Faust's agreement

Law Of Diminishing Marginal Product - Faust's agreement

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The German story of Faust is well known throughout literary and scholastic circles. In the story, Faust is a victorious expert who is unsatisfied with his life and bargains with the Devil. He offers his soul in transfer for unlimited knowledge and worldly pleasures. The favorite term: "deal with the devil" originates from the story of Faust. This story has also been interpreted by some as a metaphorical representation of an ambitions man who compromises their moral integrity to perform power and success.

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Law Of Diminishing Marginal Product

A more proper interpretation for the current political climate is the process by which government entities borrow from hereafter generations to finance public benefits that procure power for the political class. However, this model has begun to unravel in Europe as many countries are in the midst of a sovereign debt urgency that is on track to land in the United States.

The basis of this debt urgency comes from promises made by politicians for the bestowment of material prosperity in excess of what citizen produce. The narrative used to sell this box of fictional prosperity is a promise to "make the rick pay their fair share." The universal assumption of this redistributive economic model is that the 'rich' are taxed in excess of the services they receive so that the 'poor' can receive more than they produce. To many, this model carries a populist attraction because of its perceived advantage for those at the lower end of the public and economic spectrum. Unfortunately, it finally regresses toward Faust's "deal with the devil" that requires the submission of a nation's soul when the price comes due.

So how does a nation lose its soul in this way? It all starts and ends with incentives. All citizen naturally have incentives to behave in ways that result in a great life for themselves and their family. For citizen in the productive class, a great life is achieved through taking risks and realizing gains. Furthermore, these citizen have incentives to structure their financial affairs such that their tax burden is reduced to the legal minimum. Conversely, there are many citizen in the lower classes who view their path to a great life as the election of political leaders that promise to tax the producers and redistribute the resources to them. Both groups of citizen are acting in a way that seems fully logical.

The underlying problem with nations that engage in this redistributive economic model is that there is a underlying limit to how much tax revenue can be raised. An empirical analysis known as Hauser's Law has found that total Us tax revenue since World War Ii has held steady at practically 19.5% of Gross Domestic Product, despite a wide range of marginal tax rates and big volatility in tax policy. This suggests that tax payers will self-select into activities that lower their tax burden when rates of taxation increase. This means that there is an implicit cap on sustainable government spending that is equal to practically 19.5% of Gdp. Spending in excess of this estimate must necessarily be financed with borrowing or monetary inflation.

As nations incur deficit after deficit for decade after decade, the size of their national debt will ultimately come to be so large that it becomes de facto impossible for it to every be paid back without gigantic monetary inflation. In this situation, investors will often come to be wary of investing in the nation's debt securities. As the estimate of willing investors decrease, the yield required on the debt necessarily increases. As the productive interest rate on debt increases, nations must devote more of their resources to debt service. ultimately this results in a debt spiral where a country's debt obligations occupy so much of its resources that the government cannot function. In this situation, one of two outcomes inevitably occurs. If the nation owns a sovereign currency, it will naturally progress the supply of its money, devalue the currency already in circulation, and eliminate the debt through inflation. If the nation's currency is pegged to another currency or it is part of an economic union, the only remaining choice is default.

Another complicating factor is the fact that taxation rates are inversely connected to economic growth. This means that raising taxes to capture revenue will stifle hereafter Gdp growth. When entitlement promises exceed tax revenue, it results in final borrowing that ultimately creates higher interest rates on the debt. These higher interest rates place a added pinch on the funds since taxes can only be raised so much before they stifle economic increase and incentivize citizen to either leave or shift their efforts toward activities that create less output, but are more tax efficient. The up-to-date protests in Europe over funds cuts by Greece in an effort to curb its deficits demonstrate the mystery implicit in reversing this policy of systemic over-spending with borrowed money. The eventual result of perpetually delivering something for nothing can only be a financial collapse and default. This is the point where Faust's business transaction comes due and the devil lays claim to the nation's soul.

For citizen who do not wish to be caught by the collapse of debt-based entitlement spending, it is critically important to ensure that your personal wellbeing is not tied to government programs. When the collapse occurs, it will most likely create dramatic cuts, reductions, or outright default on many of the programs that the government uses to perpetuate its base of political favor. When this river of maintain from the government stops, it will right away impoverish millions of citizen who have been conditioned over manifold generations to depend on somebody else for their wellbeing. The unfortunate impact of this fact is that there will be gigantic amounts of citizen whose financial lives are de facto destroyed by the collapse of debt-based entitlement spending. As an individual, I do not possess the power to stop or even influence this phenomenon. However, I do have the power to impact my own decisions and personal financial situation. By focusing on what we can influence, instead of worrying about what we cannot change, it will allow citizen to protect the hereafter of themselves and the citizen they care about by taking thrifty action.

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