Wednesday, October 19, 2011

The primary cause for the rich/poor gap? Fiat currency

The fact that the richest 1% of the population is getting richer while the middle class and poor are losing ground is becoming more obvious. The disparity is blamed on capitalism and greed. Some of the solutions proposed to bring things back into balance are:
  • Higher taxes on the rich
  • Raise minimum wage requirements
  • Stricter regulations on businesses
  • Tariffs and trade wars
Implementing any of these ideas will lead to unintended consequences. If you tax the rich, they will take their businesses and capital offshore which will lower employment. Raising minimum wage requirements will also lead to lower employment. Stricter regulations will lead to fewer start ups to challenge the big corporations which will lower employment too. Tariffs and trade wars often times lead to real wars. None of these solutions will deliver the promised outcomes. Why? The main problem has more to do with the elastic money supply than anything else. When the dollar (or any printed money for that matter) is backed by a tangible item, meaning the currency can be traded in at any time for a comodity such as gold or silver, it limits how much can be printed. It has value. It can't be printed on demand. When Nixon took the United States off the gold standard, it set up a system of credit expansion whereby those that owned wealth producing assets (stocks, businesses, etc..) saw their wealth grow dramatically. The working class on the other hand had stagnant wages and borrowed (because of easy credit) to finance their lifestyle. Bill Bonner explains:
 The post-1971 US dollar-based monetary system permitted an explosion of credit, which naturally favored the credit industry directly, and the entire financial asset-holding investoriat, indirectly. At the expense of the middle and lower classes. In other words, the expansion of credit, caused by a flexible, expandable money regime, set the whole economy ablaze. The middle and lower classes went deeply into debt to buy things. The “rich” — or at least those who owned stocks and bonds — got richer, as consumer spending lit up the business world, and particularly the financial industry itself. Profits from the financial industry were only about 10% of the total profits on Wall Street in 1970. By the time the credit bubble blew up in 2007 they had grown to 40%. Wages for working stiffs were flat for 40 years. But earnings on Wall Street soared. In 1970, the typical salary in the financial industry was about the same as for equivalent positions in the rest of the economy. But, by the 21st century, Wall Street salaries were nearly twice as high.
People who complain about “greedy” executives and rich people miss the point. People — rich and poor — are always greedy. But they don't always have a monetary system that encourages debt and favors investors over working people. This money system was created in 1971 by the Nixon Administration, which probably didn't know what it was doing...and it was later perfected by subsequent Federal Reserve chairmen.
In addition to stretching the gap between rich and poor, the non- gold monetary system had one other notable consequence. It undermined the working classes' ability to compete in the modern world. This it did by moving more and more production to the emerging markets. In pre-1971 days, nations had to settle up on their trade balances. That is, when one nation sold more to a neighboring nation than it spent with it, the nation in surplus ended up with an excess of the neighbor's currency. This surplus currency was then presented to the deficit country. The accounts were settled by transferring gold — the monetary system's reserve at the time — from the deficit country to the surplus country.
As the gold left, it had a chilling effect on the deficit nation's economy — either because investors caused interest rates to rise or because the central bank pushed them up. This resulted in slower economic growth and less spending, thereby correcting the outflow of funds to the neighbor.
It was precisely this self-correcting mechanism that the feds were determined to stop when the Nixon Administration “closed the gold window” at the Treasury department in August of 1971. The US had spent too much on the Vietnam War. French banks, which were still very active in Vietnam, tended to be the recipients of the money...which flowed to the Bank of France. The French, anticipating a problem with the dollar, wanted to exchange dollars for gold. This was the proximate cause of the Nixon Administration's reaction — an actual default on its financial obligations. It was also the cause of the subsequent run up of the price of gold...which was followed by a bust in gold...and thereafter, a huge boom, in which ordinary Americans were lured into debt and coaxed towards poverty.
Isn't that something. Nixon took us off the gold standard in 1971 so we wouldn't have to pay France the gold they wanted for the dollars they owned. Why? Because we were already bankrupt as a nation! In 1971!

But I digress. By closing the gold window, Nixon opened the door to the wealth disparity between the rich and middle class (and the poor as well), and the eventual loss of manufacturing from America to China and elsewhere.
One other problem the middle class face due to a fiat currency: building their own personal wealth. The middle class typically builds their wealth from producing more than they consume and saving the difference. With a deflating dollar, they can never keep ahead of inflation...and when they retire, their savings do not last long.

