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- Paul Cantor Discusses ‘Dallas Buyers Club’ March 11, 2014 Ryan McMaken
- Judge Napolitano on ‘The Daily Show’ Tonight March 11, 2014 Ryan McMaken
- Don’t Dis Crony Capitalism, Sniffs Bruce Bartlett March 11, 2014 Ryan McMaken
- Death of an Auto Industry March 11, 2014 David Howden
- Support the Battle of Ideas; Not Tyrants March 11, 2014 John P. Cochran
- Why the Wealth Effect Doesn’t Work March 11, 2014 Mises Updates
- Ron Paul: Can We Afford Ukraine? March 10, 2014 Mises Updates
- Where’s the Austerity? March 10, 2014 David Howden
- Bubble-Sizing the Economy — The Fed Has Done It Again! March 10, 2014 Joseph Salerno
- Has Austerity Failed? (Has It Been Tried?) | Mark Thornton on the Tom Woods Show March 10, 2014 Mises Updates
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Tag Archives: austrian economics
Michael Duffy: As it happens, we’re going to start the year with a guest from the right, but so far to the right you certainly couldn’t call him conservative. I’m not sure what you’d call him, he is right out of the ideological ballpark. His name is Hans-Hermann Hoppe and he’s a German intellectual who lives in America. He’s going to propose ways of thinking about government, society and the economy that are literally radical.
Paul Comrie-Thomson: And I think in this case, Michael, the word ‘literally’ is being used literally.
Michael Duffy: Indeed it is. Hans-Hermann Hoppe is probably the world’s leading living libertarian philosopher. He’s emeritus professor of economics at the University of Nevada, Las Vegas, and a distinguished fellow at the Ludwig von Mises Institute. Perhaps his best-known book appeared about a decade ago, and it had the challenging title Democracy: The God That Failed. His critique was from the libertarian right.
Libertarians are part of a pretty broad church, so how would Hans-Hermann Hoppe describe his position? Just where is he coming from?
Hans-Hermann Hoppe: I am a libertarian but there exists various wings of libertarians. I am a member of the wing that is referred to as the anarcho-capitalist libertarians or, as I prefer to say, I’m a proponent of a private law society, and a private law society is a society where the same laws apply to every individual and every institution, not just separate groups of individuals—government officials on the one hand and private citizens on the other—to whom different laws apply.
Michael Duffy: In general terms, is there one particular place that you’re coming from? Is there a sort of fixed point where you start whenever you consider a new subject or a problem? Are you interested in freedom, for example?
Hans-Hermann Hoppe: Of course I’m interested in freedom. I think freedom is defined precisely by the position that I take, that every individual and every situation is subject to exactly the same law and there is no group of individuals or no particular individual that has certain privileges that other people do not have.
Michael Duffy: Okay, let’s apply those beliefs to what you’ve written about the differences or the comparison between democracy and monarchy. I suspect most of our listeners would consider that democracy is a marked improvement and a dramatic difference from monarchy. How do you see the two?
Hans-Hermann Hoppe: First you have to define a state because monarchies as well as democracies are states, and then in the second step we have to explain what the difference between these two types of states are. States are defined as institutions that are the ultimate arbiter in cases of conflict on a certain territory, including conflicts involving the state itself. And secondly, states are territorial monopolies of taxation. So this applies both to monarchies and to democracies.
In monarchies, the head of the state considers the territory as his private property, and the people inhabiting the state territory as his renters who owe him rent payments. And of course he uses his privilege that he has as the ultimate arbiter in any case of conflict and a person who has the right to tax individuals to his own advantage. He exploits his population. This is also true in a democracy. Taxation exists in a democracy, just as much as it exists under monarchy. Democratic states also assume that they are the ultimate arbiter in any case of conflict, including conflicts involving themselves.
