Thursday, January 13, 2011

Why Democracies Will Always Go Bankrupt

When I was growing up, finance was mother’s milk to me, not only because my dad was in the field, but because I was a bit of a math geek. But for my formal education, I was trained—rather rigorously, and in spite of my laziness—as a philosopher and a historian. This odd combination is why I have such a jaundiced view of economics: I don’t find economics particularly intimidating, or even particularly challenging—it’s just finance’s snooty but poor (and slightly daft) older cousin. History’s surprisingly ignorant and blinkered accountant. Philosophy and Math’s lightly retarded, Puritanically rigid, and altogether rather embarrassing spawn.

Now, it’s all good and fine for me to rant about how useless economics is—but these aren’t empty complaints on my part: I can point to a single, specific, monumental failing of economics—a failure in the discipline which pretty much proves my point:

The United States is going bankrupt—and economics cannot explain why.

In fact, a surprisingly large number of economists choose to ignore the problem of America’s looming bankruptcy altogether; or claim there is something called a “structural deficit” (a highfalutin way of pretending that it cannot be fixed, and therefore doesn’t need fixing); or else—as is the case of the fools backing Modern Monetary Theory—they make the claim that all deficits are just debts the government owes itself, so therefore the American government cannot go broke, so therefore—and let’s ring out the QED—the fiscal over-indebtedness is actually not a problem because it doesn’t even actually exist!

They really do claim that. And no, they are not high.

Of course, sovereign over-indebtedness does exist, and it is a problem—a terrible, life-or-death problem: As a lot of historians have pointed out, sovereign bankruptcy presages and ushers the collapse of great nations—often violent collapse. And this is something we want to avoid, no? 

Some schools of economic thought recognize that deficits are bad because they lead to bankruptcy, and that therefore fiscal budgets should be balanced so as to avoid them. But they do not explain why this is the case—they have no argument to explain why deficits happen in the first place. That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning.

This is a true observation—but it doesn’t explain why the sun will rise tomorrow in the east. Since the Austrians cannot explain why deficits happen and eventually lead to national bankruptcy, they are simply positing them, much like tenets of a religion. These arguments might appeal more to our experiences in the real world—especially when compared to the a priori drivel of Neo-Keynesians, Monetarists, MMT weenies, and their ilk: Peddlers of arguments as unsound as atonal clamor. But a posteriori arguments based on intuition and “common sense”—gussied up in German though they may be, and attractive though we may find them—are of no help, because they are based on faith, not reason.

If anything has to be taken on faith—if it can’t be analyzed, its premises scrutinized, and the overall argument judged to be sound or unsound—then it’s really no argument at all. 

I have an argument that explains why fiscal deficits happen. Moreover, this argument can explain why fiscal deficits occur in a democracy in a manner which is different from any other sort of regime. It can also explain why fiscal debts in a democracy grow once they start, and it can explain why this growth in debt inevitably, inexorably leads to the bankruptcy of the democratic regime. Further, this theory proves—by sound and valid argumentation—that the United States is going bankrupt right now because of this process.

It’s an overall concept I’ve designated as the Democratic Bankruptcy Paradox: The paradox by which every democracy eventually goes bankrupt—regardless of the people’s will and intention of keeping it from going bankrupt.

That’s why it’s a paradox: The citizens of a democratic state are supposedly in control its destiny. They obviously do not want their nation to suffer bankruptcy—yet in spite of their will and intent, democratic states always go bankrupt. Always.

This post will outline my proof of why this is so.

I will first explain the logic of my Democratic Bankruptcy Paradox theory, and how it is derived from a rather recently articulated problem in philosophy called the discursive dilemma, or sometimes the doctrinal paradox; an aspect of group agency (otherwise known as “the wisdom of crowds” [sic]) that has been used primarily in legal theory, but which I’ve realized has some fairly interesting—and radical—applications to macro-economics and public finance in representative democracies.

I will then explain how the discursive dilemma, when applied to macro-economics and fiscal policy in a democratic regime, leads to the Democratic Bankruptcy Paradox. It is here that I will prove two general conclusions:
• One: Democracies always act in a fiscally incoherent manner. That is, they always pursue simultaneous goals which cannot be afforded.
• Two: Democracies always go bankrupt once they have access to credit—without exception. 
Finally, I will show how my Democratic Bankruptcy Paradox theory applies to the American case, and explain why the U.S. governments at the local, State and Federal level spend more than they bring in—even as their citizens uniformly oppose this state of affairs. Which is why it is inevitable that America will go bankrupt. What we are seeing now—with the various iterations of Quantitative Easing, and the mounting national debt—is the slide towards sovereign bankruptcy which is inevitable.

So, let’s begin:

The discursive dilemma is a recently formulated paradox in philosophy about how a group’s decisions can be contradictory with the aims of the individual members of the group, to the point of incoherence. Phillip Pettit, Franz Dietrich and Christian List have done a lot of work on the issue of group agency, where the discursive dilemma is discussed; see here for a fairly complete reading list.

As with all paradoxes, an example is the easiest way to understand it—so here’s one:

Suppose there are three of us—you, me and Mary—standing around in the kitchen. Suppose that you and I believe that p is true, while Mary is sure down to her very bones that p is most definitely not true.

Mary is just one person—you and I are two. Therefore, a majority of this group believes p is true.

As I said, Mary doesn’t believe for a second that p is true—instead, she argues very convincingly that r is true. For the purposes of this example, p is completely incompatible with r; not contradictory—rather, incompatible: Symbolically, ¬(p ⋏ r).

Since Mary believes r is true, and p and r are incompatible, you therefore fervently argue with Mary about why r is most definitely not true—if r is true, then p cannot be the case. And you believe that p.

But as I listen to Mary, I come to the conclusion that r might well be true. I don’t believe that p and r are both true—because they are incompatible. I simply believe that r might be the case.

Therefore, a majority of this group believes r is true.

Which allows us to arrive at our paradox: A majority of the group believes p is true, a majority believe that r is true—but none of us as individuals believes that both p and r are true, because as I said before, p and r are incompatible.

However, as a democratic group, we believe that p and r are both true—which is incoherent.

This is the discursive dilemma.

Let me make the example more concrete: I said earlier that you, me and Mary were standing around in the kitchen? Suppose, then, that we have a cup of flour in a bowl on the kitchen table: You think we should add yeast and salt in order to make bread—to which I agree. But Mary thinks we should add eggs and sugar, to make a cake—to which I also agree, as that too sounds yummy.

As a group, the majority is in favor of adding salt and yeast to the flour, while another majority is in favor of adding eggs and sugar to the flour. But even though no individual would conceivably be in favor of adding yeast and salt as well as eggs and sugar to the flour, that is what the group as a whole is in favor of: A majority wants to add yeast and salt to the flour, while simultaneously, a majority wants to add eggs and sugar to the flour.

And that’s just a big old mess. That’s an incoherence in the democratic decision-making process.

So how does this apply to macro-economics in a democracy? It shouldn’t come as a surprise:

You, me and Mary are in the middle of campaigning for our democracy’s budget for next year.

I am campaigning for the Balanced Budget Bill, which requires that our budget be balanced—and all three of us, wholeheartedly and without reservations, agree. So the Balanced Budget Bill sails through.

You are campaigning for the Lower Taxes Bill, which you obviously favor, and to which I also wholeheartedly agree. Therefore, the Lower Taxes Bill has a majority—and it too passes.

However, Mary is campaigning for the More Government Services Bill, to which which I also wholeheartedly agree, creating another majority—and it too passes.

You may say to me, “But your position is contradictory!” But I reply, “Certainly not!”

In fact, I did my civic duty: I listened to all the arguments, and I voted for all the bills. I think we should cut taxes—so when it came to a vote, I voted in favor of the Lower Taxes Bill, which passed. But I also want more government services—so when it came to a vote, I voted in favor of Mary’s More Government Service Bill, which also passed.

And all the while, I’m still in favor of my law, the Balanced Budget Bill, for which I voted.

Thus, as a group, we have an incoherent outcome: The majority of the group believes taxes should be cut—and at the same time, the majority of the group thinks the government should deliver more services to the people. All of the members of the group individually do not want a deficit, but as a group their incoherence leads to a deficit.

This is the democratic fiscal incoherence, a situation unique to democracies.

All democratic regimes eventually reach a state of fiscal incoherence—in fact they reach this state every year, at budget time: A majority of the people want lower taxes while at the same time, a majority of the people want more government services. That is because all people want to pay less and receive more, a self-evident proposition.

A democratic regime has to resolve its fiscal incoherence every time it happens—that is, every year a new budget is proposed. If it doesn’t, it will not be able to operate the following year, as it will not have the money to do so. (This of course is assuming an independent Central Bank that will not money-print away the dilemma.)

If the democracy’s government can only spend such revenue as it actually receives (and there is no Central Bank funkiness), then the electorate will be forced to come to grips with the incoherence of its decisions in the chambers of its parliament or congress: The democratic representatives of the electorate, be they MP’s or Congressmesn, will slug it out—proponents of cutting taxes fighting proponents of more government services—until eventually, a service is cut or a tax is raised, so that the budget is fully covered: This way, the democratic fiscal incoherence is solved, year after year. 

The only way a democratic regime can avoid having to resolve its fiscal incoherence is by issuing debt.

Some democratic regimes do not have the credit-worthiness to issue unsecured debt—so issuing debt is simply not a possibility. In fact, all democracies at least initially are constrained from issuing debt because of their circumstances. They are forced to resolve their annual fiscal incoherence—either government spending will be lowered, or taxes raised, but it will be thrashed out and resolved one way or another. No one will lend them the money—so they have no choice.

However, as each successive, successful resolution of the democratic fiscal incoherence takes place, paradoxically, the democratic regime becomes more credit-worthy: The cost of borrowing goes down with each successive, successful resolution of the democracy’s fiscal incoherence.

When it finally reaches the point where credit is so cheap, and the cost of resolving the annual fiscal incoherence—politically, emotionally, practically—is higher than the cost of taking on debt, then a subtle crisis point will arise: The democratic regime will “postpone” the resolution of its fiscal incoherence, and instead take on debt.

This is the tipping point: This is the first step on the path to ruin for a democracy. It’s a subtle moment, but it’s key—the moment when the democracy decides not to resolve its fiscal incoherence, and instead paper over the incoherence by way of debt.

All democracies reach this point. The United States reached it in 1975, when it failed to balance its budget for the first time in peacetime, and never balanced it again.

Once the democratic regime fails to resolve its fiscal incoherence one year and instead covers the shortfall with debt, the democracy enters a debt spiral: The cost of resolving the fiscal incoherence of the electorate is double what it was last year (last year’s cost plus this year’s cost), while the cost of borrowing in order to paper over the fiscal incoherence has likely remained the same, or risen only slight. Therefore, the cost of borrowing the second year is half what it was the first year. And the third year? Assuming the costs of debt haven’t risen significantly, the debt is cheaper still on the third year, when compared to the costs of the accumulating, unresolved fiscal incoherence of the previous years.

This is how every year, the costs of additional debt falls in relation to the cost of resolving the accumulated fiscal incoherence. And this is how it will continue in a democracy, as its debt spirals.

So long as the cost of issuing debt remains lower than the political, financial, personal, social, and emotional costs of resolving the democratic fiscal incoherence, then the deficit will continue (or expand), and the total fiscal debt will grow—because each of the majorities will want more of what it got with each passing year.

This is the problem of unresolved fiscal incoherence: Each majority in a democratic regime becomes accustomed to getting its way, and not reaching a compromise or accomodation with the other majorities that would be necessary, were the fiscal incoherence of the democratic process forced to be resolved.

Thus, the majority which wanted lower taxes expects and demands even lower taxes the next year—while the majority which wanted more government services expects and demands more government services the next year too.

Thus does the debt spiral accelerate. An although no one wants more fiscal debt, the failure or unwillingness to resolve the fiscal incoherence—and the ease of issuing unsecured debt—makes the elimination of fiscal debt in a democracy impossible.

This is exactly the situation happening in the United States today—and it is a natural, inevitable byproduct of not resolving the democratic fiscal incoherence.

In the U.S., majorities wanting lower taxes and more defense spending get their way, while at the same time majorities wanting more government services and entitlements and goverment macro-economic stimulus get their way too—all happening while the overwhelming majority of the population is fervently opposed to deficit spending, which is geometrically adding to the fiscal debt. 

This is my Democratic Bankruptcy Paradox theory in action, as applied to macro-economics and fiscal finances in the United States: The democratic state incurs a deficit and fiscal debt which the overwhelming majority of the population do not want—yet are powerless to stop. 

(Some might claim that the discursive dilemma as it relates to macro-economics only happens in a democratic state where all of the citizens have an equal vote. This line of argument might conclude that if there was a smaller group of people with decision-making powers, there wouldn’t be this incoherence. The counterargument is, If there were some voters whose vote somehow counted for more, then the Democratic Bankruptcy Paradox would occur again, only this time in this smaller group, with all the same effects; call it the Oligarchic Bankruptcy Paradox. We can regress to smaller and smaller groups—from oligarchy, to technocracy, to committee, to triumvirate—but the Bankruptcy Paradox will always happen, unless there is a single man who decides the issue of fiscal policy—and that man’s name is Dictator.)

As the debt burden in a democracy grows because of the failure to resolve the fiscal incoherence, the total debt inevitably reaches a point where it is unsustainable. People can argue the exact point where fiscal debt becomes unsustainable—100% of GDP, 120% of GDP, or some other figure. But that issue is irrelevant for this discussion—all we have to agree on here is that such a point of over-indebtedness eventually, inevitably happens. I doubt anyone will find this presumption controversial or debatable.

Therefore, once a democracy’s debt reaches a point of unsustainability—either because it cannot borrow more, or it cannot service the debt it already has—the democracy becomes bankrupt.

So as you can see, this always happens, in every democracy: Failure to resolve the yearly fiscal incoherence of the democracy leads it to take on sovereign debt, which leads to a debt spiral, which leads to bankruptcy—every time.

There are several well known outcomes to a nation’s going bankrupt—none of them pleasant, some of them quite awful. Again, a presumption that should not be controversial or debatable: Most of the outcomes of a national bankruptcy are worse than the sacrifices made to avoid bankruptcy. Therefore, national bankrutpcy should be avoided

Now, the solution to this problem—how to avoid national bankruptcy—is quite obvious: Avoid taking on sovereign debt in the first place.

But the problem, as pointed out earlier, is that debt becomes cheaper as a democracy becomes more successful at resolving its fiscal incoherence. In every successful democracy, the point where the cost of taking on debt is less than the cost of resolving its fiscal incoherence will always arrive—it is inescapable. And when that point is reached, people will rationally decide that taking on sovereign debt and kicking the can down the road is a better choice than resolving the fiscal incoherence of the electorate.

This is why democracies will always, in the end, go bankrupt.

This is why the United States is going bankrupt now.

The United States was generally very successful in resolving its fiscal incoherence since the Revolution of 1776 until 1975. Debt was taken on—but only in exceptional cases, almost always war. See the following chart.


As can be readily seen, the periods of large debt occurred during and after the Revolution, the War of 1812, the Civil War, the First World War, the Great Depression, the Second World War.

But then since 1975, the U.S. fiscal debt grew steadily, paused for a bit in the Nineties (when because of political happenstance the contrary aims of the executive and the legislature led to debt reduction)—but then shot the moon. The Congressional Budget Office projects 10% of GDP deficits are in the offing until at least 2013, perhaps until 2016.

My bet is, the 10% of GDP deficits will be even larger in the coming years. And they will not stop in 2013 or 2016—the only thing which will stop the ever-increasing deficits is national bankruptcy. The American democracy cannot prevent this bankruptcy. Bankruptcy is the inevitable, inexorable end.

I hope I have proven why.


If you like what I’ve written, then please subscribe to my mailing list.

I’ll only contact you with things that are worth your while.

Thank you.

—GL

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211 comments:

  1. GL - makes sense, but I must say that you are overcomplicating a very simple issue. Everyone understands that human nature is to want to pay less tax yet receive more services. The end result will not likely be "bankruptcy" per se, but a significant devaluing of the currency once a basket of international currencies replaces the USD as the reserve.

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  2. Thanks, nobull, but read it again: This is the most important essay I have ever written—this is a major proof.

    What you are referring to is inference and experience—but my proof is philosophically valid and sound.

    Mull it over and think about it, and you'll see its full implications.

    GL

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  3. I don't argue the validity and soundness of your proof. I just thought it was fairly self-evident that human nature and democracies don't lead to good behavior. I also think that a good part of the problem is that those making the decisions (i.e. Congress, Fed, Treasury) all have incentives to push the problem forward, while Congresspeople are generally too stupid to even understand what the hell the problem is. Exhibit A: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aO10ieKo5lX8&refer=news

    One other thing you could do to bolster your (obviously true) thesis is to provide some examples of other democracies that have failed. Contrarians to your viewpoint would likely point out that the US is not a democracy but a republic...

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  4. If the gov't doesn't have deficits, how does the monetary base ever increase?

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  5. yes above post is right.

    for someone to has deficits someone else must have surpluses.

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  6. GL: It's an interesting argument but I really think you should read Mancur Olson's Rise and Decline of Nation, which to me is much more convincing. (short synopsis: collective action, i.e. government, always comes with asymmetry. In other words, the steel industry gets 100% of the benefits of a steel tariff, while each citizen only pays 1/N of the cost. So special interest group X has a strong incentive to lobby for legislation that benefits them, potentially even at a cost to the whole, while the rest of the group has only a mild incentive to fight them. So basically politics will always fail to special interest groups until a war/national collapse, when the slate is wiped clean and the cycle begins again).

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  7. AND because the US is a republic, and because of groups such as the Tea Party which currently maintains as it's primary issue debt reduction thru smaller govt and reduced govt spending and balanced budgets, debts may be reduced should the party hold to its' mantra and continue to vote out any rep that strays.

    Pretty simple concept. As an entrepreneur and small biz guy, when my revenues drop, or hopefully once i beleive they "may" decrease and before they actually do resulting in possible incurance of debt in the first place, I will cut expenses to a level below my anticipated revenues.

    THAT is what is lacking in DC - fiscal discipline and the intellectual honesty to know, understand and PRACTICE BASIC DOUBLE-ENTRY ACCOUNTING. More often than not basic biz intellect / experience is simply lacking in our DC reps.

    Maybe the answer is to get rid of the community organizers and lawyers in DC and replace them with small biz guys!

    My Two Cents Worth.....

    http://dmarkloyd.blogspot.com/

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  8. @D Mark Loyd
    When the 17th amendment passed the U.S slipped farther down the slope from republic toward unstable democracy.

    @ anon I don't think the thesis here is incompatible with the failure mode in "Rise and Decline of Nation" It looks very similar in basic construct.

