Unsustainable Government, Deficits and the Dollar

“The trouble with Socialism is, sooner or later you run out of other people’s money.” Margaret Thatcher

Casey Research provides a free newsletter. The latest letter contained several thoughts regarding how this economic crisis resolves including the following points:

• government has outgrown reasonable and sustainable size
• a dollar collapse
• possibility of hyperinflation

Some quotes from the newsletter:

… the remaining tax-paying sheep have only so much wool to shear. And when they’re trimmed down nice and tight and the government is suffering the ultimate fate of all socialist regimes – namely, it has run out of other people’s money – then where will it come up with the sustenance to support its inflated self?

The point where the government’s tried and true method of pushing problems down the road through printing unbacked dollars may well be reaching its limits. And in fact, it may have reached its limits – which is why we’ve seen so little in the way of dollar rallies of late.

Too Big to Bolt

So far, the government’s reliance on the escape hole of the printing press has come in very handy… during times of war, recessions, and dot.com stock market crashes. So accustomed has it become to using this particular avenue that it’s become habitual. Consequently, when faced with danger, no hesitation or further reflection is required before quickly scampering to the printing presses.

While history still contains many mysteries, there’s nothing mysterious about the long list of bitter disappointments suffered by those who learn, too late, that something has unexpectedly changed that disrupts the best-laid plans.

In the current case, the thing that has changed is that the government may have grown too big to fit through the hole to salvation.

The two charts below help make the point.

The first, from data provided by the Cato Institute, provides a historical perspective on the steady increase in the size of the government. As you can see, with the single exception of the pedal-to-the-metal spending increases of WWII, the size of the government’s role in the economy is now ticking along at unprecedented levels.

It’s worse than that, because the picture doesn’t include the extreme deficits the government is planning on running in the years just ahead, nor the massive spending associated with the passage of universal healthcare.

Reflecting on this takeover of the economy is reflecting on the winners and losers inherent in the evolving situation; as the government doesn’t actually produce anything, its gain in economic share must come at a cost to the private sector.

Fully exploring this line of query requires more time and space than I have here, but I’d like to briefly comment on an important aspect to this takeover.

Specifically, the government has become the largest single component in the economy it is supposed to be shepherding. That has consequences I will try to unveil — so please bear with me for a minute.

Visualize what would happen if the government was to wake up one morning and decide that the greedy bankers needed to be put in their place. Were that to be the case, it could cut the bankers down to size by dashing off some new regulations and/or levying new taxes and fees on the miscreants.

Likewise, if the government decided that excessive speculation were driving energy prices to artificial highs, it could follow much the same route. Repeating this exercise over and over, punishing that group and rewarding this group, is much how the government operates.

But what happens, I ask, when the biggest component of the economy, and the biggest problem it confronts, is government itself?

After all, a government can’t tax itself (well, it could, but what would be the point?). And while it should regulate itself, few instances of it doing so effectively pop to mind. Thus, we are left with a situation where the sheer size of government limits its options.

In the current context, it’s no secret that Jabba the Fed is sharpening its claws with new taxes aimed at high-income earners, but then what?

Half of the nation pay no taxes at all, so they’re off limits. And even the middle class, which is said to make up about 60% of the population, won’t provide much fodder for the federal gut. According to the Census Bureau, you’re considered middle class if you earn between $19,000 and $92,000 a year. Of course that’s a fairly wide range, and those at the bottom of the range certainly aren’t rolling in the stuff. Even those at the top of the range, having roughly half of their income deleted by taxes of all description, don’t have much of a cushion with which to soften life’s harsher blows – let alone save for a comfortable retirement. And they sure won’t react well to having to carve a larger slice of their small pie out for more taxes. Ergo, Obama’s pledge of no middle-class tax increases.

The point I’m trying to make is that the remaining tax-paying sheep have only so much wool to shear. And when they’re trimmed down nice and tight and the government is suffering the ultimate fate of all socialist regimes – namely, it has run out of other people’s money – then where will it come up with the sustenance to support its inflated self?

Per my lead-in, history does provide an answer to that — and that is to ramp up the money printing. But that runs into the reality that the government of these United States is now so bloated that it’s dangerously close, and maybe even past the point, to being unable to use this familiar way out.

The next chart from our own Bud Conrad points to the risks inherent in the unfettered deficit spending required to maintain Jabba the Fed, once it has sucked all the life blood it can from the thinning ranks of taxpayers.

Simply, we are reaching the point of no return. The point where the government’s tried and true method of pushing problems down the road through printing unbacked dollars may well be reaching its limits. And in fact, it may have reached its limits – which is why we’ve seen so little in the way of dollar rallies of late.

That’s not to say they won’t occur, but looking at the golden barometer this morning, I see that gold has just broken through to a new level of $1,132 per ounce. And the dollar index (DXY:IND) has just broken through the 75 long-term resistance point… to 74.91 as I write.

Bud Conrad, who lives and breathes this stuff – almost literally – now thinks the conditions are there for an actual dollar collapse. While it’s unlikely things will reach the depths pictured in the chart of the German hyperinflation just above, it doesn’t mean it can’t happen.

What can’t happen is for the U.S. government to take over the economy and expect it to keep ticking along through a combination of higher taxes and debt monetization.

Related posts:

1. More Dollar Woes
2. What a Weak Dollar Means
3. Death of Dollar by Peter Schiff
4. The Dismal Dollar
5. Big Government Means Poorer People