Promises Will Be Broken
When wealth was easy to identify and easy to control − that is, when it was mostly land − a few insiders could do a fairly good job of keeping it for themselves. The feudal hierarchy gave everybody a place in the system, with the insiders at the top of the heap.
But come the industrial revolution and suddenly wealth was accumulating outside the feudal structure. Populations were growing too... and growing restless. The old regime tried to tax this new money, but the new 'bourgeoisie' resisted.
"No taxation without representation," was a popular slogan of the time. The outsiders wanted in. And there were advantages to opening the doors.
Rather than a small clique of insiders, the governments of the modern world count on the energy of the entire population. This was the real breakthrough of the French Revolution and its successors. They harnessed the energy of millions of citizens, who were ready to be taxed and to die, if necessary, for the mother country. This was Napoleon's secret weapon − big battalions, formed of citizen soldiers. These enthusiastic warriors gave him an edge in battle. But they also ushered him to his very own Waterloo.
Napoleon Bonaparte himself was an outsider. He was not French, but Corsican. He didn't even speak French when he arrived in Toulon as a boy. But there never is one fixed group of people who are always insiders. Instead, the insider group has a porous membrane separating it from the rest of the population. Some people enter. Some are expelled. The group swells. And shrinks. Potential rivals are brought in and bought off. Weak members are pushed out. Sometimes, a military defeat brings a whole new group of insiders into power. Elections, too, can change the make-up of the core group.
The genius of modern representative government is that it allows the masses to believe that they are insiders too. They are encouraged to vote... and to believe that their vote really matters. Of course, it matters not at all. Generally, the voters have no idea what or whom they are voting for. Often, they get the opposite of what they thought they had voted for anyway.
The common man likes the idea that he is running things. And he pays dearly for it. After the insiders brought him into the voting booth, his taxes soared. In America, taxation with representation proved far more costly than without it. Before the War of Independence, government spending was as little as 3% of GDP. Now, according to the figures above, US government expenditures tote to 38.9% of GDP. And if you live in a high-tax jurisdiction, such as Baltimore or New York, you will find your state, local and federal tax bill will run to nearly 45% of your income.
In short, the insiders pulled a fast one. They allowed the rube to feel that he had a solemn responsibility to set the course of government. And while the fellow was dazzled by his own power... they picked his pocket!
It didn't stop there. Under the kings and emperors, a soldier was a paid fighter. If he was lucky, his side would win and he'd get to loot and rape in a captured town for three days. Relatively few people were soldiers, however, because sensible people despised them and societies were not rich enough to afford large, standing armies.
The industrial revolution changed that, too. By the 20th century, developed countries could afford the cost of maintaining an expensive level of military preparedness, even when there was not really very much to be prepared for. But the common man was skinned again. Not only was he expected to pay for it, still under the delusion that he was in charge, he also was made to believe that he had a patriotic duty to defend the homeland insiders! That is the real reason that the modern democratic system has spread all over the world. It allows the insiders to mobilize more of the resources and energy of the country on their behalf. Nothing can compete with it.
You may wonder, though, why the real insiders would devote so much of national output to programs that benefit people other than themselves. The answer is obvious; because that is how they retain power. They must buy it. And since every vote is equal to every other one, they bid for votes on the basis of price, not quality. Everyone really knows his vote is not worth very much. That is why so many are cast on the basis of what seem to be cultural or symbolic issues of little material consequence − such as gay marriage or abortion. But other voters use their votes to get the material benefits that they want. Naturally, the elites want to buy them at the cheapest prices, so they begin the bidding in poor neighborhoods. Trouble there is that poor people tend not to vote at all...so they have to aim a little higher and pay a little more, which ends up in the middle and lower-middle classes... where health and retirement benefits are key election issues. In order to win an election, all major political parties solemnly swear to do what none can do honestly... or reliably − to keep the money flowing to these voters. The party that wins is the one that makes its promises most convincing...the one that seems most able to deliver.
But now the insiders are in trouble. The typical citizen is beginning to realize that he's been had. As long as the insiders could plausibly promise him more and more benefits, he was willing to go along. But now, growth has stalled. With more and more people retiring, social costs are rising faster than revenues. Public finances can't keep up. Democracies can't deliver. And since the recipients of social spending are also the deciders, the faux-insiders who vote for the candidates of their choice, the government can't adapt. It can't avoid its own suicide. It will continue spending, diverting energy from the people who produce to the people who consume, until the system collapses. The 'complexity' of the system now strangles it.