And there is distinction in democracy also between public law and private law. Public officials under democracy can do many things that private individuals in their private dealings would not be permitted to do. They can tax individuals on a private level, this would be called stealing. They can tax individuals and redistribute income in the private level, that would be considered stealing and fencing of stolen goods. They can draft people into the army or force them to work for the state, which on a private level would be considered enslaving people or kidnapping people…
Michael Duffy: But people choose this, don’t they? People will vote for democracy, for democratic governments.
Hans-Hermann Hoppe: Yes, that brings me to the difference between democracy and the monarch. Under monarchy it is relatively clear who the ruler is and what the rules are, under democracy you can hope that you will end up on the other side, that you will be on the receiving end, and that reduces the resistance against increases of taxes, against unjust verdicts in conflicts of a situation. But the most important difference between monarchy on the one hand and democracy on the other hand is that you replace somebody who considers himself to be the owner of the country with somebody who is a temporary caretaker of the country, and that does not improve matters, it makes matters much worse.
To give you an example, if I give you a house, in one situation I make you the owner of the house so you can determine who will be the heir, you can sell the house off and keep the receipts from the sale, while in the other case I make you the temporary user of the house. You can use to your own advantage the income that you can get off the house but you have no right to sell the house, you have no right to determine who will be the heir of the house.
Will you treat the house in a different way? And the answer seems to be quite clear; yes, you will treat it in a very different way. In the one case as the owner you will be interested in preserving the value, the capital value embodied in the house. In the other case, as a democratic politician where you can only use the house but don’t own it, you will try to increase your income that you can get from the house without any regard to the capital value embodied in the house, and you will engage in capital consumption, you will want to rob the country as fast as possible because, after four years or eight years you have no chance anymore to do it. So it is far more destructive of wealth formation than monarchy.
Michael Duffy: But isn’t it the case, using your analogy, that because of elections if I want to keep the house, keep my control of the house at the end of a period of four or five years, I have to act within certain limits? In other words, elected rulers, even if they do exploit people a bit, they have to keep that exploitation within boundaries in the hope of being re-elected.
Hans-Hermann Hoppe: But this is also true for monarchs. Monarchs have frequently been killed if they overstep their boundaries, and the dynasty of which they are a member is very much interested in keeping the dynasty in power. Democrats are far less frequently killed because people always have the hope that in four years somebody else will come to power. So the resistance against attempts to increase government power to increase the amount of taxes is far lower under democratic conditions than it is under monarchical conditions.
And in addition it should be said that competition for entry into government, competition is not always good. Competition is good when it comes to the production of things that are good. We do not want to have a milk monopolist, we do not want to have a car monopolist, we do want to have competition in the milk industry and the car industry, but competition is not good when it comes to producing something that is bad from the point of view of property owners. We would not want to have competition in people—who runs the best concentration camp, who is the best mugger on the street—and this is precisely the type of competition that we have in democracy.
Michael Duffy: It’s the case, isn’t it, that democracies on the whole have higher standards of living than other forms of government, and also the case that many people who do not live in democracies would like to, to the extent that we can gauge what they want. Why is that so, do you think? Are people deluded to want to live in democracies?
Hans-Hermann Hoppe: Democracies have won out in competition against monarchies in the course of history. The monarchical age has ended by and large with the end of World War I, so it would be unfair to say that democracies are in fact richer than monarchies because we compare the 19th and 18th century with the 20th century. Societies can grow richer despite the fact that governments grow richer. So my thesis would be if we would have kept monarchies of the style that we had in the 19th and 18th century we would be far richer than we are currently under democratic conditions.
Michael Duffy: Moving on, what might a libertarian society look like? How might it organise itself?
Hans-Hermann Hoppe: The basic idea is that if every institution, every person is subject to the same set of laws, then also the production of law and order has to be provided by freely financed institutions. There is no monopoly institution in this place. This would lead to a situation where we would indeed get some sort of contract of what will happen to us in certain situations of conflict, what the provider of security of law and order will do. They will have to describe what it is that they will protect, how will they protect it, what will they do in the case of a conflict between a client of a protecting agency and the agency itself, what will happen in the case that two security providers and their clients have conflicts with each other.
