The greatest of lies about government 1

Vasko Kohimayer writes in Front Page Magazine (an article well worth reading in its entirety):

Having incurred more than $65 trillion in obligations of various kinds, the federal government finds itself in an insurmountable fiscal hole. To give a sense of size, this amount is more than the annual economic output of the whole world and four times America’s Gross Domestic Product. It would be impossible to manage this even if our leaders suddenly came to their senses and began to behave responsibly. There is little chance of that, however. The larger our debt, the more eager they are to spend more.

Despite our leaders’ efforts to conceal the level of indebtedness, its reality cannot be evaded. The steady weakening of the dollar is one evidence of that. In recent months financial experts have even been discussing the unthinkable: The possibility that the American government may default… The deficit will end up being close to $2 trillion at the end of this fiscal year… The markets are growing increasingly concerned about the possibility of the United States failing to meet its obligations.

The question is how did America get into this position. What brought this country – once a citadel of financial stability – to such dire straits? The answer will become apparent when we look at the composition of America’s debt burden.

The federal government’s obligations consist of two main components. The smaller of the two is the one that is reported on more often. It is referred to as “public debt,” or “national debt,” or “sovereign debt.” This is the debt that the government has incurred as a consequence of its budget deficits over the years. It currently stands at $11.6 trillion, which is about 85 percent of GDP.

The public debt, however, only represents a relatively small portion of the government’s total debt. The rest is primarily made up of obligation connected with three large entitlement programs – Medicare, Social Security and Medicaid. It is estimated that together their combined claims amount to roughly $55 trillion more than what the government will collect in designated taxes. At this point Medicare and Social security do not yet represent a net budgetary expense, because revenues (FICA taxes) exceed what is paid being out in benefits. To put it differently, these programs are currently running surpluses; this situation, however, will not last indefinitely. The social security surplus will end around 2018. The negative gap will then widen rapidly with each successive year… The $55 trillion question is: How will the government raise the cash once the surpluses come to an end?

There are two ways in which this can be done: by raising taxes or by borrowing. Neither seems like a good option under the circumstances. Taxes are already perceived to be high; bringing them much higher would be politically unpopular if not impossible. Furthermore, raising taxes would hamper growth, which would in turn decrease the tax base and thus defeat the purpose of the increase in the first place. As far as borrowing is concerned, it is almost certain that investors would refuse to finance additional debt given their concerns about its present levels. With no place to go, it is likely the federal government will do what governments usually do when caught in this situation: it will “meet” its obligations by printing money.

This, of course, is an easy way out, but it debases the currency and produces inflation. And since America’s huge debt load is far beyond the government’s ability to pay off with honest money, the level of inflation is likely going to be very high. It would actually appear that the government has already embarked on this path. There are even those who fear that the United States may eventually experience hyperinflation… The soaring inflation that will follow will have a devastating effect on the already fragile financial system and will inevitably lead to economic breakdown. This will in turn set off centrifugal forces in a troubled and divided society.

America’s impending travails are thus ultimately tied to fiscal mismanagement, particularly in the area of entitlements. It is as ironic as it is instructive that entitlements seek to confer the kinds of benefits the Founding Fathers thought the federal government should have no business of pursing. It was with this in mind that they drafted a constitution that sought to prevent the federal government from getting involved in those areas. They made it very clear that federal functions were to be few and  limited, confined primarily to protecting the life, liberty and property of Americans.

Ensuring people’s well-being through the provision of retirement income, healthcare and other such goods was not to be the government’s job.

It is to our detriment that we have betrayed both our founding principles and the Constitution. We have done this because we have fallen for that greatest of lies, which is that government is capable of providing for citizens’ material and social needs

Brainwashed by years of public education, many believe that ensuring the population’s material welfare is precisely what good government is all about. But no government has ever been able to pull this off

Those naive enough to rely on the government’s “guarantee” of a “dignified” retirement are bound to be bitterly disappointed… But if the only thing the government did was to fail to deliver on its promises, the situation would not be so dire. Unfortunately, it also did something else in the process – it has bankrupted this nation by saddling it with debts and obligations we cannot fulfill. This outcome is unsurprising. The old maxim is as valid now as it has always been. Government does not solve problems; it only makes them worse. Given the ambitious scope of entitlements, it was only to be expected that federal involvement would eventually create difficulties on an insurmountable scale…

Posted under Commentary, Economics, government, Health, Socialism, United States by Jillian Becker on Monday, August 24, 2009

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  • roger in florida

    This is so depressing, but look on the bright side. When hyperinflation strikes the dollar and nobody wants to accept dollars in payment for anything, we in the US have the capability to make everything that we need ourselves, without any help from Chinese, Japanese, Germans (or other Europeans). The US and it's close relative Canada have every raw material and surplus food, so don't worry.
    They on the other hand will suffer mightily from our being unable to buy their goods.
    During the German hyperinflation, German industry was booming until marks could not be used to buy raw material, however that modernised and efficient industry is what they went to war with.