INCOMPETENT GOVERNMENTS CREATE CRISES

                    Source: Federal Reserve Bank of St. Louis

    Governments around the world have proven themselves to be utterly unable to manage their affairs. The above chart shows the rapidly rising US federal government debt. All developed nations are doing the same thing to a greater or lesser extent. The US government has no honest means to repay its debt. It hopes to continue selling newly issued debt to raise enough money to repay maturing debt (plus extra debt to cover constant budget deficits). At some point, investors will become leery of the rising debt and the government's ability to service it.  The government will then have to raise interest rates to attract buyers. The consequence of doing so is that annual interest payments on the growing debt will consume an ever-larger portion of government revenues. At some point the house of cards collapses.

    Prolific author, Ray Dalio, head of the world's largest hedge fund, has put out another book. It is  titled, "How Countries Go Broke". He has studied thirty-five cases of governments and/or their national banks going broke over the past 100 years. They have much in common. Their systems collapsed when the government could no longer afford to pay the soaring interest on their debts. They were then forced to default on some or all of their debt. They can do so in two ways: 1) refusing to repay the investor upon maturity, and 2) dramatically debasing their currency to allow them to repay their creditors with the cheapened currency. Everyone understands that refusing to repay (or placing a "temporary moratorium" on repayment) is a default. Some do not to recognize that repaying with a debased currency is also a default. Repaying an honest debt with intentionally cheapened currency means the government has cheated its creditor.  

    The rising US government debt has caused its central bank to create vast sums of new currency to help fund its expenses. This erodes the purchasing power of the US dollar as shown in the next chart. 

   COLLAPSING VALUE OF US DOLLAR

                    Source: Federal Reserve Bank of St. Louis

    The falling purchasing power of the dollar has an entirely predictable result. The next chart reports the cumulative growth of the consumer price index (CPI) in the US as calculated by the US Bureau of Labor Statistics (BLS). Prices are reported to have risen from a base of 100 in 1970 to nearly 800 today. We have shown in the past that the BLS consistently understates the actual rise in the cost of goods and services. It does so by manipulating what items are included and excluded in its calculations and it employs "substitution" to manipulate reported prices lower (e.g., substituting cheaper quality goods for those formerly included). Its reports are intentional distortions of reality. Caveat emptor.

                            Source: Federal Reserve Bank of St. Louis

    Another statistic the BLS manipulates is closely related to the CPI. It is the "inflation rate" (more accurately, the "dollar debasement rate"). The government asserts that price inflation is now under 3%. The public is also told that the government's "goal" is to achieve 2% inflation - which is said to be the  "ideal" rate for the economy. We urge you to consider the many benefits of having your wages, savings and pension lose 2% of their value every year for the rest of your life.  The real price inflation rate is not anywhere near the reported 2.7% figure, as any visit to your local grocery or retail store makes obvious. The BLS changes its methodologies to calculate the price inflation rate and those changes always result in a more amenable number - so as to not alarm/enrage the public about what is actually happening.  

    The next two charts were calculated by ShadowStats.com. The left chart show the inflation rate (blue line) to be nearly 8%. It arrived at this rate using the US government's 1990 methodology. Using its 1980 methodology, the right chart (blue line) shows inflation to be nearly 12%. Both charts reveal one thing dramatically - the ongoing disconnect between the government's reported rate (red lines) and the rates that the government's former formulas produced. This outcome is not a BLS methodology bug, it is a feature.

     

    It is essential to know the real rate of inflation in order to weigh the merits of your current investments and especially your retirement plan. (Note: the term "inflation" properly refers to an increase in the money supply. That increase typically results in higher prices - what most people refer to as "inflation." Price inflation is the natural result of monetary inflation.) 

    Assume you have calculated that you will need $1,000,000 to support you in your retirement. Your work is not done. Failing to consider ongoing price inflation ensures your future misery. At just 3%, price inflation will reduce the purchasing power of $1,000,000 to $860,000 in five years, $690,000 in fourteen years, and $460,000 in twenty-four years. You might say, "Yes, but I'm earning 4% interest on my Treasury bonds so I am not affected by price inflation. In fact, I'm coming out ahead. My retirement nest egg is secure."