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  9. Gonzalo,

    Your proof as to how we get into the mess is perfectly logical. But it seems to me that when bankruptcy looms menacingly around the corner, that not balancing the budget must appear more costly than making the sacrifices and balancing the budget, even at the level of the herd.

    At some point, won't enough enough of the herd realize that bankruptcy will cost each of them individually much more than the higher taxes they must pay or lower government services that they must accept?

    We hear a large and growing number of Americans that have realized that it will cost them each more if the country goes bankrupt than it would to end the pointless wars, shut foreign bases, cut back on govt. services, raise taxes and postpone entitlement programs until people reach 67. If enough of the herd comes to this conclusion, how does your
    Democratic Bankruptcy Paradox explain why the death spiral cannot be stopped.

    I read it twice and understand perfectly how you explain the process that gets us to where we are. I don't understand how your paradox explains why its impossible to stop before arriving at the abyss.

    I think that we won't stop before the abyss, but that is conjecture. Can you prove that its true?

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  10. No doubt democracies come up with inconsistent and incoherent answers to questions of policy. However, it is a considerable reach to describe the United States as a democracy. We do not, all 310 million of us, sit around deciding on the Federal, state and municipal budgets. The people who do the deciding are typically involved in power-holding organizations where they are not equal, but are hierarchically organized, often under the leadership of a very few people. Such a social order can easily produce consistent and coherent policies, including fiscal policies. The source of the present catastrophe (of which we are observing the opening stages) must be sought elsewhere.

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  11. To Chris Ferrell,

    Thank you for being so diligent.

    You have a good point—but you're forgetting that the unresolved fiscal incoherence buids up: It is not a steady thing, but adds on with each year that it is unresolved. With each year, there is less incentive for each majority to give in, as years of unresolved fiscal incoherences builds up like plaque in the system.

    Everybody expects to get their way—so they insist on getting their way: So nobody compromises (as happens when fiscal incoherence is resolved).

    35 years of unresolved fiscal incoherence? It's too late for the U.S.

    Does this explain the process?

    I'll be closely monitoring this discussion, and will answer relevant, pertinent questions, like Mr. Ferrell's.

    GL

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  12. http://en.wikipedia.org/wiki/Republic_of_Venice

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  13. This happens not just under democracies. It also happens under tyrannies. Look at the Military Anarchy of Rome following currency devaluation after they year of five emperors.

    Individuals themselves when faced with the realities of economics can hold mutually exclusive ideas to avoid some of the unpleasantness of reality.

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  14. Anonymous at 7:29pm, 1/13/11:

    You've missed the point—I'm specifically talking about democracies, and the fiscal-finance decision-making process among the electorate. I'm not talking about other forms of governance—just democracies.

    Think it over some, then get back to me.

    GL

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  15. The overall argument is interesting and strikes me as sound. However, I must be missing something in the "kitchen" example. First you say:

    "You think we should add yeast and salt in order to make bread—to which I agree. But Mary thinks we should add eggs and sugar, to make a cake—to which I also agree, as that too sounds yummy."

    Then you say:

    " . . . even though no individual would conceivably be in favor of adding yeast and salt as well as eggs and sugar to the flour . . . "

    But wait a minute -- you just said you did "agree" to both -- how is that different from being "in favor of" adding both? Either I'm completely missing something here, or this example needs some more work.

    It seems to me that what is really going on is that many players do simultaneously favor mutually inconsistent policies, in part because many government policies are deliberately engineered to be so complicated that it's impossible to tell which measures are consistent with one's values, and also because measures that one approves of are typically bundled with others that one doesn't approve of, but you don't get to vote on them separately.
    Jack

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  16. You can also look at it this way: every election has an electorate of two parts. There are those who are going to vote for a specific party no matter what, and those who are on the fence. The way to win the nomination in a district GUARANTEED to vote for a specific party (say, San Francisco) is to promise favors to various party string-pullers, who will in turn pass the kickbacks down to their vote banks. The way to win the nomination in a district that is up for grabs is to bribe those who are on the fence. Either way, any other course of action is maladaptive and will result in defeat; either way, he who wins must do so by corrupting the electorate. Just like in ancient Athens, the resources to do so must either come from foreign conquest and tribute, or internal redistribution of wealth. In the first case, there are going to be diminishing returns, since the FUTURE tribute from tributaries will be used to finance today's bribery through various derivative schemes; in the second case, the returns will diminish even faster as the producers leave or turn into consumers.

    Note that this all applies not just to democracy but to any kind of popular government.

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  17. so the founding fathers screwed up by not saying "no debt" in the constitution.

    if they had included that phrase we'd be golden?

    seems to me you could develop a theory that says empires change the rules as needed to ensure more empire so constitutions will always be shreaded. once shreaded debt can be deployed...

    seems like someone once said "power corrupts" so is that what it boils down to?

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  18. Gonzalo is right that MMT people are fools. However, I think MMT is interesting enough that anyone not familiar with it should spend a few minutes learning about it:

    http://pair.offshore.ai/38yearcycle/#chartalism

    None of the MMT people understand hyperinflation. So I have written up hyperinflation in MMT terms:

    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

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  19. A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. ~Unknown

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  20. I think the US Federal government could fall while the states carried on. Sort of like the USSR just vanishing.

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  21. From the Oxford English Dictionary.
    Origin of the word "Democracy"
    late 16th century: from French démocratie, via late Latin from Greek dēmokratia, from dēmos 'the people' + -kratia 'power, rule'.

    My guess is that if the people really had the power, the way our money is spent would be different. The US went from creditor to debtor nation because of the Vietnam War. I'm pretty sure the Majority of the people were against the war. (I assume democracy to mean control of an organization or group by the majority of its members) It was an undemocratic process that kept the war going. The rising cost of the war led foreign central banks to redeem their dollars for gold. This eventually led Nixon to close the gold window. I think if the war ended sooner when the majority was against it the US MAY NOT have gone into debtor status or closed the gold window. So I respectfully disagree with your analysis.

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  22. GL

    This is not only occurring in a fiscal sense.

    The judiciary is also susceptible to "Discursive Dilemma”
    Read Kornhauser and Sager (Kornhauser, 1992; 1986; 1993

    Therefore, not only are we fiscally screwed, but legally we have huge problems.

    Groups in public life cannot attain to speaking with one voice, or act with one mind.

    Lacking is integrity; it is the legislature that lacks the integrity, not the voter.

    The truth is that policy makers in the USA will never achieve the simple challenge of “The many acting as one.

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  23. 1. i thought the budget was balanced for 1 or 2 years in 2000-2001

    2. cost of debt driven my short rates and credit expansion

    3. if people are voted in based on elected promises, then that usually implies giving the people more and more (bribery for power) until the well runs dry.

    4. nice theory, but guido wrote about this like over 2 years ago-

    http://guidoromero.wordpress.com/aims-and-rationale-of-this-blog/

    5. maybe the constitution should have said no un-collateralized debt should be issued ... the impact on default being the confiscation od state resources.

    6. the MMT crowd agreed is mad

    7. this ain't no rocket science, just common sense

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  24. I agree with your article, but disagree with your thesis that ALL democracies will go bankrupt.

    I live in Sweden, and we had a crisis about 1990 and a few years forward. Then all political parties came together and decided that we must have a balanced budget and a fiscal ceiling every year. And then our democracie made tuff haircuts and got the fiscal situation in order. And now we are running a balanced budget, and Swedens fiscal balance is the best in EU besides Luxembourg.

    For example we have had cuts in public pension benefits from 2009 three years in a row, without riots in the streets, although our fiscal balance was much better than in other european nations.

    So, i do not agree with you that ALL democracies will fail and go bankrupt.

    KH Sweden

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  25. 8. i thought the world was at war with "terrorism"

    rgs

    plops

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  26. I agree with Anonymous 8.48 PM right above, and a few others.

    The problem is not democracy, but corrupted democracy!

    And it is not only the politicians who are corrupted, but the whole supposedly democratic system.

    In the US especially, the electoral process has become a big TV show and the winners, Obama is a prime example, are in the same category as those of American Idol.

    It is not the concept, whether it is democracy or republic, or even dictatorship, that lead to bankruptcy, it its corruption.

    Now, it seems to me that humans have not reached the level of wisdom required to successfully implement democracy.

    They can't help acting as adolescents, who want to drive daddy's car without having a licence, and after smoking a joint with some friends.

    Of course, the adventure is doomed to end in disaster.

    Click on my name to visit my blog.

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  27. Gonzalo, outstanding analysis!

    Pinochet saved Chile in 1973, who will save us from the road to disaster?

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  28. Vincent Cate said...

    http://pair.offshore.ai/38yearcycle/#chartalism

    thanks for the link and contents! but as i mentioned here before i do believe there is a limits to money printing and that is the impact on the price of oil.

    rgds

    plops

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  29. GL,
    So if it is inevitable the only question is when. Sooner versus later? I suspect this may drag on for a good bit longer.

    What limits are there to US indebtedness? None? At least so far that is the answer. Treasury issues debt, the Fed buys it. A convenient solution.

    It will take something very dramatic to change this. What will it be? Something that we are not focusing on today, is the answer. Oh, but that I knew.

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  30. Excellent analysis Gonzalo and I fear we have to wait but a year or two for your truth to become self-evident, requiring no further argument of the point ( but PLENTY of finger and gun pointing! )
    Cheers --Martin

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  31. Wouldn't representative democracy (sans checks and balances) only accelerate the trend?

    While I accede the argument is pertaining to democracies, it would seem that it could be extrapolated to an argument against inception of any government. Any form of government must effectively be accepted by the majority through some measure of approval in the form of complicity or submission.

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  32. It's all about global consciousness these days. America's dollar will hold until the global consciousness says, "No, you're not as powerful as we thought you were." Now the problem is that we have convinced the world that The Bomb we have in enormous numbers is all powerful...which it is not.

    When people realize that our bombs aren't really that bad, then we will fall and our control over the world's economy will end.

    And honestly, there is nothing to worry about. Jesus explains that perfectly well.

    But what happens after global consciousness shifts is the question.

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  33. GL, loved your essay, but it can be boiled down even more succinctly:


    Alexander Fraser Tytler (1747–1813)
    "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."

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  34. @Anon (boy is this amusing) I think they are similar but subtly different.

    Olson's point deals with how we develop our preferences in large organizations. GL's point is that even given reasonable individual preferences, the government as a whole will have trouble reflecting them (in the cake/bread example, our protagonist may want both cake and bread, but he will probably prefer one or the other). In fact as I write this I am reminded of Arrow's impossibility theorem.

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  35. This is not a proof. It is a theory. The future is not written yet. Even if you believe that every democracy in the past has gone bankrupt and even if you have a good theory for why that happens, that does not mean that every future democracy will follow the same path.

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  36. Economist and legal scholar David D.Friedman has researched the topic of 'the economics of politics'. Perhaps that ties into this brilliant discussion, as well.

    *author of the Machinery of Freedom, Hidden Order, Price Theory and other books, also blogs at (daviddfriedman.blogspot.com)

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  37. What about Hyman Minsky? His work can explain why the US is going bankrupt.

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  38. I would vote for lower taxes and a balanced budget, but wouldn't vote for more government services in a million years. Am I alone in this thinking? Or does altruism have no place in a universe of total self-interest?

    For some stupid reason I've always thought that the Founding Fathers were under the impression that adults would be somehow involved with making the decisions necessary to govern this country, and not selfish school children unable to put the good of the people in front of their own wants and desires. Because it seems to me that any individuals who could gather together the slightest bit of backbone would crash your very carefully constructed "proof".

    Of course the sad thing is that you are probably right, but still a guy has to hope...

    JTS

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  39. Gonzo,
    I understand what you are saying and this some of the best stuff I have ever read, too bad our leaders are too scared to do anything about it..

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  40. Interesting idea. I'm not sure it really has any useful predictive power.

    First I address the focus on democracies. This seems to be a criticism of democratic systems. I rebut by asking you to consider how often dictatorships have gone bankrupt versus how often democracies have gone bankrupt IRL. I haven't done a survey, but my intuitive sense is that democracies have a much better record in this regard.

    So this argument fails as a specific attack on the democratic system, at least in a practical sense.

    The second problem is the near-unfalsifiability of the statement, "All democracies will go bankrupt" and thus its lack of predictive power. If we consider the fact that the end of a nation usually correlates with bankruptcy, this is a little like saying, "All nations will end." Sure - the heat death of the universe guarantees this, but it doesn't tell us anything useful. I need to know when they will end, how, and how to stop it. The US has been around hundreds of years and remains financially healthier than a much younger Greek democracy. If this trend were as simple as you say there would be a consistent life cycle of democracies. There is not.

    See also cases of coming back from the brink, as Sweden was talked about by a commenter above.

    In real life, the life cycle of a modern democracy is a mystery to all, born of interactions between countless different trends and causes, many of which are not named or recognized by anyone. You've found an interesting trend in the nature of special interest politics, but this really isn't much different from the old idea that small special interest groups will usually win over the mildly-interested majority. It doesn't guarantee the death of democracies, it just creates a systemic tendency towards deficit. Other side effects vary according to hundreds of factors, and may (Greece) or may not (Sweden) include bankruptcy.

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  41. Sadly, this could be avoided with a constitution-bound/enforced budget process that forces sanity (1: only the preceeding year's revenues may be spent, 2: the allocation of revenue by percentage occurs before funding decisions, 3: funding decisions per "pie-slice" may not exceed the percentage allocated) -- by a purely subtractive process. Too bad we don't have such a thing....

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  42. I have a much simpler theory. We are all taught and most assume that democracy is inherently good. But once corruption reaches a critical mass and there is money to be made in the indebtedness of others, it will happen. The corruption hides in the democracy. But the democracy is good. It is now impossible to challenge the corruption without discrediting democracy. On a smaller scale, a corrupt town sherrif and judge are hard to remove because they control the political stage. A rally for honest government is ruled to be "disturbing the peace" and the corrupt sherrif enforces the corrupt ruling. If a king was to take half your money you woulf know who to blame. But when an elected body takes half your money, they can maintain it is "the will of the people". Unfortunately, the constitution does not protect us from corrupt and arbitrary government. We have failed to protect our constitution.

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  43. GL Dude,

    Don't forget to enjoy your life. Friends, family deserve your time and talents more than we do. Nice to hear what you think, but relax cause no amount of ruminating will change the outcome.

    namaste,
    the saint

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  44. GL,
    Bankruptcy is not inevitable. If my prayers are answered and cold fusion is perfected, energy costs plummet, our economy switches on the afterburner, and we dodge a huge bullet.

    I can dream, can't I?

    KS

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  45. Andrew Jackson had wished that the Federal Government did not have the power to borrow. Apparently, he was onto something.

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  46. Gonzalo - Really nice bit of work. I figured out a while ago that there is a basic incompatibility in the areas where capitalism and democracy overlap (think Venn Diagram). I just thought elected officials would always want to give everything to everyone to get re-elected ...which is true ...but not nearly as well defined as your argument. Brilliant stuff ..thanks!

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  47. I commented above about Swedens ordeal in the 1990-ies. I believe that the right wording in your article might be MOST DEMOCRACIES GO BANKRUPT, not ALL.

    There are huge differencies between different democratic countries which are important.

    Take the difference between Greece and Sweden. Greece is a corrupt country, and it WILL fail, and Sweden is one of the least corrupt countries in the world, and it could make it without failure(perhaps).

    There are other differencies between countries that matters. How old is the country, has it a long history of stable governement, traditions an so on.

    If i would name countries less likely to fail, it would be Finland and the scandinavian countries.

    KH Sweden

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  48. Hi GL. As always, I enjoyed the post and learned a lot.

    Democracy is a broad term. I would agree that the type of democracy the U.S. has become fits your proof because we ignore our own constitution. Your proof can be applied to all current democracies (without knowing the details of all current democracies I'm only assuming).

    However, It is possible to envision a constitutional republic that would avoid this paradox as JimDesu 12:16 pointed out. I would add that it would require a gold standard or some other non-debt-based form of currency. Your premise below can be avoided

    "When it finally reaches the point where credit is so cheap, and the cost of resolving the annual fiscal incoherence—politically, emotionally, practically—is higher than the cost of taking on debt, then a subtle crisis point will arise: The democratic regime will “postpone” the resolution of its fiscal incoherence, and instead take on debt."

    Politically, emotionally, practically wouldn't matter if the Constitution explicitly prevented borrowing by law as JimDesu suggests. War funding would be handled by pulling from an emergency fund, diverting funds from other areas of the government, temporarily raising taxes, or issuing debt with assets, such as government land, as collateral.

    But for today, from a practical standpoint, you're right. This is why all democracies go bankrupt.

    Also, I don't fully accept the discursive dilemma as you presented it; but that's a separate discussion.

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  49. To all who say things like "the US isn't a democracy!", "it may happen in your democracy, but not mine!": that is besides the point. In any system where more than one person wields power this tenet will hold true. The only exception would be a group of decision makers that will, ad perpetuum, all have exactly the same goals -- which is rather unrealistic.

    To the poster mentioning Sweden: yes they did a wonderful job. But all they did was postpone the inevitable. Swedish politicians do not live in a vacuum. Current events dictate how people vote. Are you 100% certain that the next government will act the same way? And the one after that? And after that one?

    To prove that Gonzalo's statement is wrong based on the example of Sweden, you would have to be willing to assert that for all eternity, the majority of Swedish politicians will act the same way. In a country having problems with immigration, demographic upheavals and being connected to the EU (though not actually part of the eurozone), asserting an inalterable mindset is unrealistic. Just like it is for any other country.

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  50. I am reading your article and completely agree. Funny enough, I was explaining something similar to a friend over Christmas, yet not as well, I must admit. So, you have explained very clearly the point I was trying to male.

    I want to add one thing. As the paradox exacerbates itself in the form of growing deficits, you will have educated people that will construct theories justifying the possibility of persevering in the path of fiscal unsustainability. That will remove even further the wish... desire... will to resolve the fiscal incoherence and thereby expanding the volume of debt.

    Georges B.

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  51. What about Switzerland? Have they ever defaulted or gone bankrupt in the last 700 years? This seems like one of the best designed governments.
    http://pair.offshore.ai/38yearcycle/#limitedgov

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  52. About Minsky and the Austrians: They have observed that debt leads to bankruptcy, just as ancients observed that the sun rose and set every day—but they have not explained the why and how of their observation. They may have been shrewd, and many people may agree with them because what they say conforms to experience—but they did not prove anything, nor explained why it is always the case.

    I have. This post is a proof, not an observation.

    About how other forms of government go bankrupt or not: I am writing about representative democracies, not other forms of government.

