For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state. Events have already forced Premier Brian Cowen (pictured left) to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15% of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap. A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12% and heading for 16% next year. – Telegraph

Dominant Social Theme: A gloomy assessment.

Free-Market Analysis: Gloom is not so much the issue, of course, as ruin – widespread and prolonged. We have long anticipated a crisis of modern day capitalism, especially since the latest financial difficulties began less than two years ago. In the interim, central banks have poured tens of trillions into the economy worldwide in an attempt to stabilize the system. But while the system can be stabilized in the sense that bankruptcies can be avoided, that is not the same as creating policies that can contribute to healthy job growth.

The financial system of the West inevitably remains in a bubble, for it is the distribution arm of central banks, and the central banks themselves. Central banks will not let their distribution systems default – thus the enormous amount of money funneled into the financial system worldwide. But the steady-state survival of the financial system does nothing to readjust the larger economy or curb the mal-investments that must be unwound. Since most of the mal-investments lies within the financial industry and its massive loans to the corporate world throughout the West, the chances of a so-called jobless recovery remain strong.

In fact, a jobless recovery is merely a euphemism for sustaining the current system as it is – mal-investments and all. This is an accurate description of Keynesian stimulus. John Maynard Keynes, please recall, was a central banker as a young man and thus it is no surprise that his theories benefit the financial industry at the expense of the larger economy. The gift he provided to the political class was an econometrical justification for salvaging the financial economy at the expense of the industrial one. This is no small thing. Those who use Keynesian principles are able to claim they are taking action against economic depression when in reality they are using the Keynesian formula to prop up banking business-as-usual.

Prediction: Over the next year or two there will be more and more talk of a jobless recovery throughout the West and there will be many reasons advanced for why. The most obvious reason will be that the economic crisis was so deep that the jobs that were lost simply won't return. This will not be a TRUE explanation, of course. The true explanation is that the banking bubble was retained through aggressive monetization and the industrial sector was sacrificed as a result. No real economic mal-adjustments were purged and the capital that would have gone to new businesses and entrepreneurial visions was diverted to propping up zombie banks and the larger dysfunctional system.

The steps to an economic recovery are not many, but they are painful to take while trying to support the status quo. They are in fact three fold. First, the banking system must be allowed to deflate, taking with it a good chunk of the largest corporate Western entities. Second, taxes must be slashed dramatically to kick start the entrepreneurial activity that will drive economies forward. Finally, the massive benefits provided to citizens of the West must be pared back – the welfare state itself must be dismantled.

Two of the three parts of this solution to the economic crisis will not occur, or not soon. The monetary elite is dedicated to protecting the economic command and control system it has created — and they will not dismantle it, nor empower citizens with large tax cuts. But what they cannot control is the gradual unraveling of the Western welfare state. This has already begun and will continue apace, not only in Europe but also in America. More from the article charting Ireland's unravelling:

Education must be cut 8%. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland. Nobody is spared. Social welfare payments must be cut 5%, child benefit by 20%. The Garda (police), already smarting from a 7% pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc. "Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest." No doubt Ireland has been the victim of a savagely tight monetary policy given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

The current fiat money system is collapsing. We have been documenting this biggest-of-all Western stories for well over a year now. We have predicted the quasi-dissolution of the Federal Reserve and of the larger central banking system as well. While fiat money can prop up the larger bank distribution system, ultimately this latest fiat-money incarnation worldwide – one that has lasted nearly a half-century – is likely bound to fail. The jobless recovery will put great stress on the West's industrial infrastructure. The eventual deprival of middle and lower-class wage and health benefits will shatter the social compact between citizens and the state. As the current version of Western civilization unravels willy-nilly we anticipate the resurrection of the gold standard, or perhaps even a gold and silver market standard.