Government is not like science or technology – where we build, intentionally, on past experience to create something that becomes better and better over time. Instead, it is rather like an evolutionary development…that often ends with extinction.

Since America’s modern social welfare democracy is not the product of enlightened rational, accumulated decision-making, America’s leaders will be unable to re-design it for the new conditions it faces. Instead, this social welfare democracy will face extinction – like dinosaurs and Neanderthal man…and all previous forms of government…all previous forms of paper money…and all previous monetary systems.

In other words, don’t expect the US government to reduce its deficits and bring its finances under control voluntarily. It will take a crisis…and maybe even a revolution.

Let’s look at the financial situation more closely. As near as I can tell, the Great Correction continues, much as we thought it would. This is “Year 5” of the Great Correction. There is much more to go.

A Great Correction is very different from a recession. It is not a pause in an otherwise healthy economy. Instead, it is a change of direction…an adjustment to new circumstances (similar and related to the adjustment needed in government itself). After 60 years of near continuous credit expansion, the economy is finally deleveraging…reducing credit in the private sector.

To give you one small indication of the kind of adjustment that is taking place, let’s look at some good news. US manufacturing is finally picking up. For the first time in 10 years, more people are now joining the manufacturing labor force than leaving it. Of course, this is just what you’d expect. Labor costs are going down. At the margin, America’s competitive position is improving.

But this is not, as the media has advertised, “proof” the economy is recovering. Far from it. It is proof that the economy is not recovering at all. It is going in a different direction…and responding to a different set of circumstances. Much of the last 10 years was spent in bubble territory. During that time the economy was losing manufacturing jobs, not gaining them. The economy is not now “recovering” to the bubble conditions of 2005-2006. It is moving on.

And it’s a good thing. Who would want to go back to an economy that destroyed real jobs in manufacturing while creating phony, unsustainable jobs in finance and housing? Now the economy is simply doing what it should do: it’s adjusting to new conditions. Unfortunately, it will take time. You don’t shift the world’s largest economy overnight. So, the rate of joblessness is likely to remain high for many years as the transition takes place.

The other major feature of the Great Correction is the weakness of the housing industry. This too is perfectly predictable. The nation has too many houses – and they’re still too expensive. The figures show that about one in four homeowners is underwater. And there is no reason to think he’ll come to the surface any time soon.

The latest S&P/Case-Shiller numbers show the housing market seems to be entering a second dip. Once homeowners realize this, they are likely to also come face to face with their grim choices. They can default. Or they can wait it out – paying more for housing than the going rate. Many will choose to default, bringing housing prices down further. Some won’t have a choice: they won’t be able to meet mortgage payments.

Housing and jobs are the twin pillars of household wealth in America. The papers are full of stories about what happens to people when these pillars give way. High unemployment rates have lowered household income and forced people to take jobs at salaries far below their peaks. A record number, 43 million, of Americans now depend on food stamps. Children are moving back in with their parents – even adult children. And tax receipts are falling. At the local and state level this is causing havoc. The feds can print money. But California, Illinois and New Jersey can’t. And between the 50 states there is something like $2 trillion worth of unfunded pension obligations.

So far, all of those things were expected. It is a Great Correction, after all. Also expected – but still not fully appreciated – was the reaction of the US government and the Fed. When the crisis began, we calculated that it would take about seven years to bring debt levels in the private sector down to where a new period of genuine growth could begin.

We just looked at the debt levels and guessed about how long it would take to default, restructure and pay them down. There were plenty of other calculations based on different assumptions. But they all came up with about the same answer: between 5 and 10 years.

But we all underestimated the ability of the feds to muck things up. Thanks to federal intervention, it now looks as though this period of transition may take much longer. Obviously, the feds are adding debt while the private sector is getting rid of it. But it goes beyond that. The feds are also propping up the industries that need to be cut down to size – finance and housing – at a cost of over a trillion dollars.

The feds are also trying to engineer a recovery…and promising one. As I mentioned above, a recovery is just what we don’t need. But promising that the economy will return to its previous condition leads people to think that they don’t really have to make major changes. All they have to do is wait. This further delays the transition to a new economy.

Pretending the economy will return to its old pre-2007 self also makes people think that they will be safe in pre-2007 investments. So they stick with stocks and bonds…and eschew the one asset they most need. With all the talk of a “slow recovery” investors don’t suspect that there is anything really wrong…or at least nothing that a few trillion in stimulus spending can’t fix! So, they don’t make the sort of changes that they need to make – in their personal finances and in their investments.

The feds are not only stalling the transition, they are also destroying the currency and the credit of the world’s largest economy. This further confuses the situation and creates huge uncertainties. Investors are nervous. They don’t know what to expect.

They become reluctant to commit to large long-term projects – just the kind the country needs, in other words.

If you can’t trust the value of the money, how can you make a capital investment that will only pay off five years from now? How can you even make a budget or a business plan? Serious investors hold off…or put their money into the growth economies overseas, where the risk/reward ratio is more favorable and the financial authorities are not actively trying to undermine the local currency.

What is in some ways most remarkable is that even five years into the correction, the US authorities still seem to have no idea of what is going on. Ben Bernanke recently told us that we could expect 3% to 4% growth this year. Since he completely missed the biggest financial crisis in 80 years, you have to question his forecasting abilities. But even if he is right about the GDP growth rate, he doesn’t seem to understand what it means.

He admits that 3% to 4% growth is not enough. He’s thinking about employment. At that growth level, you can barely keep up with new people coming into the workforce, let alone reabsorb the 15-30 million who are currently out of work. It is also too slow to keep up with the debt load. The deficit is expected to be about 10% – two to three times more than the anticipated additional GDP. This will mean, grosso modo, an increase in the national debt equal to 6% or 7% of GDP.

You can’t expect to do that for very long. But here is the remarkable thing: so far, there is little official recognition of the dark, dangerous road that the feds are driving down. In the fedsʼ minds, the problem is that the economy is growing too slowly. Three percent isn’t enough. They believe they need more growth…and they believe they can get it by “stimulating” the economy.

It is as though they were driving down a wet country road at breakneck speed. The radio is not working very well, so they step on the accelerator, trying to catch the radio waves before they get away. When this doesn’t work, they go even faster.

This is not the way to make the radio work. It is the way to get in a serious wreck.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.