    There is more to consider. If real price inflation is actually in the 6-8% range, your nest egg will be shrinking somewhere between 2-4% every year. And that assumes Treasuries will continue to pay at least 4% interest throughout your life. Fed Chairman J. Powell is under enormous pressure from both Trump and Congress to lower rates. If he does so you will be getting less than 4% interest income, plus lower rates are likely to ignite higher price inflation. That would be a double hit to your retirement savings. To reach your retirement goal, you will likely need to save more money. Better to know that now when you can do something about it, than at your retirement when it will be too late.

Who Is Responsible For This Debacle?

   The "who" is easy to identify.  It is your government. Only it is able to debase your currency. Your employer, your hometown and state cannot do so. You cannot do so. Businesses cannot do so. Only your national government has the power to debase its currency. It does so by creating currency units in vast sums. This is no new development. Governments have been debasing their currencies throughout history. They do it for a very practical reason. If they endlessly raise direct taxes, they will foment a revolution. So, in addition to taxes, they will employ the "invisible tax" of currency debasement. The added benefit of debasing the currency is that government officials will falsely blame rising prices on "greedy businesses." 

    

    You can hope that the debasement of your currency will soon end but that requires you to close your eyes to what has gone on for centuries. Kublai Khan issued a Chinese paper currency, supposedly backed by silver, called the jiaochao around the year 1260. It lost all value due to massive over-printing to finance his war against the Southern Song. Debasement of currencies has continued non-stop from the Roman denarius to the British pound and US dollar.  Modern currency debasements, coupled with governments' many other dysfunctions, have led to the rise of many populist movements. Disgusted populations are trying to wrest control back from their incompetent and self-serving political masters. Politics is not our beat. We periodically address it because politics always impact economies. 

England

    The Tories were voted into control of the government in 2010 based on their promises to stop illegal immigration, reduce high taxes, cure the failing National Health Service, control rising crime, grow the manufacturing base, address the outdated electric generation and distribution system, reduce unemployment, rebuild decaying infrastructure, cut over-regulation and reverse the weakening economy (to name a few). 

    During their fourteen years in power, they failed to meaningfully address any of these problems. Thus, it was predictable that their opposing party, Labour, would surge back into power and it did so in 2024. They promised to fix everything the Tories had failed to address. Unsurprisingly, Labour has also proven to be wholly incompetent in addressing any of them. Illegal immigrants continue to flood into the country and they must be housed, fed, clothed, provided with medical care and schooled at enormous monetary and social cost. It was hoped by Brexiters that leaving the EU would solve the immigration problem. It did not. Nearly all illegal immigrants come on inflatable rafts from France - which is eager to usher them on to England. The NHS continues to fail to provide prompt medical care. Wait times to see doctors sometimes stretch to sixteen weeks or more and surgeries are delayed countless months. Infrastructure such as water and sewer are archaic and in urgent need of rehabilitation. Two examples: South East Water is losing 97.4 million liters of water every day due to leaky pipes. Thames Water periodically allows sewage to flow into the nation's rivers. It also managed to lose £1.6 billion in 2024.

    Upon taking power, Labour's first move was to give big raises to government workers - raises that were unfunded and, together with the raft of other Labour spending proposals, will require taxes to rise sharply. Some proposals from Rachel Reeves, Chancellor of the Exchequer, include lowering the inheritance tax exemption. This will result in many families being unable to pass their small businesses and farms on to their descendants because those businesses will have to be sold to raise money to pay the tax. These family businesses and farms will end up in the hands of corporations, hedge funds, pension funds and other wealthy investors - dramatically changing the character of the nation. 