Today, no major government in the developed world can make good on its promises. The US, for example, has committed itself to pay $86 trillion in debt as well unfunded health and retirement benefits. In 2012, the feds added another $7 trillion to this figure. GDP, meanwhile, grew by about $320 billion. Financial obligations are now growing 21 times faster than the economy that will have to pay them.
Growth rates have trended down over the last half a century. It doesn't seem to matter who was in the White House, or what was the price of oil, or whether interest rates were high or low, or whether the government ran deficits or surpluses. The same thing happened in France as in the US. From GDP growth around 5% in the 1960s and 1970s, growth rates in the developed world have been cut in half.
Nor is the current financial crisis to blame. Growth rates began to decline at least 40 years ago. Today's rates are not extraordinarily low. And nobody really knows why this is happening. A steadily declining GDP growth rate seems to defy our assumptions about the way the world works.
The world now has more scientists, more accumulated knowledge, more money spent on research and development. These things should mean accelerated growth rates. They should allow people to get richer and richer at a faster and faster pace. Why has growth stagnated?
We don't know. But we don't have to know. The question is: where's the downside? The US used a lot more energy in the period 1920-1980. Its GDP grew fast too. Now, energy use and GDP growth have both leveled out. So what?
This discussion might be merely inconsequential; instead, the future of the United States of America, Europe, Japan and the entire world economy hangs on it.
Growth − more GDP... more jobs... more revenue... more people − is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.
Growth over the last hundred years − in population, GDP, wages, prices − made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.
"Without growth," we observed last week, "this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous."
Western governments have bet heavily on high rates of growth. But those bets are starting to look like losing wagers. And it was not only government that bet heavily on high rates of growth. Private households bought bigger houses than they could really afford − counting on growth to raise housing prices. They also went deeply into debt, expecting wage growth (and perhaps inflation) to bail them out.
Investors, too, were "long growth." That is, they bought stocks in anticipation that growth would make their holdings more valuable. They took it for granted. Over the long run, they said to themselves, stocks always go up. Why? Because the economy always grows.
In a stagnant economy, stocks are only worth whatever their stream of dividend payments deserve. One company might become more valuable than others, thanks to luck or better management. But if the economy itself is not growing, a company can only grow by taking market share away from another company. Overall, investors will be even. But that's little comfort.
When you're headed for The Downside, you don't want to speed up.
If Napoleon had lost at Austerlitz, he never would have invaded Russia. If Hitler had run out of fuel at the Dnieper he never would have made it to Volga. And if it hadn't been so easy to make his first $1 million, Bernie Madoff might never have lost $65 billion.
Bill Bonner founded Agora Inc. in 1979 and has been a daily contributor and the driving force behind The Daily Reckoning since 1999. His newest book, Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Posted by Darby Jie on 12/22/12 01:43 AM
"And a big hello to you, Darby Jie. Long time! I have posted a couple of things here and there. This one is buried deep in the most viewed post as of late: "
Hi, Agent Weebley! GLAD to speak to you again. Hope all is well,
P.S. VERY interesting, the Stone of Destiny tale..
Posted by Agent Weebley on 12/20/12 02:29 PM
Hi Bill Bonner,
Quite a captivating Tale Of 2 Cities . . . but what about the 2nd City? The obverse of this decent into the maelstrom? You left me hanging at the end . . . what the Dickens do we do, Bill?
The 2nd City is London. And it requires that many people are on board for a mutially benefitial ending to the story.
And a big hello to you, Darby Jie. Long time! I have posted a couple of things here and there. This one is buried deep in the most viewed post as of late:
Posted by Agent Weebley on 12/13/12 01:32 AM: Click to view link
We are currently explaining how people can unleash the Power they don't even know they posess. We are currently hovering over Tara Hill and The Stone Of Destiny (Lia Fail,) in Ireland.
¡Invest! Click to view link
You can invest in Stirling Engine Electrical Generators, and get a free story and an equal amount of free MetaFlorin for your investment (once it begins to be printed in the near future.) The investment goes on the balance sheet as a long term liability, and MetaFlorin can be used as our Trading Game Tokens until the Stirling Engine Electrical Generators go on the market.
The Stirling Engine project is an open source collaberration . . .
. . . all part of the B-bomb (Balance Sheet Bomb) A bomb that explodes and implodes at the same time - to the untrained eye, nothing is happening.
