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FEATURE ARTICLE |
Is an Economic Deluge Nigh?
David Galland Date: 05-04-2012 Subject: Casey Research Articles If history has taught one certain lesson, it is that the less
fettered an economy, the better humankind is able to do what it does
best: run from trouble and run toward opportunity. In this way mistakes
are quickly resolved and progress assured. Conversely, the deeper
the muck of regulation, mandates, taxes, subsidies and other
bureaucratic meddling, the slower we humans are in following our natural
instincts until the point that progress is slowed or even stopped. It
is said that history doesn't repeat itself, but it often rhymes. In the
current circumstances, it appears that enough time has passed that
current generations have completely forgotten the critical connection
between the ability of humans to freely pursue their aspirations and
economic progress. You can see this ignorance in the popular
demand for even more, not less, meddling in the affairs of humankind.
Should this trend continue â€" and for reasons I will touch on
momentarily, I firmly believe it will â€" then the aspirations of the
productive minority will soon be dampened by ever higher taxes and other
attempts to "level the playing field" and the global economy, already
in tatters, will fall off the edge. There is no more timely nor
acute example of this growing trend than what is currently going on in
France. I refer, of course, to the first round of the presidential
election process, scheduled for this weekend. In France, if no
candidate attracts no better than 50% of the vote, then the two leading
candidates go to a decisive runoff vote, this time around to be held on
May 6. The current president, Nicolas Sarkozy, a conservative in
name only, was running at a fairly steady gait toward re-election
(thanks to the head start awarded all incumbents), when leading
socialist candidate Francois Hollande came out with a proposal to tax
anyone with an annual income of over one million euros at a rate of 75%.
He also promised to add a tax on all financial transactions and
increase taxes on France's biggest companies to 35% â€" securing bragging
rights as levying the world's third-highest corporate taxes, the US
being #1. This all on top of a 25% VAT, one of the world's highest. By
some calculations, the result of Hollande's new taxes is that
effectively 100% of all incomes over one million euros will now be
stripped away by the state. For good measure, Hollande also
promised to reverse the recent modest increase in retirement age from 60
to 62 pushed through by Sarkozy. While I am sure it is mere
coincidence, I found it noteworthy that Mssr. Hollande's campaign slogan
is "Change â€" Now!" Remarkably, at least for those with some small
understanding of economics, as a result of leaning into the microphone
with these proposals Hollande has galloped ahead of all other potential
contenders and is now projected to finish nose by nose with Sarkozy. After
which the also-rans will be removed from the race, freeing their
supporters to share their affections elsewhere. Given that the leading
contender for third place with an estimated 14% of the vote is one
Jean-Luc Mélenchon â€" charitably categorized as "far left", a label that
can be applied to most of the other candidates â€" it is projected that
the "conservative" Mssr. Sarkozy will go down in double-digit flames
come May 6. Bringing to mind the prophetic utterance of Louis XV: "Après moi, le déluge." The
deluge in Louis' case manifested as the murderous affair commonly known
as the French Revolution. In the case of Mssr. Hollande taking up
residence in the Palais de l'Élysée, the deluge is likely to manifest in
the form of rising interest rates as investors look to protect against
an acceleration in the country's debt to GDP ratio, already projected to
hit almost 90% this year, exacerbated by a flight of capital,
investors, entrepreneurs and large businesses. As is the nature of
such things, because of the aforementioned predilection of humans to
run from trouble, we likely won't have to wait for Mssr. Hollande to be
formally enshrined in the gilded halls for the trouble to start â€" it
will begin within days and maybe even minutes of the handicappers
concluding that his ascendency is a sure thing. Given that France
is the third-largest economy in the already-troubled Eurozone, one can
expect the deluge to spread, with potentially devastating consequences.
