"The Decline and Fall of the Welfare State" is the title of a booklet I read in 1994 when I was 16 years old. It was written by author, investor and longtime Wall Street observer James Dale Davidson, a mentor of mine.
The title is pretty self-explanatory. The booklet describes how welfare states around the world were overspending and that it was an unsustainable system which would implode on itself.
In the late 1990s, the U.S. economy had a huge surge in the economy with the tech boom and then the real-estate bubble in the next decade. These booms filled government coffers as they made billions in revenue from capital gains and property taxes.
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However, the core problems were still there: unfunded liabilities in the form of pensions and an aging population.
What is going on in Europe is not so much a "European Debt Crisis" but rather the beginning of the decline and fall of Big Brother, or the welfare state once predicted by Mr. Davidson, a columnist for Newsmax’s Financial Intelligence Report newsletter.
The Western world is aging and slowing. The East is rising again. We must remember that the post-World War II period, until about the 1990s, was a huge aberration. China and India, the two great powers of the world, were both closed off. China was communist and India turned inward during the first 40 years of its independence. They are now rising.
When you have such a shift, it is not going to be that easy. While the world economy can grow together, there also must be a transfer of wealth. Part of this means slowing economies in the West. And as these economies have large governments and social welfare states, that means less tax revenue for governments to pay for these programs.
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The bond market is now beginning to speak. Some countries like Canada, Sweden and New Zealand got lucky. They had their debt crises in the 1980s and 1990s and were small and isolated. They could restructure when the global economy was strong.
Others such as Ireland, Portugal, Iceland and Greece have not been so lucky.
However, we are now seeing the debt crisis spreading to large economies. Italy has been the first to go. France is seeing its yields rise.
After this, I think that even giants like Germany and the United States will see their yields rise.
This means a major restructuring in the West: The reduction of costs in outlays, rising taxes to close the revenue gap and an overall lower standard of living. It also will mean more printing of money as central banks will try to fight rising rates by monetizing the debt or printing money to keep rates lower as investors dump or demand higher returns for the larger risk on this debt. This means more debasement of paper currency and higher gold prices to come.
The Decline and Fall of the Welfare State will not be good for most people.
However, if you protect yourself from it in the form of buying commodities or precious metals you should thrive and survive.
About the Author: David Skarica
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