, , , , , , , , ,

“When the facts change, I change my mind. What do you do, sir?”

— John Maynard Keynes

I like to take fairly complex issues and break them down into simple truths. This process in mathematics is called forming a proof. A proof is based upon a series of accepted and demonstrable truths called axioms. In economics, the most valuable information is often found in analyzing past data, as the future is based upon far too many variables. It does not take a Ph.D however to see that we are venturing on a precipice in American history with various parallels, yet few equals.

In this country we approach almost 400% debt to GDP ratio, i.for every dollar we earn we already owe 4. I’ve been talking to a great number of people regarding their thoughts on the reformed health care system, how great it is, how we should be more like Europe, Canada, etc. I tend to agree. It would be great to have free, universal health care. Yet when I pose the question, should a person earning 100k have the same level of health care as a person earning 20k and people answer yes, I sense a fundamental misunderstanding of capitalism.

Capitalism empowers the individual, not the society. It enables the individual to provide for himself, whereas Socialism empowers the society to provide for the individual. Personally, I would rather be empowered to provide for myself, and in the current system I am unable; yet the solution for me is not to scrap the whole system. I am less concerned with which system we use, and I doubt it means a fundamental shift in our economy.  The simple point I make is that we can not afford it.

People forget that we as a country are on paper insolvent. We are not China, who has billions of dollars in reserves in several different currencies, increasing by the minute. We are America, who almost every week have to auction off billions of dollars in debt to finance our economic activity. If we look at Greece (and Portugal, Spain, and several other countries.) We can see this process isn’t going well.

Lets look at some axioms: We are posed for the largest tax increase in history come January 2011. While research shows that a tax increase has a 3x negative effect on GDP. Unemployment is at an unsustainable high. The government buys mortgages in large pools to keep mortgage rates low. They have signaled they are going to cease this.

So what does the future look like? We are broke, we are unemployed, and we have high taxes (we are Europe?). At least we have great health.

Will it truly be cheaper to change course now, because in the long run it will cost us less per capita? Forgive my morbid ending, however I am reminded of this article of wisdom.

“In the long run we are all dead.”
— John Maynard Keynes, A Tract on Monetary Reform, 1924