Curtailing public expenditure as catalyst for revolution

This is not a new theme in these pages. In this March 2009 post you can follow links and read comments to other blog entries on the logical progression brought about by the inability of government to induce expansion in the credit markets.

Today we have this report chronicling the lengths some towns, counties, municipalities and states are going to in order to fend off bankruptcy.

http://www2.macleans.ca/2010/09/14/third-world-america/

Sales of existing homes are at their lowest level in 15 years, and new home sales plummeted this summer to the lowest levels on record. Property and sales tax revenues have shrunk. And nowhere is this more apparent than at the local government level, where officials are being forced to roll back the everyday hallmarks of modern civilization.

Cincinnati, Ohio, is cutting back on trash collection and snow removal and filling fewer potholes.

The city of Dallas is not picking up litter in public parks. Flint, Mich., laid off 23 of 88 firefighters and closed two fire stations. In some places it’s almost literally the dark ages: the city of Shelton in Washington state decided to follow the example of numerous other localities and last week turned off 114 of its 860 street lights. Others have axed bus service and cut back on library hours. Class sizes are being increased and teachers are being laid off. School districts around the country are cutting the school day or the school week or the school year—effectively furloughing students. The National Association of Counties estimates that local governments will eliminate roughly half a million employees in the next fiscal year, with public safety, public works, public health, social services, and parks and recreation hardest hit by the cutbacks. A July survey by the association of counties, the National League of Cities, and the U.S. Conference of Mayors of 270 local governments found that 63 per cent of localities are cutting back on public safety and 60 per cent are cutting public works. […] America is moving “from the Jetsons to the Flintstones,” [Mrs. Huffington] argues. “The American dream was already based on the idea you could work hard and do well and your children will do better. Now we are confronted with downward mobility across the board. You have the phenomenon of unprecedented numbers of college grads who can’t get jobs.” The current public sector cutbacks in education and infrastructure will only make things worse, Huffington says. “You are both hurting people in the present, and basically undercutting your economic growth and prosperity in the future.”

And here is where most people are unable to reconcile what has been happening till 2006 and what is happening now. Pay attention.

But the problem isn’t simply a product of the current recession or the 2008 financial crisis. It is now well understood that for years Americans lived beyond their means on borrowed money.

Technically true. Americans like everyone else in the West too.

But that is not the problem. The problem is what caused people to live beyond their means. Has anyone asked the question and looked into the dynamics? People will say that capitalism, selfishness, greed or vanity are the causes of people living beyond their means. Though all true contributing factors, these are but the proximate causes.

I say it is the inevitability of the political process aided and abetted by the monetary system.

Politics is inherently and by necessity manipulative thus it can only result in expedient self serving policy. This is the one single reason why a restricted circle of banks were able to impose a fiat monetary system on the politicians in 1913. Fiat money guarantees profits to the banks whilst allowing politicians to manipulate social/economic reality. Predicated on inflation, the inflationary dynamic brought about by fiat money induces a rise in trade and asset values. At the outset of the dynamic, the difference in the rate of increase in nominal or intrinsic value is negligible. But as the dynamic progresses, the rate of increase in nominal value decouples from intrinsic value till the former runs away from the latter. Nominal value is associated with credit expansion.

Credit expansion is not a bad thing in and of itself. But credit expanding at rates that far outstrip the rate of expansion of GDP is not a good thing. So that in an environment where the progression of GDP is anemic if not stagnant the only way to induce a rise in nominal asset values is by manipulating interest rates ever lower. Eventually, when interest rate manipulation loses traction, financial gimmickry must take-up the slack (derivatives, off balance sheet investments, CDOs, CDSs, MBSs… ). When even derivatives hit the proverbial wall, government must step in with creative measures. Initially, preferential accounting treatment for select entities, then progressively outright interventions and preferential legal treatment for said favorite entities.

… have to run now… will finish later…

The keen observer will notice that a fiat monetary system is inherently and mathematically limited. That’s because despite what Monetarists and Keynesians may wish, inflation conforms to the law of diminishing returns so that at at some point, more inflation no longer has any effect on the expansion of GDP. Official data buttresses this.

The above is not conjecture. It is fact that cannot be disputed.

If politicians for whatever reason have opted for a fiat monetary system, what is also evident is that the success of the choice hinges on never allowing the public to debate the choice let alone ratify it. It follows that the success of imposing fiat money upon society rests on government successfully avoiding any study or debate of the system in academia or in economic discourse.

If the above is achieved successfully, economists, pundits and professionals will argue and debate any number of issues at any given time but few, if any, will ever question the choice of monetary system itself. In fact, things are even better.  Ignorance of the monetary system and of the laws that govern fiat money also insures that scholars in other human sciences fail to understand the basic dynamics that, for example, lead to over-consumption, the depletion of resources and the devastation of the environment – ramifications that are due in large part to the choice of monetary system.  Empirically then, it is clear that the debate must (should) center on the monetary system as the dynamic that is upstream of any and all human dynamics.

A fiat monetary system is necessarily predicated on high monetary velocity which means low savings and expanding credit. This is a mathematical truism that cannot be disputed.

Thus, if the authorities willingly discourage study and discussion of the system and, at the same time, lower interest rates and expand credit markets (as required by the logic of fiat money), the inescapable conclusion is that individuals must perforce go progressively from living a decent life on one salary, to needing two salaries, to depleting their savings, to going into debt initially for a little extra to splurge on some luxury until, finally, going into debt even for daily necessities.

So, absolutely, Americans and Europeans have lived beyond their means. But this was forced upon them by aberrant government policies that make it inevitable that people behave the way they did.

But where does that leave people like the good citizens of Ashtabula County, Ohio? How can they be safe from criminals without a fully staffed local police force, TV station WKYC asked a local judge in April. “Arm yourselves,” came the reply from Ashtabula County Common Pleas Judge Alfred Mackey. “Be very careful, be vigilant, get in touch with your neighbors, because we’re going to have to look after each other.”

And so they did. In July, a group of farmers removed the safeties from their shotgun triggers and surrounded a trailer in which a suspected house robber was hiding while they waited for the county’s last, lone squad car to arrive

http://www.marketwatch.com/story/middle-class-running-as-fast-as-it-can-2010-09-17?pagenumber=2

Middle class running as fast as it can – Commentary: Another day older and deeper in debt

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