The Prime Minister of Japan has announced his plans to resign.  One of the main reasons for his unpopularity is a view that there has been a lack of leadership in the face of the tsunami disaster.  While I’m sure this is correct, we cannot discount the fact that the Japanese economy is still not in great shape.  Obviously the tsunami was very harmful to the Japanese economy (despite what Paul Krugman might say), but it is also obvious that the economy would be in trouble anyway, even if there had never been a tsunami.

I expect politicians around the world to feel more and more heat as time goes on.  With the world economy in trouble, the welfare state is also in trouble.  Politicians are accustomed to being able to offer free lunches.  This buys them votes and keeps voting citizens content.  With tighter budgets coming, it is harder for politicians to offer free lunches as it is becoming more known that they are not actually free.

The areas where it is the most fun to watch are where citizens are demanding the impossible.  Think of Greece.  People there want these great benefits.  They want the government to provide for their retirement at an early age.  The Greek government is on the verge of bankruptcy.  They simply cannot fulfill these previous promises.  Some of the voters there are asking their government to do the impossible.  It doesn’t matter who they put in office.  No matter what, Greek citizens will see a cutback of the welfare state.  As Margaret Thatcher said, the problem with socialism is that you run out of other people’s money.

California is another place where it should be fun to watch (as long as you don’t live there).  If I were an advocate of one of the major political parties, I would not want to win political offices there.  For example, the Republicans should be happy that Jerry Brown (a Democrat) is now the governor there.  Brown is a big government guy.  He loves the welfare state.  And yet he will be the one that presides over a cut in the welfare state.  Who are the Democrats on welfare going to blame for an end to their supposedly free lunches?

The U.S. government can keep the game going longer.  They have a monopoly on the money supply.  The U.S. government can get the central bank to print money (digitally speaking).  This can keep the welfare state going on a little longer.  California has more limits.  They cannot run up their debts too big or they really will face a default.  They will be forced to default or cut back on their welfare state.  Perhaps it will be a combination of both.

The government in DC will eventually be forced to cut back.  There is a limit to how much the Fed can print before there are very serious repercussions.  I don’t think the Fed will go to hyperinflation.  They would destroy themselves.  There would be a serious breakdown in the division of labor.  There would be massive poverty and starvation in the U.S.

The more likely scenario is that we see high inflation and the Fed eventually tightens its monetary policy in order to save the dollar.  At that point, Congress will be forced to cut back.  The President will take a lot of blame unless he is very straightforward with the people.  Ron Paul is straightforward and none of the other candidates are.  Both major parties should be hoping that they don’t win the presidency in 2012.