When you intervene in a place like Iraq, it is like a bad marriage. The first few nights are fun. But soon you're looking for a graceful way to get out. Trouble is, there isn't any easy way out. So you stick with it. Time goes by. And the costs mount up. Before you know it, the cost for the Iraqi adventure is more than $1 trillion...and then it goes to $2 trillion.

Now, the feds have intervened in the economy too. And, likewise, they are trapped. By pumping in trillions of dollars - not just in America, but also in Britain and China (which have both intervened even more forcefully) - they have made it look like things are okay. They have kept zombie companies alive. The big banks haven't had to own up to their own mistakes. Companies haven't had to cut back quite as much as they would have.

As our friend Nassim Taleb puts it, the financial system "still has the same disease."

But it's being kept alive with massive doses of very expensive medicine - provided by the feds.

So what are they going to do now? They claim to have prevented catastrophe. They say they've engineered a recovery. And yet, if they let up on the drugs...the patient dies.

They're trapped...they'll have to keep pumping in money for years...until the money runs out.

Naturally, the feds want to raise as much money as they can. So, like bank robbers, they go where the money is - to the "rich."

Steve Sjuggerud tells us what has happened back at home...in Maryland.

"The state of Maryland couldn't balance its budget last year. So the state decided the right way to raise tax dollars was to fleece the millionaires... Maryland state politicians created a 'millionaire' tax bracket.

"Maryland Governor Martin O'Malley of course expected tax receipts to go up. He said Maryland's 3,000 millionaires were 'willing to pay their fair share.' The Baltimore Sun said the rich would 'grin and bear it.'

"But the opposite happened...

"Instead of 3,000 Maryland millionaires filing taxes in April 2009, only 2,000 did. According to The Wall Street Journal: 'Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year - even at higher rates.'

"A friend of mine lives here in Florida. He is not an American citizen. He pays US taxes while he lives here. But under the threat of higher national income taxes, he is contemplating giving up his green card and moving elsewhere.

"When Maryland's governor raises taxes, Maryland residents leave and government income goes down.

"When the nation's President raises income taxes, foreigners like my friend leave and government income goes down.

"Unfortunately, YOU CAN'T LEAVE.

"Wait a minute. This is America, land of the free, right?

"Not so fast... The US government will track US citizens everywhere to get tax money. If you leave to work in another country, you still pay US income taxes. America and North Korea are the only countries that tax you on your worldwide income.

"If it gets bad enough, you can just give up your citizenship, right? Nope, you can't do that either. At least, you can't do it without paying a potentially massive 'exit tax.'

"The exit tax acts like an estate tax. If you want to give up your citizenship, you have to give up nearly half your wealth above a certain level. The Economist magazine calls it 'America's Berlin Wall.' Nice, eh?

"Want some more nice? Once you're gone, you're not legally allowed to come back and visit family and friends. Yes, if the government decides you have renounced citizenship for tax purposes, a federal law prohibits you from entering the country ever again. (You can look up the rule under 8 USC 1182(a)(10)(E).)

"You can escape states with oppressive taxes. But 'escaping' the US - the land of the free - is much more difficult. And you can bet it won't get any easier as the government needs more and more of your income to pay its bills."

Bill Bonner
for The Daily Reckoning Australia

• U.S. Presidential Election
• Rare Coins as an Informal Way of Estate Planning
• You Can Have a Deadly Depression and Dizzying Levels of Inflation Simultaneously
• Playing the Tax Credit Card
• Politics is About What You Can Get Away With

We flew through the airport...got the express train. The whole thing took only a fraction of the time it takes us when we fly into Dulles at Washington.

But London was in a sour mood when we returned.

"Decade of pain predicted for public services," was the headline on Friday's Guardian from London. The reason for the decade of pain is the obvious one. Tax receipts are down - because of the depression. Governments are caught in a bind. Their revenues go down just as their costs - offering bailouts, counter-cyclical stimulus, and handouts to the unemployed - go up.

Ireland and California have been in the news on this subject. But they're hardly alone. It's a problem for almost all governments in the English-speaking world. As for the rest of the world, we don't know.

Ireland is facing its own decade of pain. So is California. This morning, California is in the news. Apparently, a deal has been worked out. The state will stay in business...and even pay off its IOUs. But it will mean cuts of 'services.' Here at The Daily Reckoning, whenever we modify the word 'services' with the word 'government' we feel we should warn readers that we don't really mean it. Most government services are a disservice...like a government-subsidized business they are a fraud on the economy, absorbing valuable resources in order to provide a 'service' that is worth less than the inputs that were required to provide it. The service is a disservice to the broader economy.

And today too we find that England is sinking deeper into depression; it too will have to endure a decade of painful honesty.

