Go ahead, let the economy collapse

A total economic collapse will reduce the deficit and get the private sector back on track

A big sell-off Wednesday. The Dow down 283 points. The 10-year T-note yields only 1.87%. And the price of gold barely budged.

In our opinion all three should be going down. Because the world is edging towards a global depression…

…with the US consumer unable to spend…

…the Chinese economy slowing down…

…and Europe preparing for defaults…

Assets should be going down. Except for US Treasury debt…which should be going up. That’s what happens in a depression.

All of which is making our “solution” to the financial pile up of ’08-’09 look better and better all the time. You’ll recall that we promised to tell you how you could fix the problem in our last exciting installment. This must have left you on the edge of your chair. It sure left us on the edge of our chair; we had to think of a solution overnight!

But it is really very simple: give collapse a chance.

Remember how desperate officialdom was to “prevent a catastrophic collapse?” Both in Europe and America. The European banks bailed out their speculators. Then the governments bailed out their banks. Then, they bailed out the countries that had bailed out their banks.

In America, the government bailed out the banks…the insurance companies…the automakers… About the only industry that wasn’t bailed out was the financial publishing industry. Guess we didn’t send them enough campaign contributions…

Then, the Europeans and the Americans bailed out each other.

And they’re still bailing. The US is running a budget deficit so large that we’ve lost track of it…was it $1.5 trillion? $1.8 trillion?

And the Europeans are preparing another big bailout for Greece…Italy…and who knows who else.

And every bailout makes the world poorer. Because it’s clearly bad money after good. Greece does not suddenly become a good credit risk just because you lend it more money. And Americans won’t be made richer because the feds offer them more debt at an even cheaper rate!

The problem is that doing more of something that doesn’t work is not a good idea. When you lose money on every sale you can’t make it up on volume! Nor is it a good idea to put more money into an investment that isn’t paying off….or to allocate more resources to an industry that stopped producing real benefits a generation ago.

Yes, that’s when the education industry turned sour — in the 1970s. Since then, it’s gotten sourer and sourer…with more and more money spent on education but not a bit of progress to show for it. The youngsters are as dumb as ever.

And the oldsters are even dumber. They want to continue to bailout, subsidize, give credit where it isn’t due, and otherwise funnel huge amounts of money to worn out, unproductive institutions. And for what? So they can avoid “a catastrophic collapse.”

Well, here at The Daily Reckoning we say ‘bring it on.’ Let’s have that catastrophic collapse and get it over with. Better now than later. It will only be worse if it is postponed.

But seriously, how would we ‘fix’ the situation? Well…that is how we’d fix the situation. We were being serious. We’re always serious. And earnest. And trying to do our best to help.

But that’s not all we would do. The problem really has two parts to it.

One part is natural, inevitable…it can’t be fixed. When you borrow too much money, you have to pay it back. Or default. Better to do it as soon as possible.

Likewise, if your company isn’t profitable…if your industry can’t take resources and add value to them…then you should go broke. Again, the sooner the better.

In these cases, the ‘fix’ is obvious. Bite the bullet.

But there’s more. There is also the zombie factor. This is something that can be fixed easily. As institutions age — including private industries — they attract parasites. The next thing you know you’re meeting with lawyers and working with regulators. There’s an agency hounding you about one thing…and a department on your tail for another.

And there are taxes up the kazoo. And debt. And extra costs.

You pay for stamps and handicapped parking places. You pay for well-meaning kids to offer advice to hardened heroin addicts…and lobbyists can get a break in the next tax bill. You pay for goons to frisk you are airports and hit squads to take out “insurgents” in cities you never heard of.

Oh, and don’t forget the kid who takes out loans so he can get a degree in the Emotional Life of Fruit Trees…and then defaults on his student debt. And the slob who uses Medicaid and disability to avoid having to go to work.

It’s all part of the picture of a society in need of a revolution…or a kick in the pants.

We propose one or the other.

How? Easy peasy. First, allow businesses and nations to go broke. No subsidies. No bailouts. No below-market loans. Just let them crash and burn. It will be fun to watch.

Second, cut taxes to 10%. That’s all. Just 10%. Like a tithe. With no deductions. No ifs…ands…or buts. Russia already has a tax like this. And it is booming.

And prohibit borrowing. Or money printing. These measures would solve the US debt problem overnight. They would protect the dollar. They would reassure investors, businessmen and householders.

They would also reduce the total US budget from about $3.6 trillion today down to less than $1 trillion. We don’t much care what the feds do with the money. They will surely waste most of it. But so what? A flat 10% tax rate would cut out most of the zombies. Freed from the dead hand of zombidom the private sector could get back to work.

Give it a whirl. Let us know how it works out.

Regards,

Bill Bonner