Thursday, March 24, 2011

Portugal Now on the Brink

Portugal is in the news today.  The prime minister resigned as the country will soon become the third European country to seek a bailout.  Just like the other welfare states of Europe, the Portuguese government spends an excessive amount of money and the government refuses to cut back in any meaningful way as many voters continue to demand a free lunch.

The situation in these European countries is similar to what is happening in many states around the U.S.  It is also similar to what is happening in Washington DC, although there are a few major differences.  Although Americans have become more dependent on big government, there is still a streak of individualism and independence in the American culture.  That is the good news.

Now for the bad news.  When these European countries are on the brink of disaster, they have to get bailed out by other European countries.  They depend on the European central bank.  There may be a limit as to how much bailing out there is because, eventually, other countries will refuse.  But it is different with the federal government of the United States.  The U.S. government has the Federal Reserve.  The Fed has a monopoly on the money supply in the U.S. and can continue the deficit spending for much longer as it buys government bonds.  The only limit that the Fed faces is that of hyperinflation and citizen outrage.

The next few years will be painful for almost everyone.  It will be painful for the masses of people that will suffer due to the horrible policies of their governments.  It will be painful for those who are used to getting a free lunch (think unions in Wisconsin).  It will be painful for politicians who have to deal with voter outrage.  Don't get me wrong; I am not feeling sorry for some of these people, especially the last group.

Voters will continue to demand the impossible.  Politicians will continue to promise the impossible.  These things will all come to a climax and something will have to give.  Voters want reduced taxes and less government on the one hand, but then flinch when specifics are mentioned.  In particular, the majority of voters say they don't want to see significant cuts in Medicare and Social Security.

What seemed like a free lunch is almost over.  The Fed can keep the game going a little bit longer, but even the Fed has been taken down a few levels.  It cannot get away with as much now.  The Fed will continue to finance deficits, but price inflation will show up in a big way eventually.  The Fed will face massive inflation or hyperinflation and will have to refuse to buy any more government debt.  Interest rates will skyrocket.  The politicians in DC will be forced to cut back.  It is just a matter of time.

No comments: