"The Argument For Mad Max"
by Karl Denninger
"If you're wondering why people think it might very well happen, you should read this: "Efforts to tame America's ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history. At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization."
The problem of course is expressed quite clearly there - we're borrowing and spending 12% of GDP, roughly, and have been for three years. Basically, over the last ten years or so we have radically expanded the idea of what people can "get" from the Federal Cheese-Chest. Medicare Part D, expanded unemployment benefits, all sorts of things. But the number of people able to pay for it has decreased.
Just take food stamps, for example. 41 million people in America receive them. That's nearly a 50% increase in the last two years, and is now up to roughly 12% of the entire population of the country. The problem is compounded by this sort of attitude: "Ms. Mueller-Holden's family earned too little to pay federal taxes last year, and received an extension on their state taxes. "Quite frankly, I don't care about the deficit," says Ms. Mueller-Holden. "It's going to take years upon years upon years to pay this all back," she says, so it's better to focus on job growth now and deal with the deficit later. Nice idea, but the problem is that Ms. Mueller-Holden isn't in charge of whether that is plausible or not. That's under the control of investors in the bond markets, and a significant number of them are foreigners, who are interested in exactly one thing: the security of their "investments."
The issue comes to the fore if the money-printing and borrowing binge continues beyond the point where confidence is lost in that future repayment capacity. Nobody knows precisely where it is. But we all know that such a point does exist, just as it exists for everyone individually. You may not know exactly which charge on your plastic put you over the edge and hosed your personal finances, but the fact is that there's a line that, once crossed, dooms your repayment capacity. In the world of national finance the real issue is confidence, and in a world where much national debt is held externally, there's a further concern that complicates things - an expectation of depreciation in the currency can lead to capital flight and a bond-market collapse.
Resolving these problems is not going to be easy. Politically, saying "no" to someone who has their hand out and insists that they absolutely need the cheese or they will starve is extremely difficult. We've done it before, in the 1990s, when "welfare reform" passed over the screams of the liberal left who claimed that we would see literal starvation of children in the streets. Congress acted anyway, and the alleged and promised starvation outcome didn't happen. But that was in a United States that was far less dependent than it is today. Today, we're living in a nation with twice or more of the population getting some sort of handout than we were then, and the key question is whether the cuts that have to happen - the Federal Government is about double it's sustainable long-run size - can be made on a political basis.
If we fail to do it, and there's a good argument to be made for the political impossibility of taking the necessary action, then the possibility of a dislocation-style "adjustment" comes to the fore - and with it large-scale civil unrest - or worse.
Nobody in government likes to say "no" as it puts their job at risk. But there's a clear line beyond which one has real trouble, and it's roughly when 50.1% of the population is receiving and less than that are paying. At that point the political impossibility of cutting back may rear its head, and if politicians cater to the demands and screams of the constituency, then collapse is not just possible - it's assured."
- http://market-ticker.org/
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