The Breakdown of Planned Economies

Something big is coming to a head and there’s nothing to stop it.  Over the last half century – or longer – more and more intelligent and able people have become encumbered by government programs of compulsory philanthropy.  In some cases, several generations of families have been wholly dependent upon the state for their daily bread, roof over their heads, and shoes upon their feet.

But, alas, everyone cannot live off the expense of their neighbors indefinitely.  Moreover, as the debt supercycle peaks, complex social arrangements directed by the heavy hand of the state are imploding for everyone to witness.  In fact, last weekend brought forth more evidence that planned economies are coming undone.

In California, for example, retread Governor Jerry “Moonbeam” Brown revealed some remarkable insights on Saturday.  Namely, that the Golden State doesn’t have a $9.2 billion dollar budget deficit as previously thought.  No doubt, that would’ve been problematic.  But not as problematic as a $16 billion dollar budget deficit.  Somehow, since January, the funding gap has widened by $6.8 billion dollars – a 73 percent increase – without notice.

How did that happen?

Unfortunately, Jerry Brown is a man of little imagination.  To solve the debt problem he’s proposing to increase the state’s sales tax and to eat the rich.  “Under Brown’s tax plan,” reported AP, “California would temporarily raise the state’s sales tax by a quarter-cent and increase the income tax on people who make $250,000 or more.”

If you didn’t know, California already has the highest sales tax in the nation and high-income earners have been disappearing from the state for years.  According to Brown, if voters fail to approve the tax increases in the November election, the state will be forced to make severe cuts to schools and public safety.

Of course things could always be worse…

Stealing Money and Giving it to the Banks

Take Spain, for instance.  The country’s banks are bankrupt.  They’re holding massive amounts of loans on their books that are going sour faster than unrefrigerated milk…

“The extent of non-performing property loans sitting on Spanish bank balance sheets is ballooning at an alarming pace,” reported Daily Forex Brief.

“If the Spanish government attempted to fill this gap, it would lift the debt/GDP ratio from near 70 percent currently to around 120 percent.  To make matters worse, flush with ECB cash, local banks have increased their purchases of Spanish bonds by a third in recent months.  As such, if bad debts at banks continue to grow (a given), and the government is forced to inject funds (money it does not have), then the public debt grows exponentially and the sovereign’s solvency is threatened, further undermining the bank’s position.  With the economy stuck in a deep recession and borrowing costs quite elevated, Spain would rapidly find itself trapped in a deadly debt spiral, requiring huge financial assistance from the EU and the IMF.”

To make matters worse, Spain has a 24 percent unemployment rate…and an unemployment rate of 50 percent of those under 25 years old.  Over the weekend, thousands of protestors took to the streets of Madrid to protest the government’s crippling combination of budget cuts and tax hikes.  Obviously, the protestors’ outrage is justified.  Their banks are insolvent their economy’s functionally dead.  Yet the government won’t let the banks default honestly.

“We are really tired of this situation,” said Madrid protester Paola Alvarado, a purchasing agent.  “And the new government is the same.  They steal our money and give it to the banks.”

Regrettably, Spain’s not alone.  Plenty of other European countries, including Italy and France, are going broke and their banks are nearing insolvency.  With this scenario facing them, the ECB will be forced to inflate the money supply at unfathomable rates.  So, too, America and the Federal Reserve will be compelled to continue pursuing a process of inflation to lighten the government’s debt burden.

We’ll be sure to keep you apprised of the situation as it unfolds.  In the meantime, we’ll offer some final thoughts…

The Breakdown of Planned Economies

Here at the Economic Prism we are not amazed that social, financial, and economic systems are breaking down.  Quite frankly, we’ve been expecting it.  Along these lines, what we do find amazing is that the whole thing expanded and held together as long as it did.

The government and social order we’ve always known got its start in 19th century Europe.  In the United States it took the Great Depression and World War II to set America marching down the road to hell.

“The Planners got a good deal of support from unthinking people on the simple score of common sense in the idea of planning as a wise course for all human beings,” wrote John T. Flynn in his 1943 work As We Go Marching, warning of America’s march toward statism.

“But the promoters of the idea of planning were thinking of something quite different,” continued Flynn.  “They were thinking of a change in our form of society in which the government would insert itself into the structure of business, not merely as a policeman, but as a partner, collaborator, and banker.  But the general idea was first to reorder the society by making it a planned coerced economy instead of a free one, in which business would be brought together into great guilds or immense corporative structure, combining the elements of self-rule and government supervision with a national economic policing system to enforce these decrees.”

It has been nearly 70-years since Flynn described the political and economic structure he observed being erected during the 1930s and early 1940s…and hardly a soul alive can conceive of anything different.  What’s more, even fewer have escaped dependency upon it in some way, shape, or form.

This system, whose emergence Flynn bore witness to, is the same system that’s currently breaking down under the crushing weight of unsupportable debt.  Central bankers and government officials the world over will do anything and everything to salvage it.  They’ll try things beyond your wildest imagination.  And when that doesn’t work, they’ll try something more.

Sincerely,

MN Gordon
for Economic Prism

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