    To her great surprise, Reeves' promise to "Tax the Rich" has prompted them to pack their bags and depart the country. Advisory firm Henley & Partners estimates that 10,800 millionaires departed England in 2024 and another 16,500 will do so in 2025. Money goes where it is treated best - and that is no longer Britain. She also proposed to increase the National Insurance tax paid by employers on their employees. The predictable result (predictable to you, not her) is that employers are discouraged from adding new staff and are, instead, encouraged to reduce staff resulting in rising unemployment (4.7%) and its related costs. Politicians lack any comprehension of the negative effects of their many political "solutions". Or, they simply do not care because the new problem allows them to address it with yet another taxpayer-funded "solution."

    Last October she announced plans to raise an additional £70 billion in tax revenues. One component is to make parents pay VAT tax on their children's private school tuition. This was based on the totally false assumption that all private students come from rich families and attend elite schools. Some forty-four private schools have announced their closures, disrupting their students' education, and shifting them to public schools that are ill-equipped to receive them. Each such student will add some £8000 pounds of expenses (June data) onto the public schools - that are already crowded and financially stressed. 

    Another Reeves' "cost saving" plan was to reduce the winter fuel allowance for the elderly. Unsurprisingly, that created a furor and had to be walked back. She also proposes to reduce tax-free annual contribution of workers' earnings to their ISA (tax-favored savings) accounts from £20,000 pounds to just £5,000 pounds. True, that will increase tax revenues, but at the cost of having workers save far less money for their retirement. Apparently it escaped her notice this will raise the government's cost of supporting them in their under-funded retirement. She has many other proposals for imposing new taxes and raising existing tax rates to cover the soaring cost of government - all of which will leave less money in the hands of the people who earned it, forcing them to reduce their spending at tax-paying retailers, which will in turn result in lower tax revenues to the government.

    Labour's promises to cut NHS wait times and improve infrastructure have come to naught, living standards continue to decline, employment opportunities continue to shrink, and crime remains elevated. The overall quality of life in England is in evident decline. Even though there are insufficient funds to pay for existing and Labour's proposed programs, PM Starmer has promised to double defense spending to 5% of GDP to meet NATO goals. How will he accomplish this when the budget is already in serious deficit? No problem, he says. He will meet his goal by defining broadband and infrastructure spending, money spent on stabilizing food prices, supply chains, and crime reduction as "defense spending." Voila, his defense spending goal is achieved!

    Rising fiscal and political turmoil has negatively affected the pound sterling and raised interest rates on gilts (government bonds). Interest rates have risen because investors demand higher rates to cover the increased risks of holding government debt. The recent sell off in gilts followed Starmer's reversal on his promise to cut disability benefits after Labour lawmakers loudly objected. Growth of these costs has surged. Four million Brits aged 16-64 now claim disability or incapacity benefits (nearly one in ten), up from 2.8 million in 2019 - with large numbers applying for benefits weekly. England has either become an incredibly dangerous place to live and work - or it is rapidly becoming a nation of layabouts expecting to be supported by a shrinking taxpaying workforce. 

    Rising benefit costs ensure rising taxes, the selling of more government debt and higher interest payments on that debt. That will have the inevitable result of further slowing the economy that is expected to grow by less than 1% in 2025. With a shrinking economy, tax revenues will fall, exacerbating the spiraling fiscal crisis. To no ones' surprise, Labour's standing in the polls has fallen dramatically.

    Thus, it was predictable that a populist, third-party emerged from the shadows to challenge the two main stream, failed political parties. Nigel Farage, a former and outspoken British representative to the European Parliament, who supported Brexit, heads up the new Reform UK party.  In the 2024 election, Reform garnered 14% of the votes and five seats in the House of Commons, shocking the two established parties. Farage campaigned on the platform that, "Nothing in Britain works anymore," as is increasingly obvious to voters. It now polls better than both of the major parties.