We need to get back to sound money somehow. Most likely massive defaults will happen; a write down of unpayable liabilities (social programs, U.S. Treasuries and other bonds), and a re balancing of assets and liabilities. Then some kind of sound money system. What is sound money? I'll explain in another blog.

For the full article written by Bill Bonner, click below.

Appetite for Wealth Destruction        

Thursday, October 6, 2011

Are we a Fascist State?

America is supposed to be the land of the free...and the home of the brave. It is hard to imagine that we live under a tyrannical rule, but we do. There are more and more encroaching rules and regulations on businesses, employees, and individuals themselves. As the state expands, individual freedom contracts. The U.S is an empire, along the lines of Great Britain and imperial Rome before then. We have military bases around the world, and we have an ever expanding welfare state. How can we have freedom with an environment like this?
What is Fascism? Lew Rockwell describes it well:

Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police State as the source of order, denies fundamental rights and liberties to individuals, and makes the executive State the unlimited master of society.
Scary, isn't it? Tell me, where is freedom in that? The freedom to do as you choose with your money, business, and time? Lew goes further. He describes the "Eight Marks of Fascist Policy" that John T. Flynn writes about in his book "As We Go Marching", along with his comments regarding the current state of the United States:

Point 1. The government is totalitarian because it acknowledges no restraint upon its powers.
This is a very telling mark. It suggests that the US political system can be described as totalitarian. This is a shocking remark that most people would reject. But they can reject this characterization so long as they happen not to be directly ensnared in the State’s web. If they become so, they will quickly discover that there are indeed no limits to what the State can do. This can happen boarding a flight, driving around in your home town, or having your business run afoul of some government agency. In the end, you must obey or be caged like an animal or killed. In this way, no matter how much you may believe that you are free, all of us today are but one step away from Guantanamo.
As recently as the 1990s, I can recall that there were moments when Clinton seemed to suggest that there were some things that his administration could not do. Today I’m not so sure that I can recall any government official pleading the constraints of law or the constraints of reality to what can and cannot be done. No aspect of life is untouched by government intervention, and often it takes forms we do not readily see. All of health care is regulated, but so is every bit of our food, transportation, clothing, household products, and even private relationships.
Mussolini himself put his principle this way: "All within the State, nothing outside the State, nothing against the State." He also said: "The keystone of the Fascist doctrine is its conception of the State, of its essence, its functions, and its aims. For Fascism the State is absolute, individuals and groups relative."
I submit to you that this is the prevailing ideology in the United States today. This nation conceived in liberty has been kidnapped by the fascist State.
Point 2. Government is a de facto dictatorship based on the leadership principle.
I wouldn’t say that we truly have a dictatorship of one man in this country, but we do have a form of dictatorship of one sector of government over the entire country. The executive branch has spread so dramatically over the last century that it has become a joke to speak of checks and balances. What the kids learn in civics class has nothing to do with reality.
The executive State is the State as we know it, all flowing from the White House down. The role of the courts is to enforce the will of the executive. The role of the legislature is to ratify the policy of the executive.
Further, this executive is not really about the person who seems to be in charge. The president is only the veneer, and the elections are only the tribal rituals we undergo to confer some legitimacy on the institution. In reality, the nation State lives and thrives outside any "democratic mandate." Here we find the power to regulate all aspects of life and the wicked power to create the money necessary to fund this executive rule.
As for the leadership principle, there is no greater lie in American public life than the propaganda we hear every four years about how the new president/messiah is going to usher in the great dispensation of peace, equality, liberty, and global human happiness. The idea here is that the whole of society is really shaped and controlled by a single will – a point that requires a leap of faith so vast that you have to disregard everything you know about reality to believe it.
And yet people do. The hope for a messiah reached a fevered pitch with Obama’s election. The civic religion was in full-scale worship mode – of the greatest human who ever lived or ever shall live. It was a despicable display.
Another lie that the American people believe is that presidential elections bring about regime change. This is sheer nonsense. The Obama State is the Bush State; the Bush State was the Clinton State; the Clinton State was the Bush State; the Bush State was the Reagan State. We can trace this back and back in time and see overlapping appointments, bureaucrats, technicians, diplomats, Fed officials, financial elites, and so on. Rotation in office occurs not because of elections but because of mortality.
Point 3. Government administers a capitalist system with an immense bureaucracy.
The reality of bureaucratic administration has been with us at least since the New Deal, which was modeled on the planning bureaucracy that lived in World War I. The planned economy – whether in Mussolini’s time or ours – requires bureaucracy. Bureaucracy is the heart, lungs, and veins of the planning State. And yet to regulate an economy as thoroughly as this one is today is to kill prosperity with a billion tiny cuts.
This doesn’t necessarily mean economic contraction, at least right away. But it definitely means killing off growth that would have otherwise occurred in a free market.
So where is our growth? Where is the peace dividend that was supposed to come after the end of the Cold War? Where are the fruits of the amazing gains in efficiency that technology has afforded? It has been eaten by the bureaucracy that manages our every move on this earth. The voracious and insatiable monster here is called the Federal Code that calls on thousands of agencies to exercise the police power to prevent us from living free lives.
It is as Basiat said: The real cost of the State is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The State has looted us just as surely as a robber who enters our home at night and steals all that we love.
Point 4. Producers are organized into cartels in the way of syndicalism.
Syndicalist is not usually how we think of how our current economic structure. But remember that syndicalism means economic control by the producers. Capitalism is different. It places by virtue of market structures all control in the hands of the consumers. The only question for syndicalists, then, is which producers are going to enjoy political privilege. It might be the workers but it can also be the largest corporations.
