Monday, March 22, 2010


The question we need to ask now is how our government is likely to react to its declining fortunes. And, more specifically, to the increasing domestic discontent sure to surface as the memories of past glory (accurate or not) are encroached upon by the new realities attendant to a bankrupt nation.
Which is to say, persistent unemployment, higher taxes, more regulation, rising poverty, and worse.
Though it is impossible to predict, given that at this stage of the game the NIT WITs (Nationalize, Inflate, Tax – Whatever It Takes) are capable of almost anything. Even so, sticking a finger in the wind, one can get a sense of the possibilities…

More Spending. Based on its own forecasts and recent comments, it’s clear that the government plans on pursuing the loose money and deficit spending policies that helped bring us to this point in the first place. While the spending may be obfuscated by bureaucratic smoke screens or stamped with politically appealing monikers – such as jobs bills, for instance – when you strip away the fa├žade, these are nothing more than more debt on top of debt.
Chickens in Every Pot. In much the same way that Romans of antiquity came to view bread and circuses as their due, so are Americans discovering new “rights.” The latest being universal healthcare and broadband Internet connectivity. On the surface, these sorts of initiatives feel good. But there again is that question of affordability.

More Taxes and More Aggressive Tax Collection. That the national tax bill is going up – and by a LOT – is disputed by no one at this point. And it’s equally certain that the IRS will be getting a lot more aggressive in collecting those taxes. How aggressive? While certainly an anomaly, it’s an illustrative anomaly that the IRS recently sent two agents in person to dun the owner of a car wash over past due taxes amounting to four cents! Seriously. Here’s the story.

Alternative Sources of Revenue. As poster child I would point to the district attorney who, on behalf of Orange County California, has filed a lawsuit against Toyota for its mechanical shortcomings. And retained a private law firm to pursue the case. There are over 3,040 counties in these United States, and the majority of them are cash starved. Overarching those counties are the equally broke 50 states, and looming over those the biggest and brokest gorilla of them all -- the federal government. This sort of legalistic looting, helped along by an abundance of underemployed ambulance chasers, could get out of control very quickly. Here’s the Orange County story.

Rising Protectionism. On April 15, the U.S. Treasury will have to issue its assessment on whether or not China is a currency manipulator (which, of course, it is -- but then again, so are pretty much all of the world’s governments). Given that the administration’s friends in the labor unions, its favorite economists (Krugman & Co), and the public at large all favor putting it to the Chinese, I suspect they will. As for the consequences, who can say, but a trade war is unlikely to be helpful to the already weakened global economy.

Exchange Controls. There is already a lot of precedent for slapping on exchange controls, which the U.S. will not hesitate to do if the Chinese try to retaliate for protectionist tariffs by dropping a money bomb on the U.S. (i.e., try to dump their dollars). But such regulations would not be limited to the Chinese, and would likely effect US individuals and businesses with off-shore assets as well. Here’s a quick discussion on that topic from Mark Nestmann of The Sovereign Society…

Penalize the Friendless. The Chinese are not the only ones without any voting power and so at risk from a government looking for golden oxen to gore. Similarly, expatriates will find themselves friendless when it comes to the government’s pocket picking. And it is not just the U.S. that will look to the expats for an added pound of flesh – a recent ruling in the UK has deemed that even if you have followed the prevailing tax legislation, which is to say did not spend more than 90 days in country in any given tax year, you are still potentially liable for your UK taxes… and for years in arrears. Story here.

War. History is replete with wars of purely political origin. In fact, that is the rule, not the exception. It increasingly seems as though the next war will be with Iran, the evidence of which is the shipment of hundreds of bunker buster bombs to the island of Diego Garcia in the Indian Ocean where the U.S. has based a fleet of stealth bombers. Story here.

Those are just a few of the ways the government is likely to respond to the challenges it faces during the lag between now -- a period you might categorize as being one where the politicians make every effort to maintain the illusion of empire -- and then, the period when the harsh reality becomes apparent to all. And that reality is that too much money has been borrowed and too many promises have been made.
Most of us will live to see this transition. That’s because it can’t last overly long – certainly not with developments moving as fast as they are. Making it through to the other side in reasonably good form is going to be a challenge each of us will face.
One way to assure that, at the least, your money won’t turn to dust before your eyes is to make sure you have diversified into the hardest currency of gold. And to build a cushion against the inflation that must be coming, consider well-researched and highly selective investments in the best gold stocks, as well – but with the caveat that, due to their volatility, a little of those goes a long way.

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