How to Address the Great Western Revenue Crisis

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (BullionBullsCanada) -- In a previous article,  I pointed out how we were in the midst of the worst revenue crisis in the history of our economies.  Here, I will focus on how we can begin the healing process from this massive hollowing-out of our economies, and why the appropriate solutions are nothing more than a function of simple arithmetic and the most basic principles of economics.

In 2005 and 2006 we were subjected to the worst of B.S. Bernanke's lies: that the U.S. housing bubble and the endless $trillions of Wall Street Ponzi-schemes which had been based upon that bubble represented a "Goldilocks economy" -- where U.S. house prices and U.S. markets were just going to keep going up and up forever. Months later the whole, fraudulent house-of-cards came tumbling down.

For the edification of Mr. Bernanke and all those who still mistakenly follow his preaching, I will describe what a real "Goldilocks economy" would look like, and how it would function. To begin with we need to quickly rebut another of the popular myths of the media propaganda-machine: that advocating economic policies to promote a healthy middle-class is "socialism."

Roughly 2,000 years ago (and more than 1,500 years before the birth of socialism), Greek philosopher Plutarch informed us of something which was already "old news" at the time of the Roman Empire:

An imbalance between rich and poor is the oldest and most fatal ailment of all Republics.

Was Plutarch some sort of closet, leftist ideologue who had somehow managed to travel back in time to the ancient past? Hardly. Like many of the classical Greek philosophers he was simply proficient with two age-old tools: logic and arithmetic. Indeed, most of the reputable elements of modern economic theory are nothing more than a fusion of simple arithmetic and common sense.

Any/every healthy economy should have a wealth-distribution curve that looks almost exactly spherical in shape: widest around the middle, and narrowing at the most-rapid rate as we approach either extreme. In other words, a healthy economy is one where the vast majority of citizens are solidly established at a middle-class level of existence. As stated previously, favoring a strong, healthy middle-class has absolutely zero to do with ideology and everything to do with arithmetic. To demonstrate this we need to again resort to the starting point of all analysis: definition of terms.

What is a "healthy economy"? Obviously to attempt to answer that question succinctly requires a general answer: a healthy economy is one which provides the optimal balance between savings and consumption. How do I justify my definition? Too much consumption is unhealthy. Not only does that necessarily imply insufficient capital for investment/development, but excessive consumption leads to numerous unhealthy consequences. To begin with, economies overheat.

When you have the maximum amount of consumption dollars flooding into an economy, inventories are drawn down, sparking prices to move higher in an inverse manner (the basic principle of supply and demand). Over-consumption (as we have seen vividly illustrated in our own economies) leads to excessively high inflation, asset bubbles, and (in the extreme) excessive personal debt -- as consumers spend more than 100% of their discretionary dollars.

It is a basic fact of arithmetic that the poorer the individual, the greater the percentage of every dollar they hold that is spent. This is one facet of the basic economic principle known as the "marginal propensity to consume". Despite the intimidating label it is nothing but an expression of a simple, unequivocal fact: by definition the poor have no excess wealth -- and thus each dollar they obtain is spent.

For this reason, we would not want to structure our economies to cause all of those consumption dollars to flow into the hands of the poor. While such policies would be extremely stimulative, they would literally be "too much of a good thing." Of course, if the poor had all the money they would no longer be "poor."

At the opposite extreme we have the wealthy. If the "problem" with the poor is that they spend too much, then you don't need to have the gift of prophesy to be able to predict the problem with the wealthy: they spend too little. As people become wealthier and wealthier, even though their total consumption may continue to increase in absolute terms, the percentage of each new dollar of wealth that they spend steadily declines. They inevitably begin hoarding wealth.

Only those who inhabit the economic middle provide an economy with the optimal blend of savings and consumption. "Not too hot" as when the poor have all the wealth, and "not too cold" like when the wealthy are hoarding all of a society's riches: a true "Goldilocks economy." Again, this conclusion has absolutely nothing to do with ideology. It is merely the other half of the principle of the marginal propensity to consume, and is an accepted part of economic theory in any/every economics textbook ever written. The rich hoard -- it is all simply a function of arithmetic.

