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SOVEREIGN MAN

You don’t need a PhD in economics– you just need to understand basic arithmetic

October 14, 2011
Pattaya, Thailand

We recently received a note from a German journalist writing for a national paper there. He asked, “Simon, German politicians swear to support the well-being of the German people. Given this, what would you advise the German government about the euro– keep saving it? Or let everything fail regardless of the consequences?”

Europe and the United States have much in common in that their sovereign debt problems are really quite simple to understand. You don’t need a PhD in economics– you just need to understand basic arithmetic.

In the US, for example, the government does not collect enough tax revenue to cover even the most basic services that society deems sacrosanct: defense [offense], social security, and Medicare.

In 2010, the federal government collected $2.2 trillion in tax revenue and spent north of $2.5 trillion just on those three programs– already $300 billion in the hole. Everything else– the post office, Homeland Security, the FAA, the FDIC, even the light bill at the White House– is funded by debt.

That includes the most peculiar debt-funded item– interest on the debt. The US government has to borrow money just to pay interest on the money it has already borrowed. This is unsustainable, it’s simple arithmetic.

Europe’s problems can also be explained as simply. Greece effectively has no money, and its only access to capital is continued bailouts. There are four options for the country being discussed:

1) Austerity. Not only is this politically unpopular, it causes social unrest. People won’t stand for it… nor will they be able to pay enough police officers to beat them back with batons. The populist uprising will squash any meaningful austerity plan.

2) “Grow its way out”. Not possible. When you count public and private debt together (roughly 260% of GDP), Greece is spending roughly 15% of its entire GDP just on interest payments. That’s an incredibly high barrier to growth.

3) Inflation. Ordinarily, governments would just print their way out… but this isn’t even possible right now because Greece doesn’t control its own printing press.

4) Default. Result? Set off a chain reaction of banking failures and a derivatives meltdown. Utter financial carnage. Nobody wants to see this.

Germany is particularly focused on #4. Many German banks would suffer or fail as a result of a Greek default, sending a terrible ripple throughout the economy.

It’s understandable that politicians want to avoid this scenario and are willing to pay a high price to do it. Hence the bailouts. But they’re completely ignoring the fact that the other options (growth, inflation, austerity) aren’t even possible.

If German politicians are really sworn to support the well-being of their citizens, the best thing they can do is look everyone in the eye and say, “Buckle up, people, we’re about to swallow a nasty pill… better we get it over with now than drag it out for years.”

The same goes for the United States.

All of these countries have seen the face of disaster before; there’s not a single nation on this planet that hasn’t been through a terrible period in its history. People suffer. They survive. And then they move on.

On a brighter note, we received a comment from reader Seneka who wrote, “I just spent 3-months living in South America. Mostly Argentina with some time in Chile.
Words that come to mind to describe Chile? Clean, advanced, polite, friendly, orderly. It is a world away from its neighbors.”

I couldn’t agree more. Look, no place is perfect. Chile has its problems too. But of all the places I’ve been to in the world (more than 100 countries on 6 continents), there are few places in the same ballpark when it comes to a free, civilized, advanced society with plenty of opportunity for all.

As I’ve written before, this is why I selected the country for our resilient community project. And also why I’ve worked with some colleagues on the ground to launch a unique, inexpensive residency and citizenship program in Chile that I’ll be discussing in this month’s upcoming Sovereign Man: Confidential.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • disqus_TLcMqwnySr

    The western world is in a race against time, while China and others only have to sit and wait until they become winners by default.

    Most individuals don’t have the comprehension of this dynamic to take appropriate action. The Occupy Wall Street movement is a clear indication of this – almost nobody among those thousands of different ideas grasps the enormity of the situation. Even fewer have the patience and financial ability to withstand the extended duration that it will take to play out.

    • Gil

      China will probably follows this script in 50 years time with their government interventions and ageing population.

    • http://www.facebook.com/profile.php?id=9214474 Mike Gropp

      I’ve been in  China for almost 2 years now, and though I don’t have a PHD in economics, I don’t need one (as the title says) to let you know China is in and will be in as deep as the US.

      http://mises.org/daily/5701/The-China-Bust-Tic-Toc

      How else do they devalue their currency to keep exporting like crazy? By printing and buying useless US dollars. Talk about bubbles, China is sitting on one of the biggest ones!

      • disqus_TLcMqwnySr

        Every economy will suffer, no doubt. There’s a difference between the east and west, though.

        A person holding seed come springtime can plant his crops and reap the yield later in the year, while those without will suffer or starve.

        China and other prudent nations have been accumulating real goods while the western world is offloading them to save their paper house. What happens when winter hits? If they survive that, what will they have at the return of spring?

        Now it may be easier to understand why the empty cities were thrown up in such a fashion, or why Dubai has gone to great lengths to develop a paradise of commerce: real assets for when the paper illusion burns away.