"UK Slump Identical to that of 1930s," says Saturday's headline in the TIMES.

A chart traces the decline...to minus 5.6% GDP growth over the past 12 months...paralleling the decline following the crash of '29.

"The collapse is Britain's economy now rivals the worst days of the Great Depression..." continues the report.

If it continues following along on the 1930s track, the UK economy will continue to decline...and bottom out at 7% or 8% below pre-crisis output. Then, it will bottom out over a period of a couple years before beginning a recovery, back to pre-crisis GDP levels.

If that's correct, we're only about 2/3rds through the depression in terms of output...and only about 1/3 in terms of time. Remember, the first leg of the Great Depression lasted 43 months. So far, this one is only 19 months old. It probably has a ways to go.

The stock market has a ways to go too. The Dow was up 23 points on Friday, bringing it to 9093. Like the economy, the stock market runs in long cycles - from bull to bear and back to bull again. The first post- war bull cycle took the Dow from under 100 to nearly 1,000 in 1966. Then, the index shilly-shallied around for the next 16 years. Adjusting for inflation, investors lost more than half their money during that period. Then began the big bull market that dominated our financial lives until 2007. But this bull market actually topped out in January 2000 - in real terms. Adjust for inflation and investors made nothing during the 2000-2007 period. So, the current bear market has been going on for nine years already. But if it lasts as long as the typical major bear market of the 20th century, about 18 years, that means it is only about half over. Look for it to end sometime between 2015 and 2020.

Where will the Dow be then? We can make a guess. If the economy were to lose, say, 10% of GDP...the loss in incremental sales would probably erase about 50% of corporate profits. And the financial industry, which had been responsible for 40% of corporate profits at its peak, will probably go back to a more reasonable figure of 10% of corporate profits - so that's a loss of 30%. Of course, there's some overlap on these figures - and a huge dose of Daily Dead reckoning - but maybe the loss of corporate earnings averages about 60%. So, if 2007 were a base of $100 in corporate earnings, we can expect only $40 sometime in the future.

The most important thing that happens in a bear market is that the multiples go down. Investors, who were prepared to pay $25 for a dollar's worth of earnings at the peak of the bull market begin to think they've been too optimistic. As the depression deepens they begin to see things differently. They see earnings continue to fall and feel they should be more cautious. So they take down p/e ratios...from 25 down to as low as 5. But let us say the p/e ratio goes to 8...on Dow earnings that are only 40% of what they were in 2007. Where would that put the bottom? Dow 1600. Allow for a little inflation...maybe 2,500.

Watch out...

Bill Bonner
for The Daily Reckoning Australia

• Every Major Bull Market Needs a Major Bear Market
• Investors Better Off Investing in Anything but Stocks
• The housing bubble caused big increases in nominal GDP
• The Profits Depression
• We Don’t Gamble on Stocks in a Depression

Readers are reminded of our Daily Reckoning Law: 'The force of a correction is equal and opposite to the deception that preceded it.' Today, we offer a corollary: 'The greatness of a depression is commensurate to the government's efforts to prevent it.'

Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head:

"The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable," explains Germany's chancellor. She went on to suggest that maybe we shouldn't repeat the errors of the past.

As a proxy for 'deception' in our handy dictum, substitute 'money.' And now consider it in its two misleading forms - credit and deficit spending. "Credit not backed by real savings is a fraud," the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.

During the entire last half a century leading Western economists imagined a world that couldn't exist for one minute - where consuming wealth makes people wealthier...and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn't need with more money they didn't have. This produced 'growth.' But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.

In the first four U.S. recessions after the Great Depression, from the mid-'30s through the mid-'50s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds - witless, as usual - often increased them or left them alone. But deficit spending went up an average of 2.2% of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.

As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new 'growth' the feds were after, but all the accumulated debt and mistakes from previous stimulus programs.

In the recession of 1973, Brookings Institution economist George Perry told Congress that "we should be pulling out all the stops" to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4% of GDP, according to an estimate by Jim Grant. Future generations of Fed governors and Treasury secretaries found more stops...and of course, pulled them out too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2% of GDP, according to Grant.

The deceptions of the Bubble Epoque, 2001-2007, were enormous. The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion - at least, here at The Daily Reckoning. The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France's deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged...an amount equivalent to a full year's annual output of the United States of America. This response is 3 times more (adjusted to today's dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.

It is, we will guess, what makes a great depression even greater.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• The Solution to a Depression is a Depression
• If the Economy is Not Recovering It Isn’t Getting Enough Stimulus
• Only Thing Rising Faster than Demand for Government Debt is Supply of It
• The Country is Going into a Recession with its Finances in the Worst Shape Ever
• Capitalism Always Takes an Economy Where it Ought to Be