Healthy Economy equals SMALL government

I used to be able to describe the United States this way, but not today unfortunately.  Where in the world can you find a strong, vibrant economy where optimism and opportunity dominate the scene-- not chaos and negativity. 


There are a lot of places around the world that fit this mold-- their economies are healthy and people are legitimately confident about the future. From Estonia to Hong Kong to Andorra to Singapore, there are common elements in these countries that have greatly contributed to their success: 


1) They're small. 
2) They have governments that generally stay out of the way. 


An obscure 20th century economist named Leopold Kohr wrote extensively about these factors; and his 1957 book The Breakdown of Nations has proven quite prophetic. 


In the book, Kohr extols the virtues of 'smallness' and indicates that most of the political challenges in the world-- military over-extension, debt, poverty, bureaucratic stodginess, etc.-- are caused by the unsustainable expansion of nations. 


For Kohr, it is simply a matter of scale. Once a country becomes too large, any system of government will become oppressive. 


Small countries, conversely, don't have the resources to wage wars or build huge bureaucracies. They're forced by circumstance to allow the market to work and the private sector to flourish. 


Singapore and Hong Kong are great examples. They're not waging wars, dropping bombs, or establishing far flung military bases. Both countries are devoid of any natural resources, and their only means of survival and success have been to step out of the way and let the market take over. 


In a matter of decades, they have become two of the most prosperous nations on the planet, and remain among the healthiest today. 


Conversely, the 'big' countries of today have assembled massive states which have spawned massive governments that require massive resources to administer... and quite oppressively I might add. 


Democracy may look great on paper, but in modern practice of today's 'big countries', it is a terrible perversion of the principles of liberty. Like Rome and the Ottoman Empire before, the individual now exists to support the state, not the other way around. 


This is exactly what Kohr warned would become the 'crisis of bigness'. Faced with economic challenges and a debilitating cost structure, big governments and bloated bureaucracies will only beget more bigness, more bloat... until the only possible outcome is collapse. 


It reads like a playbook of exactly what's happening today in the west. Already suffocating from too much debt, governments are going deeper and deeper into debt, and hiring more and more workers to administer 'stimulus programs' and an ever-expanding tax code. 


To politicians, the solution is to expand the state and expand their authority. This is the exact opposite of what they should be doing... and as has happened numerous times throughout history, it may very well lead to an entire system reset. 

Social implications of economic collapse - why this isn't fixable

Simply put, the United States and much of Europe are borrowing an extraordinary amount of money now just to pay interest on the money they've already borrowed. They cannot even self-fund their mandatory entitlement programs without going into the hole, and their options are limited:


Option 1: Continue borrowing, keep the party going.


As long as the government CAN do this, they WILL do this.  Regardless of their intentions, though, more debt only worsens the situation, creating higher borrowing costs in the long run, and even more debt. As this happens, the pool of buyers begins to dry up, especially from overseas.


Option 2: Inflation


The more buyers stop purchasing Treasury securities, the more the Federal Reserve will mop up the excess liquidity. In doing so, the Fed essentially conjures up money and loans it to the government.  This leads to the coming destruction of the dollar.


No matter what the government monkey statistics say, this is inflationary, plain and simple. The more money they print, the greater the level of inflation in the long-term. Meanwhile, as foreigners simultaneously reduce their US dollar holdings, this inflation will become more acutely felt in the US.


Option 3: Austerity


There's going to come a time when the US government is forced to face its economic reality and make some incredibly deep cuts that would be felt across society, from Wall Street and the military industrial complex to project housing on the other side of the tracks.


Option 4: Default


Eventually, the debt burden is simply going to be too much, and the most obvious solution will be to default. Politicians will make China out to be the enemy and they will probably invent a war just to have an excuse to default on Chinese owned debt. Americans will wave the flag and celebrate defaulting on their enemies.


Option 5: Economic Cannibalism


In the best traditions of Atlas Shrugged, the government will continue its persecution of the productive class- professionals, investors, entrepreneurs, and skilled workers. Existing taxes will rise, new taxes will be created, trade barriers will be enacted, and a maze of cost prohibitive regulations will be passed.


The first option (keeping the party going) is what has been happening for years. Politicians make small concessions to show they're "serious" about fiscal discipline, cutting laughably small programs while dumping hundreds of billions of dollars into wars and entitlement programs.


The worse the debt situation becomes, though, the higher the borrowing costs become, and the worse the debt situation becomes. It's not an enviable position. Existing lenders will continue backing away from the US Treasury market, giving option 1 a half-life measured in months at best.


In the longer term, only options 2-5 remain: inflation, austerity, default, and cannibalism. Each of these remaining options will shake the financial system to its core. More importantly, each of these has the power to create widespread social upheaval.


When inflation eats away at a family's already meager standard of living, when austerity eliminates the benefits to which recipients have grown accustomed, when default vanquishes a retiree's savings, when high taxes make workers feel like they're just government serfs- this is when the real turmoil will begin:


* Rising crime: devoid of a job or means to support their families, people will turn to crime out of desperation


* Class warfare: with dividing lines drawn between have's vs. have-not's, it will become unpopular and even dangerous to be successful


* Corruption: low-level public service officials will look to supplement their income through bribery and kickbacks


* Black economy: An underground, cash-only (probably gold or foreign currency) economy will emerge with people getting paid in envelopes


* Censorship: Of course they'll blame it on national security, but the idea will be to prevent public disparaging of government policy


* War: The government will need another major event to distract people from the real problems


* Protests/Riots: This is when things turn bloody


* Police state conditions: The government will close ranks and send the cops out to show all the little people who's really in charge


There are a number of other manifestations, and many are already showing signs of emergence. The US and European police states are alive and well. Crime is on the rise.


In Europe, cops are doing battle in the streets with their citizens. Think it can't happen in the US? Remember tanks in the streets during the LA riots? Remember New Orleans? Remember any number of G8/G20 protests?


Here's the bottom line: all you have to do is glance at the headlines to see what happens when you strip people of their livelihood, of their ability to put food on the table for their families.


The US has been able to kick the can down the road with the most blunt social implications simply because the country benefits so much from a US-oriented financial system. This is coming to an end very, very quickly.


As a rule of thumb, the greater the economic distortion, the harder the collapse. The US economy has been in a fantasy world for so long, and when its dominant primacy is yanked away, the collapse will be at freefall speed.


Listen... I'm not talking about the end of the world here, I'm talking about difficult times ahead, and the things that go beyond economics. It's time to face facts and look at how society will change (and has already changed).


Will you be prepared or caught unaware?