Analysis: U.S. Supreme Court Campaign Finance Decision

Is it not remarkable, dear Reader, that mere days after Republican Scott Brown upsets the U.S. Senate special election (and Obama Administration referendum), that the U.S. Supreme Court made a landmark ruling, rolling back campaign finance and anti-corruption efforts? The case was two-fold, as far as we can tell, in its implications: first, it holds time-based bans upon corporate political advertising and politicking (namely, preventing those interests from advertising too near an election day); second, it frees corporations and other such interests to make direct contributions to political candidates, rather than filtered through special interest groups. The decision was leveraged upon the First Amendment of the U.S. Constitution, suggesting that restricting corporations from doing the aforementioned activities was impinging upon freedom of speech.

This actually does have coherence, as we understand it: corporations are considered an individual under corporate law, legally on par with an actual living human being, such as yourself. So, in essence, yes, a corporation does have just as much of a right to contribute and politick for its candidate of choice as you; that they have vastly more money to throw around than you is really trivial. At least, it's trivial to the Supreme Court. The full implication of the decision perhaps did not sink into justices' thoughts as cast their votes. Let us explain:

Consider the organisation known as Goldman Sachs, everyone's favourite vampire squid. As a financial institution, Goldman can borrow an effectively unlimited amount of money from the Federal Reserve, and then turn around and invest that money into something which pays a guaranteed return. At present, much of that would seem to be Treasury Bills; in essence, Goldman Sachs permits the Federal Government to borrow from itself, but make it look otherwise, and make a profit at the same time. This cozy little arrangement, along with all the other cozy little arrangements Goldman has, seems to make a lot of people very angry. Now, let's say that a vociferous group of contenders for Congress run on a "let's shut down all the big banks" platform, and experience massive support from across the U.S.

The Lord's work would seem to be in jeopardy, no? At that point, is it not a good investment to borrow, say, $25 billion from the U.S. Treasury, and invest that in supporting the candidates who are on the "let's keep Wall Street bonuses flowing" platform? The 'return' off of that 'investment' is not necessarily quantifiable, but it is indeed qualifiable: Goldman Sachs continues to survive. That, perhaps, is the best investment that Goldman could have made with someone else's money.

We point out there is no longer any reason whatsoever that Goldman cannot do this exact manoeuvre during the 2010 Congressional elections. Nor, indeed, does anything prevent JPMorgan Chase from doing the same thing, or Citigroup, or Wells Fargo, and the rest of the too-big-to-fail crowd. Heck, the Federal Reserve System itself could start running advertising if it wanted to! Call us alarmist? Please feel free. But remember that there is nothing which will prevent this from happening.

If anyone notices how momentous this decision was, we have no doubt there will be efforts of dressing it up as a good thing; consider this hatchet piece from the Atlantic. However, in our opinion the Court has simply handed over near-total political control of the U.S. Government to large corporate interests on a silver platter. That situation is perhaps nothing new per se - consider Goldman Sachs' apparent ownership of the U.S. Treasury - but it is much, much more of the status quo, and additionally set in concrete. Going forward, we fear there will forever be a shrinking ability of small interests (e.g. individuals, small entrepreneurs, et cetera) in getting their message to their supposed representatives in Government. That could change, as an aside, if the apportionment lawsuit in Mississippi is actually successful, but the outcome of that case is far from certain.

What is certain is that the large corporations which will exploit this Supreme Court ruling will do so to the hilt, because the Depression puts their very survival at stake. Without even the most ineffective of legal restraint on their politicking, we would not be the least bit surprised if more and more high-level officials in the Government come from super-huge banks and large corporate interests, like the defence industry and healthcare, et cetera. Put simply, the sovereignty of the United States has been transferred, de jure, from the American Citizenry, to the largest and most powerful corporations. The Government must and will respond accordingly.

What this will mean for American Citizens trying to scrape their way through the Depression is fairly easy to predict. The average American will feel the pain, because he or she will be forcibly squeezed of their wealth, for the benefit of these corporate interests. The U.S. Government will continue to everything it can in order to reinforce the existence of those institutions which ethically should be left to die. The cost of these corporatist heroics will come in the forms of more bailouts, more Government largesse, higher taxes, higher inflation, and more destruction of the non-corporatised economy.

House Prices, Property Taxes, and Rent

Today we present a case study of a sleepy little town on the Pacific Coast of North America somewhere between Powell River and Portland. We have changed the name to Prosperity Harbour to protect the innocent. This town is fairly average; its heyday being some decades in the past.

