THE SOVEREIGN DEBT CRISIS

Economics studies the production, distribution and consumption of goods in conditions of scarcity. Laissez-faire captialism or pure capitalism is the complete separation of economy and state. Rather than a centralized government authority, such as the Federal Reserve Board, the Department of the Treasury, The Department of Labor and so on making decisions, it is left in the hand of individuals. Individuals choose which businesses they will patronize, how much they will work for and under what conditions, how and if they will save and invest and so on. Government neither levies special taxes or gives special subsidies or tax breaks to companies, picking winners and losers. It's all in he hands of consumers. People are free to form unions, but membership is not compulsory. This system, better described as the lack of a system, has the benefit of employees having to do their very best to compete against other employees, resulting in a productive work force. Companies must offer the highest quality at the lowest price with the widest selection and best service in order to compete against other companies, so economic production is high and efficient. The decisions of millions of individuals (what Adam Smith called "the invisible hand of the marketplace) create conditions of generalized prosperity. This is why countries with free market economic systems prosper. Because a highly skilled and educated work force is required, and such people are not easily commanded or controlled, there tends to be a high degree of personal freedom in such places.

Socialism is a system of centralized government control of economics. The government decides what is to be produced, in what manner and by whom. It may outright own the means of production or it may exercise its control through regulating, subsidizing and taxing private industry. The problem with socialism, Market Thatcher once quipped, is that "eventually, you run out of other peoples' money. That is what has occurring in Europe in the sovereign debt crisis. A deficit is a shortfall between revenue and expenses. When you run deficits every year, the total amount of this (the total owed) is the debt. The debt of a country is sovereign debt. Europe's socialistic economies are huge welfare state bureaucracy are failing. The forces are an aging population, with people living longer through innovations in modern medicine, and time. Most of these systems fund the retirement and medical care of the old through taxing the wages of the young. But when medical costs go up and the number of young workers go down, the system collapses. Such systems are often referred to as pyramid or ponzi schemes. Providing something to older investors relies on a steady stream of new investors. As soon as the new investors dry up, the old investors can't be paid and the system collapses. A similar thing is going on in Europe and with our own social security and medicare systems, established under the Roosevelt and Johnson Administrations. When Social Security was first established, there were 40 workers for every retiree. An average of 40 people funding the retirement of 1 is a workable system (though a person might still disagree with it on the grounds that people should save for their own retirement and that this amounts to socialistic redistribution of wealth). But when it was established, people would die on average within a few years of retiring. Because of an aging population, now there are only three workers for every retiree. So even though the inevitable can be staved off for a while by raising the retirement age or the amount people receive or raising the cap (currently only the first $100k or so of income is taxed), this doesn't solve the underlying structural problem. Because Europe had a lower birth rate and thus an older population, the problem is hitting there first, but with social security and medicare together making up the biggest item in the Federal Budget, unless something is done, we will face the same crisis Europe is facing.

To whom are sovereign debts owed? Other countries and individual investors who buy Treasury Bills. What happens when countries or investors don't think they will be paid because the debt is becoming so large? Interest rates go up - way up. And when that happens, servicing the debt becomes impossible and a crisis occurs. Countries essentially go into a state of bankruptcy. Emergency loans are given, new deals are cut, and drastic cuts to basic services become necessary. The domestic economy goes into shambles. With a 16.7 trillion dollar debt and deficits still around a trillion dollars every year, can the U.S. be far behind Europe?