May 18, 2010
One financial doomsday scenario
Monty Pelerin

That the US is going broke is no longer a moot point for many. The signs are everywhere; the mathematics too obvious. To understand the latter, see The Continuing Spiral to Bankruptcy, Spiraling to Bankruptcy or Welfare States R.I.P.

The timing and the manner in which this plays out is not easily forecasted. The key point in trying to forecast this particular problem is when and how the politicians respond. No politician ever wants to address a problem that inflicts pain on his/her constituents. Unfortunately, the possibility of solving this problem without inflicting pain is impossible. That option disappeared years ago.

Based on the universal political characteristic -- cowardice -- politicians never take painful actions until forced to do so. Markets will eventually be the force that causes action. The ensuing events will not be neat and tidy. One way or another, the welfare states will be dismantled. Whether this dismantling is partial or total is moot.

After decades of coddling and dependency, the US has created a class of citizens that believe entitlements are a birthright. Several generations have known only this way of life. Public "servants" are a different problem. They live in their own insulated world, divorced from the realities of markets. For too many years they have only seen their numbers expand and salaries increase. To believe that either group will accept what's coming graciously is the height of naiveté.

Chuck Roger in America's possible Greek tragedy makes the following unsettling point:

If attempts to cut education spending can send thuggish teachers' unions into the streets and a tough Arizona law on illegal immigration can send unions and race baiters screaming, what will happen if Washington politicians ever find the spine to do what has to be done to cut Welfare, Social Security, Medicare, Medicaid, and other government handouts?

Can anyone doubt what will happen when these events begin to unfold? Yes, "when," not "if" is the proper term. The US long passed the tipping point for corrective action that does not involve all of the above. So have the welfare states of Europe.

"One" financial doomsday scenario..?

I don't see how riots in the streets of America can be avoided.

Of course I thought the same 25 years ago when contemplating Social Security going broke in 2043.  How much more so - and sooner - now?