    About a constitutional amendement to balance the budget: The issue is the cost comparison between resolving the fiscal incoherence, and the cost (or availability) of debt. If the cost of acquiring debt is substantially cheaper that the cost (political, social, practical, personal) of resolving the fiscal incoherence plus the cost of breaking the balanced budget amendment, then debt will be taken on, even if that means breaking the balanced-budget amendment.

    Furthermore: When a democracy goes bankrupt, it does not necessarily end. I am not arguing that. I am saying that in a democracy, bankruptcy always happens eventually. Whether the democracy survives after bankruptcy is up to the citizens of that country.

    GL

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  53. Additionally: There are two famous quotes about democracy and money:

    Tytler's quote (mentioned twice above): "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."

    Marx's quote: "Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation."

    I must insist: These are shrewd observations—they are not proofs.

    Imagine I said: "The sun rises from the east and sets in the west." That's an accurate observation—but it doesn't prove or explain anything.

    But if I were to say, "The sun appears to rise and set, but what's happening is, the earth is spinning on its axis, and so because of our relatively static position on the earth's surface, the sun relative to us appears to rise and set." This would be an explanation that can be tested, analyzed, proven or disproven.

    A shrewd observation or guess cannot.

    That's why this post I've written matters.

    GL

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  54. Hi Gonzalo
    Why making things more complicated than necessary? The inevitableness of bankruptcies of nations is no specific characteristic of democracies but of the creation of money out of thin air - independently of who creates out of thin air. In most of today's world this is be done by central and private banks (fractional banking). And as today's money is ALWAYS (and not only through QE measures) produced as debt (see a dollar note, there it is written on) its repayment has to be made plus interests. And here is the point: The interests on all debt cannot be repaid as they were not created in this creation out of thin air. Those can only be repaid through additional debt, again created out of thin air. You see the spiral? And as the curve of interests and compound interests is exponential (compare the debt curve of all states) we will always see a collapse in the end. So, no characteristic of form of governments but a logical result of the creation of money in form of debt out of thin air. Explaining how it works in a democratic environment abstracts from the core point. By the way: Do you evaluate the US as a real democratic form of government?

    Holger

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  55. "All democratic regimes eventually reach a state of fiscal incoherence."

    More generally, all regimes eventually go broke owing to fiscal incoherence. History does not appear to support a thesis that this fate is unique to democracies.

    History does support a thesis that state power to debase the value of money eventually and inevitably proceeds to bankruptcy. If the value of money is enduring, whatever fiscal incoherence may arise as a temptation to deciders isn't ultimately executable.

    It is therefore only a failure of the regime in power to preserve value of money which enables the operation of decisions leading to bankruptcy.

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  56. Gonzalo, I like your argument.

    Your conclusion, that fiscal incoherence increases with time and never decreases, has an interesting thermodynamic flavor.

    But please address the counterexample of Sweden, and the way it handled its economic crisis in the 1990s with an increase of fiscal responsibility (coherence).

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  57. So you solved the question of why deficits happen: Power-hungry/work-shy politicians, wanting to be everything to everybody, go in hock to buy votes then kick their fiscally irresponsible actions down the road.

    Whew! That was hard.

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  58. This country is a republic in theory only. We are a democracy in reality. Nobody, except for maybe Ron Paul, in our Federal Governement even thinks about whether or not the legislation they are proposing or voting on is constitutional, i.e. lawful. And that's what a republic is: rule by law. Once you start passing unconstitutional legislation, you have become a democracy. It has become so bad, that I have discouraged my children from believing that the constitution is significant in any way at all. Could you imagine if they grew up believing that the constitution was actually in effect in the U.S.? They might decide to carry a pistol while taking a trip to the grocery store, mistakenly thinking that the 2nd amendment still applies to them. Then I would feel responsible and guilty that they were charged with a felony for illegal posession of a firearm. Yep, the constitution is just a piece of paper from history, nothing more.

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  59. It seems that Jack (comments) is the only one that pointed out that the proof makes no sense. -There can only be one majority.

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  60. GL
    U talk of a dictater but it could also be a king.
    A recent visit to Tonga helped me understand better the value of a royal family.
    Emphasis on the word family. Lot of powerful forces operate in familys and as we all know they are not perfect (just like govermnents).But for a family to succeed u have to bring things like love and respect along. They can set the tone and the example for a society to thrive. I sure dont feel loved by my PrimeMinister. Reviled maybe.
    Inheritance is another aspect of it. and we all stand on the shoulders of those who came before. and we should revel in this and make use of this experience and not apologise for it.
    In oz we still have a queen albeit a figurehead.
    But perhaps the US can apologise to the good queen and explain that the war of independance was all a big mistake. Haha.

    asterik

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  61. I too like your 'thermodynamic' approach to the dilemma but would suggest we need a grand unifying theory to explain, not just democratic economic disintegration, but ALL human economic
    systems. National Entropy as it were.

    One could, e.g., posit that regional, ethnic and class centripetal forces develop overtime and that deficit spending is necessary to overcome these forces in order to hold the state together. Alternatively, some have suggested that, overtime, the bureaucratic imperative or increasing system complexity cause the public sector to consume an ever greater amount of national resources until it is no longer economically viable for the nation to exist.

    Anyway too complex for me to figure out but the empirical evidence does suggest ALL nations or empires eventually go bankrupt not just democratic ones.

    Scott

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  62. In a word, amateurish.

    I could not tell from your article what exactly your understanding of MMT is, nor what your economic orientation is, but fortunately, your comment links provided these answers. On the later, you obviously prefer a commodity-pegged currency, and your preference of commodities appears to be gold. I find gold bugs to be amusing. There is an assumption necessary among them that their small numbers have some special insight into economics that the hundreds of thousands of formally-trained economists who are not gold bugs have just totally missed. The hubris of this is astonishing. The reason gold was dropped as a peg was not, as you say, because anyone was bankrupt. No, the reason gold was dropped was because it didn't work. Under gold or any other commodity peg, the underlying economy will eventually start acting more like that commodity and less like the economy it is. If this continues, the underlying economy will collapse, NOT from a lack of productive capacity, but rather because that productive capacity is being severely constrained by a mining problem.

    As for your knowledge of MMT, if you paid to obtain it, you should ask for a refund. Your explanation is littered with misstatements, exaggerations, and omissions. I would detail them out for you, except that I'm certain you would not be inclined to listen to a "weenie". You can be consoled however by the fact that many of yours are COMMON misstatements, exaggerations, and omissions.

    And then there is your hyperinflation. Hyperinflation is more than just inflation with big numbers. In order for inflation to be hyperinflation, it must be both persistent AND exogenously-driven. If it is instead endogenously-driven, it is merely inflation, and a new equilibrium will eventually be achieved without outside intervention. In your choice of cases, the Weimar Republic, chartalism would have had little traction, as Germany's problem was that its debt was not denominated in its own currency (i.e., it was exogenous), a situation that chartalism (now MMT) stresses as extremely dangerous. The Weimer failure thus was not caused by MMT. It would have occurred regardless of the brand of economics chosen, and even a gold peg would not have mattered.

    More recently, Zimbabwe, Brazil (and other Latin), and Iceland failed for the same reason, and MMT was not being used by any of them. In the recent cases of Greece and Ireland (and possibly Portugal, Spain, and others), the failures are due to their choice of an exogenous currency (the Euro) over a sovereign fiat, and are failures that were anticipated by many non-MMT economists (and ALL MMT economists) upon the Euro's inception. The Euro's design, while allowing for garden-variety recessions, precluded any adequate response to a severe financial shock such as we have just experienced. These failures (and those pending) could have been EASILY avoided using MMT. It's not rocket science, but one does in fact have to KNOW it to employ it, and not merely to have been exposed to cherry-picked misrepresentations of it.

    Otherwise, I enjoyed your article. You clearly put a lot of effort into it, and that is always to be admired.

    Benedict@Large
    http://www.facebook.com/benedict.at.large

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  63. Godzalo is very wordy.

    To summarize:

    Democracies always go bankrupt because eventually enough of its citizens learn to vote for too many somethings from nothings.

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  64. GL

    Great presentation.

    Two problems in America today:

    1) Absolute power corrupts absolutely. The collective government in the United States feels itself in a position of absolute authority and creates rules unilaterally, based on their own clouded interpretations.

    2) The people have grown apathetic. A sure sign of this is the spoken use of 'Whatever'. Far too many people have no desire to examine the policy making of the government allowing others to think for them. They have abdicated their responsibilities.

    hh

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  65. I skipped the rest of the article after the first few paragraphs because it's obvious that democracy tends towards impossible socialism, goes into debt, and never votes to pay down the debt by cutting services, so it eventually collapses. Once you give people the right to vote, they will eventually realize that they can vote themselves money. After that it's all inevitability, except to the extent that somebody with real leadership comes along and pressures people into making sound decisions. But then it's hardly democracy at all, and even then it's only a temporary fix.

    Benjamin Franklin once said the "when the people find they can vote themselves money, that will herald the end of the republic."

    AB

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  66. GL,

    Thank you. You explain things clearly. I'd never heard of discursive dilemma. I am enlightened.

    Humankind commonly seeks fame, power and fortune. These are strong motivations (and often exercised selfishly). They also interact to support each other.

    Alexis de Tocqueville said:
    "America is great because America is good, and if America ever ceases to be good, America will cease to be great." He said this in the context of observing American religion (specifically Christianity). He called America's faith the "secret of her genius and power".

    http://www.usiap.org/Legacy/Quotes/OtherQuotes.html

    http://en.wikipedia.org/wiki/Alexis_de_Tocqueville#Democracy_in_America

    There is nothing wrong about being wealthy, but the more of it one has, the greater the temptation to allow it to corrupt. Jesus said, the love of money is the root of all evil. (This is often misquoted as, money is the root of all evil.) We all have a choice to make about our wealth: will we love it..., or love people?

    -Dave

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  67. Consequences! Any government begins with the people. Their character determines the outcome every time! We are supposed to be a nation "of the people, by the people and for the people". Not a single comment indicates it is our fault. Take some time to learn about the foundations of America. A Republic is one form of a democracy. The Constituion limits what the government can do. The rule of law includes the safe guards necessary to protect against the vulnerabilities of a democracy.

    It all comes down to the people and their involvement in government. The character, including moral and virtues such as hard work, makes the difference. Educate yourselves, then get off your dead butts, take some responsibility. It is up to you! Failure doesn't have to happen. So stop whining and do something about it! Oh, by the way, socialism/communism/monarchies/etc also always fail! Get over it!

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  68. I'm not sure you aren't overthinking the problem of why democracies always go bankrupt but I enjoy the discussion.

    I think it can be summed up by the word "greed". Something for nothing is part of the human condition. Until Spock (or Ras) take over the planet, the pattern will continue.

    On a side note, haven't we already been bankrupt twice in the past 100 years? In the early 30's, going off the gold standard domestically and in 1971 going off it internationally. Both of those events were a type of default. The only difference between then and now is that now we are failing at currency debasement (so far).

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  69. SPECTRE of DeflationJanuary 14, 2011 at 5:52 PM

    GL, great read once again that actually makes you think outside the box. The question I have is your use of the term "majority" for multiple groups within a finite society while ignoring the minority which are always present. A Conservative and liberal will not overlap on nearly every issue. You have majority/minority for a reason. It's because as you say, there are ideals of what govt. should or shouldn't be about from various groups. At no time are their ideals overlapping. What if there is a majority that strongly believes something such as, "we shouldn't increase the national debt level", but the ruling elite simply ignore the will of said majority just like they are doing at this very moment? 71% are against raising the national debt level to 23% that are for it. They, the elite, can give a rat's ass concerning what either group wants. A strong majority was also against the TARP Bailout, but they gave the public the bird while telling us we really are number one.

    Once a Democracy reaches a stage where more than 50% receive govt. assistance of one type or another and can and do vote, you are done. I will also mention that 47% pay no federal income tax at all, and you have the makings of an implosion of biblical proportions.

    It's my understanding that no Empire has ever lasted more than 40 years once it goes 100% fiat with their currency. If we take Nixon's move in 1971 and we add 40 years to that date, we come up with 2011. I know you know history, so is this a valid observation?

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  70. As with Game Theory, we will always want more, for less. I see two horns to our problem. One is that we are hedonistic, and Saints at the same time. We want to do what is good, but we don't want to be held responsible for it's doing. I would argue the counter point on Central Banks. I feel they are necessary to smooth out the waves caused by errors in any Market Economy.

    The issue is, our system is too much like a Pyramid scheme. The present system only works if, there are always more, and more players joining. It doesn't matter how many join, or what their exact contributions are. Because, they all park assets, that are leveraged. Through Taxes, etc. This ensures a constantly increasing trickle of funds to pay for Government.

    I have been involved in research from varying disciplines. Often, the results of this research were, there is no answer. I know, there will always be an answer. We just haven't seen it yet. In the Short, to Mid term, the answers will likely be, a combination of fixes will have to occur. Like the waves caused by errors in the economy, the fixes will address these waves. As two are fixed, a third is born! So, this will have to be an on going enterprise.

    Think of Reverse Keynesian Economics. As the Economy's pendulum swings one way, we introduce patches to the economy through Government policy. As it returns to a more normal position, those returns reach a Sun Set. They end, and opposite policies are instituted to keep the economy from over heating. Both scenarios are based upon the truth that, There will always be Errors in the Economy. They are usually caused by errors in Society!

    KP

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  71. >They really do claim that. And no, they are not high.

    Are you sure?

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  72. I notice if someone posts a counterexample to 'all democracies must go bankrupt', as the Swede did, it's simply dismissed -- well, they _will_ go bankrupt at some point in the future.... With that sort of logic one can prove anything.

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  73. Too much content on this site--it's diluting the quality. This post is evidence of jumping the shark.

    Your 3 page post could have been concentrated into a U.S. citizen's demands over last 100 years: "give me lower taxes and more services, and I don't care if you borrow to the hilt to make that happen."

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  74. Your conclusion is valid based on your arguments, but your theory is irrelevant since it is based on a false assumption - namely that democracies actually exist. Man has never succeeded in creating a true democracy. It is an illusion built on a dream. And it will never happen. In order for a democracy to succeed, the majority of the electorate would actually have to be intelligent enough to know what is best for society as a whole and then vote accordingly (and not just in their own self interest). - something that will just never happen. The majority of people on this planet don't even know what's best for them. What we call a democracy today is nothing more than an exercise in choosing our own dictator. Once elected, they are accountable to noone, and use their time in office to grab as much power and money for themselves as they can while pretending to represent us. In a true democracy , for example, the people would insist on a balanced budget ammendment which would make it illegal to run a deficit. Any government that couldn't balance the budget would be immediately dissolved for incompetence and required to pay for the cost of a new election out of their own pockets.The Paradox would not be allowed to exist.

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  75. Yup! We're screwed because the majority of people in America are either stupid or greedy or both. Can't argue with that!

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  76. A sweeping statement like this title is catchy, but not true. Not *all* democracies go bankrupt. Because not *all* people who live in democracy are stupid to the point of self-destruction.

    While the USA as a country has a vast positive net worth, the federal government is fiscally on the path of insolvency. It got this way by irresponsible spending on its own, and by absorbing the irresponsible spending and debt of the private sector.

    Why? Because USA is all about money. It is so much about money that it has spent and borrowed its way to de facto default. Because it has forgotten how to create wealth, and just create money. There is only one industry specialized in doing that - create money instead of wealth. Yes, the Wall Street racket that a whole generation of people worships. Well, worship the money gods and you get what you deserve.

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  77. Fascinating discussion and brilliantly presented thesis which is one of the best I have seen for explaining WHY the U.S. as a nation (pretending to be a democracy) is technically bankrupt, but as yet undeclared but inevitable.

    Chris Ferrell asks: "I don't understand how your paradox explains why its impossible to stop before arriving at the abyss" a question I can answer.

    Technically it isn't; if our leaders had the moral fiber to admit the abject FAILURE of our present fiat monetary system that is nothing more than a glorified Ponzi scheme and instituted necessary reforms that put an end to the present abuses and actually refrained from spending what they do not have, and have not earned.

    Several posters, Holger, Neil and Anonymous, in particular touched on issues that are pertinent to the discussion, but in defence of the original thesis put forth of why default is inevitable I would make the following points.
    1) Humans are by nature selfish and greedy and very susceptible to any blandishments that appear to offer something for nothing.

    2) Collectively we have not yet learned that "no government can give us anything they have not first taken away from someone else" or that there is "no free lunch" SOMEBODY ends up paying and it is US collectively!

    3) Because of #1, socialism in all its many disguises has always failed.

    4) Capitalism is at heart a dictatorship because power corrupts and absolute power corrupts absolutely. A MONOPOLY of currency creation is simply a disguised form of dictatorship in that you can not function in a capitalist society UNLESS you go into DEBT and pay tribute to the money creators, so as the Bible so aptly says; "the borrower is servant to the lender."

    5) Legal tender laws FORCE you to use what is in effect "counterfeit money" it is virtually impossible NOT to participate in this corrupted system.

    6) People universally have been programmed to believe that the ultimate goal is to accumulate enough money that you do not have to work, you can let your money work for you in the form of interest. We have been sold this "bill of goods" in spite of the provable fact that interest in the long term is mathematically impossible.

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  78. Do to length I had to cut short my earlier submission and no doubt some readers will wonder how I came to the conclusion that long term payment of interest is impossible, so let me present the proof of my assertion.

    Graham Towers former Governor of the Bank of Canada (our equivalent of the U.S. Federal Reserve) testified before Parliament in 1939 that "every bank loan is a new creation of money, and when it is paid back it ceases to exist" and when you think that through logically the conclusions become obvious.

    The fractional reserve banking system creates money out of thin air, but ONLY the principal, NOT the interest, therefore it necessarily follows that the only way that interest can be paid perpetually is if there is a continuous stream of new borrowing of DEBT MONEY into existence as old loans are cancelled out. Not only is it necessary to maintain sufficient specie in circulation to accommodate the needs of an ever expanding economy, but also enough to service the accumulating DEBT PYRAMID!

    The interest payments demanded, since they are not created at the time of the loan means that the INTEREST accumulates as DEBT that can only be serviced by an exponential increase in NEW LOANS and the lower interest rates go, the LESS incentive there is to save, which would be prudent! The easy route is simply to roll debt over into bigger loans and that insidious habit has now infected ordinary citizens as well as government, which becomes the borrower of last resort as we are now witnessing.

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  79. Brilliant post. I have a few responses.

    1. The example explaining the discursive dilemma seemed to confuse several commenters. No surprise there, really; most aspects of rationality are deeply counter-intuitive. However an expansion on this part would be a useful addition to this article - perhaps giving a more concrete example of this occurring in a simplified democracy.