They will have to agree, for instance, that there will be independent arbitration in the case of conflicts between various protecting agencies, whereas if you compare that with the current situation, we have a situation where no contract exists between the citizens that are allegedly protected in their life and their property by the government, where it is not clear what will happen if the clients, the so-called clients of the state, are dissatisfied with the provisions that the state gives, where the clients have no possibility of appealing to independent third parties if it comes to a conflict between the state and the individual, where instead we have a situation where if you have a conflict with the state, some state agent, over property rights, it is another state agent who decides who is right and who is wrong in this case of conflict. And there you can predict of course what the outcome will be; they will by and large decide that they are always right.
Michael Duffy: Can I ask you for an example? In this sort of world you’re describing, say there was a law and everyone else agreed with it but I didn’t. So if, for example, I live in a street and I’ve got a one-hour parking sign out the front and I disagree with that but the other people in the street agree with it, what might happen then? I’m just trying to get a concrete idea of this.
Hans-Hermann Hoppe: The street would be privately owned. In a private law society there exists no such thing as public property, there exists only private property, and of course the owner of the private property lays down the rules that apply to this piece of private property. So conflicts like this would not even arise. Public property, on the other hand, generates conflicts. Allegedly we all own it. If we do not happen to agree, as if by magic, conflicts are almost unavoidable. If the unions want to demonstrate on the street and the car drivers want to drive on the street, both claim to be owners of this territory, and conflict is unavoidable. If everything is privately owned, it is perfectly clear whose rules apply and whose rules do not apply.
Michael Duffy: So if I own a house in a street, would that street belong to all the people in the neighbourhood or to another company? How would that work?
Hans-Hermann Hoppe: That can be arranged in various ways. It might be owned by all the residents on the street, it might be owned by a third party and you have the right to access your property. Obviously nobody would buy any property if he did not have the right to access his own property, so you would have a contract with the person who owns the street. Or there are neighbourhood associations that jointly own the street and make joint decisions, as in stock companies or as in gated communities or institutions of that kind.
Michael Duffy: And if I didn’t agree with them I could leave basically, I could sell my house and…
Hans-Hermann Hoppe: And then you could leave.
Michael Duffy: In Australia we have a large number of people who are on welfare, poor people who are looked after by what we call the welfare state, possibly more than in America. What would happen to those people under the sorts of arrangements you’ve been describing?
Hans-Hermann Hoppe: First of all I think that a large number of voluntary organisations would spring up, voluntary donations would dramatically increase given the fact that no taxes have to be paid. Currently the situation is such that you pay massive amounts of taxes and then people of course have the feeling why should I also support people who have this condition or that condition given that I am already paying an enormous sum of taxes.
Second, I think there would be greater pressure exerted on people not to become dependent on welfare because they are not entitled to it. They would have to behave in such a way that they satisfy their donors in some way, they have to be nice to their donors, whereas currently the situation is you feel entitled to these things and that breeds of course bad behaviour. Whatever you subsidise through taxes you will get more of it. If you support poor people, this does not eliminate poverty, it increases poverty, it increases the incentive to stay poor or to become poor. Whenever you subsidise people because they suffer from drug addiction or alcoholism, you increase of these forms of behaviour instead of discouraging them.
Michael Duffy: Do you think the welfare state can survive?
Hans-Hermann Hoppe: No, the welfare state will ultimately collapse for the same reason that communism collapsed. All Western welfare states will not be able to repay their debts, will not be able to fulfil their obligations that they have assumed vis-à-vis people who are retiring. The only way that they can fulfil it is by engaging in a massive amount of inflation, that is printing up the money in order to give the impression that they might fulfil the obligation, with the consequence of course that the purchasing power of money drastically falls and an expropriation of productive individuals will take place.
Michael Duffy: I’d like to ask you a bit more about economics but unfortunately we don’t have a lot of time left. Just very generally, can you tell us a few of your most important thoughts about how you think the international financial system ought to be arranged differently?