In the case of the US, in the last three years, we’ve seen giant banks, pharmaceutical firms, insurers, car companies, Wall Street banks and brokerage houses, and quasi-private mortgage companies enjoying vast privileges at our expense. They have all joined with the State in living a parasitical existence at our expense.
This is also an expression of the syndicalist idea, and it has cost the US economy untold trillions and sustained an economic depression by preventing the post-boom adjustment that markets would otherwise dictate. The government has tightened its syndicalist grip in the name of stimulus.
Point 5. Economic planning is based on the principle of autarky.
Autarky is the name given to the idea of economic self-sufficiency. Mostly this refers to the economic self-determination of the nation-state. The nation-state must be geographically huge in order to support rapid economic growth for a large and growing population.
This was and is the basis for fascist expansionism. Without expansion, the State dies. This is also the idea behind the strange combination of protectionist pressure today combined with militarism. It is driven in part by the need to control resources.
Look at the wars in Iraq, Afghanistan, and Libya. We would be supremely naive to believe that these wars were not motivated in part by the producer interests of the oil industry. It is true of the American empire generally, which supports dollar hegemony.
It is the reason for the planned North American Union.
The goal is national self-sufficiency rather than a world of peaceful trade. Consider, too, the protectionist impulses of the Republican ticket. There is not one single Republican, apart from Ron Paul, who authentically supports free trade in the classical definition.
From ancient Rome to modern-day America, imperialism is a form of statism that the bourgeoisie love. It is for this reason that Bush’s post-09/11 push for the global empire has been sold as patriotism and love of country rather than for what it is: a looting of liberty and property to benefit the political elites.
6. Government sustains economic life through spending and borrowing.
This point requires no elaboration because it is no longer hidden. There was stimulus 1 and stimulus 2, both of which are so discredited that stimulus 3 will have to adopt a new name. Let’s call it the American Jobs Act.
With a prime-time speech, Obama argued in favor of this program with some of the most asinine economic analysis I’ve ever heard. He mused about how is it that people are unemployed at a time when schools, bridges, and infrastructure need repairing. He ordered that supply and demand come together to match up needed work with jobs.
Hello? The schools, bridges, and infrastructure that Obama refers to are all built and maintained by the State. That’s why they are falling apart. And people don’t have jobs because the State has made it too expensive to hire them. It’s not complicated. To sit around and dream of other scenarios is no different from wishing that water flowed uphill or that rocks would float in the air. It amounts to a denial of reality.
Still, Obama went on, invoking the old fascistic longing for national greatness. "Building a world-class transportation system," he said, "is part of what made us an economic superpower." Then he asked: "We’re going to sit back and watch China build newer airports and faster railroads?"
Well, the answer to that question is yes. And you know what? It doesn’t hurt a single American for a person in China to travel on a faster railroad than we do. To claim otherwise is an incitement to nationalist hysteria.
As for the rest of this program, Obama promised yet another long list of spending projects. Let’s just mention the reality: No government in the history of the world has spent as much, borrowed as much, and created as much fake money as the US. If the US doesn’t qualify as a fascist State in this sense, no government ever has.
None of this would be possible but for the role of the Federal Reserve, the great lender to the world. This institution is absolutely critical to US fiscal policy. There is no way that the national debt could increase at a rate of $4 billion per day without this institution.
Under a gold standard, all of this maniacal spending would come to an end. And if US debt were priced on the market with a default premium, we would be looking at a rating far less than A+.
Point 7. Militarism is a mainstay of government spending.
Have you ever noticed that the military budget is never seriously discussed in policy debates? The US spends more than most of the rest of the world combined.
And yet to hear our leaders talk, the US is just a tiny commercial republic that wants peace but is constantly under threat from the world. They would have us believe that we all stand naked and vulnerable. The whole thing is a ghastly lie. The US is a global military empire and the main threat to peace around the world today.
To visualize US military spending as compared with other countries is truly shocking. One bar chart you can easily look up shows the US trillion-dollar-plus military budget as a skyscraper surrounded by tiny huts. As for the next highest spender, China spends 1/10th as much as the US.
Where is the debate about this policy? Where is the discussion? It is not going on. It is just assumed by both parties that it is essential for the US way of life that the US be the most deadly country on the planet, threatening everyone with nuclear extinction unless they obey. This should be considered a fiscal and moral outrage by every civilized person.
This isn’t only about the armed services, the military contractors, the CIA death squads. It is also about how police at all levels have taken on military-like postures. This goes for the local police, State police, and even the crossing guards in our communities. The commissar mentality, the trigger-happy thuggishness, has become the norm throughout the whole of society.
If you want to witness outrages, it is not hard. Try coming into this country from Canada or Mexico. See the bullet-proof-vest wearing, heavily armed, jackbooted thugs running dogs up and down car lanes, searching people randomly, harassing innocents, asking rude and intrusive questions.
You get the strong impression that you are entering a police State. That impression would be correct.
Yet for the man on the street, the answer to all social problems seems to be more jails, longer terms, more enforcement, more arbitrary power, more crackdowns, more capital punishments, more authority. Where does all of this end? And will the end come before we realize what has happened to our once-free country?
Point 8. Military spending has imperialist aims.
Ronald Reagan used to claim that his military buildup was essential to keeping the peace. The history of US foreign policy just since the 1980s has shown that this is wrong. We’ve had one war after another, wars waged by the US against non-compliant countries, and the creation of even more client states and colonies.
US military strength has not led to peace, but the opposite. It has caused most people in the world to regard the US as a threat, and it has led to unconscionable wars on many countries. Wars of aggression were defined at Nuremberg as crimes against humanity.
Obama was supposed to end this. He never promised to do so. But his supporters all believed that he would. Instead, he has done the opposite. He has increased troop levels, entrenched wars, and started new ones. In reality, he has presided over a warfare State just as vicious as any in history. The difference this time is that the left is no longer criticizing the US role in the world. In that sense, Obama is the best thing to ever happen to the warmongers and the military-industrial complex.