    2. A second way to bolster the impact of your article would be to include graphs of other nations; this would demonstrate a consistent pattern. I have no idea how to find this information, and I'd be curious to see what Canada's history looks like.

    3. Democracy vs Dictatorship: while your Democratic Bankruptcy Paradox probably wouldn't apply to a Communist government (too many differences in the accounting), I think it can be extended to Capitalistic monarchies and dictatorships: because "Rule by One Man" doesn't actually exist historically - a King has his Counsellors, a Tyrant has his Bureaucrats. The proof might need slight modification, but I think it could be extended to these forms of government as well.

    For the next few points, I'd like to rebut some of the arguments I've seen here (if you don't mind).

    4. Enforce a gold standard/Constitutional amendment against debt: The DBP describes the forces which are inevitably at work in a Democracy, and when there's a market incentive the market will respond. Drugs are readily available, despite being illegal; debt will make itself available, despite preventative measures taken against it. These might be good ideas, and help extend the solvency of the Democracy, but they're not ultimate solutions. The structure limiting government can always be altered - temporarily the first time, due to an emergency - then again because of a crisis - and then finally because of inconvenience.

    Which leads up to the next point:

    5. Sweden is solvent/there is corruption in America/Heinlein had the right idea with Starship Troopers: Moral behaviour in a Democracy is not an absolute that can be written on stone tablets. Just look at the housing crisis - even if you knew the game was rigged, it still made sense to buy a house a $0 down. Doing otherwise is shooting your nose to spite your face - it wouldn't have prevented the collapse, it just would have hurt you financially.

    Moral behaviour can't even be defined over time, let alone enforced; changing circumstances will change what's moral. This won't prevent it, either.

    6. This is just a theory/doesn't prove/etc: I see a misunderstanding of science and rationality in these circumstances. 'The sun rises every morning' is an observation. 'Newtonian mechanics!' is an explanation of that observation, which makes predictions such as 'the sun will also rise tomorrow'. If you're looking for an ontological proof that the sun will rise tomorrow (or that DBP is true) you're shit outta luck - there ain't no such animal.

    I suppose that Jesus could be reborn, and be elected President for Eternity, and preside over a democracy that never goes in debt. Or aliens could blow up the sun tonight. But those probabilities are pretty low.

    To argue against this theory, you need to argue against the discursive dilemma. There is mathematical proof behind this concept, and its application to Democratic Budgets is direct. That credit will become more available over time is demonstrated by the very principle by which credit works. Until you disprove DD, or growing availability of credit, you cannot disprove DBP

    7. Last bit, I promise - in combing Idea Space I could only come up with one possible solution: the Singulatarian AI. If we could replace the federal reserve, and the supreme court, with some sort of hyper-intelligent immortal entity, whose only goal is financial stability, then democracy might have a chance.

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  80. This comment has been removed by the author.

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  81. One more time to complete my thoughts:

    If it were possible for "running printing presses" to create wealth then the simple solution would be for the governments to send every citizen say a million dollars, (not that the Zimbabwean variety would buy you much) and temporarily this could unleash a buying frenzy that would stimulate the economy artificially. Think "quantitive easing" but the main reason that is NOT a solution is that people with a million in their bank account would no longer have an incentive to work, and since without production there can be no consumption, it can not produce desired results.

    This brings me to my ultimate conclusion, we need to recognize that true WEALTH comes from the earth in some form. We either dig various minerals and metals out of the ground and convert them to useful items or we grow plants of myriad kinds with different useful properties.

    These in turn are not of our creation, they require "rain in due season" (another biblical term) sunshine for warmth, NONE of which we control or produce, they are all a GIFT from a benevolent Creator, or according to some, a fortuitous circumstance of evolution, and all we are required to do is be good stewards of our inheritance.

    What it boils down to then is that each of us has a contribution to make to society by employing our individual skills in the most productive way, given our talents and proclivities; to create something that is useful to society, being satisfied with a fair exchange for our labour in relation to that of a fellow human being with a different skill set.

    Unless we are prepared to go back to barter, what we need is an HONEST monetary system that provides a "measurement and STORE of VALUE" that a fiat DEBT INSTRUMENT can by no stretch of the imagination ever provide. Any paper "investment" involves counter party risk, while on the contrary, genuine gold and silver coins have a world recognized intrinsic value that has maintained purchasing power for 5000 years.

    Once again the Bible comes to the rescue with a requirement that we have "honest weights and measures" and a definition (on which the U.S. constitution was based), that a SPECIFIC weight and purity of gold and silver are used as money for fair exchange of goods based on man hours and capital employed in their production.

    Either we are satisfied with a "fair exchange" with our neighbour or we are part of the problem by wanting to obtain more from the system than we have actually earned by our contribution, and so we have come full circle.
    It all comes back to human nature, selfishness and greed, (see Pt#1). The Ponzi scheme of fractional reserve banking simply providing the opportunity for an ELITE to enslave the majority through DEBT that mathematically can never be paid, it is the ultimate PONZI scheme that has now engulfed the world and since there are no more players left to bring into this corrupt system of financing, the end game is near.

    Slavery is wrong, monopolies are wrong, pyramid schemes are wrong, yet we the people do not seem to have the intestinal fortitude to search out and elect representatives with the good sense, moral principles and insight to pass laws that would put an end to these accumulated abuses.

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  82. A quick response to Thinker70:

    Your first three points can briefly be summed up as "People are greedy and ignorant - this is why Socialism fails." And you're correct, but you're using emotionally pejorative words. The same problem would occur in a society composed of Supergenius Paladins.

    The crux of the issue (and of the premise of the discursive dilemma) is that we're ends-seeking agents working on limited information.

    A Paladin in a Socialist society will still be 'greedy' by eating most of the time, choosing to starve only when strong arguments are provided. Granted, they're a Supergenius, with a much better understanding of politics than your present day citizen - but they still don't have *perfect* knowledge. By the time you convince them to starve to death for the greater good, it's already too late for their sacrifice to avert the crisis.

    Positing greed an ignorance implies that education and ethics are the solution. They're not.

    As Robin Hanson so frequently quips "Coordination is HARD."

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  83. If it were possible for a government "running printing presses" to create wealth then the simple solution would be for the governments to send every citizen say a million dollars, (not that the Zimbabwean variety would buy you much) and temporarily this could unleash a buying frenzy that would stimulate the economy artificially.

    Think "quantitive easing" but the main reason that is NOT a solution is that people with a million in their bank account would no longer have an incentive to work, and since without production there can be no consumption, it can not produce the desired results.

    The simple truth is that a system of "social credit" could be implemented in the absence of legal tender laws to serve the people by financing on a debt free basis any needed public infrastructure, roads, schools, airports sewers, water mains, electric generation and distribution facilities etc.

    There is no impelling need for us to pay for it TWICE (through interest)
    the private bankers do not need to be cut in for profits equal to or even exceeding the raw material and labour costs to provide any needed infrastructure that serves the best interests of society.

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  84. GL,

    Sovereigns do not go bankrupt; it has never happened in the history of man to my knowledge. They always have the power to payoff all debt with fiat currency. This gives them a fresh start but more times than not with a different government.

    The United States is a Constitutional Republic which is not as you know a Democracy as we are Rule - by - Law and not Rule - by - Man. Many events would need to change if we were to migrate towards a true Democracy with one man one vote rules.

    Is America in a financial mess - you bet - can we get out of it - you bet. Congress has the power to restore our financial health. Do they have the courage to do what is necessary? I do not know.

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  85. I also feel like you are over-complicating a simple point, and I don't agree that Austrian economists don't explain what brings about the bankruptcy and crisis. Hoppe for example has written a lot about how one can logically conclude that democracy can only end in complete failure. Actually, I think his emphasis on the violation of property rights ties in with your emphasis on incoherence.

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  86. GL your paradox makes sense. What people fail to see is the ones who are willing to work want less Government and a balanced budget. The ones unwilling to work want more government and don't care about the budget because they are not going to pay for it. The US sad to say has reached the point where the unwilling to work are the majority. In my community 60% of the the people can work but instead are on disability.

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  87. Each year voters elect those who claim to be able to lower taxes and increase benefits
    The tipping point comes when the majority of voters are recipients of benefits, not tax-payers.
    Taxes then rise, taxpayers leave or go bust, and there is no-one left in the community except those on food stamps

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  88. Dude, I haven't gone through your essay thoroughly... (im fcking tripping with that Seela song and have been looping it non stop since yesterday) however straight off the bat it makes pretty much sense... but being a fellow chilean, how does it play along in country like ours, where we are so conscious we are a poor country resource-wise (to say the least) and the whole political spectrum is so accordingly patriotic and responsible and the 'superavit estructural' is our badge of honour? Add to that low corruption and a pretty easy to govern, proud population that for the past 20 years is still happy enough with just not being under a dictatorship. I mean, I don't think there is any margin for a chilean government to get even a little wreckless with our economy and it might be the only place were saving up and being stingy can win you votes.

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  89. @Chris Ferrell: The answer to your question is because 47% of the US population already doesn't pay any income tax, so they feel they have no skin in the game, and since as good Americans they are lazy and selfish they are OK with you getting the money from somewhere, just don't ruin my free ride...that's the social services piece. Corporate welfare has pretty much the same mentality as well..."get your money, just not from ME."

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  90. I don't entirely see how your two "you, me, and Mary" examples prove the point.

    First:

    "But as I listen to Mary, I come to the conclusion that r might well be true. I don’t believe that p and r are both true—because they are incompatible. I simply believe that r might be the case."

    "Therefore, a majority of this group believes r is true."

    Not so. In this case, the result is a stalemate. One of the three people thinks p is more likely than r, one thinks r is more likely than p, and the last of the three thinks both are equally likely AND equally unlikely.

    Second:

    "Let me make the example more concrete: I said earlier that you, me and Mary were standing around in the kitchen? Suppose, then, that we have a cup of flour in a bowl on the kitchen table: You think we should add yeast and salt in order to make bread—to which I agree. But Mary thinks we should add eggs and sugar, to make a cake—to which I also agree, as that too sounds yummy."

    The problem here has nothing to do with the group dynamic (the democracy). It's all down to one individual, the one who agrees with both of the others. If that individual ("I" in your example) were alone, his choice to vote for making bread AND cake would have the same effect on the outcome (a mess).

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  91. Dear Gentle Readers & Kind Fans:

    I very unhappy situation has arisen—some losers are trying to smear both me and my arguments.

    Please go here to read this post at The Hourly G:

    “How to Deal With Liars? Expose Them"

    http://thehourlyg.blogspot.com/2011/01/how-to-deal-with-liars-expose-them.html

    It's a very unpleasant situation—but you cannot let liars slide.

    GL

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  92. @GL: "Thus, as a group, we have an incoherent outcome:..."

    This should not be an unexpected outcome, since the definitions of "needs" and "resources" are individual, not absolute. I believe that my "needs" are more important than yours or Mary's, but I believe my resources are not so plentiful as yours and Mary's (some people get all the breaks!). So it is the responsibility of our "representative democracy" to make it good. Unfortunately it doesn't do its job very well (bribery, no doubt). It gives me some of the stuff I "deserve" plus some other stuff I don't even want (like an interest in a bunch of F22 Raptors) and doesn't charge me completely for it, but it gives you and Mary stuff too (that you don't "deserve") and, on top of that, doesn't charge you two with even enough to pay for your stuff, let alone the stuff I've got that I need help paying for!

    This is the same fundamental problem with Marx's "from each according to their ability and to each according to their need". Who is going to determine "need" and "ability"? If you let me do it, it's a good bet that I'll have a Ferrari and plenty of time to drive it. It's pretty hard -- impossible I would suggest -- to find that truly neutral entity that could do that.

    Good theoretical proof though!

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  93. From my engineering background I see unrestrained sovereign debt as an stability problem.
    Fiat money, fractional reserve banking and central banks form an unstable system.
    A gold standard, prohibition of fractional reserve banking and no central bank would make the financial system stable.
    Then only REAL savings, not counterfeit, would provide capital.
    The amount of REAL savings sets the interest rate.
    Prohibition of fractional reserve banking would avoid bank counterfeiting.
    Democracies then would not necessarily go bankrupt.

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  94. A democracy comprised of 33% of the population that can't decide between 2 choices and would rather support both is the problem with 'democracy' today. Give me 2 options (incompatible at that - like borrowing more money to save the economy) and I want em both!

    I guess we'll all get what we deserve...

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  95. Hello GL. Your construct of the problem much appreciated. And I enjoyed most of the responses. Fun. My spin is... there is a Biblical connection should anybody be tolerant enough to consider it. That is found in Jeremiah 25 v 15-30... which is about Jeremiah handing the cup of reeling (financial collapse)to the nations of the earth... in the order of each of their "reeling". We the USA would be included in the nations of the North. The point of this is... our current condition is God's creation putting us all together in this predicament. Could be it is all by design. EB

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  96. I'm looking at your curve of the US government's debt as a percent of GDP, versus time. I note that it is nowhere near a monotonically increasing function. How do you explain the periods when the government paid down its debt, given that the Discursive Dilemma mechanism has always been present in our political decision making process? And why couldn't we pull back toward solvency as we have several times previously?

    I happen to think that this time it is different, and that the government will not regain control of its finances, because this time the Fed's monetization of the debt is giving the politicians an easier way to (temporarily) roll over the debt. In other words it requires both political capital allocation and government controlled fiat money banking to enable debt to rise to an irreversibly unpayable level. The sovereign's creditors do not have veto power over its borrowing because their voice in the credit markets is drowned out by the voice of the central bank. Without this negative feedback signal the system becomes unstable.

    Thanks for your very enlightening blog.

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  97. It cracks me up that you believe you have thought of something new and revolutionary ....

    Do you seriously believe that no economist has ever thought of this before you ?

    http://en.wikipedia.org/wiki/Voting_paradox

    Infact, there is a whole area of economics, called public choice theory, which you seem to be unfamiliar with. Look it up.

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  98. "This is the most important essay I have ever written—this is a major proof."

    Amazing -- Gonzalo apparently thinks the way to prove something is to put lots of words like inevitable in italics!

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  99. Couple of comments.

    1) This is one situation in which the 'block' style government we have in Australia avoids to a certain extent the pitfalls outlined, as in effect there is only one decision block. As we only have two 'people' in our parliament, only one of which is in control at any one time, the situation is to some extent avoided. Not entirely, as these discussions go on within each party, but it does limit the diversity of views that have majority support.

    2) Democracy as currently practiced is also unstable when those who do are not contributing financially to the funding of government get a say in the allocation of funds, or rather, get to vote for those who allocate funds. Suffrage should be universally available on condition of contribution, not universal.

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  100. You say you are a student of history...

    Please point to a democracy that has failed catastrophically.

    Next, name a democracy that failed catastrophically due to bankrupt state finances.

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  101. GL,
    You pose an interesting take on the topic. In the classic example of the discursive dilemma (p^r=R) where both p and r must be true for R to be true, I think it's important to define R, our outcome. If I understand your contention correctly, we can express the formula approximately as p(lower taxes) ^ r(more government) = R (sovereign default). If I'm correct in my assumption as to your hypothesis, then we need to add a third variable s, for "central bank shenanigans". The problem is that this third variable would have to be sufficiently obscured to enough people for them to believe that p^r is not necessarily = R. Mathematically, I'm not sure how you would express that. This is almost an episode of "discursive dilemma meets asymmetric information".

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  102. Another verbose load of economic BS from GL. Let's debunk it, shall we...

    1) "The United States is going bankrupt—and economics cannot explain why"? Proper economists like Mises and Hayek explained it decades ago - not just about the USA but about any economy that reaches this state. Do not tar all economists with the same brush.

    2) "That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning." Well, guess what. 99% of natural science is based on observations. The nature is not mathematics. Nature just is. The laws of thermodyniamics have never been proven - they are just observations, based on the fact that nobody has every observed them not holding. In fact, your so-called "proof" is based on nothing but observations, too.

    3) Your so-called "discursive dilemma" is based on the assumptions that the people involved in the group decision are incapable of basic logic. If you believe in "p" but, after listening to Mary, you start believing in "r", and if you also know that "p" and "r" are incompatible, then the moment Mary convinces you, you should stop believing in "p" - if you are capable of basic knowledge. I guess, Gonzalo has flunked his mathematics/logic exams, that's why he went into history, finance, ecnomics, filmmaking and other inexact matters. :-)

    4) Unless, of course, you simply want to illustrate that the majority of the people are morons incapable of logic reasoning and wanting a free lunch. While I might agree with you on this, I must point out that (a) it is not a proof but just yet another observation and (b) you are by far not the first person who has observed it. I could quote myself, but I'll go with much brighter minds instead:

    "A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to lose fiscal policy, (which is) always followed by a dictatorship." --Alexander Tyler, 1787.

    "When the people find they can vote themselves money, that will herald the end of the republic." --Benjamin Franklin

    5) As we saw, the claim that "all democracies go bankrupt" is based on nothing more than an observation - an observation of human nature expressing itself in the known democracies so far. This is by no means a proof that all democracies must go bankrupt, forever. Consider, for instance, a democracy that in its Constitution forbids its government to borrow except during times of war. A gold standard fulfilled such a role and the US Constitution *did* state that all money should be gold and silver coin. Arguably, the US democracy failed when the bankers managed to convince Congress to do away with sound money. Perhaps the Constitution should have been more explicit regarding government borrowing.

    6) It is not true that the USA has never had a ballanced budget since the 70s - apparently, you've flunked your history exams, too. Do not confuse positive public debt with a lack of ballanced budget (i.e., lack of deficit). Clinton had a ballanced budget and even a surplus for a while. (This is in no way an endorcement of Democrat politics or even of Clinton's regime. It is simply a statement of fact.)

    In conclusion, my advice, Gonzalo, is again to stick with matters you have some clue about. Economics is certainly not one of them - and, apparently, mathematics, logic and history aren't, either.

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  103. Another verbose load of economic BS from GL. Let's debunk it, shall we...

    1) "The United States is going bankrupt—and economics cannot explain why"? Proper economists like von Mises and Hayek explained it decades ago - not just about the USA but about any economy that reaches this state. Do not tar all economists with the same brush.

    2) "That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning." Well, guess what. 99% of natural science is based on observations. The nature is not mathematics. Nature just is. The laws of thermodynamics have never been proven - they are just observations, based on the fact that nobody has every observed them not holding. In fact, your so-called "proof" is based on nothing but observations, too.

