The Fatal Flaw That Will Bankrupt Our Democracy

Source: Wikipedia.

Dear Diary,

We’re still in the lazy days of August, with little going on in the stock market. So let’s use this time to look at deeper trends.

We left off last week with discouraging words.

First, we noted that, according to Washington’s own budget people, Social Security is going broke 20 years sooner than forecast. It’s already $15 trillion in the hole, with a deficit that’s up 300% (mistakenly reported as 400%) in the last five years.

Second, we sympathized with our new dear readers of our new venture, The Bill Bonner Letter.

It must be difficult coming into a conversation that has been going on for so long. Especially when many of the ideas we are talking about are complex and confusing – at least to us!

Many are those who have tried to understand economics and markets in a simple and definitive way. They’ve laid out their diagrams and made their forecasts.

The graveyards and insane asylums are full of them. Because no matter how much you think you grasp… there is always more that gets away from you.

The Real Triumph of Civilization

To remind you, we were wondering why the Social Security system exists.

If government really were the parasitic zombie we think it is, why would it set up a retirement pension system that seems benign… and that now has the support of an overwhelming majority of Americans? (Especially those over 65!)

Is it possible that modern democratic government really is a different institution – of, by and for the benefit of the people who are governed?

Does it represent real progress in the life of mankind?

The answer we came to on Friday was “sort of.”

Civilization (including the rules and customs we associate with modern, democratic governments) makes possible trade, commerce and entrepreneurship. This allows people to become wealthy.

Wealth allows them to build new and better weapons. Less civilized governments (dictatorships, Communist countries and other basket cases) fall behind.Civilization triumphs because it pays.

Our modern, more or less consensual… more or less participatory… more or less respecting property rights… and more or less predictable government seems to have evolved along with an increase in firepower.

Firepower costs money. The freer (more civilized) an economy is, the more firepower it can produce.

Bullies, Bosses and Blowhards

As Henry David Thoreau first observed (in an essay published in 1849 called “Civil Disobedience”), “That government is best which governs least.”

Civilized people neither want nor need much government. Instead, it gets in the way. The more they have of it, the less able they are to produce wealth. (And firepower.)

That leaves little for the bullies, bossies and blowhards to do. So, they turn to Social Security… and Obamacare… and Homeland Security – programs that appear to be set up to benefit the ordinary citizen.

Instead of a barbaric institution of naked aggression and force, government is said to have no further point or purpose but to make citizens’ lives better.

That is why we have the Fed. It is really a cartel of bankers who make sure they protect and defend the right of bankers to make a lot of money.

But have you heard Janet Yellen lately? She says she is deeply… deeply… concerned about the plight of the unemployed!

Most of the public believes that modern government is merely a grand insurance program. It protects them. It defends them. It pays their medical bills. It provides an income during their working lives and a pension for their retirement.

More important, it flatters them. It convinces them they are the real deciders: the captains of a superior civilization, the citizens of an “indispensable nation,” without which the light of the world would be extinguished.

But there is a big flaw in this model.

The feds’ insurance business may be backed by firepower, but it is dependent on voter support. The voters want more and more benefits. And they are not too picky about financial standards.

The model works only so long as the economy and credit are both expanding. When those stop growing, the system goes broke.

Regards,