Thus in any/every economy where a disproportionate share of an economy's wealth flows into the pockets of the wealthy we would expect the exact opposite problems we experience when (if) the poor had all the money. Instead of our economies overheating, this hollowing-out effect would cause our economies to get more and more sickly -- precisely mimicking the biological symptoms of anemia .

This is what our theory dictates, but what of our empirical evidence? Today the wealthy (most specifically the top-1%) hold the largest proportion of our societies' wealth in history. Worse, their annual incomes have never been higher while their effective tax rates have never been lower. The "sucking sound" as these parasites drain the remaining blood from our economies simply gets louder and louder.

What has been the consequence of this hollowing-out? Surprise, surprise! Exactly as our economic theory has predicted our revenue-starved economies are all at the point of collapse. Yet instead of doing anything to stop the blood-sucking of the parasites at the top, we have our governments continuing to insist that their victims engage in ever more-extreme dieting -- i.e. "austerity". Our governments have become nothing more than "pimps" for Vampires , like some low-budget "Dracula" movie.

Greece's economy didn't really begin to disintegrate completely until its government initiated austerity. The U.K.'s two years of austerity has only caused its deficits to grow, while its economy now shrinks into an official "double-dip recession." The most recent convert to these suicidal policies of Friedman Austerity is Spain. It's not making any progress on its deficit, but its economy is shrinking now too .

Obviously if the deficits only grow (or at worst remain the same) while the economies continue to shrink smaller and smaller this is not "fixing things" -- it is literally lemming-suicide, as clueless Western governments follow the government of Greece off its economic cliff.

If starving/squeezing those on the bottom only makes our economies sicker and sicker (until they default like Greece) then obviously to heal our economies we need to boost revenues by taxing the (very) wealthy. Even if I had not already established this fact with charts, theory, and analysis; this is a simple proposition of logic.

Again, we have empirical evidence to back-stop the argument. If the Bush tax-cuts from 2000 (the biggest tax-cuts for the very wealthy in history) caused U.S. tax revenues to totally collapse, then merely reversing those hand-outs must have an extremely positive effect on revenues.

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Of course in the U.S. that's no longer nearly enough. The $trillions which ultra-wealthy Americans have piled on top of history's largest wealth-hoards have all come at the direct expense of added $trillions in U.S. debt (at all levels of the economy). It is not sufficient that the Vampires are simply prevented from any more blood-sucking. One way or another they must disgorge much of the blood they have already drained from our economies, to retire those added debts (and the interest payable on them) with budget surpluses.

History's answer to this "disgorging" process has always been the guillotine. However that is so very, very messy. As I have pointed out in this series (and previously), a wealth tax is a humane mechanism to dispossess the ultra-wealthy of all of their excess blood without going to the extreme of decapitation.

Our economies are collapsing. The statistical lies of our governments can hide that (for a while) but it certainly won't do anything to prevent it. Indeed, with our governments all literally engaged in the most harmful, destructive policies possible (to feed the Vampires , every further day of denial only causes further irreparable economic harm.

We can stop this destruction (i.e. our economic rape) before our economies have finished their collapse or after they have done so. If we do so after, history tells us that almost certainly the "tool" to be used will be the guillotine. If we begin to repair our economies before the Vampires have drained the last drop of blood then more benign solutions remain possible.

Our economies have gone from being a series of roughly spherical distribution curves for the wealth of their populations, to a collection of obscene, inverted pyramids. You don't need a degree in economics to understand that an inverted pyramid is not a stable structure (for an economy, or anything else in the universe).

The pendulum of history is about to swing back because it must swing back (just as it has always swung back for thousands of years). It would behoove those currently on top to facilitate this progressive reversal rather than to stand in its way. History is very clear about what happens to such people.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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