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Consequences of the Recent Election

Tuesday, 04 December 2012 12:56 Written by 

Explanations for the results of the recent U.S. Presidential Elections abound: improper messaging on the part of the Romney ticket, a lack of inclusiveness on the part of the Republican Party, simple tribalism as a result of changing demographics, a belief in Santa Claus, or a combination thereof. A French philosopher once observed that “Nations get the Governments they deserve” and the history of the Western World since the end of the Second World War has been for Nations to elect Governments that allow people to enjoy lifestyles they are unwilling to fully work for. There have been, of course, exceptions, particularly in the U.S. which might have slowed the trends, but broadly speaking, these are mere bumps on the road which neither changed nor altered the greater trends towards increasing the size of the welfare state, and by extension, their corresponding Governments. The recent election represents the popular approval of the growth of entitlements, or as some have more colorfully labeled it: “Santa Claus”.

Use of the terms “socialist” or “Marxist” are often dismissed by those considering themselves fair-minded and reasonable, but these words are finding themselves as accurate technical descriptors of many modern nations. Though considered by many to be civilized, the French Government now comprises 56% of its total economy. This has clearly crossed the threshold into socialism. The parasite (Governments/entitlement programs) is now larger than the host (private sector). The host is now perceived as being the parasite and coexistence of both in their current state now has a shelf life. The predictable results of this are easy enough to see through other European States which have enjoyed lifestyles in excess of their willingness or capacity to earn: Greece, Portugal, Spain, and soon – Italy. And yes, I’m conflating an outsized Centralized government with enjoying unearned lifestyles as this is the instrument for the entitlement distribution, wealth extraction and public sector employment which is a drag on any economy. We’re not as far from this corrupt indulgence in entitlements here in the U.S. where insanity has also become commonplace. As Tyler Durden from the site Zero Hedge wrote recently:

“…the painful reality in America: for increasingly more it is now more lucrative - in the form of actual disposable income - to sit, do nothing, and collect various welfare entitlements, than to work. This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantified, and explained by Alexander, "the single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

 

So what’s the point of mentioning this? It is merely to observe that the trends towards entitlement spending and Government largesse are accelerating despite the obvious unsustainability in this direction. In fact, this will continue to increase until going parabolic and breaking the greater economies of the West and some emerging markets dependent on the West for growth. The reelection of Barack Obama is the most visible symbol for this ideology. One of the great myths of Socialism is that it is a selfless ideology. People of the entitlement philosophy are not concerned with the welfare of the economy or even the state of their employers. Just witness the recent performance of the Baker’s Union in dealing with the now defunct Hostess Brands. In this example, the parasite killed the host to the destruction of 18,000 jobs and destroyed itself in the end (or at least the jobs of 15,000 of its own members). Expect this trend to continue and accelerate with future labor disputes.

Where will this lead? Consider on a personal level some point in your life where you might have been running up an amount of debt through credit cards or big ticket items and how difficult it was to enforce discipline and live an austere lifestyle to pay off this debt (assuming you didn’t declare bankruptcy). On a macro level where large groups of people are involved under similar circumstances (entitlement programs), the ability to enforce discipline voluntarily by their political representation becomes well nigh impossible. In this scenario, the vast majority of affected individuals believe that someone else should take the hit regardless of fiscal reality. It will always be perfectly reasonable to the 47% who pay no Federal income tax to demand more from the upper 5% who already pay nearly 60% of the total. Even the fiscally minded and vilified Republican Vice Presidential candidate Paul Ryan wasn’t going nearly far enough with his entitlement reforms in order to reach a glide path towards fiscal sustainability. They were merely the most politically palatable changes he could propose without getting completely crushed in the election.

What part of “there’s no more money” do the endless parades of rioters in Greece not understand? Even those who might dimly surmise budget realities have become so dependent on Government that they’ll riot too. Don’t look to rugged individualism here. Cultural differences aside, Greece is a microcosm of what’s coming to a city near you. Therefore, you can expect more election results favoring the entitlement minded and money printing (now $85B a month under QE3) until the system breaks and austerity is forced on everyone. In the meantime, expect financial repression at all levels of Government on the tax-payer and consumer (more on this in a future column) as well as a hyperinflation event by the end of 2014.

What signs to look for in order to recognize a new dawn for lasting recovery? On the political front, at the very least there must be a change of leader and party rule. In more extreme cases, a harder revolution will occur. Recent Economic Nobel Prize winner Thomas Sargent released the study “The Ends of Four Big Inflations” which examined policy implementations following extreme cases of hyperinflation in the twentieth century. Only through major political change were new monetary and economic changes successfully achieved. In other words, don’t expect any kind of serious recovery if the same guys are in charge when we got into this mess. I suspect this will also include central bankers.

On the economic front, faith and confidence in the currency can only be restored by the introduction of a monetary role for gold. For a thought provoking and well-researched historical analysis as to why, I would strongly recommend John Butler’s recent book “The Golden Revolution.” Butler goes into multiple factors which will determine why the eventual price of gold will likely be a multiple of today’s $1700-$1750 per ounce range, but also explains why our monetary system is so fragile and exposed to collapse.

As to continuing down the same path with the same kinds of solutions that got us here, additional fiat currencies (not backed by anything) would only prolong the agony and do nothing to restore confidence. Analysts and policy makers who routinely dismiss gold as a “barbaric relic” have labeled gold as “overpriced” and in “bubble territory.” Meanwhile, gold has been up in price every year since 2001, averaging 17% returns per annum while the real bubbles of stocks, housing, and Government bonds of all stripes have imploded. Expect this trend to continue and accelerate on both fronts. These will be the ultimate results of the 2012 Presidential Election.

Disclaimer: I am not a financial advisor and encourage everyone to perform his own research before making any investment decisions.

Last modified on Friday, 07 December 2012 09:10
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1 comment

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