Another Day, Another Economic Catastrophe

hy does it feel like the world is coming to an end this week? Didn't we just get an end o' the world last week? The U.S. government's debt ceiling was just raised, with the European press mimicking the hysterical claim that unless the Government was allowed to burn another 14 trillion or so of somebody else's money, America would lose its AAA credit rating, which would cause financial Armageddon. The government already spends twice as much as it takes in. Obama was trying to panic the country once again into increasing that ratio. He got his wish. The debt ceiling was raised. The exact opposite of what the administration predicted happened.

The very next day, the world's stock markets, realizing that the US government had just received a mandate to suck the economy dry with new taxes, promptly crashed. The American news media, for some odd reason, seemed not to have made the connection with the higher debt ceiling. But the British press did, and even the Europeans, a people world-famous for their ability to blind themselves to reality, understood it.

By Friday, America had lost its AAA credit rating anyway, as Standard and Poor downgraded its assessment of our economy from "sucky" to "really sucky." (I have it on good authority that these are the terms professional economists use.) Even Communist China chastised us for our failure to make capitalism work. This is the level of humiliation our leaders have brought us to. But unless the government wakes up and massively downsizes, it could be only the beginning.

The Republicans, held by the Tea Party to their promises of government downsizing, had valiantly but unsuccessfully tried to hold American debt to its previously-agreed limits. Predictably, the press blamed the crash not on the raising of the debt ceiling, but on the Republicans' attempts to avert it. Others blamed the Chinese for producing too many cheap goods. A few, including Senate Majority Leader Harry Reid (D-Nev.), concluded that it reinforced the need to increase taxes. There were even some committed leftists who were still convinced the whole thing is the fault of President Bush and the evil moustache-twirling bankers, and Obama just needs more time.

But time is now Obama's enemy. Historians will blame the upcoming collapse of the global economy primarily on Barack Obama. Last year, to give one tiny example, the US government spent $1,340 collected at virtual gunpoint from every man, woman, and child in the country, just for interest payments alone. However, the blame is not on the USA alone. In the UK, for example, the government reputedly confiscates 80% of the revenue from their own North Sea oil field. At these rates, it is remarkable that anyone would bother to start a business there.

So is the end of the world approaching? Until this week, logic argued against it. Given another year and a half, Obama and the economic policies that gave us three years of economic agony will be gone, and the American economy will bounce back. Years of pent-up demand will shoot productivity to new highs. Europe might even begin to shake off its Frankencontinent nightmare. The Middle Kingdom will continue moving closer to becoming the Middle Class Kingdom. So why so much anxiety?

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The reason is that a year and a half from now, thanks to the Democrats' disastrous shopping spree, the dollar may no longer be the world's reserve currency, but just another regional paper token that nobody trusts and nobody wants to get stuck with. America may be just another country, more like Belgium or Argentina or Greece than the superpower it once was. To the liberals, being a quaint third-world country might sound like fun. But the people in Somalia or even Greece would trade places in a second.

Some people think America's economy can never collapse because we have 12,762 tons of gold stored in Fort Knox and in the Federal Reserve Bank. That's 306 million troy ounces, although not all of it exactly belongs to us (although there's an old saying about possession being nine-tenths of the law). Unfortunately, at today's prices ($1651.80/ounce), and counting possession as ten-tenths of the law, that's still only $505 billion. Thanks mainly to those free-spending Democrats in Congress (including the ones who were there during the Bush administration--and, to be fair, Bush spent an awful lot as well) that's only 3½ percent of our national debt. Our entire gold reserves--assuming they're really still there--are barely enough to cover one year's interest on the national debt.

Who will be hurt the most? People like a good friend of mine who lost his job today. The guy came back from vacation on Tuesday. On Wednesday he was out. No warning. He was a middle manager, good at his job. I admired how well he had built his team. But the beancounters at the top had whittled it down to half its size to save money. His best workers had seen it coming, and left. That's how a company goes down the drain. By making idiotic rules that make it harder and harder for good people to do their job, one incompetent person at the top can destroy an entire company. The same is true for countries.

It goes without saying that next Monday, August 8, 2011, we will see a huge drop in the market. ( Update, Aug 8: So far, 600 points ... a big drop, but not as bad as feared.) But the real economic calamity is still months away, and it is still possible, at least in principle, to avoid it. If the US government could somehow cut its size, and its expenditures, even if by only 30%, the calamitous events of the next decade might still be avoided. Of course, we know the government is as clueless about economics as they are about history, and are unlikely to do so. But if we wait until 2012, it could be too late.

Thanks to Barack Obama and the deluded something-for-nothing economists who are encouraging him, our economy is now heading straight toward the ground at warp one. As Scotty from Star Trek would have said: you cannae change the laws of economics. If you spend more than you take in, sooner or later you're gonna run out. We're almost out.

Update (Jan 20, 2012): A excellent new article by Stansberry Research explains, using solid facts and statistics, how our economic problems started and what the likely outcome will be. That article should be required reading.