海角大神

Americans had something to celebrate this Independence Day. 鈥� the Feds鈥� $600 billion money-printing program 鈥� ended on Friday. And guess what? The world didn鈥檛 end with it.

Instead, the stock market gave a loud 鈥榶ahoo!鈥� The Dow rose 168 points. If QE2 is going to be the death of the US economy, the stock market doesn鈥檛 see it.

Not that stock market investors always have 20/20 vision. These were the same people who were buying Lehman Bros. and mortgage lenders stock just before the company collapsed.

So, we鈥檙e not saying that today鈥檚 prices will necessarily be the same as tomorrow鈥檚. The market may know the price of everything at every moment. But it doesn鈥檛 know the value. So, as it discovers value, it changes its mind about the price.

Still, we find it mildly disturbing that the Fed can cut off a $100 million-a-month buying program without upsetting investors鈥� sangfroid. It doesn鈥檛 make us wonder about the Fed鈥�but about investors. What鈥檚 wrong with them?

But since it was a national holiday, we decided not to worry about it.

Instead, we鈥檇 spared a little pity for the US Senate. The poor senators decided to stay in session this 4th of July. They thought it was important to pretend to solve the US debt crisis.

As you know, from the day of its founding 鈥� that is, July 4th, 1776 鈥� to the present day, the feds have run up approximately $14.3 trillion of official national debt. And since Congress has only authorized $14.3 trillion of debt, they鈥檙e running into a problem. Either they pass a new law, raising the debt ceiling. Or they cut spending so they don鈥檛 have to borrow more money. Or, they treat the debt ceiling law like the US constitution, and simply ignore it.

We know which choice we would make. But nobody asked our opinion, so we鈥檒l keep it to ourselves.

The debt ceiling is distraction. It鈥檚 just an American nuance to a genuine problem that is plaguing all the mature democratic/capitalistic economies. Greece, Britain, Ireland鈥�dozens of other countries鈥�and the US.

As regular readers of this Daily Reckoning know, It is a problem with the funding of the modern social welfare state鈥�and the 鈥榮ocial contract鈥� itself. The bargain is this:

The people give up 20% to 50% of their output鈥�and sometimes, their lives鈥�to their government.

In return, the government promises to make their lives better than they would be otherwise.

But how can the feds make the common citizen鈥檚 life better? If it gives them back in services only as much as they鈥檝e paid in taxes, what鈥檚 the point? In fact, the government can鈥檛 even do that. It is a poor capital allocator. And there鈥檚 a huge amount of inefficiency and friction in the system. So, the government spends money unwisely. It gets a poor return. If people get half of what they pay for it will be a miracle.

When the system was first invented, in the 19th century, it worked well enough. GDP growth rates were high. Old people, regulations and government-provided services were few.

But as the system matured, over 150 years, it became zombified. That is, the friction, misallocation of resources, fixed costs, old people and parasites increased. The feds spent more and more. People got less and less for it. They didn鈥檛 want to raise taxes鈥�because the voters would feel they weren鈥檛 getting their money鈥檚 worth. But the voters still wanted more and more 鈥榮ervices.鈥� So, from approximately the end of the 鈥�30 glorious years鈥� following WWII鈥�in about 1980鈥�to the present, the government was only able to expand services by borrowing.

And now, borrowing is becoming a problem. Wise鈥�or lucky鈥�countries such as Greece and Britain (not necessarily in that order) are now being forced to cut back. Either because they can鈥檛 borrow now鈥�or they fear they won鈥檛 be able to do so in the future. Naturally, the zombies don鈥檛 like it. They鈥檝e taken to the streets in Athens as well as London.

In London, the schoolteachers 鈥渋nterrupted鈥� services all across England last week. In Greece, they didn鈥檛 even have to strike; they weren鈥檛 supplying much service anyway.

Where will this lead? We don鈥檛 know. But it鈥檚 a serious question. And we don鈥檛 think about serious questions on a national holiday. Besides, it鈥檚 probably against the law.

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