Part II of my series which addresses the positive future that potentially lies beyond devolution and collapse focuses on the high cost structure of the U.S. economy which dooms it to insolvency.

Yesterday, in The Next Golden Age, Part I, I laid out why the Savior State and its sprawling fiefdoms (both domestic and global) are unsustainable and thus will inevitably devolve/collapse.

Based on the historical accidents of plentiful cheap energy, global dominance via the destruction or marginalization of competitors and favorable demographics, the Savior State and its global Empire arose to reach the present extremes of marginal return: treasure, blood and effort are thrown at "problems" even as the returns sink to negative territory.

Exponential growth of State revenues and debt (public and private) is unsustainable, yet the status quo will immediately implode without borrowing on a vast and rising scale (the Savior State currently borrows 11% of GDP every year, a sum sure to rise).

We can thus look forward to the demise of the entitlement mentality:

The entitlement mentality is a prison of resentment, self-absorption and complicity in the "project" of enlarging the Central State and its Power Elites' share of the resources, output, wealth and income of the nation and the world.

Now I would like to focus on the pragmatic result of marginal return and protected fiefdoms: an intrinsically high cost structure in the U.S. economy.

I have addressed this many times over the past few years:

Lowering the Cost Structure of the U.S. Economy (August 29, 2008)

Is Higher Education Worth a Lifetime of Debt? (August 26, 2009)

What Won't Be Changing (February 2, 2009)

This Week's Theme: The Coming Great Depression (November 24, 2008)

Has Capitalism Failed? (December 19, 2008)

The key dynamics of high cost structure are:

A. Marginal return: as the returns on investment plummet to zero, the status quo attempts to "solve" the "problem" by borrowing and throwing ever-larger sums of money at the "problem." Thousands of pages of legislation add more complex layers of bureaucracy to systems already groaning under a crushing complexity and resulting inefficiency. Returns soon drop to negative.

B. Cost of borrowing rises: One way to think of this is to recall the physics of corn ethanol: consume a barrel of oil producing the ethanol and get 2/3 of a barrel of equivalent energy as a result. The 1/3 loss is filled by borrowed money, which masks the loss and shunts the burden forward, but with the added cost of interest. Thus marginal return which is cloaked by borrowing merely doubles the burden going forward: not only is good money being put after bad, but the money is borrowed, leaving futere taxpayers/citizens with an ever-rising burden of interest to service. The economy loses not just in the malinvestment but in capital and national income being diverted to pay interest on the money squandered in the misallocation/ malinvestment.

C. Cost of energy rises: All sorts of inefficiencies, fraud, predatory skimming and waste could be covered up by the unequaled benefits of cheap, abundant energy. Once energy is no longer abundant or cheap, then the true costs of our national high cost structure and profligacy will be revealed. Higher energy costs will act as an economy-wide tax, pulling income out of every household and enterprise, and thus complicating the Savior State/global Empire's project of extracting ever-larger sums from the national income.

D. Full spectrum defense of the Status Quo fiefdoms: Those who have garnered enough wealth and assets to dictate State policy will naturally defend their share of the swag to the death. The nation itself will be picked clean as each fiefdom-- sickcare, the National Security State-within-a-state, the military-industrial complex, the parasitic banking (and shadow banking) sectors, etc.--goes for broke (double entendre intended) to protect every last dollar of its swag.

In so doing, each fiefdom guarantees that the tax burden on the dwindling class of productive citizenry and enterprises will rise, increasing the cost structure of the nation.

National insolvency and the writedown of uncollectable/unpayable debt will clear the decks for a low-cost structure economy. Prosperity flows not just from higher productivity but from higher productivity in a low-cost structure economy. If the structural ("overhead") costs of the economy are rising faster than output and productivity, then the citizens become poorer with every passing day. That is our fate until the entire high cost structure of the Savior State/global Empire and its insatiable fiefdoms tumble into insolvency and all the accumulated debt is written off and renounced.

From the ashes of the shadow State and shadow banking system's leverage, fraud, and exponential debt will arise the "cash is King, productivity is Queen" economy which favors productive labor and investment over parasitic capital and its partner, the Savior State.


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