RICHES TO RAGS
While the US struggles with its debt and political dysfunction, many other countries around the world are also facing big headwinds. England is suffering soaring social welfare costs, worklessness, illegal immigration, a broken national health service, dependence on foreign nations to meet its natural gas and electricity needs, the impending loss of its last steel plant, and a declining birth rate leading to fewer young workers to support a rapidly growing elderly population. Currently, 28 million private industry workers financially support 9 million people who are "economically inactive," 6 million public sector employees, and 13 million state pensioners. The top 10% of wage earners pay 66% of all taxes but continue to be hectored to pay their "fair share." The result? Nearly 400,000 British workers report their intention to move abroad in the next two years. Over 11,000 millionaires emigrated in 2024 - a 157% increase from the year before. Eventually, the tax burden will fall entirely on illegal immigrants and politicians - as they will be the only ones left.
Can British industry save the day? Not likely. National production fell for the 12th consecutive month in February. GDP rose a meager 0.1% in the final quarter of 2024. It was 0.0% in the third quarter. In a recent survey, 55% of businesses said they had cancelled investments or put them on hold following Rachel Reeve's proposed October budget. Can the British "can do" spirit turn things around?
It is said that the goal of many young Brits is to score the "Trifecta" of securing a council apartment (free public housing), PIP (Personal Independence Payments - welfare) and a Mobility award (free vehicle for those suffering illness, disability or mental health conditions). Some 815,000 people now qualify for a free car, up from 650,000 two years ago. It is difficult to feign a long-term physical disability, therefore a popular method to qualify for benefits is to claim a hard-to-disprove mental health condition. These programs were established with the best of intentions to aid the truly needy but, like all government benefits, people find ways to scam the system, helping to grow government costs far beyond the ability of workers to support them through taxes. Between 2019 and 2023 the number of young Brits claiming welfare due to sickness or disability grew by an astonishing 25%. A million 16-24 year olds are classified as NEET, "not in employment, education or training." Soaring social costs + stagnant economy = impending budget crisis.
In an effort to avert that crisis, the Labor government is pressing for increases of existing taxes and a raft of new taxes. One new tax would fall on private school tuition payments. The argument is that the wealthy parents of these students can well afford it. That ignores the inconvenient fact that 25% of these students come from lower income homes. Another stab in the back for working Brits trying to buy a home is Labor's decision to assess the 2% "stamp tax" on home sales costing just 125,00 pounds. It was formerly assessed on home costing twice as much. Inevitably, the tax burden always slides downhill to punish those least able to shoulder it. However, the British economy is not suffering alone.
German industry is challenged by high energy prices and low-cost Chinese imports leading to a rapidly stagnating economy. Labor layoffs have been in the news for months. Auto manufacturer Volkswagen has threatened to shutter multiple German assembly plants and layoff thousands of employees. Its sales in China are flagging badly as Chinese auto makers' sales surge, such as BYD. Deutsche Bank announced 2000 cuts in its retail division. Siemens is to cut 6000 jobs in its automation and EV charging businesses, Bosch 5500 and Thyssenkrupp 11,000 by end of decade. The German government is also in upheaval. Having lost a majority in the Bundestag, German political leaders called for snap elections (having learned nothing from England and France's snap elections that were expected to give a majority to the ruling parties, but did not). German Chancellor Mertz is struggling to assemble a working majority without having to deal with the AfD party that garnered more than a fifth of the votes. He views them as "too far" right.
President Emmanuel Macron beat Marine Le Pen's National Rally party in the last French election but also did not achieve a majority. He refuses to deal with Le Pen due to her party's conservative views. Having to work with her was conveniently averted when she was recently convicted of an election funding violation that bars her from running for office for five years. That has raised the ire of many French voters who believe her prosecution to have been politically motivated. The prosecution of political opponents is a regular feature in Latin American "Banana Republics" but has now become the "go-to" solution for many failing political leaders. Witness Putin's jailing of popular opposition candidate Alexei Navalny's and the latter's subsequent death in prison. Turkey's Erdogan has jailed his main political opponent, the mayor of Istanbul. The US witnessed comparable "lawfare" (multiple criminal prosecutions and civil litigation) against Trump initiated by Democratic prosecutors and Democratic funded lawyers. US voters were offended by that tactic and returned Trump to the White House.
