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The Daily Reckoning

Bernanke's plot to overthrow the US dollar

With the US so deeply in debt and the economy stagnated, even heavy taxes on the rich won't recoup government costs

(Page 2 of 2)

If Americans don’t buy, Chinese don’t make. That leaves both of them feeling a little poorer.

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And here’s what happens when people get poor.

PHILADELPHIA (CBS) — Thousands of Philadelphia residents gathered in long lines, citywide, waiting hours outside of 12 County Assistance Offices, hoping to apply for relief following Hurricane Irene.

The residents, many confused and lacking official information, hoped to receive a month of food stamps for food ruined by floods and power problems caused by the hurricane.

The program, called Disaster SNAP (Supplemental Nutrition Assistance Program), was created by the federal government and is administered by the State Department of Public Welfare.

Because of unexpectedly large turnouts, the application process was moved from Disaster Recovery Centers in Philadelphia to the 12 state offices in neighborhoods citywide.

Residents, based on income, household size and proof of flood-damage can receive up to a month’s worth of food stamps.

Those already receiving food stamps are eligible for partial relief, to the extent that their prior month’s food supply was damaged.

Throughout the day Monday, and beginning early Tuesday morning, many state offices had lines stretching for blocks with confused residents, many alerted by other neighbors that relief was available.

Little if any guidance was available at offices in the early going, although later in the day, officials did permit applicants to fill out forms outside the building instead of waiting for hours in line.

A thought keeps coming to mind. This correction is bigger, meaner and longer lasting than even we imagined. It’s not just taking us through a normal recession cycle…and not even through a normal credit contraction.

Actually, we have so little experience with credit contractions that we don’t know what normal is. Like the US in the ’30s? Like Japan in the ’90s?

At least we know how, in theory, credit contractions work. People cut back spending until they have rebuilt their balance sheets. That’s why they are also called “balance sheet recessions.” We can also make some estimates about how long they will last, based on how long it should take to pay down debt. When the correction began we calculated that it would last 7 to 10 years. That’s how long it would take to pay down debt to ’80s levels, assuming savings rates went back to where they had been at the beginning of the ’80s.

Now, it looks like it will take longer. Maybe forever. At least, it will seem like forever.

This is partly because the feds interfered. They panicked when it looked like the process of de-leveraging was out of control. People were going broke — even people who made large campaign contributions! Even people who were members of that privileged fraternity — bankers! So, they came in…and locked up the economy in its depressed state, keeping zombie institutions alive indefinitely.

But that’s not all. It will also take longer because it is a more serious correction. It has a lot of work to do. What exactly?

Well, we don’t know exactly. But many of the governments of the developed countries are not likely to survive.

‘Wow, Bill, have you lost your mind?’

We don’t take anything for granted. And we know that we are sometimes right and sometimes wrong. And always in doubt. Still, the social welfare governments of the modern world are not equipped to deal with this challenge. They were designed for growing economies, not stagnant ones. They were all created in a period of growth — made possible by the widespread introduction of cheap fossil fuels. That period is over. Temporarily or permanently. And the dinosaurs of the growth era are unable to adapt to the colder climate of the new age of austerity.

Here in France, for example, they’ve already taxed the rich about as much as the rich can stand. And they’ve robbed future generations as much as they could get away with. What else can they do?

In the US, they can probably tax the rich harder…but it will yield peanuts, perhaps even reducing the feds’ take. America’s providential state is less generous and less ambitious socially than the French model. On the other hand, the US is far more ambitious militarily. For every layabout chiseler the French supports, the US supports two soldiers and one Pentagon contractor. The cost is staggering …and probably even more irreducible than Europe’s social costs…

Neither the Europeans’ social welfare states…nor the Americans’ welfare/warfare state…are likely to survive in their present forms.


Bill Bonner,

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