International Forecaster Weekly

Government The God That Has Failed

Is Obama telling the truth or crying wolf? Sequestering will reduce spending by 3%. Given the fragile state of our economy, I’d speculate that an early end to “sequestration” might also coincide with the official beginning of hyper-inflation.   Being the world’s biggest debtor, government can’t survive significant deflation.  Therefore, as an act of self-preservation, I expect government to cause inflation to rise significantly this year.

Alfred Adask | March 13, 2013

“Sequester” is used to describe recent cuts in spending imposed on the national government under the A.D. 2011 Budget Control Act.  The intent of the 2011 Act was to compel government to act more responsibly in relation to its enormous annual deficits.  The mandatory spending cuts started March 1st, will be spread out over the next six months, and should total $85 billion. 

Prior to the sequester onset, a CNBC article reported,

“Obama cautioned that if the $85 billion in immediate [spending] cuts—known as the sequester—occur, the full range of government would feel the effects. Among those he listed: furloughed FBI agents, reductions in spending for communities to pay police and fire personnel and teachers, and decreased ability to respond to threats around the world.

“He said the consequences would be felt across the economy.

"‘People will lose their jobs,’ he said. ‘The unemployment rate might tick up again.’"

Since the onset of sequester, Obama has continued to warn that sequester could cause economic catastrophe.  But is Obama telling the truth or crying wolf?

     The national government’s annual budget deficit is projected to be about $1.1 trillion in A.D. 2013.  That’s how much money the feds will have borrow this year in order to continue to maintain its current spending rates.

If the mandatory “sequestering” of funds causes government to reduce spending by $85 billion for 2013, it will reduce total government spending by just 3%.  That’s nothing to sniff at, but if our government is in such dire straits that it can’t cut its spending by a mere 3%, we are truly in deep do-do.

     More, while the “sequester” causes government to cut spending by $85 per year—under the guise of QE3, the Federal Reserve is injecting $85 billion per month into the economy.  It’s hard to believe that the sequester’s loss of $85 billion in annual spending can be significant while QE3 is injecting an additional $935 billion into the economy.  It seems improbable that the sequester might be anywhere near as catastrophic as President Obama alleges. 

     Even so, Obama’s warnings might be valid. 

I.e., total (federal, state and local) government is said to account for about 40% of the GDP.  National government spending accounts for over half of that, or about 22% of the GDP. 

If the federal gov-co were required to cut spending by 3%, that would translate into a 0.7 % loss for the GDP.  I’m not sure that the GDP (which shrank by 0.1% in the 4th quarter of 2012) could absorb another 0.7 % loss without sliding into a full-blown depression.  Therefore, it might be true that we not dare allow the “sequestration” to continue—at least not for the next six months.

     If so, the Republicans might allow the sequestration to proceed for several months, leverage all the political and financial benefits they can for whoever actually owns the Republican Party, and then compromise with Obama and the Democrats—perhaps this Summer—to either end the “sequestration” or otherwise start printing mo’, mo’ money to let gov-co spend, spend as much as it likes and offset the effects of sequestration.

     Regardless of what the Republicans might do, if the dangers alleged by Obama are real, those dangers are not based on sequestration being so inherently dangerous—they’re based on our economy being so fragile

     Given the fragile state of our economy, I’d speculate that an early end to “sequestration” might also coincide with the official beginning of hyper-inflation. 

As measured on the US Dollar Index, the value of the fiat dollar hasn’t risen dramatically in the past two months, but it has risen significantly.  That means the fiat dollar is “deflating” and growing more valuable.  That rise in value should explain some of the fall in the price of gold, but it should also mean that our overly-indebted government is repaying its debts with more expensive (deflated)—rather than “cheaper” (inflated)—dollars. 

     My reading of our overly-indebted government is that it can’t stand to repay its debts with deflated (more expensive) dollars.  My expectation is that government will return to inflation with considerable zeal in the next few months.  Maybe we’ll see hyper-inflation (over 20% per year) maybe we’ll only see 10 to 15% inflation. 

     Being the world’s biggest debtor, government can’t survive significant deflation.  Therefore, as an act of self-preservation, I expect government to cause inflation to rise significantly this year.  I therefore expect the price of physical gold to do the same. 


     How did we get into an economy where we’re so dependent on government that we dare not behave responsibly?  How will we escape the possible depression by borrowing more money or hiring more government employees (who don’t produce anything other than an increased tax burden on those who actually work and make a productive contribution to society)?

     How long can government continue to operate on the basis of feigned compassion for its dependents rather than hard, objective reason?

How long can we continue on this allegedly compassionate path to disaster before we reach the disaster?

     We could get tough with government dependents now, or we will get tough with them after the economy collapses.  But we are going to have to get tough on government dependents because, in truth, the government is broke.  It can’t pay its bills.  Government can’t keep all of its promises.  Government is bankrupt.

     So, why should those Americans who are productive be forced to make good on the government’s debts and promises to its dependents? (And, when I say “productive,” I’m not talking about the super-rich. As a class, they’re just as dependent class as welfare recipients.  When I say “productive” I’m talking about people who actually work for a living in the private sector.) 

     If government weren’t bankrupt, why must it run a $1.1 trillion annual budget deficit?  Why is the government’s true national debt estimated to be in excess of $200 trillion? 

Sooner or later, most of the people who depend on government for jobs, welfare, subsidies and pensions will find themselves left to act independently to provide for their own survival. 

More, if the national government is responsible for 22% of the GDP, what’s going to happen to that 22% of the economy if the national government is forced to admit that it’s bankrupt?  Could that admission collapse most of the entire economy?

     On the other hand, what if the national government continues go deeper into debt and grow even larger?  What will be the effect on the economy if 22% is not only bankrupt but growing?  Is an analogy between bankrupt government and cancer unreasonable?  How large can a bankrupt national government become before it collapses and takes the entire economy with it? 


     Is there a painless “way out” of our economic predicament?  Is there a way that we can somehow separate and preserve the 60% of the economy that is productive and independent from the 40% that depends substantially on a bankrupt government? 

If there’s a painless “way out,” I can’t see it.  I can’t imagine it.  If 22% of the US economy is to greater or lesser degree dependent on a national government that’s bankrupt, we seemed destined to go through a very difficult and painful “correction”.  The only questions are When does it start? And How long will it last?

     We could “get tough” now—while it still might be possible for the nation to survive—and reduce or even terminate government’s seemingly compassionate support for its dependents.  Alternatively, we will “get tough” later, after the whole economy collapses, we’re scrambling for our lives, and even our national survival is threatened. 

     Sooner or later, those who remain in the 60% of Americans who are still productive will have to “get tough” on the 40% of us who depend on government welfare, subsidies, grants, pensions and employment to survive.  When that “get tough” moment arrives, those who depend on government will find themselves in desperate straits.

     When that moment arrives, we will see a class conflict—but not between the “haves” and the “have-nots” so much as between the “productive” and the “government dependents”.

     Do you suppose the suddenly-impoverished, government dependents will attack and rob the 60% who are still productive?  Or will they attack their former benefactor—the government—as the “god that failed”.

     The era of big government may be nearing its end.