Posted by amanfromMars on 12/19/12 11:28 PM
So the Insiders are in real danger THIS TIME then..good news.
But would you mind explaining how, or why, you foresee said outcome. Thanks." ….. Posted by Darby Jie on 12/19/12 02:11 PM
Of course I do not mind, Darby Jie, and it is a valid live beta test of insider systems which like all to believe that they know about all that is going on around them, although the most probable true reality of that fabulous stretch of the imagination is that they might like one to think that they be aware of many things but would have no effective understanding of the ones which are designed to out and prevent secrets which create corrupt and perverse inequitable disadvantage.
Mankind and Virtual Machines and Algorithms are all getting smarter and will not tolerate the abuse and use of fools to prevent the spread of knowledge, information and intelligence which allows smarter Mankind and Virtual Machines and Algorithms to do as they see fit and proper, and which when shared and explained in simple words, will be unreservedly positively supported and reinforced, and thus also virtually invisibly protected, as IT proves ideas freely shared and deeds transparently done are mutually advantageous to all …… for whenever systems are run with secrets which admin are terrified of sharing and of being widely known, are those systems slaves themselves to that which is an unknown known, and paralysis and stagnation sets in and delivers a most catastrophic toxic mix of false accounting which destroys their hosts from deep within/top down.
Posted by Agent Pete 8 on 12/19/12 10:22 PM
Thankyou Bill Bonner for reminding us that Promises Will Be Broken, especially when Deception abounds and confounds.
Hi Darby Jie, Agent Weebley is Stellar, as found currently hovering over Galway or thereabouts in the Aircar, admiring a Circular Aircar Entanglement. It may be Perpetual. I see it as a very pretty subset of an array of such magical things.
I will pass on your regards and ternarily inject/reflect a couple of my own too. I would antici Agent Weebley pating that ball straight back at you also.
Season's Cheer All.
Posted by Darby Jie on 12/19/12 05:31 PM
Agent Pete 8:
How is Agent Weebley? Pls send my regards.
Posted by Agent Pete 8 on 12/19/12 05:05 PM
aManFromMars, I would thus expect same earth-bound insiders to be most exquisitely intrigued to learn and catch the whiff that Non-State Actors can/may proffer the most proper of landings to end such inevitable descent gently, gents.
Manners in Mankind's mergers, management and macro-metriculate-meritocracy matters.
Darby Jie, the shame in the future of repeating the same moronic rinse-o-matic replacementarian revolutionary rortic rackets relying on rifles and rockets, rips ridiculous holes in the integrity, sustainability/stability and righteousness of the result.
We have all been deceived, no-one squeaks totally clean.
For your own tiny and/or huge part(s) in the great mass-manipulation-madness that bring us here frowning; do each of us then respectively deserve to further suffer the dishonour of dominion, once We find/see/show/know the ways in accord with All around each of you, in a to-be-peaceful world?
Upgrade from hate's ways to retain your appetites and honour at the real WinWinWinners' dinner, when all is both said and done.
There are however, some rather naughty boys and girls out there though...
Posted by mava on 12/19/12 02:36 PM
One can only fool people so much. Mainly, the former growth wasn't even so much growth proper, as it was the use of accumulated resources due to a false perception of returns created by fiat money. Eventually, the resources (capital) gets depleted in real terms and the growth declines and then disappears.
Proper growth is only sustainable with real returns not being negative. This is now impossible to gauge, because of data being skewed by fiat. Therefore, when there is a negative real production it is not detected. Capital is being eaten away.
When the realization comes as to the true state of affairs, it is the Mises Moment.
Posted by Darby Jie on 12/19/12 02:11 PM
Hopefully the Masses, in desperate revenge and restitution, will Possess great empowerment [from a Most Holy friend?] soas to enable your wonderful prediction of "they-the Insiders-and their friends be[ing] in real danger of losing everything, including their lives"...
So the Insiders are in real danger THIS TIME then..good news.
But would you mind explaining how, or why, you foresee said outcome. Thanks.
Posted by amanfromMars on 12/19/12 10:39 AM
Seems like the insiders are in dire straits need of some new friendly rogue blood with radical renegade ideas to be financed, Bill Bonner. Failing that, will they and their friends be in real danger of losing everything, including their lives, as the masses learn of the games which have played on them to enslave them to usury and debt ... . a contrived entanglement specifically designed to be so.