re-elected Obama and seeing the FECKLESS Republicans cave)?  Huh, bitchez?

If you want all the way OUT, there are only two ways:

1)  LEAVE the country, but then deal with their .gov...

2)  Go Galt, get off the grid and below the radar.

The Bearing has only begun, sigh...  As redpill noted, it is hard.

Landotfree's picture

"is that the fiscal situation is unfixable"

Sorry Ron Paul but the financial system is not broken, the equation is working right on cue.   What is called unfixable, I call perfection... that is the system and the underlying equation that is used is working according to real Law ie Math.    Humans will continue to attempt to obtain what is unrealistic i.e. exponential growth and  will tire once more and the equation will output the known outcome.... max potential on the downside.  My guess 1-2 billion unfunded liabilities will have to go but if nukes are used, could be 7 billion plus animal population.

I like Ron Paul but not much he could or could have done to fix anything.  The problem is, the equation is working to perfection, time is approaching to flush it all away.  


I would probably avoid Asia, I would hate to be there with 4 billion others but who knows?  


Joe Davola's picture

Funny thing how spending is always part of 'permanent' law, but lower tax rates have a limited duration.  Any fiscal conservative who signed on to that deal is a moron at best.

AldousHuxley's picture

avoid capital gains taxes by never selling

avoid dividend taxes by buying munis

avoid sales taxes by buying used goods

avoid income taxes by accepting only cash

avoid inflation taxes by buying gold








Zap Powerz's picture

Its always hard.  Life is a competetion, a struggle to survive.  Our ancestors defeated all other predators, incliment weather, disease and famine.  You and I and our kids get to defeat our current environment.

The hardest part is going to be the shock.  The shock Americans are going to feel when they are hungry, cold, sick and fighting for their survival.  We have had it easy for so long.  That will change and only the most resourceful (fit) will survive. The same way it has always been, the same way it always will be.

Gird your loins my friend.  The fight for your survival has begun.

GCT's picture

Screw it dochen cash out your 401k buy physical and keep some cash and then go on welfare.  That ought to work.  No need in hiding when in the USA do as te USA does these days. 

Buy an RV or a sail boat no property taxes that way.  Sail the world make stops to stock up on staples and catch your protein.  Enjoy the world!  Dam my wife just kicked me to wake me up.

FreedomCostsaBuck-o-Five's picture

Have you tried cashing out of a 401k? It ain't easy... You gotta retire or be fired. The govt has us by the short hairs....

Karlus's picture

I think Barter (aka Black Market) is going to happen more and more. I also think the govt will frown on this.

I saw that some entity had sued Armslist which is exactly a barter site...I also feel like the actual .gov is going to crack down on like trades as they traditionally want a piece of the action

AldousHuxley's picture

that's why they are legalizing certain drugs.....

digitalhermit's picture

One can still "hide" in plain sight by "offshoring" into Bitcoin's public ledger. :-)

CH1's picture

One can still "hide" in plain sight by "offshoring" into Bitcoin's public ledger. :-)

Only if you know what you're doing.

Bitcoin is NOT anonymous, and the NSA tracks every Internet transmission.

Don't misunderstand - I LOVE Bitcoin - but you have to do it right.

Freedom ain't free.

FreedomCostsaBuck-o-Five's picture

Dang straight...

Freedom costs a buck-o-five!

TBT or not TBT's picture

and there are three type of people in this world, Chuck.

cxl9's picture

the NSA tracks every Internet transmission

This statement is silly.


CH1's picture


Good luck to you.

AldousHuxley's picture

who cares about the NSA. If KGB paid millions into presidential funds, NSA wouldn't care about the ruskies.

Shell Game's picture

“And how we burned in the camps later, thinking: What would things have been like if every Security operative, when he went out at night to make an arrest, had been uncertain whether he would return alive and had to say good-bye to his family? Or if, during periods of mass arrests, as for example in Leningrad, when they arrested a quarter of the entire city, people had not simply sat there in their lairs, paling with terror at every bang of the downstairs door and at every step on the staircase, but had understood they had nothing left to lose and had boldly set up in the downstairs hall an ambush of half a dozen people with axes, hammers, pokers, or whatever else was at hand?... The Organs would very quickly have suffered a shortage of officers and transport and, notwithstanding all of Stalin's thirst, the cursed machine would have ground to a halt! If...if...We didn't love freedom enough. And even more – we had no awareness of the real situation.... We purely and simply deserved everything that happened afterward.”   -Aleksandr I. Solzhenitsyn, The Gulag Archipeligo

Joe Davola's picture

Nah, it'll be different here.  /sarc_off

bank guy in Brussels's picture

Every Jew needs a gun against the Nazis

And we are all Jews

Stud Duck's picture

Great comment there, Shell Game, great comment!

"We purely and simly deserved everything that happened afterward" get right to the point!

I wonder how many of these "revolutionaries" commenting in here really know about "the big ugly". I can assure you all, ugly is not strong enough word for it!