    3) Your so-called "discursive dilemma" is based on the assumptions that the people involved in the group decision are incapable of basic logic. If you believe in "p" but, after listening to Mary, you start believing in "r", and if you also know that "p" and "r" are incompatible, then the moment Mary convinces you, you should stop believing in "p" - if you are capable of basic knowledge. I guess, Gonzalo has flunked his mathematics/logic exams, that's why he went into history, finance, economics, film-making and other inexact matters. :-)

    4) Unless, of course, you simply want to illustrate that the majority of the people are morons incapable of logic reasoning and wanting a free lunch. While I might agree with you on this, I must point out that (a) it is not a proof but just yet another observation and (b) you are by far not the first person who has observed it. I could quote myself, but I'll go with much brighter minds instead:

    "A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to lose fiscal policy, (which is) always followed by a dictatorship." --Alexander Tyler, 1787.

    "When the people find they can vote themselves money, that will herald the end of the republic." --Benjamin Franklin

    5) As we saw, the claim that "all democracies go bankrupt" is based on nothing more than an observation - an observation of human nature expressing itself in the known democracies so far. This is by no means a proof that all democracies must go bankrupt, forever. Consider, for instance, a democracy that in its Constitution forbids its government to borrow except during times of war. A gold standard fulfilled such a role and the US Constitution *did* state that all money should be gold and silver coin. Arguably, the US democracy failed when the bankers managed to convince Congress to do away with sound money. Perhaps the Constitution should have been more explicit regarding government borrowing.

    6) It is not true that the USA has never had a balanced budget since the 70s - apparently, you've flunked your history exams, too. Do not confuse positive public debt with a lack of balanced budget (i.e., lack of deficit). Clinton had a balanced budget and even a surplus for a while. (This is in no way an endorsement of Democrat politics or even of Clinton's regime. It is simply a statement of fact.)

    In conclusion, my advice, Gonzalo, is again to stick with matters you have some clue about. Economics is certainly not one of them - and, apparently, mathematics, logic and history aren't, either.

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  104. Another verbose load of economic BS from GL. Let's debunk it, shall we...

    1) "The United States is going bankrupt—and economics cannot explain why"? Proper economists like von Mises and Hayek explained it decades ago - not just about the USA but about any economy that reaches this state. Do not tar all economists with the same brush.

    2) "That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning." Well, guess what. 99% of natural science is based on observations. The nature is not mathematics. Nature just is. The laws of thermodynamics have never been proven - they are just observations, based on the fact that nobody has every observed them not holding. In fact, your so-called "proof" is based on nothing but observations, too.

    3) Your so-called "discursive dilemma" is based on the assumptions that the people involved in the group decision are incapable of basic logic. If you believe in "p" but, after listening to Mary, you start believing in "r", and if you also know that "p" and "r" are incompatible, then the moment Mary convinces you, you should stop believing in "p" - if you are capable of basic knowledge. I guess, Gonzalo has flunked his mathematics/logic exams, that's why he went into history, finance, economics, film-making and other inexact matters. :-)

    4) Unless, of course, you simply want to illustrate that the majority of the people are morons incapable of logic reasoning and wanting a free lunch. While I might agree with you on this, I must point out that (a) it is not a proof but just yet another observation and (b) you are by far not the first person who has observed it. I could quote myself, but I'll go with much brighter minds instead:

    "A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to lose fiscal policy, (which is) always followed by a dictatorship." --Alexander Tyler, 1787.

    "When the people find they can vote themselves money, that will herald the end of the republic." --Benjamin Franklin

    5) As we saw, the claim that "all democracies go bankrupt" is based on nothing more than an observation - an observation of human nature expressing itself in the known democracies so far. This is by no means a proof that all democracies must go bankrupt, forever. Consider, for instance, a democracy that in its Constitution forbids its government to borrow except during times of war. A gold standard fulfilled such a role and the US Constitution *did* state that all money should be gold and silver coin. Arguably, the US democracy failed when the bankers managed to convince Congress to do away with sound money. Perhaps the Constitution should have been more explicit regarding government borrowing.

    6) It is not true that the USA has never had a balanced budget since the 70s - apparently, you've flunked your history exams, too. Do not confuse positive public debt with a lack of balanced budget (i.e., lack of deficit). Clinton had a balanced budget and even a surplus for a while.

    In conclusion, my advice, Gonzalo, is again to stick with matters you have some clue about. Economics is certainly not one of them - and, apparently, mathematics, logic and history aren't, either.

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  105. A very interesting post indeed.

    I remember reading the other day an article, I think it was in the Economist, mentioning that a one party regime ensures that the authority in charge will move towards a more sustainable way of managing things.

    The reason is that as this monopolistic party believes he will have to deal in the future with possible problems that would be the consequences that his management could create today, he therefore will be more cautious today about the future consequences of what he decides today.

    There are probably many other problems linked to one party rule, but that would also explain why communist ruled China seem to end up with such large excedents instead of deficits, and such huge reserves of dollars and euros.

    Looking for examples, the other countries with large foreign reserves are to my knowledge Japan, which is democratic, but with cultural characteristics that have led to de facto one party rule, countries with huge natural resources which therefore can spend without ending up in deficit (either autocratic such as Saudi Arabia, or democratic such as Norway, maybe also Russia, or Brazil the great agricultural giant), or very small countries that have specialised in special activities such as banking (Luxemburg, Liechtenstein,... Iceland tried but it did not work there...)

    Obviously authoritarian regimes can also end up with big deficits and inflation, if they are mismanaged, for example Argentina in the days of the junta. Authoritian regimes risk also to end up into gross mismanagement because no opposition to the supremo's rule is allowed, see North Korea or Zimbabwe..., democracies do not face this risk so much until they go bankrupt...

    I can see only one example of a significant country with reasonably managed public finances (although there are deficits there too, but reasonably small) and also fully democratic, and with no natural resources of any magnitude, which is Germany (and maybe a few nordic a germanic minded countries in Europe). Maybe it is because of memories of the Weimar republic and how a failed democracy lead to a very nasty regime... Cultural elements such as the prevailing consensus culture probably help too. (see "Mitbestimmung" in German firms)

    So, a very interesting post, leading to this strange conclusion that if we would want to reduce global imbalances, either the Americans or the Europeans should move towards a political system more like China, or the other way round, China should abolish one party rule and have the same deficits as every other major country.

    I guess I would prefer the western world to choose some kind of constitutional rule to avoid deficits on a significant scale (say above 3% of GDP), stick with it (unlike the Europeans which have put the rule in the Maastricht treaty and then forgot about it) rather than have the Chinese communist party take over. But if we do not move quickly to more sanity in the western world, the other solution will come; witness the other day how the Chinese finance minister received a state welcome in Spain as though he was some kind of living god...

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  106. Gonzalo, your article is perhaps mildly interesting but didn't Bastiat beat you to your 'original' ideas, by about 160 years, with his book 'The Law'? (as condensed into his quote "Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.")

    Also, to diss the Austrian school for its 'a posteriori' methods, when the whole point of Austrian school is that it is an 'a priori' science, in a sea of 'a posteriori' monetarist nonsense, perhaps reveals your lack of reading of the Austrian school.

    A quick google reveals this article for your entertainment:

    => http://mises.org/daily/2025

    You might also want to try reading 'Man, Economy, and State, with Power and Market' by Murray Rothbard, particularly the 'Power and Market' section. I'm afraid you'll see your 'original' ideas popping up again there, too.

    If you've already read it, try reading it again, only this time without missing out most of the words.

    You could also try 'Democracy: The God That Failed', by Hans Hoppe. Once again, lots of your 'original' ideas appear, though Hoppe does acknowledge many of them to his mentor Rothbard (who in turn, acknowledges them to Bastiat, through Henry Hazlitt.)

    It's a real shame you felt the need to diss the Austrian school. Many of your constituency were in the Austrian school. A lot of these people are now going to drop you.

    What a terrible shame.

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  107. Gonzalo:

    You articulated your theory and it is valid, however, only to the point of isolating it, or better said restricting it to the confines of national borders.

    And "national borders", is exactly where the conflict lies...

    Just remember one thing.... An American oligarch has more in common with a Chinese oligarch than with an American construction worker, doctor, computer programer, et al.... The transition to global parity is not an easy one, however, it is inevitable.....

    "...... This transition will be achieved by whatever means are necessary, recruiting the receptive, persuading the skeptic, coercing the ignorant and eliminating the recalcitrant, or we can leave it to the wisdom of our natural environment to eliminate our entire species, both the so called good and the so called evil, in the same fashion that we eliminate viruses that endanger our species....."

    It is programed into our genes to transform the social order for the sake of our survival..... And it shall be so.....

    My best regards,

    Econolicious

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  108. GL,

    Excellent work. A real contribution and you should be proud.

    This process is only "inevitable" because a large portion of the electorate and their representatives are too corrupt and greedy to understand that wealth redistribution is immoral and will always start this call for "services" and "higher taxes". The "lower taxes" crowd is not averse to paying taxes; just ridiculous fucking taxes that are shifted to corrupt purposes at the top and bottom of the economy (rich and poor subsidies). I hate to oversimplify, but if the fucking communists and liberals would stop with the wealth redistribution and pandering to the obese class, we could get a handle on this problem. Now of course, its too late so we will have to have a big collapse and die off to fix it.

    Onward into the night.

    Will

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  109. Firstly, I would like to compliment you on a well presented argument and secondly, I'd like to point out a few important facts to present you with a larger frame of reference for this subject.
    A.) The United States is not a democracy. The founders clearly constructed a Republic when they founded this nation for a democracy has majority rule, i.e. two wolves and a sheep voting on what's for dinner, whereas a republic protects the rights of the sheep to not be eaten regardless of the outcome of the vote for tonight's menu. The wolves have to order pizza.
    B.) The Founder's also saw fit to protect the nation from incurring debt by writing several safeguards into the constitution. For instance, the congress had the responsibility of creating and regulating the currency, and it was also to only use gold and silver for that currency. This would prevent the creation of any debt, since all money in circulation would be backed by real wealth. Congress maintained a debt free money system and a balanced budget for over a hundred years this way.
    C.) The actual reason for the climbing debt in this nation, and all other collapsed empires before it, is the institution of a privately owned central bank which loans all of a nations money to it AT INTEREST. The government borrows money from the federal reserve and promises to pay interest on the loan; however, the government gets all of it's money from the FED including the money to pay the interest on the previous loans. Since the formation of the Fed we have been borrowing money just to repay the interest on our very first loan, and we've been incurring more debt in the form of interest with every dollar printed.
    It is that one simple and often overlooked fact that is bankrupting our nation along with almost every other nation in the world. The Fed is owned by the same people as the World Bank and the IMF, they loan almost every country in the world their currencies, they print money at will, it is backed by nothing of real value and we just gave them trillions more dollars just because they threatened us into giving it to them.
    That is why empires collapse, the banks planned it and cleaned house on the way up and down. Record profits on Wall Street this year even though the rest of us are broke...

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  110. This theory sounds a lot like the theory of Austrian economist Hans-Hermann Hoppe described in his book "Democracy, The God that Failed".

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  111. I just have to laugh at Lira's reassurances that he is correct because he is, well, correct, because his arguments are philosophically sound.

    I'm struggling to think of someone who goes through a lot of trouble and then proclaims there's no point in trusting him and that his arguments are not philosophically sound.

    Well, anyway.
    Here's a blog spot that actually references the hard work of Lira to come to his conclusions.
    http://www.economicpolicyjournal.com/2011/01/tragedy-of-gonzalo-lira.html

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  112. GL-
    the founding fathers solved for this. They decreed that money be hard assets (only). we cannot blame them. We can only blame their greedy offspring who listened to those who told them how great our nation could be if only we had a central bank to handle the day to day money mechanics.

    And then, the greedy went of to debate new and ingenious ways to spend those notes, that they truly failed to realize were debt instruments, and not money.

    The Constitution is not the problem, it is the solution. There was basically amenments nullifying the constitution. Remember - and I am not religious, but, we should all remember only one thing in Christianity, and only one if we can - Sermon on the Mount (Wolves in Sheep cloth).

    We always hear what we want to hear, not what we need to hear.

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  113. GL,

    I am new to your group and will attempt to offer another way.

    first is that no proof can be based on fatal flaws - your theory that the AMERICAN "DEMOCRACY" will go bankrupt contains a fatal flaw as the premise that we are a democracy is wrong. "We are a Constitutional Republic".

    Being a Constitutional Republic we do not operate as you presentation alludes; Mary and group are not germane to our system of Government. Example to prove you have another fatal flaw: If the House of reps. passes a law the Senate can kill it, if the House and the Senate passes a law the Executive can kill it, if all three pass a law the Courts can kill it, if all four pass a law the States can kill it, if all pass a law WE THE PEOPLE can kill it for we own the Constitution.

    So, as you can see the Republic form of Constitutional protection is designed to protect the smallest minority from the large majority, in fact it is designed to give the power to the sovereign individual.

    So, your proof can not stand it proved your hypothesis is invalid. This is why we must have full and open peer review of all works before we declare absolutes.

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  114. The u.s. is an oligarchy.

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  115. Anonymous,

    I have read your writing and you know better than throw up a flawed opinion - it has failed. As the old saw goes - that dog will not hunt.

    Logic is necessary and it demands a proof - you have none.

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  116. Prince Harry Or Hewitt's Boy?January 15, 2011 at 10:22 PM

    I like it.It's very simple and logical.It's so simple that it might even give Americans pause for thought.Now get it on television and the Yankees will have to start to admit that they destroyed their rule book and indeed became a Democracy.Americans aren't stupid,just ignorant so maybe you can wake them up a little.

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  117. I would just like to point out, if my high school civics teacher was right, the US is really a representative democracy, which is what a republic is. So, based on the transitive property of congruence, the US is a form of democracy, because:
    Republic=representative democracy=form of democracy
    Therefore, republic=form of democracy
    Also, it may be proven that a republic is a form of democracy because
    1. A (unspecified form of a) democracy may be defined as any form of government body where the common people vote/decide in some aspect of the government
    2. In a republic, the common people vote for government representatives
    Therefore, a republic is a form of a democracy

    Democracies (of any type) don't inherently become bankrupt, they instead eventually find it easier to, or necessary to issue debt, which eventually leads to bankruptcy, for reasons that have been previously described (many times). Also, when debt is issued, it becomes necessary to issue more debt to support that debt. This can be described in the following formula:
    d={[(y1i+y2i)-p]+(b-f)}-RX
    Where d=debt required, y1=debt from previous year, y2=debt from current year, i=interest rate, p=paid off debt b=current year's budge, f=amount of budget that is financed through debt, R=revenue, X=inflation rate
    *f is subtracted from b because f is included in y2
    *R=r-e where r=gross revenue and e=expenditures, minus debt expenditures, (i.e. works projects, entitlements, etc.)
    Note: If d<d-RX, there is no net debt gain
    This is an oversimplified formula that doesn't factor in various factors (or includes them in other factors for the sake of brevity)
    Please point out/correct any mistakes in this formula. It would be very much appreciated.

    But frankly, it doesn't matter what form of democracy it is.
    The representatives who decide fiscal policy have even more of an incentive to follow the path that leads to the bankruptcy, because making decisions (i.e. more spending and less taxes) that lead to bankruptcy is what keeps them in power, because that is what the majority of their constituents want. Once the majority of Americans wake up and realize that, it won't matter, because undoing such embedded systems as our debt-financing system is virtually impossible in any realistic socio-political climate like ours, and once we try, it will imply that US debt is not the safest asset in the world, which will tell investors of all types to get the hell out of US debt, which opens up a whole new can of worms.

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  118. Gl,

    Your high school teacher - surly you jest:

    You position is fatally flawed again. I think you are attempting sir to defend the defenselessness: Which is more in line with the theories of Cervantes.

    Purpose and scope

    John Adams defined a constitutional republic as "a government of laws, and not of men."[2] Constitutional republics are a deliberate attempt to diminish the perceived threat of majoritarianism, thereby protecting dissenting individuals and minority groups from the "tyranny of the majority" by placing checks on the power of the majority of the population.[3] The power of the majority of the people is checked by limiting that power to electing representatives who are required to legislate with limits of overarching constitutional law which a simple majority cannot modify.

    Also, the power of government officials is checked by allowing no single individual to hold executive, legislative and judicial powers. Instead these powers are separated into distinct branches that serve as a check and balance on each other. A constitutional republic is designed so that "no person or group [can] rise to absolute power."[4]

    The notion of the constitutional republic originates with Aristotle's Politics and his notion of a possible fifth type of government called the polity. He contrasts the polity of republican government with democracy and oligarchy in book 3, chapter 6 of Politics. Polity, in the general descriptive sense, can refer to the political organizational system that is being used by a particular group, be it a tribe, a city-state, an empire, a corporation, etc. In Aristotle's second, more specific sense of the word, he envisioned a polity to be a combination of what he thought were the best characteristics of oligarchy (rule by the wealthy) and democracy (rule by the poor). The polity government would be ruled by the many in the best interests of the country.

    Oligarchies favored the wealthy members of society and featured elected leadership positions.

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  119. Some of GL's previous arguments have been "right on". However, this is a bit too involved to make a lot of sense. At any rate, it is making many viewers think and that's good.

    As for "original" ideas, I have read Dr Hoppe's book on Democracy which is a logical presentation in a very similar vein (although a several hundred page book takes a bit of effort to comprehend). Currently, I am reading Dr. Kohr's book, "Breakdown of Nations". Kohr's argument is that problems arise not from deficiencies of democracy nor from evil or greedy leadership, but basically from the bulk (density) of a county's population. Again, it's difficult to summarize a 200 page book in a few words, but Kohr's observations seem to me to be totally correct.

    Incidentally, in economics and politics, "forever" can be placed in the contents of an observer's life span. As Keynes said, "in the long run, we're all dead". So "ultimately" has little meaning to me.

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  120. Bud,

    Would it not be better to use books of the time period before and during the creation of the Constitution to evaluate how and why this form might succeed where all others before have failed?

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  121. I think that by arguing over government structure here, we're missing the point. The important thing is this:
    In order for elected officials to keep themselves in power, they need to appeal to their voters. The most effective way to do this is to:
    A. Lower taxes
    and/or
    B. Increase spending
    The combination of lowered taxes and increased spending results in a deficit, which is made up for through debt. Debt is the easiest and most politically safe way to make up for the deficit. Once debt is established, it is easier to pay for it with more debt than to raise taxes and/or cut spending (both politically risky moves) to pay for the debt. This results in the good ol' debt spiral, which is, to be blunt, bad. And at this point, it doesn't matter whether it's a constitutional republic or a deconstitutionalized unofficial oligarchy, because something needs to change before the country defaults.
    This is more or less what Gonzalo tried to explain in his post, minus the philosophicalization and attempts at logical reason. Representatives stay in power by issuing debt or debt becomes easier than balancing the budget, debt compounds itself through debt cycle, country goes bankrupt. Simple.

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  122. Young Sir,

    It is important to be accurate in you presentation as it will control the result of your statements.