Hans-Hermann Hoppe: The fundamental problem that we have which began in its most drastic form since 1971 is that all governments are nowadays on a pure paper money standard. All governments or their central banks can create money out of thin air. Increasing the amount of money in existence does not increase wealth in society, it is just additional pieces of paper. There is not one additional consumer good resulting from more money being printed, there is not one additional producer good resulting from more money being printed. If by money printing we could make societies richer, there would not be a single poor society. In fact, there would not be a single poor person on earth.
All that this money printing does is redistribute income and wealth from those people who print and get and spend the money first, and it impoverishes and expropriates who do get the newly printed money last, who are on fixed incomes and are confronted with rising prices resulting from the fact that additional money was being printed.
So the most important monetary reform that we can hope for would be the abolishment of all central banks and the return to a situation that existed for most of mankind, namely a situation where money is a regular commodity that must be produced in a costly way, such as gold and silver, by the market. Again, no monopoly in the production of money but competition in the production of money, and money being a regular commodity that cannot be generated out of thin air.
Michael Duffy: What about the role of intellectuals? We’ve never had anyone like yourself on our program before and that is disappointing. Why don’t more people think like you or it least engage in more diverse thinking about freedom?
Hans-Hermann Hoppe: The answer to that one is very easy. Most intellectuals are state employees, and of course they know where their money comes from. While that fact does not determine in the Marxist way how people think, it definitely helps to know where your money comes from. The demand for intellectual services on the market is far lower than the impression that intellectuals themselves tried to spread. Their salaries would probably be significantly less, there would be significantly less so-called intellectuals because they realise that their biggest helper is the state. They tend to be in favour of state institutions, tend to be in favour of having public education, public funding for research. Again, most research that is being done, especially in the social sciences, appears to me as a big waste of money. Societies would be richer if many of these so-called research projects had never been carried out at all.
Michael Duffy: Professor Hoppe, thanks very much for your time today.
Hans-Hermann Hoppe: Thank you very much.
Michael Duffy: Hans-Hermann Hoppe is emeritus professor of economics at the University of Nevada, and a distinguished fellow at the Ludwig von Mises Institute.
In coming weeks here on Counterpoint we’ll be talking to another prominent libertarian, David Hart. He’s an Australian historian, now resident in the US, a self-described ultra-sceptic who runs the important website, the Online Library of Liberty, and we’ll hear his views on freedom, war and the growth of the state.
With bitcoin gaining mainstream attention the coming attack on its users is inevitable. In this short piece I will explain how it is likely to unfold and how you can survive it.
First, a little background:
In 1996 E-gold was one of the early entrants to the market with a private, global e-currency. They achieved stellar growth and widespread attention – much like bitcoin today. Accolades came from freedom-lovers everywhere. They were the “Great Gold Hope” that would free the people by freeing the money. Privacy-enthusiasts, libertarians, gold-bugs, autarchists, anarchists, voluntaryists, drug-dealers, and even unsavory types flocked to it with praise and adoration.
Of course, the monopolists of the monetary system didn’t take lightly to this threat to their very existence. They came after the independent exchangers and e-gold with their full force and fury – eventually succeeding in convicting the key players for “conspiracy to operate an unlicensed money-transmitting business” and “conspiracy to engage in money laundering”. E-gold was fairly easy to take down because their operations and data-center were centralized and readily accessible.
Many folks who are now currently acting as currency exchangers for bitcoin will be the first to come under attack. Many will get hurt and possibly even imprisoned but, because of its decentralized nature, bitcoin will survive where e-gold did not.
If any of the large exchangers like mtgox.com are operating out of the US then it won’t be long before they are raided and shut down. Individual exchangers will be targeted as well – just to make an example and to scare others out of the community. This will create a giant “wet blanket” on the current enthusiasm for bitcoin and I expect the currency to take a major drop in exchange value when this happens. Not to fear though. Bitcoin will survive due to its decentralized “peer to peer” nature and it will continue to operate as an “alter-cash” resuming its growth albeit at a slower rate during the immediate aftermath.