Being an older place, the houses tend to be on the small side with plenty of cottages, each having less than 1000 square feet of floor space. As of today, the asking price on these little, older cottages ranges from $90,000 to $180,000. Prices have only sagged a bit since the onset of the Depression thanks to generous mortgage programmes from the Government.

Property taxes here are modest, averaging about 1% annually of the market value of the houses. Rents in Prosperity Harbour are low for a place on the West Coast. A typical two bedroom house rents for $600 per month.

The gross rental yields tend to range from 5 to 6%. After allowing 1% for taxes, 2.5% for maintenance, and .5% for insurance the net yield works out to only 1 to 2%.

Until recently, landlords were banking on appreciation to make up for the lack of yield. The last two years have been disappointing in that department, to say the least. Furthermore, there is no hope of raising rents or even maintaining them anytime in the foreseeable future. A great wave of rental construction completions has been hitting the market: luxury duplexes; low-income projects; warehouse district renovations; and everything in between - all begun at the peak of the recent housing mania. The major property management companies have even entered a price war as their efforts to whittle down their swelling rental listing portfolios become desperate. Even with asking rents down 1/3 or more from their peak two years ago, vacancies go begging.

Prosperity Harbor is not losing population. What is shrinking is the number of households. Or put differently, the increase in household formation - a fact of life in North America since the European settlement began - has gone into reverse, here as elsewhere. Unemployed and underemployed persons are doubling up and making do with more cramped conditions.

What hope is there for Prosperity Harbor's landlords? None. As long as incomes continue to fall, there will be less and less money available for rent. Property taxes will not fall. As assessed property values decline, rates will rise in order to maintain public expenditures. Even if a frenzy of cutting the public sector hits Prosperity Harbor's voters, it will only serve to shrink the incomes of the local public servants - furthering the vicious cycle of declining incomes.

In a word, Prosperity Harbor's landlords are f****d. This goes for the landlords who rent to themselves as well, a.k.a. homeowners. Housing here is a terrible, terrible investment and will be remain so until prices come in line to a sane multiple of rents - meaning those old cottages need to be selling for something like $9,000 to $18,000 - a mere one tenth the current prices!

This Week's Herbert Hoover Award

One of the things that President Herbert Hoover showed is that, without a doubt, raising taxes during a Depression is a very bad thing to do. In the spirit of never-learning-from-History, we present this week's Herbert Hoover Award to (drumroll):

Pennsylvania Governor Edward Rendell and North Carolina Governor Beverly Perdue

Governor Rendell wishes to raise his State's income tax from 3.07% to 3.57%, to help close a $3.2 billion budget shortfall; Governor Perdue is asking her State's legislature to raise up to $1.5 billion in new taxes, to help close North Carolina's $4.5 billion budget deficit.

Cutting spending is something that Governments often cannot do, as Governor Perdue makes painfully clear, when defending the need to raise taxes to protect the jobs of North Carolina's teachers:

"We cannot increase class size. We cannot lay off teachers. We will not sacrifice North Carolina's economic future."

Governor Rendell has his own version of that attitude, stating that he wanted to decrease taxes in his State, but the 2007 Depression “blew the wheels off that idea.”

Sorry, Governors Perdue and Rendell, but you both fail basic economic history. During economic contraction, a Government - if it wishes to alleviate the pain of said contraction - should shrink at least as fast as the greater economy. Better still, the Government should shrink its presence in the economy - specifically, its taxation rates - even faster than the economy is contracting. The reason is very simple: in order to help an economy regain its footing on a new, lower footing, the citizenry requires a larger share of their shrinking income to stabilise their personal finances.

If a Government moves aggressively to take a larger share of a shrinking pie, an economic contraction likely will become an economic collapse. During economic downturns, investable capital must be as liquid as possible, so that investors - via markets - can help build up viable enterprises and tear down the dead and dying refuse. Increasing taxation rates effectively prevents that, as savings is hampered. Governments will invariably spend their tax revenue on dead-or-dying enterprises (a.k.a. major campaign contributors) - misallocating capital which ought to go to promising ventures.

Congratulations, Governors. Your actions are an inspiration to us.

***

On a positive note, we give weak applause to the Government of Ohio for refusing to raise taxes, even in the face of an argument for raising taxes involving the old "think of the children" ploy. In fact, a planned tax reduction is being kept on schedule.

New tax cuts would be an excellent idea, but we suspect that's asking for too much. Still, here's hoping the Ohio Government will continue to resist the urge to kill the State's economy.

A Huge Regressive Tax for Americans

We had hoped to report on further FDIC closures, but there were none.