    Reform's stated priorities include limiting all non-essential immigration, increasing funding for the NHS, raising the income tax threshold to 20,000 pounds to aid lower income workers, abandon green energy initiatives to save households money on energy bills and continue development of North Sea oil and gas to lessen the nation's need to import high-cost foreign energy.  As Labour continues to prove its incompetence, Reform's future brightens. The pressing question is, if Reform wins the next election can it turn the tide and put England back on an economic and social recovery path?  The odds are very long against it due to entrenched interests who will oppose any meaningful changes to the status quo, but they are not zero. Clearly, something dramatic has to change and soon or Old Blighty is at risk of sinking beneath the waves. Jeremy Warner at the Telegraph laments,

    Few events are as powerfully symbolic of Britain’s paralyzing inability to get anything done than [the withdrawal of] Labour’s welfare reform bill. If a government with an overwhelming majority cannot even get a relatively minor adjustment to a plainly unsustainable welfare budget through its backbenches, what hope for anything more substantive? Dysfunctional and powerless before the growing mass of discontents, the country seems to be slipping into a state of abject anarchy in which meaningful change and progress becomes virtually impossible to achieve. It is hard to recall a time of greater pessimism, or indeed a wider sense of despair among Western democracies in general. Small wonder, given the litany of broken promises. Labour’s inability to carry out even the most basic of fiscal reforms points to a broken system heading ever more unavoidably towards disaster.

 France

    President Emmanuel Macron's centrist party failed to obtain a majority in the last election and was forced to ally with several leftist parties in order to form a working government. The populist and euro-skeptic National Rally Party, headed by Marine Le Pen, actually won the most votes in the first round election (but not a majority) but was shunted aside after Macron allied with the NPF (New Popular Front) made up of the Unbowed, Socialist, Green and Communist parties. That alliance promises many new spending programs, return of the retirement age to 60 from 64, to raise public sector wages, link salaries to inflation, raise housing and youth benefits, cut income taxes and social security withholdings for lower earners, raise the minimum wage, fund 500,000 childcare placements, cap food, electric, natural gas and petrol prices, boost green energy spending and overhaul the EU's agricultural policy - all of which is to be done, they claim, without raising taxes on workers. 

    In an effort to counter the National Rally's most popular position, Macron now promises to stem immigration (after allowing 2.8 million visa to be issued in 2024). In short, he makes many promises requiring much higher social spending with money to pay for it supposedly coming from higher taxes on businesses and the wealthy.  Of course, higher taxes on businesses simply raise their costs of producing goods and services and that increased cost (together with their other rising costs including labor) will be passed on to consumers. Those consumers will not be happy. Proposed price controls will predictably lead to shortages because producers will not deliver a good or service to the market they will have to supply at a financial loss. It is a simple thing for politicians to ignore the endless historic failures of price controls but it will be impossible for them to ignore their consequences - with the lower classes always hit the hardest. Many rural and poor French people feel that political leaders have long ignored their concerns and they are increasingly angry about it. Cue the ominous music. 

Germany

    Germany is suffering from a raft of problems that have resulted in a flat economy and growing public discontent. Allianz SE's CEO and Chairman of the Board, Oliver Bate, recently commented that "We're back to where we were in 1997...when Germany was called the sick man of Europe." He warns about the unsustainable growth of health and welfare costs and cautions that the underfunded social security system is at risk.  This chart reports Germany's pathetic lack of growth of GDP.

                Source: Federal Reserve Bank of St. Louis

    Immigration is a source of growing public unhappiness. Former Chancellor Angela Merkel allowed a surge of a million refugees, mostly from the Middle East, to gain asylum and spent 20 million euros to support them. Immigrants continue to stream into the country. High energy prices hurt both businesses and households alike. Naturally, a populist party has arisen to challenge the main stream parties that are increasingly seen as ineffective and out of touch with the needs of the German people. That party is Alternative for Deutschland (AfD). It won one-third of the seats in the last election in the state of Thuringia, in the east. In addition to focusing on immigration, the AfD seeks a return to the former free market economy with minimal state intervention.