As for the right in this country, it once opposed this kind of military fascism. But all that changed after the beginning of the Cold War. The right was led into a terrible ideological shift, well documented in Murray Rothbard’s neglected masterpiece The Betrayal of the American Right. In the name of stopping communism, the right came to follow ex-CIA agent Bill Buckley’s endorsement of a totalitarian bureaucracy at home to fight wars all over the world.
At the end of the Cold War, there was a brief reprise when the right in this country remembered its roots in non-interventionism. But this did not last long. George Bush the First rekindled the militarist spirit with the first war on Iraq, and there has been no fundamental questioning of the American empire ever since. Even today, Republicans – except, again, Ron Paul – elicit their biggest applause by whipping up audiences about foreign threats, while never mentioning that the real threat to American well-being exists in the Beltway.
Sounds like Fascism to me. What can we do? First of all, don't believe the illusion that we are free. Then we can take action. Ironically, I am not talkning about revolution. That takes force which ultimately leads to the same ends. It is better to rebel. Here are some ideas:
  • Join forces to end the Federal Reserve.
  • Always push for lower taxes...and a large reduction of the welfare/warfare state.
  • Rebel against laws that make no sense.
  • Use other forms of money for a meduim of exchange and as a store of wealth, such as gold, silver, and maybe copper.
  • Barter.
  • Keep as little money as you can in the banking system. This difusses the money expansion scheme they use.  
  • Discuss and promote ideas about true freedom and peaceful cooperation.
If we all do this, the state loses power and influence. We can gain freedom. The empire will fall.