The "Waxman-Markey" bill winding through Congress has an ostensible purpose of capping carbon dioxide emissions. According to US News and World Report, if passed, it will cost the average household as much as $1600 per year, "with low-income households carrying a heavier burden."

A puny, $160 per person tax credit is being proposed to offset the cost, but that will do little to help the average citizen.

Whatever the merits or demerits of a 'carbon tax', it should be presented in a revenue-neutral fashion. The current proposal will have a decided, depressive effect on the economy at a time when such effects are most definitely not needed.

The share of the US economy managed by government is at an all-time high, and still growing fast. This ill-conceived 'energy plan' along with similarly ill-conceived mandatory health insurance programs may push the Nation, already burdened with bailouts and nationalisations, too far down the road of a command economy.

Central planning does not necessarily wreck an economy, of course. Many European nations have a fairly high level of government involvement with the economy and still enjoy a high standard of living. But there, better social welfare results have been and can be expected from the taxes and regulation. We believe that is because socialism, whatever its demerits, is a proactive and coherent movement to distribute public benefits. In the USA, socialism is ideologically extinct, and government intrusion is reactive and self-serving.

A European level of government economic control in the USA will not yield European-style benefits, but an economic catastrophe. Mark our words.

Expanding Government, Declining Economy

USA Today reports "Benefit Spending Soars to a New High". 'Benefits' being the euphemism for 'Welfare', now that there is no shame in being on the dole. In any case, state and federal welfare payments are now one-sixth of Americans' income.

As the Depression grinds on, there will be considerable pressure from all sides to maintain and expand 'benefits'. These 'benefits' will have to come out of taxpayer pockets, one way or another. Since visible taxes will probably not be raised enough to cover the swollen 'benefit' roles, there will be some of that hidden tax coming down the pike - inflation.

Redistributing income, up to a point, may have some merits. But if the productive elements of society - most of whom are having a fairly rough time of it lately, too - are overburdened with increasing taxes, there will be further decline in economic activity.

As we have discussed repeatedly before, there is a range of government spending in an economy which is optimal, and spending below or above that range is destructive. At present, government spending at all levels (according to the helpful folks at usgovernmentspending.com) is a 45.2% share of the economy as a whole. This is up from a 37% share in the last fiscal year.

The rate of increase in the share is a whopping 22%! If the share were to increase at that rate for just another two years, the USA would end up two thirds of its economy (mis)managed by the State - a comparable level to Eastern Europe in the Soviet era. And probably with similar results.

Of course, the Nation's leaders are emphatically stating that since recovery is around the corner, there will be no need for further increases. We beg to disagree on the recovery part. Recovery is not around the corner. Whatever spin may be being put on 'the numbers' - they are in fact truly terrible.

In the face of Great Depression II, Mr. Obama's administration will not be able to resist expanding 'benefits', as well as bailing out and nationalising banks, insurance companies, car makers, airlines, airplane makers, and God-only-knows who else.

We believe, with some confidence, the deeper Uncle Sam dives into the economy, the worse the economy will perform. Since the leadership seems infected with some sort of intervention mania, we also anticipate that the lack of recovery will promote ever-larger bailout and 'recovery' schemes. These in turn will hurt the economy even more. We can't anticipate how long these destructive cycles will continue, but probably long enough to turn the USA into a dramatically poorer nation.

Ireland Doesn't Need a Bailout?

Anyway you look at it, Ireland's economy is in shambles. The formerly fastest growing member of the EU is now the fastest shrinking - with a rosy, Government forecast of -8% change in GDP this year.

Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."

The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.

Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.

We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.

The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.

Unemployment versus Contraction

We were reviewing the statistics at Shadowstats - a service that reports relatively honest economic data for the USA - and noticed a 19% unemployment rate (ouch!) and a 4% rate of GDP contraction (bad, but not that bad). Two points immediately leapt up: one, there is a fairly wide divergence; and two, this is divergence in an opposite direction from the Great Depression.

The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.

The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.

Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.

The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.

Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.

The Government is Flailing

It looks like an increasing possibility that Mr. Timothy Geithner, U.S. Treasury Secretary, may be the first major sacrifice on the Obama Administration's altar of Grand, Empty Gestures. The more President Obama has to say he fully supports Secretary Geithner, and that a resignation of the latter would not be accepted by the former, the more we wonder what is really going on. To put it simply, me thinks he protests too much.

Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?

"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"

We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.

Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...

It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.

But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...

The Dark(er) Side of Raising Taxes

As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.

As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:

According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!

But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.

With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.

Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!