    What you said is not what GL said and is not relevant to the post. he was trying to PROVE his hypothesis and he failed for three or more fatal flaws in fact.

    Now attempting to alter the Hypothesis is not a valid argument.

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  123. Sorry, GL, you have created a logical fallacy which takes the form of “All so-and-so’s do such-and-such.” Since you are not God and are not all seeing and all knowing, then your knowledge and understanding is limited. Specific examples do not provide proof, because you may not know what principles are at work. At best, you may say, "All the examples I’ve seen show that democracies become bankrupt.”

    I’ll agree that the US Federal Reserve Bank is becoming bankrupt and that the absence of an honest medium of exchange will vastly harm the US economy. It is the people realizing that the dollar is already worthless which will produce the disruption. This realization is what sets the economy aright.

    A deflation or depression is a correction to monetary inflation, just like a hangover results from the body purging toxins created from drinking alcohol. Fearing, and thus attempting to avoid, a deflation is like "taking a bit of the hair of the dog." It means that you remain drunk on money creation. The FED is constantly afraid that the suckers it is defrauding will wake up to put them out of business.

    The evil doer here is fractional reserve banking. It is the bankers who have been slowly corrupting our country for a hundred years. They have turned America’s means of communication, the Universities and the newspapers, into their handmaidens. I agree that we no longer have a Republic. The game was over when the government no longer pretended to obey the law, but that happened in the fifties and sixties. We are getting a hangover now because we are starting to wake up.

    The Founders knew the evils of dishonest banking. The US Constitution expressly prohibits the states from making anything legal tender but Gold and Silver. The Tenth amendment says that the Federal government can only do what it is expressly delegated. What is that? It is that Congress can coin money which at the time meant out of precious metals. Congress can regulate the value of those coins by determining its weight and purity just like it could declare standard weights and measures. Congress could also borrow money, but there was no need to establish a private central bank like the FED.

    It is not yet clear whether America will be an exception to your rule that bankrupt democracies become tyrannies. Unruly TEA party members might rebel and take back the country from the elites.

    The reason that the FED is in trouble is that QE2 is not working out as expected. The FED expected interest rates to remain low despite the FED diluting the money supply. Interest rates rose because people refused to play along with the FED. If the dollar is backed by the "full faith and credit of the US government,” what happens when people lose their faith? If the masses lose faith, we get a hyperinflation. If the insiders and traders do that, then we get what we are experiencing now.

    If the FED rocks the boat, too much, then increasing numbers of people will become disaffected. Soon enough, people will recognize that prices are rising in the grocery stores faster than reported. What causes the dollar to collapse is that people take evasive action. We are already bankrupt. We just need to realize it.

    This process was well known from the South Seas bubble in 1711; Economists need not explain the process of inflating the money supply. All they need do was point and say “look." The problem is that the Bankers have been using propaganda to cloud the minds of the public. They employ false Keynesian economists to justify money creation. They are simply no longer believed.

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  124. Democracy is merely another name for "tyranny of the majority" and is but a stepping stone towards eventual dictatorship. Of course the whole thing will crash and burn in time (any thinking fool can see that), but on the upside, at least we can abandon the nonsense that our votes actually make a difference as we transition from Brave New World to 1984.

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  125. “Democracies will always go Bankrupt”. A Proof by Gonzalo Lira the Philosopher. According to Gonzalo, this is also a very important Revelation.

    Let us assume Gonzalo has actually discovered a Profound Truth here. What are we supposed to do with this knowledge? Well, if we don’t want to go BK, then we shouldn’t strive for Democracy, right? Does Gonzalo offer us a good alternative form of Goobermint that will NOT go BK? Is the subtext here that we should strive for a Dictatorship to insure our future Solvency? Does Gonzalo Prove that Dictatorships don’t also always go BK? Perhaps ALL forms of Goobermint are destined for Bankruptcy? That would be the more General Case of his “proof”, and I would buy that one with any monetary system that had compounding interest at its core. That is a straight mathematical proof which just depends on the interest function to create more debt in the system than there is real economic growth, which it eventually must in any resource constrained environment.

    An alternative choice if Gonzalo’s Proof is valid is to choose Democracy with the foreknowledge it will go BK. Then you do a Reset when the inevitable BK comes, discharge the debt and call it Jubilee. That has been a historical choice in some periods, though the BK Goobermints were not Democracies in that period of history.

    Still another choice is to understand the limitations of a monetary system, and choose not to use one at all. If you don’t run a monetary system to govern the economics of your community, you can’t ever go BK. Your resources might run thin of course, but if you aren’t assigning monetary values and using money as a medium for exchange, its simply impossible to go BK in the monetary sense of the word.

    On a practical level, this rather convoluted “proof” is pretty meaningless, even if it is true. All Goobermints have problems remaining solvent when running a monetary system, that has been true for all of history. Some last a bit longer than others, but they all eventually crash when presented with diminishing resources for the Civilization they operate under.

    From the point of view of Goobermint, you are much more likely to go BK not based on the type of Goobermint, but whether that Goobermint is in control of its own monetary system or not. If somebody ELSE is in charge of the monetary system you are using, you are a whole lot more likely to go BK sooner than if you control it yourself. If a small group of people are in charge of the Money everybody else uses, who is going to go BK first, the Goobermints beholden to that system or the people who run it? You do not have to be a Rocket Scientist OR a self-styled Philosopher to answer that question.

    Part 2 follows…RE

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  126. Hi,DEMOCRACYis based on liberty,equality and fraternity.That cannot go bancrupt.
    Savage capitalism can put a democratic SYSTEM down.Dictatorship can put DEMOCRACY down.
    Socialism is what you are referring too;that,also,can put a democratic system down.

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  127. Hi,I made a mistake.I should have said "an economic system in a democratic regime can go down"not democracy.

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  128. GL,

    If you are right, and I believe you are, what America needs most now is not the Tea Party movement, but a Cincinnatus, the Roman Dictator who resigned absolute power at the end of a crisis, or another George Washington, who voluntarily gave up power, not once, but twice. Huge shoes to fill...

    Our political system is broken, and we stand at the brink of the abyss. If we are lucky, a Cincinnatus or Washington stands somewhere in the wings. If not, I fear what you predict will inevitably occur.

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  129. Hi, Anonymous at 12:18 AM. If you read the Federalist Papers, you find that the founders were very afraid of a democracy, because rule by the mob always turns into a tyranny.

    I know it seems trivial to some people for Conservatives to point out that the US had a Republic. But, the reason that we lasted so long as a nation was, partly, due to the restraints placed on the government by the constitution.

    The current administration does not care about restrains. It does not care about the rule of law, nor quibbles about constitutionality. It just wants us to swallow our medicine and do what our betters tell us to do. It doesn’t want a fuss, so it will be underhanded and sneaky in achieving its goals. It will use any crisis to pursue its ends and the Progressives have engineered a dandy of a crisis. Our wealth has been stolen. We merely have not recognized it yet. The Financial meltdown merely makes the truth evident.

    James Madison only gave our republic a life expectancy of a century. It would take that long for the grafters, the looters and the power seekers to subvert our republic. That happened in the 1920s when the bureaucracy greatly expanded its powers.

    We have been waiting, this last 90 years, for the corruption to sufficiently decay our bulwarks. We are, likely, in the last days of the old Republic Our currency crisis is merely the most visible sign of that fate. It is the moral decay which will sink us, because most of us do not understand what the welfare state has robbed from us. Moral Men and Women will fight and die to keep from being turned into slaves. Many of us, during the currency collapse, will demand a lord and master to put us into chains.

    We can no longer go back to what we once were, so what do we become when the crisis hits? Do we roll over and allow the Progressive elite to destroy the last remnants of the republic? Or do we reclaim what was great and good about America? Far more than a mere economic debacle lies ahead. It will be as great a test of character as the First American Revolution was.

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  130. If you want to understand real economics (not that Bankster economics they teach at Harvard, Yale, Princeton, and Columbia) you should look into the Austrian School of Economics. (http://mises.org/) That's real economics, and the only economic school of thought that predicted the current U.S. debacle years before it happened. (And real economics is not, contrary to what Thomas Carlyle quipped, "the dismal science.")

    Studying history without understanding real economics only gives you half the picture.

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  131. GL
    Unfortunately, your specious argument against democracy will be taken by some as a justification for tyranny.

    ANY government that excessively diverts available resources to wasteful endeavors will go “bankrupt”.
    Typical waste has been for warfare, and for elite luxuries, including monuments to their aggrandizement.
    That has proven true for the Roman empire, European kings, and conquerors like Napoleon.

    SOME governments will remain temporarily solvent by plundering others. Thus the British empire helped remained solvent by plundering India.

    SOME governments will remain temporarily solvent by plundering natural resources, such as timber or gold. But when the trees are cut down, or the mines become exhausted or unavailable, they will no longer be able to finance their purchases. Thus Spain acquired power for a while, the USA was able to exploit a virgin continent, Western nations used African slaves, and the Saudis have petroleum.

    SOME governments will organize investments in productive and beneficial activities. As long as the environment is not degraded, and the benefits not diverted wastefully, insolvency may be avoided. If however, the investments are not maintained, the economy may falter, and insolvency may result.
    For example: Professional engineers warn US roads, rails, electrical grid, sewage systems, dams, levees, water pipelines, and bridges have not been maintained, repaired, or replaced as needed. Trillions of dollars are needed just to bring the systems up to minimal standards of safety and usage. Trillions and trillions more to upgrade to what‘s needed for a first-rate economy. As many realize, resources have instead been diverted to enrich a financial cartel and to militarism.

    For a proper democracy to exist, the populace must have access to information for decision-making.
    A secretive government, a secretive military, and secretive global corporation do not provide for democracy. As others have pointed out, nothing close to democracy exists.

    I would rather trust to a democratic rule than to rule by an insider elite. There is no basis to believe the interests of an elite will be the same as that of the general population. Better to trust the general population to determine its own destiny.

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  132. Hi,UrbanBand,
    I am a French Canadian from Montreal.We are facing the same problem but for a different reason.Here,north of the border,it is because of too much socialism:costs are out of control.
    For you guys,I think you got a major problem with the FED.A private own business control your money?To me, that is nonsense.They will not let go easily...ask the Kennedy family.
    Yes,I agree with you...very diffucults years ahead of us,specialy for our childrens.
    P.S.excuse my spelling mistake...

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  133. What is often pointed to as a failure of “democracy” is instead usually a diversion of resources which benefits a ruling elite; an elite who misinform and misleadingly portray it to the public as a benefit or savings for all.

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  134. " . . . and that man's name is 'Dictator'."

    Damn . . .

    Awesome . . .

    Everybody else is fucked up but Gonzalo saves the day with the 'Unified Theory of Why Democracy Sucks" (aka 'The Founders Knew Whereof They Spoke' . . .).

    I love it . . .


    Trav.

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  135. Sure,

    Democratic States or Republics are Parasitic Ego Masses, in which people are held hostage in their Labor (direct taxes), in their Homes (property taxes, which even renters pay, indirectly, to pay for communized Public State Schools, even if they don't participate in them), in their Purchases (most have sales/indirect tax on non-foods, some even on grocery items), and in their Persons (as conscripted killers for the State, against poor peasants overseas).

    Much can be deduced or inferred from my above assertion alone.

    But it's nice to see G.L. make a case (proof) exposing the eventual fiscal flaws that Democratic States will all exhibit.

    I don't think there is a solution. And I don't think it's even a good idea to try to avoid a State Collapse. Not at all.

    It will be better for people everywhere when the political bands of hostile political fictions are dissolved, so-to-speak. And I hope they are dissolved without bloodshed, much like the Soviet Union Collapse. Of course, the State there, just rose up, so-to-speak, in a leaner form.

    No, only Statist Idolators, Political Elites, State Employees, and Tax-Subsidized Corporation personnel will mourn a US Collapse.

    Of course, the initial chaos that undoubtedly follows such a collapse is not proof that the State was ever a stabilizing in Society. Not at all. That would be just more proof that the State make any People weaker, morally, by making them mindlessly dependent and demanding on using the agency of the State and a Secret Ballot to take property from others or exercise power over others.

    Peace be with you all,
    C. Livingstone

    PS: It's kind of like Christ told us, how the State is a Shakedown and a Scam:

    "And he said unto them, The kings of the Gentiles EXERCISE lordship over them; and they that exercise authority upon them are CALLED benefactors. But it shall not be so among you..." Luke 22:25 & 26

    You see, God never ordained the State. The State ordains itself by the use of FORCE. And it's a fraudulent CLAIM to suggest the State has any legitimate or beneficial purpose.

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  136. GL,

    Your argument seems sound. It also strikes me as similar to one I have been making lately, (without the same rigor). My argument has to do with the Supreme Court's poor logic in granting corporations the same rights as individuals.

    The Court's argument is that a corporation is a collection of individuals. Since those individuals each has a right to free speech, the group they belong to, by extension, deserves the same rights.

    One thing this thinking fails to account for is something similar to your discursive dilemma that exists within a corporation. Being a collection of people, one would expect the corporation to act in the interest of those people. But that's not what often happens.

    Instead a corporation must act in its own interests which are often completely different from the interests of a majority of the employees or even the shareholders.

    Here lies a large pool of Lack of Rigor, I'm afraid. Neglecting the obvious overlap, is a corporation a collection of employees or a collection of owners, or is it both? I would only say here that since stock owners are mostly powerless in our corporate structures, that corporations are more collections of workers than collections of owners. I'll just leave it there and go on.

    As an example of the corporation being required to do something at odds with its employee's, it's country's, and even its own best interests we can look at the out-sourcing movement begun during the Y2K fix.

    Companies who failed to jump on the outsourcing bandwagon at that time were left with escalating labor costs and an inability to compete. No doubt some of the more stubborn ones suffered and a few even went away. All the large corporations yielded to the inevitable and cut away large swaths of their own employee bodies within the US. But like hydras (and unlike true citizens), they re-constituted themselves with new employee growth overseas. This was obviously not in the best interests of the USA. And it certainly was not in the best interests of the large number of laid-off US citizens who used to make up the bodies of these corporations.

    But a case can be made that, long term, outsourcing is not even in the best interests of most of our corporations. Because as a result of the unending hemorrhaging of American jobs, many American companies are now facing the imminent implosion of their primary market--the USA.

    I would guess that most corporate leaders are aware of this even as it is happening. But because of the structure of our society they are powerless to do anything about it. Because, to paraphrase one of our great bankers, as long as the music keeps playing, they have to keep dancing.

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  137. It is interesting that Mr. Lira posts a hypothesis for review of his PROOF and no one debates the facts at hand and the validity of the PROOF.

    Instead most all express their political opinions without any proof of their stated position. Keep to the subject of the post or visit a political blog - this was a submission for peer review of a PROOF.

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  138. Peer review of what, precisely? Is this an academic journal? I think not. While the proof presented was compelling in my opinion - and, I assume, in the opinions of most everyone who read the proof - I have no standing to provide any sort of 'peer review' as a layman - nor do the majority of those reading the post. It's food for thought and a damned fine read, in my opinion - nothing more. I think that Mr. Lira would present something more polished for a true peer review. This is a blog, for God's sake - not holy writ.

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  139. Trav,,A blog it might be but GL submitted a work to the public at large for review and claimed a proof for which he has not proved. Even in the casual form it begs the question of what is the purpose and why the claim of PROOF if it is just a casual piece?

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  140. GL's argument has been reviewed and rejected,
    and properly so with the rejection of his premises

    1) his examples of bankrupt "democracies" are invalid
    2) his unwarranted failure to consider the non-financial economic, environmental, and military reasons for solvency, bankruptcy and collapse.
    3) he goes from the specific to the general with a loaded and simplistic example.
    One could just as easily presume three wrong opinions, all arriving at a correct perspective after democratic discussion.
    The dynamics of group decision-making neither logicaly nor inevitably lead to economic disaster.
    The dynamics of dictatorial or elitist decision-making are more prone to disaster because of narrower focus, and and narrower self-interests.

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  141. LockJ,

    In response to one of your posts (apparently you feel strongly about this issue . . .):

    ". . . first is that no proof can be based on fatal flaws - your theory that the AMERICAN "DEMOCRACY" will go bankrupt contains a fatal flaw as the premise that we are a democracy is wrong. "We are a Constitutional Republic"."

    Are we now? Foundationally, you would seem to have a point but, operationally, this nation is a democracy - and has been since at least 1912 - with all the baggage that entails. The income tax, the direct election of senators, the abolition of the various states' militias with the institution of the national guard as replacement, the abdication of congress' Constitutional obligation to legislate v. legislative authority delegated to the executive branch, war-making authority delegated to the executive branch - enough already. In fact, we've passed the point of democracy, even, unless you count the USSR and national socialist Germany as democracies . . .

    And, Constitutional? Puhleeze . . . I could delve into that one but, what's the point . . .

    "Being a Constitutional Republic we do not operate as you presentation alludes; Mary and group are not germane to our system of Government."

    Perhaps you prefer "Nancy and group" or "Hillary and group" . . .

    "Example to prove you have another fatal flaw: If the House of reps. passes a law the Senate can kill it, if the House and the Senate passes a law the Executive can kill it, if all three pass a law the Courts can kill it, if all four pass a law the States can kill it, if all pass a law WE THE PEOPLE can kill it for we own the Constitution."

    Jesus, this is tedious . . . Name me one law passed by Congress that has ever been repealed by legislative action (there may have been a few but I'm not aware of them) - hell, the Mann Act is still operative, for God's sake.

    "So, as you can see the Republic form of Constitutional protection is designed to protect the smallest minority from the large majority, in fact it is designed to give the power to the sovereign individual."

    When's the last time you flew? Tried to buy a firearm? Underwent an IRS audit? Started a business? Opened a checking account? Once again, tedious . . .

    "So, your proof can not stand it proved your hypothesis is invalid. This is why we must have full and open peer review of all works before we declare absolutes."

    Unless you're you . . .

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  142. Trav,

    You are pointing to temporary anomalies in what you think the Constitutional Republic Form of government should be . . .

    You should read the Federalist papers and the papers of the founders - framers and letters of the times then you might have a better concept of what your government is and how it is design to work over the ages. It is illogical to support it a filed system because there is a temporary break down because the PEOPLE were not demanding their rights.

    The current nullification of the health care bill is proof that the Congress and the President can be over ruled and the law they passed is rejected [legally refused nullified].

    So you my friend argue vehemently by without facts and again using FEELINGS and acquisitions. Your defenses are unfounded and fail on the merits.

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  143. rwe2late,

    "GL's argument has been reviewed and rejected,
    and properly so with the rejection of his premises"

    On whose authority? Damn, I apparently find myself in the presence of divinity (or, perhaps, merely genius) . . .

