Mailvox: Eurosclerosis and collapse

Eilonwy asks about RGD:

I’m reading The Return of the Great Depression, which I bought at full-price at the Wall Street Borders. I’m only a quarter through it, since I have to call my securities-analyst brother once a day to make sure I understand the concepts. In short: it’s slow, but worthwhile, going for me.

One question I have for you, and maybe it’s answered later in RGD is: when? I get this sense from reading your blog and Mr. Denninger’s, that the center cannot hold much longer and that we are tottering on the brink of a Greek-style collapse. Then I read on Yahoo Finance that Social Security has moved permanently into the red and that the debt we will accrue paying SS benefits will hurt our AAA rating, moving us yet further into debt. As Ed Morrissey states, “the wheels have begun to fly off the entitlement bus.”

What I don’t quite understand is how the welfare states of Europe cruised along – functionally – for 60 years, with entitlement programs far more progressive than what we have here, before facing the crisis they find themselves in now. Whereas (at least when reading you and Mr. Denninger) it doesn’t seem our economy will be able to hold it together for five years, and we haven’t even socialized medicine yet!

I think my question is twofold: 1) are we really bordering collapse, or could we limp along a la Britain and France, with a soft-totalitarian welfare state, and remain semi-prosperous for a decade or three before all the bad decisions we’ve made and are making really come back and whallop us? and 2) if we are bordering collapse, why do we find ourselves here so quickly?

The main reason that Europe has been able to limp along with heavier social outlays is because the European nations have virtually no defense budget. Since 1962, U.S. defense spending plus defense-related interest on the debt has amounted to around $2,500 per year per capita. If you consider that full Social Security benefits at the average income amounts to around $12,576 per retiree, it’s not hard to see where Europe has been finding its additional social spending.

In answer to your first question, yes, we really are bordering upon collapse because our total debt level is over 500% of GDP when all of the unfunded, off-balance sheet debts are included, as they must be. This is completely unsustainable even if we ended all defense spending today. Which, of course, we’re not doing anyhow. In answer to your second question, this is a rather binary problem. You can get by one way or another right up to the moment that you can no longer do so. While some still think it’s possible to hyperinflate out of the problem – which is really just a means of buying stability a little time if you consider the eventual fate of most countries that hyperinflated – there is a very serious timing problem even if the peculiar U.S. debt-money system permits such rampant inflation.

Once the fleets of money helicopters are sent aloft, it’s game over for the global economy, for everyone with savings, and everyone holding debt. That’s assuming it even works; if it doesn’t work then it’s an instant game over for geopolitical stability. So, Washington and the Fed don’t dare to issue the order until the very last minute… which means that when the next default crisis hits, there is a very good chance that they will not react quickly enough and the financial system will collapse in a catastrophic manner beyond the ability of even hyperinflation to help it limp along.

Perhaps the financial wizards who created this situation can find a way out of it, but I do not see one nor have I read anything by anyone that offers what I consider to be an even remotely credible solution. And while it’s true that these events always take longer to develop than anyone ever thinks, when they finally come to pass they tend to unfold much faster than anyone expects.