Chapter 2: The Basics
The three headed attack dog
Democracy faces three dangers:
1. Fiscal breakdown – The immediate cause – the trigger
2. Welfare breakdown – The underlying cause of all the problems
3. Social division -The apparent cause – the one that people will blame
These three problems magnify each other
More dangerous than three dogs
Financial breakdown – The only chart you need
Amount of income tax paid according to income level:
This disparity underlies all our problems.
Politicians love promising “free” goods and services, as your God-given right, because it gives them power. And there is always a majority of us who can profit by voting for more.
Until we can’t.
“A government that robs Peter to pay Paul can always depend on the support of Paul.” – George Bernard Shaw
“Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury and bankrupt the nation.” – Karl Marx
It is a tribute to the sense of voters that democracy has proved Marx wrong.
Government debt is unsustainable
They can’t repay it, because they don’t have it. They can’t default on it, because they live on it. If they do, the banks that lent it will go broke. And our economies will collapse.
Government debt falls into three categories:
1. Official debt – debts the governments admit to;
2. Unofficial debt – promises that governments have made to their citizens;
3. Guarantees to the banks – money that governments are on the hook for if the banks go down.
Official government debt
Here is a list of western governments’ official debts as a percentage of GDP.
Think of GDP as your yearly pay, and the debt as your total credit card balance.
Official govt debt, as % of GDP Total owed,
US 100 $15,154
UK 83 $2,052
Ger 80 $2,819
Fra 88 $2,410
Italy 120 $2,623
Spa 64 $949
Official government deficits
And here is a list of deficits, as a percentage of GDP.
This is the increase in government debt each year. Think of the deficit as the amount you add to your credit card balance every 12 months.
Official govt deficit, as % of GDP Total increase,
US 8.7% $1,300
UK 8.5% £121
Ger 2.5% $2,819
France 5.7% €90.8
Spain 8.5% €90.4
Unofficial government debt – America
These are debts that governments pretend they don’t owe, mainly in promises such as healthcare and pensions.
Think of it as promises you’ve made to support your relatives: there’s no bank involved, but you can’t get out of it.
Here is what America has promised to its citizens over the next 75 years:
– The American Federal Government’s unfunded liabilities for the next 75 years amount to $222 trillion, or about 15 times America’s GDP.
– Last year that figure was $211 trillion – it rose by $11 trillion in 1 year.
– This assumes interest rates stay as low as they are (they won’t) and that medical costs don’t rise (they will).
Unofficial government debt – UK & EU
Here is the same figure for Britain and the EU, calculated in 2004, as a percentage of GDP:
– E.U. €1,971 billion (434% of GDP)
– UK £5,316 billion (442% of GDP)
A decade later, these figures have probably doubled.
Politicians will pay these debts before they pay official debts, because we can vote and riot and banks can’t.
Official government guarantees to banks
Western governments have so pumped up our economies with easy credit, that they risk collapsing if a major bank goes broke. So they are forced to guarantee bank loans.
Here are the official bank loans that our governments are on the hook for, and the amount the banks are holding in reserve:
$billion Bank assets
US 13,145 1,034
Eurozone 31,848 1,297
UK 9,705 449
Japan 11,928 561
So the banks have lent out 20 times as much as they are holding as assets, and they will become insolvent if 5% of their loans go bad.
Unofficial government guarantees to banks
And that’s just the official bank loans.
Then there are the unofficial bank loans: the financial bets (‘derivatives’), that banks have made.
If these bets go bad, then governments must bail them out as well, if they want to keep their economies going.
Derivatives for the top 25 American banks come to $212 Trillion*, or about 14 times America’s GDP.
The total amount of these derivatives in the world is $600 trillion, or about 8 times world GDP, backed by about 0.1% in bank reserves.
One trillion dollars = a stack of $100 dollar bills, 69 miles high
The more a state borrows, the more its lenders doubt that it can pay them back.
The more lenders doubt that the state can pay them back, the more interest they demand.
The more interest they demand, the more the state has to borrow.
This chain of events becomes a spiral, and then a whip, when lenders realise that they can’t sell the debts on to anyone.
No one will lend anything to the state, and everyone demands that the state pays them back.
No one will work for the state without money up front, and the only government services will be the ones it can pay for from day to day taxes. And the state collapses.
…Or else it prints money.
If the state prints money, that money will eventually get into the wider economy.
If this money enters the wider economy, prices will rise.
If prices rise, people will spend their money faster.
If people spend their money faster, prices will rise faster.
If prices rise faster, workers need higher wages, which the state pays by printing more money.
But this only works if the state prints faster than people expect, which means prices will rise faster still. This chain of events becomes a downward spiral when no one wants any amount of government money. And the state collapses.
And if the state goes broke, it can’t pay welfare.
Welfare is not like air, and the state has no money.
If the state goes broke, it can’t pay welfare.
Borrowing and printing won’t help any more than eating your own tail.
If the state goes broke, it can’t pay welfare.
The problem with welfare is that we like it.