    "1) his examples of bankrupt "democracies" are invalid"

    As I recall, the Weimar Republic of the 1920's, Argentina on several occasions, Brazil and Mexico are all examples of democracies that have defaulted on sovereign debt.

    "2) his unwarranted failure to consider the non-financial economic, environmental, and military reasons for solvency, bankruptcy and collapse."

    The official rationale for default is immaterial to his central argument. The creditors that get stiffed certainly could give a rat's ass as to why . . .

    "3) he goes from the specific to the general with a loaded and simplistic example.
    One could just as easily presume three wrong opinions, all arriving at a correct perspective after democratic discussion."

    Sounds like a day in the life of the Congress . . .

    "The dynamics of group decision-making neither logicaly nor inevitably lead to economic disaster."

    Group decision-making does not exist. Ayn Rand said it most succinctly; ". . . a board is nothing more than one or two men with ambition and a whole lot of ballast . . ." Margaret Thatcher, as well; "Consensus is the abrogation of leadership."

    "The dynamics of dictatorial or elitist decision-making are more prone to disaster because of narrower focus, and and narrower self-interests."

    Unproven - and the current drift of the Chinese nation would seem to give lie to that assertion. It does, of course, depend on what perspective you're speaking from. Also, the late, largely unlamented British Empire was the poster-child for elitist, dictatorial decisionmaking and it lasted what? 400 years or so? How about Rome? 700 years or so? Damn - history's a bitch, ain't it?

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  144. LOCKJ said...
    "Trav,

    You are pointing to temporary anomalies in what you think the Constitutional Republic Form of government should be . . ."

    And how temporary might those be? As far aas I can discern, no violence that TR, Wilson, FDR, Truman, Johnson, Nixon, Clinton and the Shrub family have ever done to the Constitution have ever been repealed or even seriously questioned.


    "You should read the Federalist papers and the papers of the founders - framers and letters of the times then you might have a better concept of what your government is and how it is design to work over the ages. It is illogical to support it a filed system because there is a temporary break down because the PEOPLE were not demanding their rights."

    I should, should I? Damn, how could I have missed that. It must have been because I was reading the Anti-Federalist Papers - as well as Burke, Hume, Smith, Locke - Christ, when would I have had the time . . .?

    "The current nullification of the health care bill is proof that the Congress and the President can be over ruled and the law they passed is rejected [legally refused nullified]."

    The triumph of hope over experience . . .

    Once again, name one piece of fe'r'al law that has ever been repealed. I dearly hope you're right about the healthcare atrocity but, once again, history's a bitch . . .

    "So you my friend argue vehemently by without facts and again using FEELINGS and acquisitions. Your defenses are unfounded and fail on the merits."

    Yeah. Whatever.

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  145. Trav,

    Your list of reading is lengthy - what was John Locke's law?

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  146. LOCKJ said...
    Trav,

    Your list of reading is lengthy - what was John Locke's law?

    Quite simply, preexisting natural law, rationally discovered, as opposed to regulation (for lack of a better word) artificially devised by man.

    What else would you care to ask?

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  147. Actually, GL and all commentators, seem not to see the wood for all the trees. Perhaps you are reading too many books.
    The simple reason for deficits is overspending relative to GDP, period. The only solution is to cut spending. That will happen when the problem and solution is clearly articulated as done by Gov. Christie in New Jersey. You theorize that it can't be done, but you don't prove it. Sorry.

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  148. TRAV
    re: the previously listed shortcomings of GL's argument
    1) You ignore the point many have made that the democracies were not, in fact, "democracies".
    You ignore my previous remark about information and secrecy.
    2) I will explain the logical point for you.
    Any government, including Democracies, can go bankrupt for reasons beyond their control (e.g. environment, subordination to an imperial power).
    3) Unfortunately for the naive prejudice of Ayn Rand, there is plenty of evidence that groups can effectively evaluate alternatives and decide on excellent solutions. "Group decision-making does not exist" ???... are you insane? Try googling it.
    4)I explained WHY tyranny was more prone to error. I also explained that there are OTHER factors to consider for economic solvency apart from the form of government. The longevity of the British or Roman empires, or of Napoleon's and Hitler's have to be evaluated considering all the relevant influences.

    You have addressed none of the points I made, and only the ones you made up.

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  149. rwe2late said...
    TRAV
    ”re: the previously listed shortcomings of GL's argument
    1) You ignore the point many have made that the democracies were not, in fact, "democracies".
    My ass. The governments in question were all democratically elected. My problem with the term ‘democracy’ is the fact that it is a moving target. Hell, Hitler (and God knows how I hate to make an example of that bastard) was democratically elected.

    ”You ignore my previous remark about information and secrecy.
    2) I will explain the logical point for you.
    Any government, including Democracies, can go bankrupt for reasons beyond their control (e.g. environment, subordination to an imperial power).”
    For God’s sake . . .
    Name one . . .

    ”3) Unfortunately for the naive prejudice of Ayn Rand, there is plenty of evidence that groups can effectively evaluate alternatives and decide on excellent solutions. "Group decision-making does not exist" ???... are you insane? Try googling it.”
    Once again, name one . . .

    ”4)I explained WHY tyranny was more prone to error. I also explained that there are OTHER factors to consider for economic solvency apart from the form of government. The longevity of the British or Roman empires, or of Napoleon's and Hitler's have to be evaluated considering all the relevant influences.”

    Hitler’s relevant influences? You reckon? Yet you dismiss Gonzalo’s premises out of hand. What the hell? I’m not at all saying that you don’t have a point but I am absolutely saying that Gonzalo has presented a premise worthy of careful consideration.

    You have addressed none of the points I made, and only the ones you made up.

    I beg to differ . . .

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  150. I think the problem is that economics, which seems that it should be an observational science, is in reality a formal system axioms and rules of inference. All of the different schools of economics only differ in their particular choices of axioms. If the axioms are actually false statements, then the system generates absurdities, the result of which we can see all around us.

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  151. Mickeyman,

    You've written the smartest thing of all the comments—you've successfully diagnosed what's wrong with economics as a discipline: "A formal system of axioms and rules of inference. All of the different schools of economics only differ in their particular choices of axioms. If the axioms are actually false statements, then the system generates absurdities, the result of which we can see all around us."

    Exactly.

    GL

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  152. A note to LockJ: No, reading books (discussions, explanations, etc.) which in my opinion have basic truths regarding human actions is akin to reading math books that have basic truths such as 2+2=4.

    In any event, one of the truths in human actions is that people will do what they perceive that they can get away with. This generally is what happens in society. In a democracy, bad policies are typically supported by those who perceive that they can get away with, for example, any need to pay any collective debt simply because that debt will either be paid by someone else or can be "kicked down the road".

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  153. OK, Foul! Acually, the Austrian School provides the most cogent & historically verifiable explanations of economic calculations...it does the best job of formulating and presenting economic explanations for real world, causal relationships.

    Moreover, it's the endemic & panmictic, corrupt nature of the beast (Hamartiology) that truly explains why democracies & all other forms of human governance ultimately fail; economic bankruptcy is an subset of this decline. Also, though not implying inferences by the Author re the certainty of failed democracies as suggestion that Collectivism, Statism, Socialism & the like offer anything better for the broadest, societal enjoyment of standards of living & overall quality of life...just wanted to affirm such as the annals of History make this case.

    Ref the 'Gross Public Debt' chart & the assertion that Debt "was taken on—but only in exceptional cases, almost always war." This is a cart & horse connundrum. Please read Murray Rothbard's treatise, "AMERICA's GREAT DEPRESSION", with chapter & verse drill-down proofs of how debt is amassed and wars (then) result.

    The Austrian explanation for the post WW2 trend simplified is the bravado of Central Banking run amok in concert with Globalist elistism & Corporate Cronyism run amok...hardly poster child entities of democratic representative forms of government. The USA's been running on a war-time status for some time, affording sweeping powers to the Executive Branch (EOs & Presidential Directives)...all end-runs on Constituational intent. Such explains the contemporaneous tail end of the graph.

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  154. The problem with most economists is that they see the economy as a machine with levers to be pulled, buttons to be pushed, and cogs to be greased. Terms like "jump start" the economy or "prime the pump" are indicative of a mindset lost in fantasy; kneeling at their altar, their Gods are silent because they do not exist.

    The economy is not a machine, but an ecology. It's constituent organisms (you and me) respond to stimuli, but not necessarily in the way you might think. Indeed, at its most base level, economics has nothing to do with numbers; it is the study of human behavior. It is the Holy Grail that eludes the statists.

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  155. Hi GL,

    The main fallacy is your use of the concept "Group". There is no such thing. All groups are merely a collection of individuals.

    All "group" decisions are flawed and invalid.

    Gr

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  156. Why just democracies? My reading of history is that totalitarian states of all subspecies - whether kingdoms, peoples' republics or garden-variety tyrannies go bankrupt with remarkable speed and frequency while democracies on average do so rather less (the cluster of current condenders creates a false bias in public perception).

    The growth of incoherence you propose is a reasonable mechanism but can just as well operate amoung factions at dictator's court. Indeed, since such factions are most often founded on the idea of looting any sort of principled check on their actions is unlikely. In contrast, democracies, as long as they remain democracies, must pay attention to the rule of law and the longer term interest of the people and, unless they have very badly flawed constitutions, have mechanisms for managing divergent views without blowing themselves up.

    Maybe you assume that the USA remains a democracy but if so it's a very odd one where the interests of Wall Street and a handful of other powerful lobbies count for 99% and the interests of the people count for 1% in Versailles on Potomac.

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  157. The discursive dilemma in politics sounds a lot like Orwell's doublethink. As in, a particular individual is capable of holding in his or her mind two things that are incompatible, even contradictory, and believe in them both simultaneously.

    The example of the three people in the kitchen has you believing in two incompatible things simultaneously, very similar to doublethink, if not the same.

    Except that doublethink applies even to the individual, so even a government of one person would suffer from it, not just democracies. Although democracies suffer in particular because of the sheer number of people involved, leading to communications problems i.e. "the left hand not knowing what the right hand is doing" and conflicting agendas.

    I can lend you a more powerful insight into the goings on here. Because doublethink is only possible in men who lack a consistent and pre-eminent system of morals. Whether you believe in Christianity or not, what this religion did provide to the USA back in the day was a consistent and preeminent moral structure. A structure which discouraged doublethink and moral "sell-outs" and encouraged hard work, prudence, self-denial and facing objective reality.

    That structure has been lost, perhaps irrevocably. One day, certainly after much suffering, we will gain it back.

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  158. Correction, I meant to say if we do regain a collective moral compass, it will not be without a lot of suffering.

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  159. This is not a cyclical thing. Democracy does not renew itself ad infinitem. This is a time line. Hey don't flatter yourselves by thinking democracies are going to go on forever. History will come to a close, because along with democracy/capitalism we have increasing imperialism. This will end with absolute imperialism at "the end of the age", which is closer than you desire. If you are evolutionary & adiestic you believe it will go on for a long time, is even cyclical. The Bible is and has always been true when applied correctly.

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  160. Unfortunately, dear Anonymous at 11:37 AM yesterday, our problems are global.

    The only country to act rationally in this crisis is Iceland: they repudiated their debts, deflated their currency and are in the process of arresting their bankers for fraud. But, even they will be hurt when the world goes to hell in a hand basket. This cannot be avoided, because the damage has already been done. We must pay the price for a hundred years of money creation. We partied like there was no tomorrow, but tomorrow is on our doorstep, knocking.

    "I am a French Canadian from Montreal. We are facing the same problem but for a different reason.Here,north of the border,it is because of too much socialism:costs are out of control.”

    Could that socialism even be possible without money creation? Socialism impoverishes people; it redistributes other prople’s wealth. You in Canada have a different banking system than the US, but it operates by Fractional Reserve Banking, too.

    Our financial house of card is in free fall. It is not clear who will be taken down. Propping up the cards delays the reckoning, but that produces a wider and louder boom when it collapses.

    "Yes,I agree with you...very difficult years ahead of us, especialy for our children.”

    The only solution is to suffer. Out of suffering can come wisdom. It’s how we learn our limits. Refusing to learn lessons from the past causes us to repeat mistakes. Most of the cure is to stop doing what harms us. When you place absolute power in other people’s hands, why do you expect that they will not use that power against you?

    The only disagreement that I have with GL is that I think the future is undetermined. There are hopeful signs amid the parlous ones. The American TEA Party is one of those signs.

    Also, the monetary collapse will take down most of the social institutions of the welfare state. The Government has no credit, hence, it can pay for only what it has tax receipts. In the continuing poor economy, most governmental actions will seem unnecessary while vital services go unfunded. There will be a huge fight over what gets money.

    Think of this as a way to clear away the underbrush. The government can only afford to pay for what is popular with the voters. Many state and federal institutions, now considered essential, will be privatized or abandoned. One of my hopes is that this will include the schools.

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  161. Austrian economics clearly explains why deficits occur. Governments simply want to wage war, create social programs, etc, etc as they deviate from a market philosophy.

    The very argument that democracies will always go bankrupt is flawed simply for two reasons (pertaining to your essay):

    1.) The US government is NOT a democracy - it is supposed to be a Constitutional Republic.

    2.) The US government is NOT a democracy - it is in fact a Facist state.

    It's fairly simple to see you have no idea how the real world operates, or indeed how it supposed to operate. Your entire premise is flawed.

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  162. Too harsh, dear anonymous at 3:45 pm. GL isn’t fundamentally wrong: he just hasn’t been rigorous enough, that’s all. He and we have a different assessment of American culture which leads us to seeing a different outcomes.

    We need to deal with reality; America is all screwed up. Is it a fascist state? Yes. Will it be become a tyranny as GL contends? I don’t know.

    It is freedom and honesty which will correct our problems, not a supreme ruler in Washington. In fact, if Obama acts has though he intends to become a tyrant, he will get a rebellion on his hands. Obama looks like a malignant narcissist, so he is likely to try to overturn the US constitution.

    The question is whether we citizens will allow him to do it. Are there enough people willing to place their lives, property and sacred honor at risk to prevent it? Will the US military defend the Constitution or the administration? If the military won’t attack a lawful rebellion against his unconstitutional acts, then he is lost.

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  163. mickeyman said...

    "I think the problem is that economics, which seems that it should be an observational science, is in reality a formal system axioms and rules of inference. All of the different schools of economics only differ in their particular choices of axioms. If the axioms are actually false statements, then the system generates absurdities, the result of which we can see all around us."

    January 16, 2011 9:08 PM
    Gonzalo Lira said...

    "Mickeyman,

    You've written the smartest thing of all the comments—you've successfully diagnosed what's wrong with economics as a discipline: "A formal system of axioms and rules of inference. All of the different schools of economics only differ in their particular choices of axioms. If the axioms are actually false statements, then the system generates absurdities, the result of which we can see all around us."

    Exactly.

    GL"

    OK, gentlemen, you've nailed my problem with the Austrians. However, they still seem to have the most coherent understanding of the basic problem - i.e. to devise some system of societal organization whereby men can live together peacefully all the while acting as they please without butchering one another. Their failure seems to lie not so much with their philosophy as with the difficulty of the the proposition itself. People like Mises and Hayek gave it their best efforts and produced a large amount of (in my opinion, anyway) very well-reasoned commentary. Are we to dismiss it out of hand because they failed to deliver a 'Unified Theory' or are we to pick up where they left off and attempt to perfect the concepts that they introduced?

    My problem with much of the blogosphere is that everyone seems to have an opinion but noone seems to have a coherent solution . . .

    For what it's worth . . .

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  164. At least their justification of ruining the world's economy because of they are doing God's work has been totally debunked.

    Sometimes I wonder if China or the USA are equally corrupt. Well, at least China is far richer and the USA bankrupt.

    Djune.

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  165. GL,

    Nice and beautifully argued. But if we go the way of a John Gray (the philosopher not the relationship guru), Nassim Taleb or Shoepenhaur we can point that ontological arguments of the xistence of God, Justice, Fairness and other such are well--wanks. Observation is indeed the best we have so thus ease up on the empiricists a bit. Economists love models and trained philosophers love proofs. The universe cares for neither.

    Peter Clemenza.

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  166. In my opinion, the economic problem could have been far milder if they have put behind bars the crooks that are responsible a decade ago.

    Having uncontrollable deficits is one thing[stupid politicians] and doing business illegally/immorally[corrupt politicians and bankers] is another.

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  167. In my opinion making the US dollar artificially high is corruption because it doesn't rely on the free market and it has nothing to do with increasing deficits, that is just a consequence but to immorally increase debt.

    Djune

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  168. As I pointed out, I think that economics a formal system. If the axioms are wrong, the system may be logically consistent, but still generate false statements.

    Now GL, it is my sad duty to inform you that there is a flaw in your selection of axioms. In particular, you assert that "The citizens of a democratic state are supposed to control its destiny."

    Actually, you may have been very cunning here. Do you mean that they are supposed to but do not, or that they do control their nation's destiny?

    If the latter, I would submit Washinton Post polls (http://www.washingtonpost.com/wp-srv/politics/polls/postpoll_022607.htm) which showed that a majority of Americans (in 2007) felt the war in Iraq was going badly and should be ended as soon as possible. But what did the government do?

    A major problem is that the public does not control their nation's destiny. Sometimes the leadership goes and does whatever it wants to, and then bribes enough voters with their children's money that they stay in power.

    I'm not convinced that the flawed axiom is fatal to your conclusion--it still seems that democracies are doomed to bankruptcy--but I think the real reason is that in order to increase its power, governments must consistently hide the real costs of their programs from the voters, resulting in destruction of the nation's capital through dissipation and inflation.

    I have a discussion of the philosophical consequences of the existence of different economic schools here (if you allow us to post such things in your comments). If you delete this link I understand.
    http://worldcomplex.blogspot.com/2011/01/meaning-of-schools-in-sciences-and-its.html

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  169. Mickeyman, you are asking too much of a science like economics. Truth can easily be ignored. Nihilists deny that there is truth; they can suborn our educational establishments.

    A science can be logical, internally consistent and produce reliable results, and yet still be disbelieved for political reasons. An absurd argument like Keynes “General Theory” could grab political attention, because it gave politicians the justification to interfere in the economy and to spend money. Too often, ideologies turn into dogmas. They become camouflage for the power hungry and the rent seekers.

    What value is there in a science which does not predict accurately? Ludwig Von Mises warned of the 1929 crash and, if he were alive, would warn of the coming one.

    America was a republic, but any human institution can become corrupted. Now, we have a shell of the republic on its last legs. But, everything ends. Sometimes in ending, new life is born.

    You have strange ideas about the nature of a republic, mickeyman. Public opinion does not always direct national policy. All a free republic does is provide a space for competing interests to duke it out. As I said earlier, President James Madison only gave the Republic a life expectancy of a century. That time lapsed 90 years ago.

