Is an Economic Deluge Nigh?
By David Galland, Casey Research
The ebb and flow of economic history reveals a vital lesson: the less an economy is stifled by regulations, the more effectively people can navigate challenges and seize opportunities. In an unfettered environment, mistakes are swiftly addressed, and progress is achieved.
On the other hand, when bogged down by excessive regulations, taxes, and bureaucratic interferences, individual progress tends to stall. It seems that with the passage of time, contemporary generations have significantly forgotten how crucial the freedom to chase personal ambitions is to economic growth.
This ignorance is evident in the increasing demand for government intervention in the economy. If this trend persists—which I firmly believe it will—the ambitions of the productive minority will soon be stifled by soaring taxes and misguided attempts to create equality. As a result, the fragile global economy may very well collapse.
A glaring example of this ongoing trend is the current political landscape in France, particularly as the first round of the presidential elections approaches this weekend [LAST WEEKEND].
According to French electoral rules, if no candidate secures more than 50 percent of the vote, the top two contenders advance to a decisive runoff, set for May 6 [ARTICLE WRITTEN ON MAY 4. SEE NOTE BELOW].
The sitting president, Nicolas Sarkozy, who has been running for re-election, faced unexpected competition from socialist candidate Francois Hollande. Hollande has put forth an audacious proposal to impose a staggering 75 percent tax on individuals earning more than one million euros per year, in addition to raising corporate taxes to 35 percent, making France’s tax rates among the highest globally. For context, there’s already a 25 percent VAT in place, one of the steepest in the world. Some argue that these new tax reforms could effectively strip away nearly all income over one million euros for the fortunate few.
Hollande also intends to reverse a recent increase in the retirement age from 60 to 62, an initiative pushed by Sarkozy. Coincidentally, Hollande’s campaign slogan is “Change – Now!”
Remarkably, as a result of these proposals, Hollande has surged ahead of other candidates and is projected to be neck-and-neck with Sarkozy.
The relegated candidates will bow out, allowing their supporters to align with one of the front-runners. With Jean-Luc Mélenchon, dubbed “far left,” projected to claim around 14 percent of the vote, it is anticipated that Sarkozy’s re-election hopes may end in a disheartening defeat on May 6 [HOLLANDE DEFEATED SARKOZY IN FRANCE’S RUNOFF ELECTION ON MAY 6].
This situation brings to mind the words of Louis XV: “Après moi, le déluge.” In Louis’ case, the deluge materialized as the cataclysmic French Revolution. Should Hollande ascend to the presidency, we may witness a deluge in the form of escalating interest rates as investors brace for an accelerated rise in the country’s already troubling debt-to-GDP ratio, expected to near 90 percent this year, compounded by a potential exodus of capital and enterprise.
The ensuing turmoil may not wait for Hollande’s official inauguration; it could start bubbling over the moment it becomes apparent that his rise to power is inevitable.
Considering that France is the Eurozone’s third-largest economy, the repercussions could be far-reaching and devastating. The mere thought of the guillotines rolling out across Europe becomes less ludicrous when you consider that Eurozone nations collectively owe around nine trillion euros, a substantial amount needing to be refinanced in the coming years. Furthermore, recent data from the IMF suggests that European banks may need to divest up to 3.8 trillion euros in assets—many of which are dubious—by next year to maintain solvency.
Over in the United States, the situation isn’t much better. The recent electoral changes have left the government desperately seeking an additional $1.4 trillion annually. Meanwhile, Japan, the world’s largest debtor in terms of debt-to-GDP, faces challenges as local funding sources dwindle, necessitating recourse to international markets.
In essence, we’re confronting a scenario where there is an overwhelming demand for resources from multiple nations simultaneously.
Public Demand for Socialism
It’s not just that these governments are on the brink of financial collapse; they are likely to become even more adrift as interest rates rise. There’s a worrying global trend toward socialism gaining public support in response to an escalating crisis.
This evolution is hardly surprising when you consider that, for decades, public education has been primarily managed by state employees.
For instance, a revealing quote from a college student’s essay in the U.S. illustrates this mindset:
ESSAY ON GOVERNMENT ASSISTANCE
STUDENT AT VALENCIA COLLEGE
“As human beings, we are not really responsible for our own acts, and so we need government to control those who don’t care about others.”
This student was part of a Valencia University economics class. When asked to write an essay on the American Dream and what assistance they expect from the federal government, only about 10 percent wanted the government to leave them be—while a staggering 80 percent hoped for government support in achieving their dreams, including free college, healthcare, job placements, down payments for homes, and retirement income sourced from the wealthy.
Please take a moment to watch a worthwhile interview with the professor.
This perspective is eye-opening.
The underlying message here is clear and important.
After years of indoctrination through state education, the populace is now conditioned to look to the government for solutions, even as it has often been the cause of their problems.
Faced with the intractable mess they’ve created, these governments must propagate the myth of their omnipotence. However, with challenges mounting, public faith is beginning to wane.
This creates a precarious situation, for the only viable solution is to do the opposite of what the public has come to expect: governments must reduce their roles in the economy significantly. They should incentivize individual pursuits and wealth creation by lowering taxes and dismantling the extensive regulations established over decades.
Yet, should governments attempt such measures, the ideologically conditioned masses would likely react with confusion and indignation, as it contravenes everything they’ve been taught. The reaction would be akin to the Pope declaring from the St. Peter’s Basilica balcony that there is no god—an utter shock leading to riots.
Coercion and Theft are Now Considered Moral
We find ourselves at a pivotal juncture in history.
On one side, many believe that government is the solution to all issues, and that any new administration can mend the situation. On the other, politicians—many of whom feel they must meet public demands for action—find themselves in a bind.
Typically, such demands lead to grandiose speeches and superficial measures. Today, however, the severity of the crisis requires more substantive action. It won’t dissipate unless the established market dynamics are restored.
This brings us back to the troubling reality: the populist masses are unlikely to accept politicians minimizing taxes and regulations for business, or curtailing state guarantees and services.
The phrase “between a rock and a hard place” falls short of encapsulating the gravity of this situation.
The unrest is palpable, with the public expressing grievances that resonate with political figures, who hastily adopt the language of revolution to appear aligned with the masses and redirect outrage towards capitalists who serve as scapegoats in this unfolding saga.
When confronted about his hefty tax plans, Hollande stated:
“It’s not a question of return. It’s a question of morality.”
When coercion and theft are viewed through a moral lens, the implications can be grave, and the outcomes will likely be detrimental.
While I can’t predict how this all will unfold, I can confidently state that the outcome is unlikely to be favorable.
Sincerely,
David Galland
for Economic Prism
[Editor’s Note: David Galland serves as Managing Director of Casey Research. Throughout his diverse career, he has held various roles, including conference director for a major investment conference, financial newsletter publisher, and executive positions in mutual fund companies. David’s bleak outlook for the future has been a topic of discussion among experts at the recently concluded Casey Research Recovery Reality Check Summit. If you missed it, there is an opportunity to hear the presentations in an audio collection, available on CDs or in MP3 format—order your copy now.]