That the guillotines may soon be rolled out across Europe can be better
understood by taking into account that the Eurozone sovereign deadbeats
are on the hook for roughly nine trillion euros in debt, some
significant percentage of which has to be rolled over to ready buyers
over the next couple of years. Adding weight to the problem is that,
according to the latest figures out of the IMF, Europe's banks may have to sell off up to 3.8 trillion euros in assets, many of them questionable, between now and the end of next year. At least, if they want to remain solvent. Across
the pond, the United States also has aggressive funding needs, given
that the "change" we experienced ourselves in the last presidential
election has left the government gasping for about $1.4 trillion in
additional funding each year. Then there is Japan, officially the world's
largest debtor in terms of debt to GDP, where the easy availability of
local funding has dried up, requiring that nation to go to the
international markets for funding as well. The phrase "an awful lot of hogs at the trough" comes to mind. My
point is not just that these governments are broke and are about to get
a lot more broke as interest rates rise on their many debts and
financings, but rather that the global trend toward a resurgence in
public demand for socialism in response to a worsening crisis is a
certainty. How could it be otherwise when for decades now the schooling of children has been delegated to functionaries of the state? For
evidence, look no further than the screen swipe here. It is a quote
from an essay by a college student in the United States on role the
government should play: The
writer of those words was a member of a Valencia University economics
class. The professor, Jack Chandliss, asked the class to write an essay
on what the American dream means to them, and what they want the federal
government to do to help them achieve that dream. Out of 180 students
participating, only about 10% wanted the government to leave them alone
and not tax them too much, but a whopping 80% wanted the government to
provide pretty much the whole dream thing wrapped in a tidy bow â€"
including free college tuition and health care, jobs, even the down
payment on their future homes, money for retirement and hard cash, taken
in the form of taxes from rich people. Please take a moment to watch a worthwhile interview with the professor. Pretty eye-opening, eh? The point here is not complex, but it is important. With
the apparatus of state education over many years serving to bamboozle
the populace into the hardened belief that government has a positive
role to play in virtually all aspects of modern life, it should come to
no surprise to anyone that, when push comes to shove, people are now
trained to look to government to solve the problems â€" even when it was
the government that created the problems in the first place. Thus,
confronted with the intractable mess they have made, these governments
have to keep alive the mythology they have created about their
omnipotence. Which is easier said than done, because with things now
swirling fairly quickly around the drain, the mob is beginning to lose
faith â€" and even patience. Which puts these governments in a very tight spot, because the only way they can actually fix things is by doing exactly the opposite of what people have come to expect from their governments, which is
always to do more. Put simply, the only hope now is that these
governments begin to reduce their roles in their respective economies,
and dramatically so. Concurrently, they have to encourage people in
their aspirations to greater wealth, by lowering their taxes and
unwinding the tangle of regulations they have created over the last
half-century. But if the governments actually tried to take these
actions, the brainwashed masses would be positively befuddled then
outraged, as it goes against everything they have been taught. Why, it
would be like the Pope shuffling his way to the balcony of St. Peter's
Basilica and informing the doting faithful that there isn't a god and
never has been. Riots would follow. So it is that we find ourselves at a particularly interesting juncture in the historical record. On
the one hand you have a majority of the world's population who have
been carefully schooled into believing that the institution of
government holds the solution to all problems and is the source of
succor to all who need it. (Even that subset of the populace who has
lost confidence in their current government invariably believes as
doctrine that the next and better government can change things for the
better and lead the way to the shining castle on the hill.) In
this mix are the politicians and their functionaries, 99.99% of whom
believe that, if for no other reason than their re-election prospects,
they have to do something to meet the demands of the public. Of
course, under normal circumstances the "something" usually consists of
making grand-sounding speeches and otherwise blowing smoke. Today that's
just not going to cut it, for the simple reason that the crisis is
real, it is spinning out of control, and it's not going to go away
unless and until the markets are allowed to breathe again. Which
brings us full circle to the simple truth that the brainwashed public
won't stand idly by while the politicians lower taxes and regulations on
the profit makers or cut back state pensions and guarantees or
otherwise reduce any of the many services the state has taken on itself
to provide. "Between a rock and a hard place" is an inadequate phrase to describe the situation. Meanwhile,
the mob has started to gather, their dark mutterings heard by the
politicos who quickly don the red caps themselves, the better to be
viewed as one with the people and join in expressing outrage against the
capitalists who have been selected as fall guys in this unfolding
drama. When confronted by reporters about the fact that his 75%
tax on high-income owners would raise nowhere enough revenue to offset
France's towering debt and social obligations, Mssr. Hollande was heard
to respond: "It's not a question of return. It's a question of morality." When coercion and theft are considered moral, anything is possible, and none of it good. While I certainly can't say how this is all going to end, I'm pretty sure it's not going to end well. [Was David's pessimistic view of the future shared by most of the experts who spoke at the just-concluded Casey Research Recovery Reality Check Summit? If you weren't there, you can still learn the answer to that
question â€" an audio collection of every presentation is in progress.
You'll hear every speaker… see every graph and chart… learn what the
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