        Possession is 9/10ths…

  • Stoneage

    Interest period is a non winner..  Mathematically impossible becausse the money to cover theinterest is never printed.  It’s called usury and is unlawful.  Unlawful because of reason stated above.. You cannot pay bach that which doesn’t exist.  The entire world needs a huge shovel to get out of this one..  My vote is to buckle up and ride out the failure.  Then use Just weights and measures to get back on track..  Clamshells, rocks – heck even gold and silver would work just fine..

  • Getyour Factsright

    One may not need a Ph.D. in Economics, but one should pay attention in government class. Then one would know the post office receives almost no federal funding at this time.

  • Jevonsparadox

    ” Everything else– the post office, Homeland Security, the FAA, the FDIC, even the light bill at the White House– is funded by debt.”

    “The US government has to borrow money just to pay interest on the money it has already borrowed.”

    I agree with the basic thrust of the argument but PLEASE lets get the facts right: (1) The Post Office is entirely funded by postage-  and it would not be running into the ground if the ideologues in Congress were not deliberately trying to cause its failure by mandating pension plan contributions that go well beyond what is actuarily required.  (2) the FAA is funded (like the SEC and the FDIC) by industry fees.

    The U.S. does not have to borrow just to pay interest on the debt.  Semantics you may say, but no the implication of that statement is that tax revenues do not even cover interest payments.

    The situation is serious enough that we may stick to the facts…leave it to others to make stuff up or distort the truth.

  • http://www.laurie-the-traveler.com Laurie

    “The US government has to borrow money just to pay interest on the money it has
    already borrowed.”

    Simon, if I didn’t know better and if I wasn’t so stupid I would swear that is the world’s biggest Ponzi scheme. :)

  • 4thaugust1932

    US companies are evading taxes by opening/operating an office in Ireland.
    But US citizen must pay income tax to US Gov if he is working in Ireland.
    Insider trading is legal to US Congress members.
    And insider trading is illegal to US Citizens.
    How long this hypocrisy will continue?

    • doesNotMatter

      It will continue till you actually do something about it……Yes, i mean YOU, personally……not us….not we…….YOU

  • Facts Matter

    Gee, my comment pointing out Simon has a few of his facts wrong never made it to the board. Makes you wonder, doesn’t it, whether this Anointed One can stand being shown to be consummately wrong….

    • Cyrille

      R U te guy talking about the post officenot recieving federal funding? u should get ur own fax right, PO lost 20 billion in the last four yearz! where do you think that money comes from?? the goverment! and where do they get it from? china! catch a clu, ‘facts matter’.

      http://www.businessinsider.com/post-office-bailout-2011-5

  • http://www.facebook.com/jay.twila Jay Twila

    There is no completely safe haven on this earth. The reason is because we’re living in a highly interconnected and interdependent world. However, there are some places where you can minimize your exposure to economic calamities. Much of that begins with getting your own personal house in order.

    Even then, I’m of the opinion it is okay to simply pack up and leave. Sometimes the best time is right now. Even with dogs, kids, mortgages, etc. Just break free.

    The biggest barrier to Latin America for Anglos in my opinion is the Spanish language. If Chile for example were an English speaking country, many more of us would be down there right now. Language matters and as people get older they usually dislike learning a new tongue. Otherwise sure, Latin America is blessed with several potential safe havens.

    The other two problems with Chile are its tremendous income inequalities (not a problem in my book, but usually a problem decried by Marxists), and the fact it’s only been a few decades since the dictatorship ended. Look, Panama had a dictator until 1989. Their track records in “freedom” are still very small compared to the U.S. or U.K. (I know the U.S. and U.K. mask many of their problems and may ultimately slip into a soft undeclared tyranny)

    • amerikanka

      I find it odd that language is the biggest barrier – I mean, Spanish isn’t even a language that uses a different alphabet. And to me, “a few decades” is a long time – a lifetime. Is there currently a threat of dictatorship in Chile today?

  • Blkknight999

    Your statement above is not true. The Post Office is not “funded by debt”, it’s revenue is derived from fees collected from the sale of postage and stamps.

    • doesNotMatter

      ha ha ha ha……..good one Blkknight999. That will show Simon. does he not also know that the government is funded not by taxes, but the sale of services the government provides us such as………… um…..such as………er…..i mean ………eh..
      …. Well, I’m pretty sure they provide us services, I just can’t think of them off of the top of the head. Take that Simon

    • USPS and Amtrak

      You realize that The US Postal Service does not earn enough money through “fees collected from the sale of postage and stamps” to even cover its operating costs? It needs debt and/or tax money to continue staying afloat

  • jondaw
  • Dr. Truth

    Merely contemplating the notion of government leads to our implacable and continual downfall.  It becomes a blood-sucking virus that will never give up its host until the host is killed.  The framers of the US Constitution set up many checks and balances and the idea of Divided Sovereignty to delimit the prospect of Tyranny, but really all of that ended with the presidency of Lincoln, who essentially extirpated the principle of States’ Rights on behalf of the accretion of power in the centralized apparatus of the federal government.  This ideology has disseminated its virions on a global scale, even providing the Bolsheviks their own paradoxical modus operandi of achieving internal peace through the imposition of continual strife.  Thus government will ineluctably progress to its only possible, logical conclusion: the annihilation of the individual.  As Sherlock Holmes might say, “It is elementary, my dear Watson.”  In essence, it is war over your very soul.

