Persistent Questions About the Future of the US Economy

We’ve covered a lot of ground over the past few months. Not much action in the markets yesterday, so let’s stop here and take stock.

What we know so far…

First, it was clear from the get-go that there was a bubble in finance and housing. The only people who couldn’t see it were the people in finance and housing…and the feds. It reached its peak in ’05-’07…then, exploded.

Second, it was obvious that the US economy entered a period of debt destruction — a Great Correction, we called it. There was never really any hope of ‘recovery.’ Once it blows up, you can’t put the pieces of a bubble back together.

Third, the question then was how long the Great Correction would last…which depended on what it was correcting. No one knows. We’re still correcting the debt bubble, which could take another 10 years or so. But this correction could be tough; there are other things going on. Which led us to start asking questions about what we don’t know:

Can any government in the developed world survive? Will there be enough growth to keep them from going broke? Was the growth of the post-war period a fluke? Was the Industrial Era driven entirely by cheap energy…a ‘growth spurt’ that is now played out? Are the developed economies so burdened by zombie institutions that they can never hope to compete with the emerging markets? How do governments shuck off the zombies?

Those questions gave us something to think about.

We saw, for example, that the theories of government were mostly wishful thinking, apologia, and claptrap. Government is raw force…used to transfer wealth and status to the insiders who control it. The reason for the triumph of democratic government is that it gives more people the illusion of power…and welcomes more people as insiders (however modest their participation). As time goes by, more and more groups get special privileges, contracts, jobs, tax breaks, bailouts, protections and redistributions. Eventually, there are more insiders collecting wealth than there are outsiders producing it. Then, reform is practically impossible. The political system is entirely under the control of the zombies. The only resolution of this is catastrophe — either in the form of bankruptcy, hyperinflation, war, revolution, or some combination.

Zombies are expensive parasites. The more political power they gain, the less flexible and adaptable the economy and the society become. Capitalism is corrupted. The ‘system’ cannot correct itself. Politicians may talk about cutting spending, balancing the budget, and protecting the nation’s finances. But they can’t do it. The leeches want more and more blood. Sooner or later, the host goes broke.

But bankruptcy is not the biggest menace — not for the US. An empire risks losing its soul as well as its money. That is the drama we are watching in the Republican presidential race. The devil has already laid his trap — the Pentagon budget, Homeland Security, Patriot Act, the Defense Authorization Bill, sidelining Congress, torture, the use of drones at home and abroad, the pre-meditated murder of Osama bin Laden. It is probably just a matter of time until it springs shut.

“Wait, Bill,” writes a reader. “You keep going on and on about the Pentagon. But the military is going to take the budget bullet, if you know what I mean. That’s where the automatic cuts are focused.”

Oh yeah? More below…

Of course, we don’t know what will happen. We’re just watching, wondering…guessing…like everyone else. We’re also probably a bit more ‘pessimistic’ than most observers. Because we have a lower opinion of our fellow man than most people do. Not that he is bad. But he is subject to influence. And sometimes the influences upon him are rotten. The average person we meet is a decent enough character; we almost always like him. But the average Roman in Caligula’s reign was probably a decent fellow too. Sometimes people get trapped…where the worst take over…and decent people can’t stop them.

Remember the meeting at Davos with the “remodeling capitalism” theme? We were suspicious and dismissive. After all, no one ever modeled capitalism in the first place. It seemed vain to talk about remodeling it.

Besides, we’ve seen these architects and decorators at work before. We wouldn’t want to live in a house they designed.

Stephen Roach, an economist with Morgan Stanley and Yale, took part in the discussion. His account of the conference confirms our guess: this was the most prestigious meeting of dumbbells on the planet.

One speaker urged a repudiation of materialistic values. Another wanted to confront human rights abuses. Another wanted to make some point about the Arab Spring.

Two thirds of the participants, writes Roach in The Financial Times, “felt capitalism was not working.” But none seemed to have any idea of what capitalism really is…or what might be wrong with it.

A group of Occupy agitators broke into a chant: “No speeches. No stage. Join us!”

Join us? Why?

“We simply cannot continue to cut our defense budget if we are to remain the hope of the Earth,” says Mitt Romney.

Where do candidates get this sort of stuff? Who writes lines like that? Who takes them seriously?

According to Romney, the Earth itself longs for more US military spending.

His adversary, Newt Gingrich, says he thinks that Obama’s Pentagon cuts will make the US as vulnerable to attack as it was before World War II.

But the Pentagon won’t really have less money to spend. They’re not really talking about cutting defense spending; they’re talking about cutting projected military spending increases. Even after the ‘cuts,’ the US military will still be spending more than the next 10 biggest spenders put together.

While Republican candidates try to out-Rambo each other, the president himself sends teams of Navy Seals to rescue American hostages…and never fails to remind Americans that he was the one who ordered the killing of Osama bin Laden.

All the candidates think the American people want war. Or…what?

Actually, Americans don’t want war. The latest Pew Research polls show them more opposed to foreign military adventures than at any time in the last 15 years. They’re more interested in getting a job…and protecting their retirements. Given the choice, they would probably want to see military spending cut back and the money put into their own pockets.

But they won’t be given the choice. The system is rigged. Between them and the outcomes are 10,000 lobbyists and millions of zombies. This is why representative democracy doesn’t work.

Decent people will generally have decent responses to decent questions. Put to a ballot, how would American’s vote?

1. Should the US balance its budget…or continue to spend $1.50 for every dollar in revenue?

2. If you have to give up something, which would you rather do without: foreign wars…or domestic health and retirement benefits?

3. Should Congressmen be forced to leave Washington after a maximum of 2 terms?

4. Should members of Congress be forced to live by the same laws as the voters?

5. What do you say to a flat 10% tax rate, on all income…across the board…? Yes or no?

6. Should the President be allowed to kill or imprison anyone he wants, without due process of law?

Our guess is that the voters would do the right thing.

But they’ll never get the chance. The system is in the hands of the zombies now. Lobbyists, lawyers, connivers, chiselers, contractors, layabouts and scalawags and world-improvers — each one takes a little piece of the old republic…until there’s nothing left.

Tomorrow: how the zombies work…

Regards,

Bill Bonner,

for The Daily Reckoning