The EU is confronting many challenges including the realization that it will have to pay for its defense instead of relying on the US to pick up the lion's share of that cost. Germany has long resisted liberalizing EU fiscal rules, but recently agreed to waive its 3% budget deficit limit to allow for substantial increases for defense spending. Once fiscal rules are ignored to favor defense, there will be relentless pressure to ignore them for other "pressing needs" such as supporting German industry, controlling immigration, increasing social benefits, raising public service workers' wages, addressing its woeful lack of energy independence, etc.
Britain and France are also clamoring to increase their defense spending, reportedly to discourage Russia from overrunning all of western Europe. The secret hope is that such spending will stimulate GDP growth and make political leaders look good. This all despite Russia's huge loss of life and military equipment in its Ukraine misadventure that has left it both financially and militarily weakened and embarrassed after having failed to achieve its blitzkrieg into Kiev. The only way France and England can support large military spending is to go further into debt as neither country will significantly decrease social spending. Editorialist Ambrose Evans-Pritchard at the Telegraph recently wrote,
Please forgive my burst of optimism a few weeks ago. I now fear that the EU's incorrigible pathologies will reassert themselves, and that Europe's half-baked rearmament will degenerate into a fiasco.
Trump tariffs and their effects on the world economies are much in the news. As with many subjects, Trump is both right in some respects and wrong in others. He is right that many foreign nations impose tariffs on US goods. For example: China imposes tariffs of 15-20% on US goods and more depending on the product, the EU charges 10% on vehicles and up to 30% on agricultural products, India charges 17% on most goods but 100% on vehicles, SE Asia 10-25% and more on finished goods, Taiwan 6% generally but higher on steel and other goods. So it is true that US producers have been saddled with foreign tariffs for a long time and that has hurt US export sales. However, engaging in a tariff war only encourages foreign politicians to charge yet higher reciprocal tariffs in an effort not to look weak. Tariffs in most cases are unjustifiable and negatively affect both producers and consumers. Nations with low-cost workers naturally have an advantage over nations with high labor costs. In a world of open, free trade, the higher labor cost nations can compete by being more efficient and productive. If Trump's imposition of tariffs causes the parties to sit down and reduce tariffs worldwide, that would be a huge win for everyone. If that does not happen? Rig for stormy weather.
China's Problems
China, the world's largest producer, is flooding the world with its excess production. It is trying to encourage Chinese workers to spend more on Chinese goods to decrease the nation's reliance on foreign markets - markets that are becoming increasingly hostile to China's mercantilism. The problem is that workers are cutting back on their purchases fearing that higher US and EU tariffs are going to be a dead weight on their economy. Chinese workers are also dealing with rapidly declining housing prices resulting from egregious overbuilding of apartment units. That goosed China's reported GDP in years past but those empty units are now an enormous albatross around the government's neck.
Many Chinese turned to buying apartments as an investment after suffering losses in the Chinese stock market. A common practice was to pay in advance for a unit to fund the construction. The bankruptcy of many builders has resulted in a huge inventory of both finished and unfinished units causing financial losses for both the builders and the buyers. Foreign bondholders of sixty-two of these companies have received only 1% back on defaulted off-shore bonds, with little hope of getting any more. Consequently, virtually no foreign money is coming into the country to support the industry. The Chinese government is attempting to address this problem with lower interest rates and easier terms but there is no quick fix. Compounding the problem is that local governments, that funded their expenses with land sales to developers, are now also in desperate financial condition and need bail-outs. A study done back in 2021 reported that fully 17% of living units built in China were unoccupied. That might be over 20 million units. Nevertheless, the Chinese Communist Party (CCP) continues to issue statistics reporting a robust economy (5% GDP growth). You might view that as skeptically as you view US and other government economic statistics.