  • http://www.the-urban-survivalist.com Urbivalist Dan

    I’m laughing thinking about what it would be like if politicians ever were to get up and lay out the options like they were here in this post-1,2,3, or 4. 

    And then look their constituents in the eyes and say, “you know what, we’re going with option 4. It will 

    ‘Set off a chain reaction of banking failures and a derivatives meltdown. Utter financial carnage.’

    but hey, it’s still the best option.” 

    I would love that. 

    • DoesnotMatter

      @Urbivalist Dan, I am sure you would love that…..but the constituents probably would not, the lobbyists would certainly not, and those who fund the politicians re-election campaign would definitely not……so I don’t think it’s gonna happen.     Unless you could convince the politician that you could do something very unpleasant to him if he did not make you happy. Think you are that persuasive?

  • DetoxRevolution

    I am seriously wondering, what happens after high inflation / hyperinflation?

    From the research I’ve done, what follows a period of high inflation is heavy deflation as the economy practically comes to a halt during hyperinflation as people can’t afford anything anymore.

    It also seems that hyperinflation only lasts (well “only”) a few years before turning into heavy deflation.

    That’s when cash is king again.

    It would be great to have someone explain what usually happens after hyperinflation

    • DoesNotMatter

      @DetoxRevolution, what usually happens after hyperinflation is usually a hitler

  • TW

    Simon, 

    I know you and Dr Corbin are huge believers in Chile – and I was hoping you could comment on the October 19 story that Chile is now implementing a military draft order – in response to the nationwide student protests? 

    http://www.independent.co.uk/news/world/americas/chile-tackles-protesters-with-military-draft-order-2372518.html

    I dont ever remember reading anywhere that military service is mandatory in Chile on this site or Dr Corbin book I purchased (maybe I missed it) – and in times like these in Chile where they supposedly dont have enough volunteers to serve – they implement the draft.  

    I can imagine if this was the US – you would point to this as an example of tyranny – and reasons to leave – so, I would be curious to hear your take on it when its Chile. 

    I should also point out how important this is for people with families looking to get citizenship in Chile.  If you get citizenship – as well as your kids – “Military service is obligatory in Chile”.  

    TW

  • JCC0

    Simon,

    I think what many, if not most, are railing against is Capitalism as practiced by the U.S. today, and not capitalism in general, at least from what I’ve seen and heard.

    • DoesNotMatter

      @John Cusick, I don’t think those railing against capitalism really know or care about the subtle (or not so subtle) distinction between actual capitalism and the version practised by the U.S. They are angry, they are not thinking, they don’t like capitalism and they mean to destroy it, period! 

  • Tommie

    Greece will exercise option 3, – inflation, Simon. You have laid it out very nicely, except you’ve made the mistake assuming that Greece doesn’t have the printing press.

    There is no Greece. There is EU. The goal of EU, as of any other government is the continuation of government by any means. The EU has a problem in one of it’s extremities, and if the problem was unique, it would opt for an amputation. However, since the problem is not unique to one province, and the EU clearly understands that options 1 and 2 are unreal for the reasons you state, and that they will remain unreal for other PIIGS even if Greece is made to exercise option 4, then the EU surely knows there is only option 3.

    Does the EU have the printing press? I believe they do.

    USPS derives it’s means from exploiting the monopoly powers over every US resident, granted to it by the US Government. A manifestation of those powers can be found in your mailbox most of the days, – the junk mail.

    Put it another way, the USPS steals your mailbox space and time you spend clearing your mailbox, as well as the money you pay to haul away the trash.

    There is absolutely no difference between the USPS, and a mafia cartel that charges small time gangsters to forcibly store dead bodies in your freezer, so that you then go ahead and dispose of them on your own.

  • samcarmx

    October 24, 2011
    6
    The One Per Cent’s New/Old Solution to Economic Crisis
    Destroying Estonia
    by JEFFREY SOMMERS and MARKKU SIPPOLA

    http://www.counterpunch.org/2011/10/24/destroying-estonia/

  • samcarmx

    October 24, 2011

    12

    var addthis_config = {“data_track_clickback”:true};

    Destroying the Livelihoods of Thirteen Million People

    The Myth of Greek Profligacy

    by MARSHALL AUERBACK

    http://www.counterpunch.org/2011/10/24/the-myth-of-greek-profligacy/

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