TBT or not TBT's picture

Gun control will be big on the govt agenda this year, suddenly.   A lof of people are wise to the pent up danger of tyranny, too, which explains gun stores being out of stock with long backorders on everything, ammo particularly.

kliguy38's picture

But, but I thot we just fixed the cliff and now its safe to go out into the pool.....did they lie???? I think I'll put a stack of Ben's in my pocket and see how I get through the TSA next week.......

Vandemar's picture

The can has been kicked.  Alea iacta est.

But hey, the "MARKETS" seem to think it's been "fixed".  Increasing both deficits and taxes is good for the economy?  Who knew?

Michaelwiseguy's picture

The complete and total economic collapse of the USA that's 100 guaranteed will solve many problems for us.

The federal government will be starved to death of money used to carry out tyrannical terrorist activities against the American people.

Manthong's picture

“the federal government will be starved to death of money”

That could have happened in the Constitutional United States of America, but it can’t happen now that the subversion is near complete and the states are subservient to the federal government.

Our last chance is a House of Representatives that could act to defund, but they seem to all be tools of the Federal Dominion, too.

Kiss freedom goodbye.

CH1's picture

Dump the system and start building better things.

Michaelwiseguy's picture

The financial nuclear bombs are all in place. A zero dollar value for you and me also applies to the US government. Derivatives collapse, bond market collapse, and dollar collapse all at the same time should do it.

CH1's picture

economic collapse of the USA that's 100 guaranteed will solve many problems for us.

NO. Free lunches will not be forthcoming.

There is no safety from Big Brother unless you WORK or PAY to protect yourself.

Computing power continues to get cheaper - and they already have more than enough. Only those who ACT have any protection.

Zap Powerz's picture

A collapse will indeed solve many problems.  It will also create new problems.  But there are always problems to be solved.  Im bored with the old problems so bring on the new ones!

rwe2late's picture

From the movie "Cool Hand Luke"

"What we have here is a failure to communicate"

(said by the warden to prisoner Luke after having him beaten by guards)

Cognitive Dissonance's picture

A classic scene.......soon to be repeated everywhere.

The poor warden was so reluctant to "discipline" an unrepentant and subversive Cool Hand Luke.

Zap Powerz's picture

And the beatings will continue until moral improves.

lemonobrien's picture

this is why i buys golds

foxenburg's picture

I buys them also. and keeps them in various holes in the ground. but I suspect that in 10 years, when I might want to sell a few coins, that it'll be like trying to fence stolen property. The various govts would say it was indeed stolen property, as I ought to have handed over anything i earned to them in the first place, then i'd have nothing to worry about. But I'm sure it will involve exfiltrating with part of one's stash and selling it somewhere like like the middle east. then infiltrating back with your fiat.

Karlus's picture

It will come in the form of patriotic "anti-hoarding" legislation. It wont just food either. Your "private property" will be broadcast as a greedy threat to your brother man.

lemonobrien's picture

sell your silver to get out of the country; use your gold to build a new life.

JPM Hater001's picture

"the Obama administration is scurrying to seize federal pensions as a temporary fix."

Private companies get to go to prison for doing this dont they?

redpill's picture

Depends whether or not you used to be the Governor of New Jersey.

MayIMommaDogFace2theBananaPatch's picture

Over the years, he worked his way up to Chairman and CEO of the company (Goldman Sachs) in 1994 and successfully converted the investment firm from a private partnership to a publicly traded corporation.

That previous 'gig' prolly did at least a little bit to help Mr. Corzine through the that very trying time in his life -- post MF Global.

Fucking sub-human!

lunaticfringe's picture

Love this piece. Captures the essence of what happened and proves why Congress' actions are so predictable. 

ZerOhead's picture

Distilled to it's essence for the ADHD challenged readers out there...

The uncomfortable truth that nobody in officialdom wants to admit (save outgoing Congressman Ron Paul) is that the fiscal situation is unfixable.

"Unfixable" as in if you aren't taking proactive actions to deal with the inevitable outcome you will find yourself completely fucked.

redpill's picture

Funny how things remain unfixable when you refuse to even try to fix them.

TerminalDebt's picture

Don't worry, Uncle Ben is ready and willing

wee-weed up's picture

Ah, but Big Brother has a solution to the Prisoner's Dilemma...

Waterboard the fuckers - they'll both talk then!

youngman's picture

The problem I see is the we think we can play in the worlds sandbox....where I see them sending us back to our own backyard and playing in our own little sandbox...our dollars will not be wanted outside of the USA...

DoChenRollingBearing's picture

For now plenty of people & countries will take your $.  The secret to is to get assets OUT of the USA now (yesterday) to a juriscition that you feel is relatively safe (or where you know the ropes, have family, and so on).

South America, with all its problems (legion) is at least behind the digital totalitarian curve.  Some countries are better than others.

Snakeeyes's picture

You don't need game theory to figure this one out. Democrats ar expert at class warfare and demonization. Look at what just happened. The Republicans surrendered with a fight.

We ARE Greece, but far bigger.