The country is imploding under the weight of fourteen trillion dollars of debt, sixty trillion dollars of unfunded entitlement programs, and a monetary policy bent on destroying the currency and economy.  Government intervention in private citizens' lives and the economy has failed.  The eighty year old Keynesian economics experiment that started under President Roosevelt is nearing an end. 

The current state of economic affairs reminds me of the Saturday morning cartoon where the Roadrunner is chased by Wiley Coyote.  The clever Roadrunner leads Wiley to the edge of the cliff, maneuvers quickly to safety, and Wiley runs off the edge of the cliff.   Wiley remains suspended momentarily in mid-air before realizing his fate and plummets to the canyon floor.  

Government has lied and deceived several generations of Americans.  Politicians and bureaucrats will say and do anything to save themselves regardless of the consequences to the country or the economy.  Citizens have been led over the cliff by the government and are in a state of suspended disbelief. This is our Wiley Coyote moment!

Consider two questions: how does government repay fourteen trillion dollars of debt, and how does government pay for sixty trillion dollars of unfunded entitlement program obligations?  To address these questions you must understand how government raises revenue.  Government has three options; to tax, to borrow, or to inflate.

Taxation

The debate over tax rates is an argument used by politicians to garner support and votes for their ideology.  The so-called rich are demonized by politicians and the regressive media to pit one group of Americans against another.  The rich are too small a constituency for politicians to concern themselves with when compared to the lower and middle income earners.  The data tells quite a different story than politicians or the regressive media lead people to believe.  The Internal Revenue Service released Publication 1304 - Individual Income Tax Returns 2008 last year.  The data is summarized below:

*AGI - Adjusted Gross Income

• A mere 2/10ths of one percent of tax returns filed had an AGI > $1 million. Yet, 24.1% of the entire tax burden is paid by this group.
• Those filers with an AGI > $200,000 represent 3% of all tax returns filed. Yet, 52% of the entire tax burden is paid by the top two groups.
• Compare the top bracket with the bottom bracket and you'll find the per filer AGI ratio from the top to bottom bracket is 177 to 1. A filer in the top bracket has an AGI 177 times that of the lowest bracket. However, the per filer tax paid ratio between the two brackets is 936 to 1. A filer in the top brackets pays 936 times that of the lowest bracket.
• 47% of all income tax returns filed had no tax liability. That is 67 million income tax returns filed that paid nothing in federal individual income taxes.

If the government taxed every dollar above the $250,000 AGI threshold at 100% it would generate roughly $1.37 trillion of additional revenue.  This still leaves a deficit of $250 billion dollars for fiscal year 2011.  More importantly, people would simply stop working once government confiscated all earnings beyond a certain threshold.  There is no point in working if government is simply going to confiscate your earnings to redistribute to government designated recipients.

Borrowing

The government borrows money to fund deficit spending.  When expenses exceed revenues the government sells U.S. securities through the Federal Reserve to borrowers.  The borrowers become creditors as the U.S. owes other governments, institutions, and private investors their principal plus some amount of interest.  Every time the government borrows money to fund deficits the national debt increases.

Foreign governments have reduced their holdings in U.S. securities and are reluctant to continue funding deficit spending.  The Federal Reserve is suppressing interest rates which means those investing in U.S. securities receive a low rate return.  As with any investment there is a risk and reward, and many investors are not willing to risk their principal investment for such low returns on their investment.  Eventually, interest rates must rise if the government wants to attract buyers of government securities.

Inflation

The government's great equalizer is inflation.  Policymakers in Washington decide to create money out of thin air.  New money is printed by the Treasury, at the request of the Federal Reserve, and used to purchase U.S. securities previously sold to investors.  This is referred to as monetizing the debt.  The inflow of new money results in inflation.  Policymakers create terms like Quantitative Easing to not alarm the public to their actions.

Moreover, government deceives us by referencing the Consumer Price Index (CPI) as a measure of inflation.  The CPI is based solely upon a basket of ever-changing, government defined goods and services.  However, the CPI is the nominal inflation rate because it does not include currency devaluation.  The real inflation rate is substantially worse than the CPI because it accounts for the growth in printed money.   

We know this as purchasing power and every time the Federal Reserve prints money it erodes purchasing power.  In other words anyone holding dollars becomes poorer every time the Federal Reserve expands the money supply. 

Two leading economists of the twentieth century had opposing views on economics and the role of government in free markets.  However, both shared a common view on inflation. 

Milton Friedman said, "Inflation is taxation without legislation."   

John Maynard Keynes said, "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

Another unpleasant effect of current monetary policy is it penalizes lower income earners.  The Federal Reserve is keeping interest rates artificially low while monetizing the debt thus reducing purchasing power.  Those who do not have the means to invest in equity or debt markets, commodities, etc. have no other options other than simple interest bearing checking, savings, or money market accounts.  Interest is a pittance before inflation, and once you factor in the real inflation rate, those lower income earners actually lose wealth by saving.  The little guy that government proclaims to protect is the first to feel the negative effects of the Fed's inflationary monetary policy.

The simple truth is government cannot tax or borrow its way out of the current situation.  Moreover, austerity programs can only go so far as discretionary spending amounts to $1.3 trillion, or 36%, of the entire federal government budget this year.  The remaining 64% covers entitlement programs and interest on the debt.  By 2020, the federal budget is projected to be $5.6 trillion with $4 trillion for entitlement programs and interest on the debt.  This is before Obamacare is implemented.  

Government is left with two unpleasant choices; sovereign default, or erode the purchasing power of the currency in which the debt is denominated.  Technically, the latter is another form of default.  Practically, politicians will proceed with the latter option while trying to disguise their actions as necessary, or for the benefit of this or that class of people.  Eventually, the economy and country will collapse.  It's not a question of whether a collapse will happen, rather a question of when it will happen.

Citizens have been lied to and deceived by our government.  This is our Wiley Coyote moment.  Will citizens remain in a suspended state of disbelief and continue the farcical game?  Or, will citizens wake up and do something about it?