To protect yourself I recommend the following:
You probably have a little more time before the attacks come (maybe a couple of months?) to acquire bitcoin with cash – and there are profits in speculation to be made until then but, when the raids come, expect a sharp correction before exchange values move on to new highs over a longer period of time. What you do not want to do is be involved as an “exchange service” conducting exchanges in and out of national currencies and you definitely do not want to have your money sitting in the exchanger’s account when they are raided and shut down.
Remember, e-gold was shut down for “conspiracy to operate an unlicensed money transmitting business”. Do not store any money in online accounts like mybitcoin.com in case they get taken down along with the exchangers. Keep all of your bitcoins on your computer with multiple, encrypted back-ups both on the cloud and on an external thumb drive.
The safest way to acquire bitcoin is to let people know that you will accept it as payment for your products and services. Do not ever exchange it for national currencies. The point that people miss here is that national currencies are the very problem that freedom-lovers are trying to get away from. Instead, use bitcoin to trade with merchants and individuals who accept it as payment. Offer it as payment to those who are unaware of it and explain the benefits to them. This will help develop the market and create a solid economy outside of national currencies. After the initial attack, bitcoin will likely be one of the most powerful and revolutionary tools to bring about more freedom and liberty to humankind.
The People Who Do Everything Right Are the Ones That Really Get Screwed by the Federal Reserve – Bob Wenzel
LaTi has a story out today about homeowners stuck in Las Vegas because of the collapse of the housing market:
Charles Mills can barely afford to stay here. But he also can’t afford to move.
That’s why the 44-year-old heavy-equipment operator was preparing to leave his wife and young daughter here and go where he could find work — the Oklahoma oil fields. Mills has a mortgage to pay, even if its size pains him.
He purchased his house in 2006 for $308,500. Current value: $105,797.
“We talked about it: What can we do with the house?” Mills said. “Nobody’s going to buy it. Nobody’s going to rent it. If we walk away, my credit’s shot. We’re stuck.”
In some parts of North Las Vegas, more than 80% of homeowners have plunged “underwater,” meaning they owe more on their mortgages than their properties are worth — a stunning concentration of aborted plans and upended lives.
I have an ex-girlfriend in the same position. Last I talked to her, I think she was underwater on a house to the tune of $150,000. (Hey, don’t blame me. I warned her.) She won’t walk away from the property because just like the Las Vegas homeowners, she doesn’t want her credit ruined.
These are the people that do everything right. They don’t lie, cheat or steal. They aren’t Austrian economists, so they don’t understand the business cycle. When house prices were going up, the conservative thing, in their eyes, was to buy a house, since houses ”always go up in value.” They didn’t understand it was a Federal Reserve manipulated scam.
Most people don’t reguarly check the California Senate Committee on Banking, Finance and Insurance for the latest news about potential legislation, and so it’s no surprise that most people have never heard of California Assembly Bill 2789. That’s too bad, because California AB 2789, passed into law in September, 2010 and effective January 1, 2011 as the Money Transmission Act (see http://www.dfi.ca.gov/licensees/…), is a ticking time bomb, and the big red numbers are glowing “50″ as of midnight tonight.
What the law accomplishes sounds mundane enough: it requires money transmitters–companies that act like banks, but aren’t, such as PayPal–to get licenses. As usual, however, the devil is in the details. Previously, California corporations were only required to get money transmitter licenses for international funds transfers, and domestic transfers were unregulated. Now both kinds of transfers are regulated. Also, the price of each license is a little bit steep: half a million dollars and change.
Oh, and if you want to do business nationwide, you’ll need 43 more of those licenses from almost every state. The forms and requirements are different everywhere, most states want your fingerprints to do a criminal background check (the exact same criminal background check, it turns out), and the price varies wildly from a measly $10,000 to $1,000,000+ per state. Want the forms? Good luck finding them; some states don’t post them on-line.
