Posted by Karl Denninger
Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.
El-Erian goes on to list six points that make most people’s eyes glaze over. Indeed, the entire editorial is one of those things that reminds one of Alan Greenspan and his famous “how to write 3,000 words and yet never find two people who agree on what you said.”
The final three paragraphs are worth reading though:
This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.
You mean things like taking in 30% of what the government spends via taxes, then dismissing this as “oh we’ll just issue some more T-bills”?
There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.
Uh, did you parse that one folks?
“…..tyranny of backward-looking internal commitments”
That’s code for “entitlements that were promised to people but cannot possibly be provided, no matter how long people howl – or how loudly.”
Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised (sp), the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.
Forget it. One need only look to Greece, where telling people they have to actually go to work and produce something in order to earn a public-sector salary produces riots.
If you think we’re “more advanced” in our thinking here in the United States you’re simply insane.
Times like this require a man in the left seat with a big fat church-bell sized set of balls, and the willingness to be unpopular enough to be a one-term wonder. This is inherently in conflict with the narcissist personality required to run for President in the first place.
Nobody who wants the job and is electable to the office is fit for it at a time like this. I’d do it if drafted, but I’d never put up with the crap required to get there, nor am I electable – because I refuse to lie in the fashion required to obtain the office. Stumping for votes while pointing out that promising to pay $100 trillion in Social Security and Medicare that we don’t have and can’t acquire, that if we try to print our way out of debt that “obligation” will go from $100 trillion to $250 trillion (which still can’t be paid), and that the sort of measures required to bring the economy and government back into balance – at both a state and federal level – will result in massive shifts in the economy’s balance and, in the short-term, lead to even more pain, are not popular. To the contrary – not one person receiving those handouts would vote for me, and since they’re nearly half the population there’s not a snowball’s chance in Hades that I could carry the day at the polls.
So what’s required is a paradox. You need a man or woman who will run for the office saying all the “right things” while lying through their teeth. Someone who will shed that veneer the instant the election is over, then take the left seat and be a five-alarm bastard once in office, placing a big sign on the door “$ = NO!”
Someone who will take a look at The Constitution and if they can’t find whatever it is being proposed in the four corners of the text, it’s gone. That is, Social Security and Medicare – gone. Provide some sort of subsidy to the states with whatever we’ve actually got in the so-called “Trust Fund” (that is, distribute to them the “special Treasuries” in the so-called “box”) and immediately end FICA. The States are then free to run the programs as they see fit. This will instantly force accountability and a transition to a privately-owned pair of accounts, or perhaps one account that provides both functions, since people move and won’t accept anything else.
Someone who will align tax revenue with GDP permanently and radically. This means The Fair Tax, and if Congress won’t enact it, then The President does it by executive order – by abolishing the IRS’ funding and authority! Issue an executive order barring the DOJ and other Federal Law Enforcement from enforcing anything in The Internal Revenue Code, and suddenly Congress will become far more reasonable since in order to acquire funds they will have to do the right thing. Radical? Yes. Bye-bye 16th Amendment and “K Street.”
Now go find the rest. Departments of Education and Agriculture, as just two examples: Gone. All State Mandates from The Federal Government: Gone.
If you can’t find it in The Constitution it goes back to The States and is regulated within their borders. The ability of the people to freely migrate from one state to another enforces fiscal responsibility – if you behave like a jackass, such as California has done, you will be rapidly de-populated and without a tax base, your policies fail. End of discussion. No more Federal Welfare of any sort. If The States want to provide it and can fund it, goody for them. More likely what happens is that The States suddenly find that they can provide lots of workfare doing things that need done, provided they outlaw public employee unions first to disarm those thugs.
On monetary policy it’s simple: The Fed either honors its actual written mandate or they’re gone too. No more BS, no more opacity. Everything they do is public and published on The Internet. Send up a bill mandating that any gaming of economic statistics or monetary policy is a federal offense garnering you 20-to-life in the can and demand that it pass or you’ll veto every bill that comes to your desk until it does.
On Credit Default Swaps and other instruments: All trade on a public exchange. All exchanges in the US are public, non-profit organizations. The Federal Government will run one and The States are welcome to set them up too – but only as public non-profits. National Best Bid and Offer (NBBO) is guaranteed by law with felony criminal penalties for anyone gaming it – like offering “Flash Orders.” Any federally-chartered institution that fails to adhere to One Dollar of Capital is instantaneously closed – without exception. All firms trading on a public exchange or doing business in The United States across state borders (and therefore under proper federal regulation) is required to produce full, complete and truthful financial statements, without exception. This means the use of off-balance sheet anything is absolutely prohibited under pain of immediate delisting and felony fraud prosecution.
We adopt a national policy that tariffs are set to provide wage parity. This will produce howling from the WTO. Tough. No longer will we permit wage arbitrage as a reason to offshore jobs. This is not only Constitutional, it is the premise upon which this nation was founded in terms of how the Federal Government is supposed to acquire its funds! Combined with The Fair Tax, which will make the United States a corporate tax haven (zero corporate and personal income tax rate) this will result in an instantaneous flood of manufacturing and high-tech jobs back into the United States – all GDP boosters. The United States GDP would double within a decade.
Refuse to sign any budget that does not run a primary surplus, except in times of declared war. If Congress or The Administration wants to play International Cop it either funds the entire thing on-budget and pays for it or declares war and has the ability to do so via deficit spending.
Adopt Freedom’s Vision for monetary policy. No more debt-backed currency. If The Fed doesn’t like being relegated to a clearing house for payments that’s too damn bad. Tell the CFTC you’d like them to list a “boiled rope” futures contract just to underline the point.
The only solution long-term? Yes.
Will it happen? Not unless our present Administration grows a set of balls, which it does not at present possess, or someone is willing to both lie themselves into office and then do it anyway.
As a consequence what El-Erian is talking about will happen – an “unexpected” recognition of the reality that what is being done today both is unsustainable and won’t work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote – and at that point it will be to late to avoid the ugly consequences.