[This blog was originally published by The Alliance Report, www.the alliancereport.com]

Now that the Presidential election is behind us, all eyes are directed at the upcoming “fiscal cliff.” Will a compromise be reached? If so, what will its elements be? If not, what will be the impact on the economy and the markets?

There are hundreds of articles on the subject of the fiscal cliff – virtually every financial firm and economist has weighed in. But if you ask me, the fiscal cliff is a tempest in a very small teapot compared to the real question, which is: Do the world’s modern democracies have any clue how to finance themselves?

We laugh at Greece, Spain, Portugal and Ireland, but the sad truth is that every modern democracy is hopelessly saddled with debt. Even if these countries figure out a way to pay down their current indebtedness (which they haven’t), how will we all fund ourselves going forward? My suggestion is that the “end of history” has actually arrived this time (rather than when Francis Fukuyama famously first suggested it), for the simple reason that all known methods of financing post-industrial democracies have been tried and have failed. We’re out of ideas.

The first idea, which dominated the world outside the US until very recently, was for the state to seize the means of production. Evil profits would accrue not to greedy capitalists but to the state itself, which would redistribute the goodies to its citizens according to their needs. A nice idea, except that it destroyed the Soviet Union, nearly destroyed China, and ran the economies of Europe and India into the ground. (The same idea is currently running the economies of Cuba and Venezuela into the ground.)

Ok, that didn’t work (sorry, Karl Marx), so instead we decided to leave enterprises in private hands and simply to tax the hell out of the profits. Tax rates in some nations reached confiscatory levels (for example, they topped out at 98% in the United Kingdom, pre-Thatcher). This worked for awhile, but high tax rates everywhere and always lead eventually to lower tax revenue, which is exactly what happened. Since then, tax rates around the globe have come down substantially.

Finally, since Socialism didn’t work and confiscatory taxes didn’t work, we tried borrowing. Boy, did we try borrowing! Of course, there’s nothing wrong with borrowing if you use the proceeds to improve your competitiveness. But we all used borrowed funds to support current consumption. Now the European periphery can’t borrow any more, Germany won’t be able to borrow any more once they write the big check to bail out the aforementioned periphery, and how long can it possibly be before Japan and the US won’t be able to borrow? As they say, the bond markets remain open to a nation until they don’t.

In fact, all known ideas for redistributing wealth to the middle classes don’t just fail to work, they have consequences that are cataclysmic. When state ownership of productive enterprises failed in the Soviet Union, it didn’t just set the Russian people back a few years—it set them back roughly a century. Relative to other societies in Europe and elsewhere, Putin’s Russia occupies about the same place in the world as Czarist Russia did in the early 1900s. Europe’s ‘‘middle way’’ allowed it to avoid this calamity, but its long flirtation with Socialism built up a culture that was, and remains, anathema to the sort of individual initiative that propels growth.

By the time high and highly progressive tax policies failed, Europe was suffering—the rich had been bled dry and there was nowhere else to turn. Britain in particular was sinking slowly into the English Channel, at whose bottom it would be lying today if Margaret Thatcher hadn’t come to power. And, of course, we all know how ruinous southern Europe’s flirtation with borrowing turned out to be.

It’s possible, to be sure, to imagine a world in which wealth redistribution means moving money from the rich and middle classes to the poor. But it isn’t possible to know how we’re going to get there or when it’s going to happen. Political incoherence is everywhere, and the implications of this for the United States – Europe isn’t the canary in the coal mine, it’s the gorilla in the kitchen – are many and profound.

Maybe voters in the modern democracies will suddenly develop a powerful case of self-restraint, but that seems highly unlikely, based on the sorry history of those democracies. Like it or not, we seem to have reached the end of history (again).

Please note that this article is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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