Despite serious problems, the CCP continues to focus on growing the country's gold holdings. In addition to adding significantly to its "official" gold reserves (it is believed there are large unreported gold holdings as well), it recently authorized Chinese insurance companies to buy and retain up to 1% of their reserve assets in gold. The driving force behind this is to reduce China's reliance on the US dollar and US Treasuries as financial reserves. This follows the US's bone-headed move to freeze Russia's US Treasury holdings following its invasion of Ukraine. As a result, a growing number of nations are leery of holding US debt, not knowing when they might next be on the receiving end of Uncle Sam's sanctions. The US Treasury must continuously sell ever more debt in order to redeem maturing bonds and finance Congress' unquenchable spending and deficit habits. As more nations and foreign investors move away from the dollar, the Treasury may find it increasingly difficult to find buyers for its bonds.
The people of India, a land of 1.4 billion souls, have historically purchased gold to celebrate weddings, anniversaries and other special occasions. They and the Chinese have recently turned to gold to hedge their other investment risks and reduce their US dollar holdings. India's gold-based ETF's have surged 50% between January 2024 and January 2025. This, coupled with ongoing buying by central banks around the world, provides significant price support for the metal. It has risen more than $500 an ounce in the last three months - over 15%. By contrast, the S&P 500 is -5%. While gold's price has been rising for many years, it has not been in a straight line. But future price increases are virtually assured as governments continue to debase their currencies. Here is a chart showing the ongoing loss of purchasing power of the US dollar. One does not need bifocals to notice the trend.
Source: Federal Reserve Bank of St. Louis
Growth of Government
The US government created "by the consent of its people", was designed to accomplish two things: protect the people from foreign invasion and the people's personal and property rights from aggression by others. Thus, the ratifying states granted to their new government the power to create an army and navy to repel invaders and a court system to resolve disputes peacefully. They also granted to the new legislature the power to enact laws to facilitate interstate commerce and to create a post office. These are the so-called "enumerated" powers of the national government.
There are specific constraints on the new government written into the Constitution as well because the people had been subject to authoritarian rule by the king of England and knew from history that governments of all stripes always seek to expand their power over their citizens and extract ever more of their wealth. Consequently, they specified that all powers not specifically delegated to the national government are "reserved to the states." It was on that basis that the founding states, ever leery of a powerful central government, agreed to join the union of states. Had the scope of national power been left open, not one of the states would have joined the union.
Fast forward to today, where the US government has insinuated itself into and seized control of virtually every aspect of its citizens' lives. Some will argue that this is for the good. They might argue that allowing the states to control their own destinies would have led to chaos (e.g., different standards of weights and measures). One flaw in that argument is the unwarranted assumption that those involved in commerce would have failed to create standards.
Another argument for big government is: "Who would build the roads?" Roads existed within the states before there was a national government and a Department of Transportation. They were constructed by the people who needed them. They typically charged tolls to reimburse those who made and maintained them. Many today would object that a nation consisting of nothing but toll roads would be an abomination. They ignore that is what exists today. Roads are financed with money collected by the government from taxes on gasoline and diesel fuel (and sales taxes on tires and the vehicles themselves). Every public road today is a toll road - funded by taxes assessed on the users of the roads. Those taxes are collected at the petrol station instead of at a toll booth.
What about the Federal Aviation Administration, one might shriek? Without the FAA flying would be an incredibly dangerous undertaking! That ignores the obvious fact that the owners and insurers of billions of dollars worth of airplanes would take action to protect their investments by establishing a flight control regime. They would pass that cost onto their customers through ticket prices just as the cost of the FAA is passed on to the same customers through taxes and fees. This prompts the question of how did the US government became so massive in obvious derogation of the Constitution?
Ignore the Constitution
Political leaders have continually coalesced ever more power into the national government. The US, and virtually all governments, have become increasingly powerful and authoritarian. This came to pass in the US despite the Constitution's limits on the national government. During Franklin D. Roosevelt's terms in office, he and his Democratic party proposed and passed a series of laws seeking to vastly expand the scope of the national government. The Supreme Court struck those laws down as "unconstitutional" (i.e., declaring that they were beyond the powers granted by the Constitution to Congress).