The more we like it, the more we demand it.
The more we demand it, the more likely it is to break down.
And then people get angry. Angry people look for someone to blame, and then things turn ugly.
Welfare dependence 1
40% of households receive means tested benefits. These are benefits – mainly dole and housing benefit – that we can only get if the state judges us to be poor.
30% of households receive means tested benefits as the main source of income.
Welfare dependence 2
1 pays for 2.16
The burdens are unsustainable.
Each private sector worker in Britain supports himself plus at least 1 other person:
– 28.9 million workers
– 7 million of them are employed by the state
– 6 million other people receive out of work benefits
– 12.5 million others receive state pensions
So 22 million private sector workers support themselves plus 25.5 million others.
Welfare Dependence 3
It’s my right!
If you tell us that something’s our right, see how we react when it’s taken away.
The London riots of summer 2011 were blamed on welfare cutbacks: the £30 per week Education Maintenance Allowance.
In 2010, Greek protestors set the Marfin Investment Bank building alight. 3 people died.
The protests were over a 9% cut in government spending.
How would we react to a 90% cut?
There are three major divisions emerging within western society:
1. Wealth division, caused mainly by loose monetary policy;
2. Religious division;
3. Political division.
These divisions create two problems:
• First, they provide an object of blame, and a pretext for violence if we get angry.
• Second, a deep enough sense of division fractures the sovereignty of the state and, therefore, its ability to suppress violence and disorder.
Take a five minute look at European history, and ask yourself how rare such violence is.
How deep is the divide?
Can you reverse these divisions?
If not, can you stop one group seeking exemptions from state law?
If not, can you stop that group opting out of state law?
If not, can you guarantee their right to vote to decide state law?
If not, how do you maintain state sovereignty?
Is a state without sovereignty still a state?
State authorities will fall over
Proposals for ‘limited government’, ‘constitutional republics’, ‘localism’, and ‘the minimal state’ will fail because there will always be a politician to persuade us that just a bit more free stuff won’t hurt. Until the system falls over.
And if governments fall over, they will find it hard to get up again because we will make the same old demands of them.
Governments are in an unstable equilibrium. For now.
The state has come to the end of the line
‘The trend — as shown by the Balkan wars — is toward denationalization, privatization and commercialization of war, in the course of which local warlords, bandit chiefs, mercenary-hiring companies, as well as internationally connected and deployable religious warriors are increasingly the real actors in the prosecution of war. …Do not count on a treaty, a ceasefire or concluding peace. Just think about informing yourself on the effects of it and preparing for its development.’ – Udo Ulfkotte, author and journalist, Frankfurter Allgemeine Zeitung
How much are you prepared to risk for your belief in politicians?
The 1990s Yugoslav wars saw 130,000 to 140,000 killed, and 4 million displaced
Yugoslavia had a population of 20 million.
Western Europe’s population is 15 times this.
Are they worth it?
An explosive cocktail
These things feed on, and magnify, one another.
Government bankruptcy feeds welfare collapse.
Welfare collapse feeds public anger.
Public anger feeds political, wealth-based, and religious conflict.
Conflict feeds uncertainty about state authority.
Uncertainty about state authority feeds government bankruptcy. Until…
‘…we had a budget deficit of more than 20 per cent. If you look at the point where military coups are carried out in Latin America, you will find that they coincide with a budget deficit of 20 per cent. That is when a country becomes ungovernable.’
In 2009, after the last credit crunch, Britain’s budget deficit was over 11% of GDP. America’s was over 10%.
If the next crunch is as bad as the last then the deficit will hit 20%.
When is the next crunch due?
1973-1975 OPEC recession
1981-1982 Monetarist recession
1990-1991 Savings and loan recession
2001-2001 Dot.com recession
2008-2009 Housing bubble recession
… ? Bond bubble recession
‘… whenever there are hard times, people look for somebody to blame. … Financial types get blamed first, the foreigners get blamed second, and (reporters) are next.’
Somewhere in Europe…
Collapsing banks, collapsing currencies; the bankrupt state retreating to its hub; the sudden end of welfare, protests, riots; shortage, beggary, desperation, need; cheap prostitution, cheaper prostitutes; poverty castigated, might made right; financiers strung up, town halls set on fire; snap elections, the politicians’ flight; the politicians extradited back; the politicians paraded and tried; inciteful leaders maddening the crowd, with selfish, undercutting rhetoric; Councils retreating from no go estates (except a few unpaid idealists); the vulnerable freezing in their rooms; stairs full of refuse, lifts ground to a halt; car jackings at the traffic lights at noon; kidnappings, home invasions, cops gone rogue; anxiety, conflict, strife and rivalry, for scarcities that were as free as air; gangs, retinues, assassins, skirmishes; blockades, sieges, squeezes, service denials; turf, zones, ghettoes, millets, enclaves, Beiruts; revenge, vendettas, feuds, the rise of brutes; artillery, grenades, clearance by flame; then a long, inward, falling silence; shame.