Here is Lew Rockwell's article. The Fascist threat.

Wednesday, October 5, 2011

Is Social Security a Ponzi Scheme?

The controversy surrounding Social Security is reaching a fevered pitch. It is becoming clear that there are not enough funds to keep Social Security solvent much longer. Something has to be done. But what? Those on the left want to see higher taxes, especially on the rich to keep Social Security going. Those on the right would love to see it privatised, fully or partially.  A question that needs to be addressed is if Social Security is a Ponzi Scheme. If it is, it would be a difficult program to maintain indefinitely. If it is not, then a more sustainable solution can be proposed. So is it?
Walter Williams has some insight on this:      
 The very first Social Security check went to Ida May Fuller in 1940. She paid just $24.75 in Social Security taxes but collected a total of $22,888.92 in benefits, getting back all she put into Social Security in a month. According to a Congressional Research Service report titled "Social Security Reform" (October 2002), by Geoffrey Kollmann and Dawn Nuschler, workers who retired in 1980 at age 65 got back all they put into Social Security, plus interest, in 2.8 years. Workers who retired at age 65 in 2002 will have to wait a total of 16.9 years to break even. For those retiring in 2020, it will take 20.9 years. Workers entering the labor force today won't live long enough to get back even half of what they will put into Social Security. Social Security faces Ponzi's problem, not enough new "investors." In 1940, there were 160 workers paying into Social Security per retiree; today there are only 2.9 and falling.
This is clearly a Ponzi scheme. Just based on demographics, there will be for the foreseeable future less workers contributing to Social Security than retirees taking out benefits. That is only one problem. The other one is the mismanagement of Social Security funds by the government. Over the years, the bureaucrats have borrowed from the Social Security trust fund and replaced it with Treasury notes. In other words, I.O.U's from the government. At present it seems to be a "safe" investment, but if the U.S. debt keeps growing and Mr. Bernanke keeps running the printing presses (or digital accounts on a computer), those Treasury notes become less valuable...just pieces of paper and government promises. I ask you, do you want to trust your future to these promises?   
Back to the main point: is Social Security a Ponzi scheme? Yes, only worse. It is compulsory. You or I have no choice but to participate. I see it as a Ponzi scheme, but I do not have the choice to "opt out". At least with Mr. Ponzi, once people catch on, they can stop contributing.
Something does have to be done. Right now there are three choices:
  1. Raise taxes. That always happens. This process never stops. My question: When is enough, enough? Nobody has a clear answer to that, so we see "tax creep" .
  2. Lower benefits. Bummer. I paid all these years into Social Security (maybe even more taxes) and I get less back than my grandparents?
  3. Print more money so the government keep the Social Security checks coming. Alas, this always happens as well. The bad thing about this is your check stays the same size, but the dollars you get have less purchasing power. 
This is not promising. Much worse is my concern for my kids. Increasing their taxes and lowering their benefits will make it harder for my kids to build a good life for themselves.
What about a solution? Somehow Social Security needs to be dismantled. Once again, Walter Willams has a partial solution:
 I believe that a person who is 65 years old and has been forced into Social Security is owed something. But the question is, Who owes it to him? Congress has spent every penny of his Social Security "contribution." Young workers have no obligation to be fleeced in order to make up for the dishonesty and dereliction of Congress. The tragedy is that most seniors just want their money and couldn't care less about whom Congress takes it from.
Here's what might be a temporary fix: The federal government owns huge quantities of wasting assets – assets that are not producing anything – 650 million acres of land, almost 30 percent of the land area of the United States. In exchange for those who choose to opt out of Social Security and forsake any future claim, why not pay them off with 40 or so acres of land? Doing so would give us breathing room to develop a free choice method to finance retirement.
It is just one idea, but I think he is on the right track.

For reference, here is his whole article.

Feel free to comment.