As the economic collapse approaches, be aware that government will become more desperate and resort to measure(s) that will enable it to survive. The myth of government as a good, necessary and positive force in society is coming unraveled. To understand how we got to this point, it is useful to review some economic history..
The US has gone through many boom-bust cycles in its history. In every case excessive liquidity has triggered a boom which inevitably ended in a bust. Ludwig von Mises expressed the relationship thusly:
Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.
In the 1960s the arrogance of government led it to believe that it had obsoleted the business cycle. Keynesian economics provided the means to manage the economy in a way that would prevent downturns. Government convinced the population of this fallacy.
Initially government’s belief was sincere but based on an incorrect economic theory. The naive belief didn’t hold for long, but it was never renounced. Politicians liked the new-found power it afforded them. As a result, they promoted this new tool and role for government. A wrong theory can still be valuable if it furthers other aims, like the accumulation of additional power.
Keynesian economics was never correct in any long-run sense. This fact was seemingly understood by Lord Keynes himself. He focused only the short-term. When a critic questioned him about the long-run, he famously brushed aside the objection with the curt reply: “In the long-run we are all dead.” Keynes died during his short-run. The rest of us are living with the long-run consequences he was unwilling to address.
Keynesian economics appeared to work in the short-run because of the liquidity created by government efforts. This liquidity provided the basis for a new boom, but not a correction of the weaknesses in the economy that produced the recession. Its “solution” was similar to a drunk continuing to drink to avoid a hangover. Mises and others observed that any relief was temporary and the ultimate outcome would result in a bigger and unavoidable correction.
The political class repeated the Keynesian myth so often that it became accepted. That enabled them to increase control and power over the economy. For a while it worked as a short-term palliative. It did so by avoiding the pain associated with a recession. However, each application of the medicine was like the drunk and imbibing another drink. The cure was prevented from occurring, but the ultimate hangover was not avoidable and would become much bigger when it happened.
More harm (long-term) is done by “solving” the short-term problem with the same poison that brought it on. Each economic intervention was intended to prevent the economy from undergoing the inevitable hangover. Both the drunk and the economy only cure their problems by allowing the dry-out period to run its course. Government wants to prevent this from happening.
In the early stages, before the distortions had multiplied, government interventions could either eliminate the recession or make it milder. However good this might be in the political arena, it is bad, bad economics. While matters appear calm on the surface under the surface price distortions and mis-allocations of resources are not corrected and are increased with each intervention. They are suppressed, but at the cost of making them worse.
For the last decade, our recessions have become worse and our economy weaker as a result of the build-up in these unseen distortions. The dot-com boom was triggered by the loose money injected into the system prior to Y2K. At that point, the economic system should have entered a big recession, possibly depression. Government options were limited, at least in the traditional sense of interventions. Rather than admitting defeat, in desperation, they chose loose credit applied to the housing market. They literally created a Potemkin economy which eventually collapsed.
This collapse threatened the world’s financial system. Again, in even more desperation, government stepped in to bail out an insolvent banking system. This bailout was done on the backs of taxpayers who will have to pay back the massive amounts of government debt raised to accomplish the task. The financial system did not fall (yet!), but neither did the economy recover. We are four years after the problem and there are no signs of a recovery.
The economic system cannot recover. It s racked with cancers that will keep popping up. It needs serious treatment, but the political class cannot admit that or allow it to happen. As a result, they desperately milk what few options and resources they have left. We have reached the point where everything is failing. Whether it be Fannie and Freddie, the Post Office, social security, our healthcare system, etc. Government is virtually out of options other than massive printing of money in order to be able to pay their bills.
As we slide toward economic ruin, one system or structure after another comes under stress. Jim Quinn tells us about the next likely high profile collapse and that involves student loans:
Delinquency rates on student loans made in the past two years stand at 15%, according to FICO, versus 12.4% for loans made from 2005 to 2007. This is proof that loans doled out since the Federal government took control of the market have been distributed willy-nilly in a frantic effort to artificially reduce the unemployment rate. Average student- loan debt last year rose to $27,253 from $17,233 in 2005, with almost 605 of bank managers surveyed in December expecting delinquencies to worsen in six months, according to FICO. Andrew Jennings, chief analytics officer of Fair Issac, said in a statement:
“This situation is simply unsustainable and we’re already suffering the consequences. When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default.”
When subprime mortgages blew up, at least there was collateral to alleviate some of the losses. When the subprime auto loans blow up, at least there will be vehicles to repossess. Student loan debts are the ultimate in subprime, with no collateral and millions of jobless debtors. The situation is much worse than the delinquency numbers reveal. More than half of the student loans are in deferment, grace periods, or forbearance, meaning they are not currently requiring repayment. This means the true delinquency rates are twice as high as the reported figure of 15%. What happens next can be succinctly summed up by the esteemed economist John Kenneth Galbraith:
The involuntary taxpayer bailout for this Federal Government created disaster will exceed $200 billion after the shit is done hitting the fan.
The Emperor has no clothes, but he is doing everything he can to prevent citizens from recognizing that fact. The issue of student loans is a prime example of government’s true concern. Most kids coming out of high school (under-educated) are incapable of understanding the ramifications of student debt. They don’t know they are being lured into debt from which the declaration of bankruptcy is not an escape. It is offered to these novices in the same fashion that sub-prime mortgages were offered to home-buyers who had no chance of qualifying under normal standards and no chance of ever paying back the loans.
These are acts of desperation. They are cruel acts. They show that government will do anything to survive, no matter who it has to hurt in the process. Government is nearly out of options, but that only means they will try to create new ones. The trial balloon of confiscating IRAs, a technique used by Banana Republics before, has already been floated.
Be assured, government has run out of legal options, but that will not stop them. They are thinking in terms of the unthinkable and the illegal. Government has might and power. No law will stand in its way of survival. “We don’t need no stinking badges” has replaced the Rule of Law and our Constitution.