Economic Chaos, Three Possible Solutions

Posted on May 8, 2010

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It would seem that the recent economic crisis enveloping Greece is merely a preface to what is to come in many of our States and eventually to the U.S. as a whole. Our deficits are staggering and unsustainable. As I see it we have three choices, none of which are ideal.  Solution 1. We raise taxes.  Because taxing  the rich will not begin to solve the problem, a VAT tax must also be considered as well as increased taxes on the middle class. To successfully reduce the deficits to sustainable levels we will also need sustained and substantial growth of GDP and that is not consistent with high taxation.  Because increasing taxes will undoubtedly curtail the growth of GDP  we will have to be prepared to live with high unemployment and a reduced standard of living. This path would render the U.S. very similar to the present European welfare states which are  imploding from  high taxes, bloated govt. and cradle to grave entitlements.  Solution 2.  We can drastically cut govt. spending, reduce entitlements ( beginning with the repeal of the Health Care Reform Act)  and cut  Social Security, Medicare,  Welfare and Education spending. If we do this we must be prepared for the same kind of social unrest that we are seeing happen in Greece. In order to  get people back to work taxes will have to be reduced and the Bush tax cuts maintained at the same level they are today.  Solution 3.   We can return to the Gold Standard. This would require a govt. announcement that at some specified time in the near future all U.S. Currency would be redeemable for Gold. As well, all foreign trade and transactions would be denominated according to a fixed Gold Standard. All those trading with us would be expected to have their currency backed by Gold at the same fixed rate. Gold then would seek a level more realistic to the present real value of U.S. Currency, maybe even $5,000 or more per ounce. This solution would be followed up with a Constitutional Amendment requiring a future mandate of fixing Currency to a fixed amount of Gold to back it. This last solution is the one that many  Tea Party advocates would prefer to see.   Solution  1. is what the present Administration is working to achieve and solution  2. is what the majority of the Republican Party would advocate.  All of these solutions have severe downsides and are prone to unanticipated consequences.  Solution 3. could even return us to the problems of the 1880′s and 1890′s where because of  limited money supply Western farmers and ranchers fought intensely  for free coinage of silver. We may well be in a no win situation, but if I had to choose,  I think I would choose solution 2, which seems possessed of fewer long term problems.  Solution 1. is how we got to where we are, and would seem to have high potential to make things worse.  Solution 3.  seems highly complicated and requires that other major economies follow suit. The future implications of solution 3 are not very clear and it would be the most difficult for the average citizen to understand.

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