There is no mathematical possibility of escaping the economic bind we face without reducing the welfare state. The current financial crisis only exacerbates a situation which long ago passed the tipping point. The Federal government’s total liabilities exceed $100 trillion (most of that from the unfunded liabilities of the welfare state: social security, medicare, etc.). With the financial crisis, we now have an additional black hole, our banking system. The condition of the banking system has been covered up, but that is becoming harder and harder to do as banks collapse under their own weight as a result of deteriorating conditions.
To the government and the Federal Reserve the only tool they have ever possessed (or learned to use) was a hammer. Thus, all problems look like nails. They only know how to spend and inflate, exactly the actions that brought us to this point. This approach has never succeeded economically, but it has managed to cover up past crises. Of course that was acceptable for virtually all politicians.
The present economic thrust is an attempt to (temporarily) save the welfare state at the expense of destroying the dollar. Unfortunately, that will not prove possible. At some point, probably not too far off, the dollar will collapse. Once the dollar is emasculated our standard of living will dramatically shrink, and future economic growth will approximate that of Old Europe. Under such conditions the carrying costs of the welfare state will be impossible to bear. We will lose both the dollar and the welfare state. In dangerous times such as these, governments are often overthrown with new entities appearing that look nothing like the structure they replace.
There is no way to reasonably estimate the timing of the dollar collapse which will trigger the entire process. A catalyst will probably be the Treasury market where interest rates will start to increase to reflect higher default risk. Regardless, it appears as though we are getting close. The dollar has been very weak, and the anti-fiat currency, gold, appears strong. If (when?) the event occurs, it likely will come very quickly. Too many Central Banks are holding too many dollars and Treasuries. At some point a panic to get out of the dollar is likely. Once the first domino falls, the entire global system is apt to implode swiftly. These are indeed dangerous times.
A deeper discussion of the reasons why our present course of action is hopeless is presented here: http://market-ticker.denninger.net/archives/1415-Labor-Day-Musings-Part-II.html