    The AfD is "euro-skeptic", viewing their bureaucratic masters in Brussels as distant, unresponsive and antithetical to their national culture and needs. It seeks a return of the nuclear power that Merkel shuttered to gain support of the green party. It complains that the small and poorer nations in the EU continue to view France and Germany as cows to be endlessly milked. The AfD appeals to those with a strong sense of German nationalism who value the importance of the nuclear family and traditional values, all of which they see as being threatened by immigration and the increasingly socialist EU leaders. The German economy was devastated after Russian gas was cut off following its Ukraine invasion. That, coupled with increasing prices, has set the stage for the rise of the AfD and its Mises-like declaration in 2017 that, 

Any form of state-directed economy will sooner or later end in misallocation and corruption. And so, we share the opinion of the founders of the social market economy that the market is always a means to an end, never an end in itself.

    The two major German political parties (Christian Democratic Union and Social Democratic Party of Germany), fearful of losing power to the upstart AfD brand it as "far-right", sometimes referring to it as a "Nazi" party - an epitaph intended to stir up hatred and contempt for it. However, labeling someone a "Nazi" has become the "slur du jour" by those in political power who feel threatened by anyone seeking reform of their failing government. Its overuse has caused the term to lose its sting and now suggests the declarant's increasing desperation. AfD co-leader Alice Weidel's staff claims that the German Federal Office for Protection of the Constitution (BfV) has launched a secret probe of the AfD hoping to find a reason, any reason, to bar them from running for office.  Criminal prosecution and disqualification from office are now the favored means for those falling out of public favor to remain in control of the government.

    Chancellor Friedrich Merz is struggling to maintain his ruling coalition. He acknowledges immigration is a problem but says that Germany is well equipped to take in 60-100,000 immigrants a year. He claims to favor free market capitalism, stricter unemployment benefits for those who can work but do not, a need to increase the average number of hours worked (many union contract call for just 37.8 hours per week), and to move more part-time workers (now 30% of workforce) to full time. But those in his alliance strongly oppose these positions. A growing concern is that in ten years, 4.8 million workers (9% of Germany's workforce) are due to retire. 

    Merz has proposed a huge "stimulus" package for the economy - to be funded by taking on more debt. AfD scored over 20% of the last election and its numbers appear to be rising, setting the stage for increasing political conflict. An end to the Ukraine war and resumption of the flow of Russian gas would greatly aid the country in getting back on its feet again but there is little chance of that happening any time soon.

The Netherlands

    Nederlanders are also increasingly unhappy with their political leadership. The populist Party for Freedom is a right leaning party led by Geert Wilders. PFF has a platform of euro-skepticism, anti-immigration, pro free markets, and lower taxes. It won a majority in the 2022 parliamentary elections. There is growing dismay about thousands of immigrants coming from the Middle East and Northern Africa. This has produced cultural clashes, rising social costs and crime. The problem is that many of the immigrants are not just resistant to assimilating into the nation's culture but are overtly hostile to doing so. They wish to create their own insular state within their host country. That is not well received by the nation's natives.

    In addition to controlling immigration, Wilders seeks to grow GDP, combat rising inflation and the high cost of living. He hopes to resolve tariff issues with the US, lower income and energy taxes, lower the mandatory healthcare contribution level, cut government spending, and reduce government regulations. He supports leaving the EU that he views as an overbearing, distant ruler lacking any concern for the country's needs. He has expressed an interest in reintroducing the Dutch Guilder as the nation's currency in place of the euro that is controlled by EU politicians in Brussels, and the European Central Bank.

    Another party-in-opposition is the People's Party for Freedom and Democracy (VVD). It is center-left and stresses individual freedom, free-market capitalism, and limited government intervention. However, it favors staying in the EU, strengthening the country's borders, increasing asylum scrutiny and becoming energy independent. What is clear is that a growing portion of the population is looking for major changes in government.

Conclusion

   Many people are fed up with paying high taxes and getting little in return for it from their governments. They believe the established political parties are incapable of running their government for the benefit of the people. How this plays out is unknown but history puts us on notice to be prepared for changes - potentially dramatic changes. There will be risks and opportunities that accompany these changes. Now is not the time to be complacent. "The times, they are a-changing."

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