Raising Taxes in a Depression

President Obama, in his budget proposal, aims to raise income taxes in 2011. Leaving aside all issues of whether taxes are a productive use of the people's money, there is the question of the consequence of raising taxes in a Depression.

In the US, the last time this was tried was 1931. The federal government at the time was running a huge deficit due to collapsing tax revenue, and there was a universal political consensus at the time, that budgets must be balanced. Spending was cut in some areas. The States, however, were desperately short of funds and received expensive bailouts from the federal government that caused overall expenditures to rise. The solution seen at the time was to raise taxes.

The consequences of that, as every student of history knows, were devastating. Mr. Hoover, the president at the time, became so unpopular that shanty towns springing up were named "Hoovervilles," and newspapers were called "Hoover blankets."

We are not fond of government deficit spending, and would prefer to see fewer bailouts. However, to raise taxes to fund bailouts - taking dwindling funds from the productive population and giving it to the spendthrift elements, is just about the worst thing that could be done in this environment. We are not optimistic about the wisdom of the Congress, and it seems history is doomed to repeat.

Is The Media Crying Wolf?

Since the present epoch is 'The Information Era,' and the economy is the big story of the moment, there is now abundant commentary on the "Deepening Recession." The question of whether the world may be in for a depression has now hit the mainstream.

Given the mainstream media's poor track record of appropriate attention to what is truly relevant, legitimate questions arise: "Is this recession thing just media drum-beating - a 'media event'?" Is the economy even that bad? Or are things actually much worse? Could it just be that it was a bad downturn, but now that it is getting so much press, one can figure the worst is actually over?

Our opinion is that things are actually much worse, and that the bad news will be 'spoon fed,' and not so much as a result of some sinister conspiracy as from the cycle of denial, confusion and slow recognition of conditions as they are.

The essence of the 2007 Depression, like depressions before it, is falling income - whether through pay cuts, unemployment, or lower returns on investments. Falling income sets off a vicious cycle of economic contraction as households spend and save less, tax receipts fall, and organisations invest less - further reducing what will become others' income.

An economist whom we admire, a Mr. Williams, presents a strong case that the USA has been in recession since 2000, and that government statistics to the contrary are unreliable. You may read more about this at his website. If the USA has indeed been contracting economically for the past seven years, then the apparent prosperity was most definitely a bubble. Its crashing down now is only the reality that a shrinking economy cannot support exaggerated consumption.

There is a great deal of productive capacity in the human race and its artifacts. Income is flowing from this capacity, but one must learn to live within and not beyond one's means. When this story is the top of the news, then you will know the worst is over.

How Likely is Hyperinflation in the USA?

Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.

Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?

Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.

Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.

The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.

We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.

Two Macro Trends of the 2008 Depression

We have been careful to avoid detailed or specific predictions of what is going to happen during the 2008 Depression. Certain symptoms, like the housing price and tax receipt collapses, are 'baked into the cake.' In this post, we will look at some macro-scaled trends of this Depression, and what shapes they may take in coming years.

The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.

This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.

This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.

The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.

As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.

These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.

The Looming Tax Catastrophe

The 2008 Depression is lowering tax revenues due to investment losses, declining earned income, and falling property values. To raise taxes at this point, even to maintain revenue, will create even less investment if levied on business, thus hurting prospects for job creation; and if levied against individuals, will lower discretionary spending and further the crash in consumer spending.

Governments can cut spending, as is happening in most U.S. states, but the effects of that are also depressing - government spending is, after all, somebody's income. Governments at present are actually increasing their spending in a big way via the bailout mania both by 'investing,' and by covering the losses these 'investments' will inevitably bring. Additionally, there are plans in the works for a new, New Deal.

Governments tend to have pretty good credit ratings, so they can borrow quite a bit to cover the shortfall of tax revenues, but there are limits. There comes a point when lenders begin to doubt whether the funds will be repaid and that source is precluded. Currently the USA has a direct federal debt liability of about $40,000 for each and every person in the country. Evidently the USA's creditors (mostly trade partners) think that is a viable sum. How much higher will they let that go, especially as incomes start falling? We don't care to hazard a guess, but probably not too much higher. So while this option is open to the USA Federal Government for the time being, it is a temporary phenomenon.

There is a darker 'solution' to where a government could get money to spend - the printing press. This would, of course, cause a ruinous decline in purchasing power - furthering deepening the depression.

Raise taxes to cover spending - deepens the depression. Cut spending to match the fall in taxes - deepens the depression. Max out the Federal Debt 'credit card' - keeps the bills paid for the time being, but what to do when it's maxed out? 'Print' money - one way ticket to Zimbabwe. This is looking like a no-win situation.