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Is an Economic Deluge Nigh?

By David Galland, Casey Research

If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured.

Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped.

It is said that history doesn’t repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress.

You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to “level the playing field” and the global economy, already in tatters, will fall off the edge.

There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

In France, if no candidate attracts no better than 50% of the vote, then the two leading candidates go to a decisive runoff vote, this time around to be held on May 6.

The current president, Nicolas Sarkozy, a conservative in name only, was running at a fairly steady gait toward re-election (thanks to the head start awarded all incumbents), when leading socialist candidate Francois Hollande came out with a proposal to tax anyone with an annual income of over one million euros at a rate of 75%. He also promised to add a tax on all financial transactions and increase taxes on France’s biggest companies to 35% – securing bragging rights as levying the world’s third-highest corporate taxes, the US being #1. This all on top of a 25% VAT, one of the world’s highest. By some calculations, the result of Hollande’s new taxes is that effectively 100% of all incomes over one million euros will now be stripped away by the state.

For good measure, Hollande also promised to reverse the recent modest increase in retirement age from 60 to 62 pushed through by Sarkozy. While I am sure it is mere coincidence, I found it noteworthy that Mssr. Hollande’s campaign slogan is “Change – Now!”

Remarkably, at least for those with some small understanding of economics, as a result of leaning into the microphone with these proposals Hollande has galloped ahead of all other potential contenders and is now projected to finish nose by nose with Sarkozy.

After which the also-rans will be removed from the race, freeing their supporters to share their affections elsewhere. Given that the leading contender for third place with an estimated 14% of the vote is one Jean-Luc Mélenchon – charitably categorized as “far left”, a label that can be applied to most of the other candidates – it is projected that the “conservative” Mssr. Sarkozy will go down in double-digit flames come May 6.

Bringing to mind the prophetic utterance of Louis XV: “Après moi, le déluge.”

The deluge in Louis’ case manifested as the murderous affair commonly known as the French Revolution. In the case of Mssr. Hollande taking up residence in the Palais de l’Élysée, the deluge is likely to manifest in the form of rising interest rates as investors look to protect against an acceleration in the country’s debt to GDP ratio, already projected to hit almost 90% this year, exacerbated by a flight of capital, investors, entrepreneurs and large businesses.

As is the nature of such things, because of the aforementioned predilection of humans to run from trouble, we likely won’t have to wait for Mssr. Hollande to be formally enshrined in the gilded halls for the trouble to start – it will begin within days and maybe even minutes of the handicappers concluding that his ascendency is a sure thing.

Given that France is the third-largest economy in the already-troubled Eurozone, one can expect the deluge to spread, with potentially devastating consequences. That the guillotines may soon be rolled out across Europe can be better understood by taking into account that the Eurozone sovereign deadbeats are on the hook for roughly nine trillion euros in debt, some significant percentage of which has to be rolled over to ready buyers over the next couple of years. Adding weight to the problem is that, according to the latest figures out of the IMF, Europes banks may have to sell off up to 3.8 trillion euros in assets, many of them questionable, between now and the end of next year. At least, if they want to remain solvent.

Across the pond, the United States also has aggressive funding needs, given that the “change” we experienced ourselves in the last presidential election has left the government gasping for about $1.4 trillion in additional funding each year. Then there is Japan, officially the worlds largest debtor in terms of debt to GDP, where the easy availability of local funding has dried up, requiring that nation to go to the international markets for funding as well.

The phrase “an awful lot of hogs at the trough” comes to mind.

My point is not just that these governments are broke and are about to get a lot more broke as interest rates rise on their many debts and financings, but rather that the global trend toward a resurgence in public demand for socialism in response to a worsening crisis is a certainty.

How could it be otherwise when for decades now the schooling of children has been delegated to functionaries of the state?

For evidence, look no further than the screen swipe here. It is a quote from an essay by a college student in the United States on role the government should play:

The writer of those words was a member of a Valencia University economics class. The professor, Jack Chandliss, asked the class to write an essay on what the American dream means to them, and what they want the federal government to do to help them achieve that dream. Out of 180 students participating, only about 10% wanted the government to leave them alone and not tax them too much, but a whopping 80% wanted the government to provide pretty much the whole dream thing wrapped in a tidy bow – including free college tuition and health care, jobs, even the down payment on their future homes, money for retirement and hard cash, taken in the form of taxes from rich people. Please take a moment to watch a worthwhile interview with the professor.

Pretty eye-opening, eh?

The point here is not complex, but it is important.

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