    In the war of 1812, the British was boarding US merchant ships and interning sailors. You would think that the Atlantic maritime states of New England would be up in arms about this, since it was their ships and sailors. But, they were not. It was the Western states which forced a war with the Brits on this.

    The Public controls the nation’s destiny by electing new representation. The weakness of our republic was that corrupt politicians can use public funds to buy votes. But, even that ends, because the government creates a crisis and forces the public to pay attention. They will elect people who will clean house. It’s been a long time since America did that. Mostly, it was because we were so rich that it didn’t seem to matter. Even today, we use far fewer taxes for government than the Europeans do. But, our elitists have spent our wealth and regulations are keeping us from making more.

    The coming currency collapse will anger the voters. Those voters are unlikely to hand more money and power to the elites of either party. I expect a repudiation of the elite classes.

    If the government is not allowed to continue to muck up the economy, then the collapse need not take a decade. Hoover and FDR took a banking panic in 1929 which should have lasted nine months and dragged it out for twelve years.

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  170. One: Democracies always act in a fiscally incoherent manner.

    This is a manifestation of an all-too-human tendency: we all want to have our cake and eat it too!

    • Two: Democracies always go bankrupt—without exception.

    What about Democracies under the Gold standard? Under the Gold standard, Congress will have to balance the budget every year.

    We are going through a nasty depression. If the outcome of this mess is the adoption of the Gold standard, I shall be thankful.

    Sidharth

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  171. "One: Democracies always act in a fiscally incoherent manner.”

    I suggest that you look at Iceland’s recent actions to see why this statement is untrue. Republics can make mistakes, but they are forced to correct their ways. Iceland is well on its way to recovery.

    " Two: Democracies always go bankrupt—without exception.”

    I suggest that you look at 700 years of the Swiss Republic to see why this is untrue.

    "What about Democracies under the Gold standard? Under the Gold standard, Congress will have to balance the budget every year.”

    Yes, Fiscal restraint must be maintained or undesirable consequences immediately follow. Inflating the money supply results in losing your Gold supply to other countries.

    "We are going through a nasty depression. If the outcome of this mess is the adoption of the Gold standard, I shall be thankful.”

    So will I, but the real villain here is Fractional Reserve Banking. That must end.

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  172. @D. Mark Lloyd, who posted above: Many of us who are skeptical about the Tea Party will take it more seriously when it puts its money where its mouth is, based upon this breakdown of the 2011 U.S. budget breakdown here:

    http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

    Most budgetary line items range between 3 and 70 billion $. However, defense is projected to cost $721 billion, while unpaid interest on past war debt ranges between roughly $115 billion and $450 billion. Those last two line items alone total over a trillion $.

    When the Tea Partiers face up to that simple fact, they will have my undivided attention and campaign contributions.

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  173. Dear anonymous at 3:41, you seem to be obsessing about 27 percent of the 2010 budget.

    We TEA party members want to end excessive Federal power and taxation; we are in reaction to Obama’s excessive spending and social program creation. We want to roll back Obama’s attempt to turn us into a Social Democracy like the European Union.

    After we have finished rolling back Obama’s social agenda, we can start attacking the other 73 percent (the social entitlements). But, the military will be cut too. Our soldiers will be coming home. The world will erupt in violence when they leave.

    We won’t get a chance to cut spending deeply, though; Obama’s veto will prevent that. In the coming hyperinflation, most of the entitlement budget items will fall off the radar. The government can only fund those programs it can pay for out of taxes. The economy will be devastated.

    The military will be charged with keeping the peace. As the EPA, OSHA, NASA, the departments of Energy, Commerce and Education go by the wayside, the military will be getting more of the budget. It will approach the percentage of budgets in the 1800s.

    This will not be due to any love we have of the military, but from a need to maintain order.

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  174. Dear Lord, thank you for putting Gonzalo Lira in this world of fools. Thank you, Lord, for creating this magnificent creature of spectacular intelligence, standing far above the common herd the way the Himalayas soar above the hot and dusty plains. He has "proved" what mere mortals could never have penetrated. Thank you also, Lord, for having simultaneously created his groupies who continue to encourage the overflows of his genius.

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  175. "OK, gentlemen, you've nailed my problem with the Austrians. However, they still seem to have the most coherent understanding of the basic problem - i.e. to devise some system of societal organization whereby men can live together peacefully all the while acting as they please without butchering one another. Their failure seems to lie not so much with their philosophy as with the difficulty of the the proposition itself."


    Well, that and the fact that they actually ignore the fact that we should think collectively!! How can you begin to solve big collective problems when you only focus on individuals? The level of ignorance of how natural systems work, the fact that a body acts different than just all the individual cells looking out form them selves, that a community becomes a sort of organism .... whose behavior cannot be understood completely by simply talking to one person in the community. It doesnt take a genius to figure out that this

    "to devise some system of societal organization whereby men can live together peacefully all the while acting as they please without butchering one another."

    Is doomed to failure. Each individual MUST voluntarily relinquish the urge to "do as they please" for any type of society to last. Its their focus on individual freedoms at the expense of everything else that is the death knell of Austrian/right-libertarian thought.





    "People like Mises and Hayek gave it their best efforts and produced a large amount of (in my opinion, anyway) very well-reasoned commentary. Are we to dismiss it out of hand because they failed to deliver a 'Unified Theory' or are we to pick up where they left off and attempt to perfect the concepts that they introduced?"



    Okay.... lets give Mises and Hayek an ovation for their efforts..... but then lets properly chastise them for their insistence that un fettered self interest is a goal worth chasing. Not to mention their insistence on hard money principles that put currency values above human values.

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  176. That is why as a Constitutional Republic we protect the smallest minority [the sovereign individual]from the largest majority [the collective]. The Founders were very wise men that understood human greed and quest for power.

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  177. Dear GL,
    you seem to be equivocating over the exact meaning of "believe" in your proof.

    First you write that Mary believes something "down to her bones."

    Then you write about accepting the possibility that something might be true as belief.

    Most logic journals would demand a rewrite, at very least.

    Further, there is a problem with your notion of inference: you have not specified which persons hold which beliefs about ~(p&r). It almost looks like you want to do modal logic.

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  178. Jesus, Greg, what a collectivist you are.

    There are no Big Collective Problems, there is only living out of accord with reality. When people and ideas are allowed to compete freely then problems are solved. Our current governmental tyranny and the coming monetary debacle is due to the Progressives and the Federal Reserve Bank defrauding the American public. The fraud has already taken place, but people haven’t woken up to it yet.

    There are only individuals in this world, although many people hold their allegiance to the tribe.

    Why did the Soviet Union fail, Greg? It failed because it could not get its people to produce wealth. The Workers said, “The State pretends to pay us and we pretend to work.” As Ludwig Von Mises stated in the 20s that a Socialist State has no means to price anything. It doesn’t know what anything is worth. Therefore, it cannot assign priorities for goods and services.

    "Each individual MUST voluntarily relinquish the urge to "do as they please" for any type of society to last. Its their focus on individual freedoms at the expense of everything else that is the death knell of Austrian/right-libertarian thought.”

    I suggest that you read Alexis de Tocqueville’s book “Democracy in America” to see where you are wrong. He showed in 1830s America what limits were placed on individual actions. The American Society was not chaotic, nor lawless. We had less crime than Europe.

    There were many restraints on individual actions in early America. The first was the community associations by which Americans solved group problems. If a road was needed or a schoolhouse built then neighbors got together to built it. Next, was local politics where people decided what was in the common good and how to restrain criminality. Then there was religion which reformed character and provided for the needy. Finally, there was the family which provided a person’s immediate care. The combination of these four empowered people while limiting the harm they might do to each other. It made the American people independent of authority. It is what made American society so different from an authoritarian society like France, say.

    “Okay.... lets give Mises and Hayek an ovation for their efforts..... but then lets properly chastise them for their insistence that unfettered self interest is a goal worth chasing. “

    I dispute that their self interest was unfettered. People stayed within the law and the moral code imposed by Christian values. People were public spirited. It was a common practice for people to help their neighbors when a need occurred.

    "Not to mention their insistence on hard money principles that put currency values above human values.”

    What human values are there which are not individual values?

    What you are talking about are the collective values of the tribe. Who is to decide what those are? Tribes have leaders which the members enslave themselves to.

    No thanks. That is so Fifth Century. A Republic is much better.

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  179. UrbanBard,

    maybe it is the virtues of selfishness that cause people to act in a group to build a school or a road. Advancement seem to follow selfish study or selfish research by entrepreneurs? The selfish then build a factory to benefit their need to have more.

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  180. I have seen the people that shop at Wal-Mart. The majority of Americans will not understand what happened to them even after it occurs. The sheeple will just find a politician to blame and be herded till they die..........

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  181. Bravo! Very nice theoretical development, especially the key about borrowing becoming easier. I would add that balancing becomes more difficult with complexity.

    This is a very necessary contribution because mere observations without plausible (vetted through debate) theory is merely happenstance. Correlation is not causality. Suggestive, but no valid predictive power.

    Some of the contra-observations are obviously the result of exogenous shocks and limited in size and time: 90sUS (productivity) and NZ/Sweden/... (borrowing difficulties). Even Switzerland has to be viewed for what it is -- a loose collection of cantons with very little federal spending while the cantons are hemmed in by competition with each other (esp for business) and limited borrowing capability.

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  182. LockJ, We are talking about human beings here. We are simultaneously selfish and community minded. Wealth only comes from work. Currency is not wealth: that which maintains our lifestyle, such as food, water and gasoline, are.

    If a social system is unfair, then people will not labor to merely have their wealth stolen from them.

    This was why the Puritans almost died out in the 1620s: they had a common storehouse. Everyone was supposed to put the food they grew in the storehouse. Some of the men had wives at the colony, and the single men resented that what they grew fed other men’s wives. The single men went on strike even though this was counter productive and many of them starved to death during the coming winter. The Plymouth colony did not become self supporting until they gave up the common storehouse. Thus, collectivism, such as the puritans had, is anti productive. People will not work, long and hard, to serve strangers.

    We humans are naturally selfish, but when our basic needs are met, our social needs arise. We create social organizations to protect us and give us peace and stability. When those social institutions no longer serve us, then they will be replaced. I am currently on Social Security, but I expect it to fail. There will be great privation, because the government will be unable to fund the social institutions.

    I selfishly act to protect myself and to profit from the coming dollar collapse. I’ve tried to get people to listen about what I think is coming. They think I am a nut. They could cheaply protect themselves now, but they won’t. I will selfishly allow them to get the fruits of their labors. I will protect me and mine, instead.

    Greg believes that people are naturally slaves. Perhaps he is a slave, but most americans are not. In the coming monetary debacle, the real Americans will have to stand up to the looters and the moochers like Greg. I expect to buy two home defense shotguns at a gun show next month. I am prepared to use them against people like Greg.

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  183. Didn't Alexis de Tocqueville make substantially the same point?

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  184. I have an idea: I know that the Democrats, not the Republicans, will bring about the financial, military, and social ruin of the United States. I know this because I have picked an arbitrary date (2012) and since I can see the future and the future is ruin, I am right. This is the most important thing I have ever written.

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  185. Anonymous said... "HE THINKS THEREFORE HE IS CORRECT"?

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  186. The world's oldest democracy is in the Isle of Man (the House of Keys), which is over 1,000 years old. It still runs the island, despite being subsumed by the UK, and exists like a state in a federation. England's democracy has been through the wringer several times, but has come back and grown stronger after each reversal, over many centuries.

    I am not sure that a collapsed democracy must end in a dictatorship. If the will to be democratic is deeply embedded in the people, they will form a democracy and try again. If they fear the power, the pain and the choices, they will slide into a dictatorship as an easy way out. See Erich Fromm's "Escape from Freedom" for a discussion of this, and Machiavelli suggests as much in "The Prince."

    That said, the critical part in this discussion is not the issue of the end, but the inevitability of the decline once debt is embraced as the regular way of doing business. Perhaps we can be even more specific, and consider the problem to be using debt to cover on-going costs, as opposed to one-off investments in specific (and finite) projects. (A 'specific project' could be a war with a definite objective, especially if started by a foreign power, e.g., WWI and WWII. Other examples could be the Marshall Plan, and a lot of the New Deal projects.) Using debt to fund Social Security or Medical Care (of whatever type) is clearly a disaster in the making.

    It should be noted that Johnson's "Great Society" plan in the mid-1960s was not founded on debt, but on excess capacity in the US economy and a desire to even things out. The Vietnam War and changing politics destroyed that plan, leaving the US with entitlements and increasing debt.

    Thank you for this discussion, GL. I will be taking it to heart.

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  187. GL,

    Our Founding Fathers (specifically John Adams) said this:

    "We have no government armed with power capable of contending with human passions unbridled by morality and religion. Avarice, ambition, revenge, or gallantry, would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other." --October 11, 1798

    I think that explains why Democracies always go bankrupt, especially this one.

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  188. the closer to the equator, the lower the intelligence. FACT.

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  189. We ought to stop waving around "Republic" like some kind of magical talisman. An American-style republic is still a fundamentally democratic form of government. The legislatures are still elected, and if they want to keep their cushy jobs, they had better please some portion of their constituents. These constituents give contradictory messages that do lead to the discursive dilemma. History has shown us that any alleged limits on governmental spending or power in our Constitution are easily painted over if there is enough demand to do so. The Constitution does not defend itself. Congress happily accepted the verdict of Wickard v. Filburn, so why not accept every other current and future abuse?

    In any case, "democracy" was used in the essay in a very broad sense, to refer to any polity in which fiscal power is distributed among essentially equal individual, such as 535 men and women in Washington, D.C. Yes, they are allegedly constrained in their acts, but did we not have quite a few "conservatives" (who usually pretend to love the Constitution) calling loudly for Congress to try to exempt certain legislation from Supreme Court review just a few years ago?

    In any case, the Constitution did not prevent our current situation, and sideshows like the "Tea Party" are already irrelevant--their fiscal responsibility message has been hijacked by jingoists and "social conservatives" who don't care a fig about budget deficits when push comes to shove.

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  190. Very good article. The only part I would disagree with is the assumption that a country ran by a dictator would not be affected by this behaviour. I would argue that any person or country who has credit available to them could and often do fall into the same trap. The easier it is for them to get the credit the easier it is for them to fall into this trap.

    The housing meltdown was caused by many individual homeowners following the same path as governments, borrowing more and more money to pay off past expenses.

    I believe the real culprit besides human nature is easy credit.

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  191. Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. Traditionally, from antiquity through the 19th century, it refers to domestic debts, particularly agricultural debts and freeing of debt slaves.

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  192. i am donna pinto,from what I can read. It has been sad news and scam to everyone about spell casters or so. But to me they are so real cause one worked for me not quite two weeks. I traveled down to where his shrine his and we both did the ritual and sacrifice. I don't know about you but spell is real;love marriage,finance voodoo, get your ex back voodoo,love voodoo,lottery voodoo,weight loss voodoo,money voodoo, business voodoo,it's all he does. I used my money to purchase everything he used he never collected a dime from. He told me I can repay him anytime with anything from my heart. Now I don't know how to do that. If you can help or you need his help write him on nativedoctor101@live.com. Thank you.

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  193. I wrote a much longer comment but the session refreshed and it's gone, so here's the short version.


    Logically sound. I would accept the proof.


    Word of caution - theories when applied to human behaviour tend to be flawed at some level because there are no axioms on which to build a solid foundation. Lies, misinfo, disinfo, incoherence, confusion, flipflopping - all of these things make a mockery of simplified examples when applied to people.

    Having said that, the forces involved here are strong enough that it probably still holds and probably with near 100% efficacy.

    Nice work.

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  194. Hi Gonzalo,

    although I appreciate your try to form a sound theory on the problem I agree with the first poster and some of the later ones that you should not make a simple thing too complicated. I mean people like Krugman get prizes for citing the obvious, while packing these trivialities in a theory for their "scientific" community. And they merit him with a price to make this whole smoke and mirror look like legitimate science.

    Sorry, but in fact by submitting your idea to the same standard of argumentation use by the pseudo-scientific community of economists (that haven't managed to offer anything else than observations that led us nowhere) you are not doing yourself a favour.

    I can only see this as an attempt to gain some credibility with those circles in order to get some recognition. If it is the case that you prefer to remain some unknown blogger as you describe in your post on Zerohedge (the Krugman article) than you need to make a difference between you and them. It does not mean to discard logic and proper argumentation yet the form of the argumentation must also be liberated from stereotypes. In the end the scholar must leave the methods of the failed tutors to find the truth.

    In that sense you lost me in the beginning. Furthermore, the conclusion that only contradicting human decision will create the need for debts is too simple. Like one of the previous posters I think that huma nature is to complex to boil it down into formulas and economic theories, most of which are not worth the paper they are written on.

    When you think about some psychological theories which claim that leadership is mostly being excercised by psychopatic characters that know how to gain broad political support by playing out factions you leave the ground of sane theories as there is a quite big amount of unlogic behavior injected into the calculation which in my opinion devalues any such approach because a logic, sane thinking and somehow predictable behavior is the premise to every theory.

    In addition, your theory is based on the idea that a democracy is working and the people are in power. This is your major flaw. In reversal this would mean that autocratic systems are not failing. This is easy to confute by history.

    For me it boils down to ruling or being ruled. Whether you look into politics or banking, either you lead or you loose. Debt is a means to direct people the way the ontrolling forces like them to go. That there has been no major war on a global scale is not only due to the nuclear threat but also due to the anesthetic effect of debt. In the end as you wake up the damage is done and the real wealth has been funneled to those that had all the real wealth before.

    So in fact you will never achieve balanced budgets, neither in democracies nor in adictatorial style of ruling since in the end the big money rules and not the people.

    Yours sincerly
    Homer

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  195. I got here from your post on ZH with the letter of warning to GW. As you cited in that post, CITE YOUR SOURCES. You claim that EVERY democracy will go bankrupt. Please give historical examples. I think that would further strengthen and develop your case.

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  196. Erm, I think your fundamental assumption is awry. America is NOT a democracy. I was going to say shadowy deals control government decisions but it's worse than that.

    Corporate lobbyists OPENLY control government because they bride legislators with campaign contributions. And then those corrupt politicians install corrupt judges in the courts.

    So your people in the kitchen with the ingredients aren't voters, they are really evil actors concerned only about profit for their masters.

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  197. Gonzalo,

    Very interesting article, but I don´t think your critic to austrians is fair. In fact, professor Huerta de Soto points out this issue. Here you can watch and hear a brief mention (I am tuning the video to the exact point when he talks about it): http://www.youtube.com/watch?v=0Q75g4m5Y2Q#t=3m06s

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