Roosevelt's response? He and the Democratic majority in Congress threatened to expand the number of judges on the Supreme Court by sufficient numbers to outvote the sitting justices. Result? The Supreme Court meekly acquiesced and started rejecting challenges to the proposed laws. In short, the Supreme Court abdicated its duties to enforce the Constitution's limits on the national government. Since that day, there is virtually nothing that the national government cannot do despite the fact that the Constitution specifically states that all non-enumerated powers are reserved to the states. The consequence has been the stupendous growth of the federal government (and commensurate weakening of state governments) with a small group of political elite able to gain control of the government to empower and enrich themselves at the expense of "The People" whose interests' they are supposed to represent and protect.
We have no problem with people getting rich - even ridiculously rich. Steve Jobs became extremely wealthy by designing and selling products that consumers craved: reliable, intuitive computers in a day when other offerings were buggy and difficult to use; the I-Pod that revolutionized listening to music of your choice; followed by the now-taken-for-granted smart I-Phone that killed most land line phones because they are such an improvement over the old technology.
However, we have a big problem with politicians who manage to become staggeringly rich while claiming to represent "The People's" interests. The sad fact is that governments always end up being controlled by and enriching the few at the expense of the many. It is obvious that a government limited to providing a defensive army, post office, court system and facilitating interstate commerce could never have amassed a $36 trillion national debt. A government run amok was able to do so easily. The annual interest cost on that debt is soaring. Here is a chart showing the percentage of total revenues being spent on debt service now and in the future.
The Trump Card
Will the new US administration succeed in reining in the scope and power of the massive US government? Our prediction is, "Not a chance." That is because both political parties continue to promise endless benefits to voters and political supporters, with that massive spending unsupported by revenues. The Republicans, who claim to be fiscal conservatives, have been and continue to be just as fiscally profligate as their opponents, the Democrats. The Republican house recently passed a Continuing Resolution extending all spending at current levels - including that which massively exceeds revenues - plus more for defense. The Democrats were happy to go along as it kept their favored programs funded. How will the nearly $2 trillion dollar deficit be covered? The same way it has been covered for decades - by borrowing and debasing the currency - the time honored ways politicians seek to keep the plates spinning until they leave office and it all becomes someone else's problem. Here's a look at the current government debt. It exceeds $36 trillion and is growing rapidly. Bear in mind that this does not include numerous "unfunded" government obligations such as pensions and veterans' care as well as underfunded Social Security and Medicare expenses. It has soared from $24 trillion in 2020 to $36 trillion today - a 50% increase in just five years.
Another scenario is that federal lands could be leased to mining companies to allow them to produce and refine minerals essential to US industry and national defense such as copper, cobalt and rare earth elements. Most of those now come from the US's chief geo-political rival, China, putting the US at strategic risk. Republicans tend to favor developing land and mineral wealth (forgetting there are pollution issues to be addressed) while Democrats oppose doing so (forgetting that the copper, steel, aluminum and lithium in their EV's, laptops and large screen TVs do not spring forth from the earth in finished form).
Money raised by developing land and mineral assets could be used to reduce the national debt, but the virtual certainty is that it would instead be spent by politicians on "more of the same" bloated government and fiscally irresponsible programs. The change in the US administration led many to hope that the leviathan US government and its uncontrolled spending and regulation would be tamed just as Javier Milei is succeeding in doing in Argentina. Others fear that a dystopian Trump nightmare is nigh.
Conclusion
Republicans have come to concede that Trump, with his flurry of pronouncements and executive orders, is somewhat "quixotic" (tariffs on, tariffs off, tariffs back on, 25% tariffs, 10% tariffs) while Democrats simply think him to be "unhinged." Does he have a secret plan to right the ship of state or is he all bombast and bluster? Is he playing 3-D chess that we mere mortals cannot comprehend or is he just shooting from the hip each new day? He expresses his opinion that Canada should be the 51st state. He threatens to take over Greenland - by force if necessary. He angers two of the US's closest trading partners and the EU by imposing tariffs that will cause severe damage to their economies. We were taught early on that "you can attract more flies with honey than with vinegar" (though we confess to never understanding why anyone would want to attract flies). Fortunately, politics is not our beat. Instead, we focus on how politics will affect the well-being of the productive portion of the economy. At present, it is not looking promising.
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