Why does California’s law matter at all when the regulatory framework for money transmitters is already such a mess? Well, Silicon Valley is located in California, and if Valley startup founders risk going to jail (which, under the updated PATRIOT Act, they do; see http://www.law.cornell.edu/uscod…) for transmitting money illegally without a license, then there aren’t going to be very many new companies working on ways to handle payments that don’t involve the same old banks touting the same old plastic cards. Not to mention that there aren’t a lot of investors who like the idea of putting half a million dollars into a company’s bank account so that it can be immediately locked up and used for licenses.
In other words, the Money Transmission Act is designed to kill innovation.
The only silver lining is that the very last clause, section 1872, allows companies that had already been operating under the old law to continue doing so without repurcussion until July 1, 2011, which is when the music stops. On that date, every affected company needs a license application on file, or else the founders, employees and even investors will be committing state and federal crimes by merely continuing to operate.
Who would sponsor such a draconian law? According to legislative analysis of AB 2789 (see ftp://leginfo.public.ca.gov/pub/…), we can blame The Money Services Round Table. If The Money Services Round Table sounds like a shady political group that doesn’t want to reveal its true identity, that is because it is a shady political group that doesn’t want to reveal its true identity! Thanks to the Freedom of Information Act, however, we know that its lobbyists had some very important things to tell the Federal Reserve in 2006 (see http://www.federalreserve.gov/SE…), including its member list (which may have grown since then). At the time, it included such names as:
- Western Union
- American Express
While it’s no surprise that these companies might want to keep out the competition, that doesn’t make anti-competitive behavior something we should accept. The big four payment card companies (Visa, MasterCard, Discover and American Express) have managed to raise interchange fees for years and years thanks to legislative tricks, and only now is Congress trying to solve the problem by regulating debit (but thanks to lobbyists, not credit) card interchange rates via the Durbin Amendment to the Dodd-Frank Act, which has severe problems of its own.
You might argue that innovation in the financial industry is alive and
well, but you’d only be right if you mean that in the most cynical
terms. Case in point: Square, a payments company that is a media darling frequently cited as a leading innovator, does not disrupt the financial infrastructure in any way. In fact, Visa just invested in Square directly because it does such a good job of propagating the status quo. PayPal similarly exists to promote existing financial infrastructures, not replace them with something better.
My company, Think Computer Corporation, will be forced to shut down FaceCash (https://www.facecash.com)–the only payment system built from the ground up to replace the plastic card network–if we cannot meet California’s requirements to apply for a license by July 1. (We’re pretty confident we’ll be okay, but it’s still a considerable risk.) Another one of our competitors won’t admit it, but even after raising $20 million in venture capital funding, they just stopped operating entirely in April, 2011, likely because of the regulatory uncertainty posed by AB 2789. Today, a former American Express executive who worked on the company’s Serve mobile payment system confided that the license issue had even become an internal issue for the one of the very same companies that sponsored the legislation in the first place.
Simply put, in a capitalist society, this system is insane. It does not protect consumers. It prevents market competition. It keeps interchange prices so high that Congress can’t even hold enough hearings about the issue.
Fortunately, this is one problem that is easy to solve. Tell your representatives in Congress to override California AB 2789 with a federal money transmission framework that makes sense, and allow competition to lower prices on its own.
From Richard Ebeling:
(The following testimony was delivered before the House of Representatives Subcommittee on Domestic Monetary Policy and Technology, chaired by Congressman Ron Paul (R-Texas), on “Monetary Policy and the Debt Ceiling: Examining the Relationship between the Federal Reserve and Government Debt,” in Washington, D.C. on May 11, 2011)
“I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared . . . To preserve our independence, we must not let our rulers load us with public debt . . . we must make our choice between economy and liberty or confusion and servitude . . . If we run into such debts, we must be taxed in our meat and drink, in our necessities and comforts, in our labor and in our amusements . . . If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy.”
Government Debt and Deficits
The current economic crisis through which the United States is passing has given a heightened awareness to the country’s national debt. After a declining trend in the 1990s, the national debt has dramatically increased from $5.7 trillion in January 2001 to $10.7 trillion at the end of 2008, to over $14.3 trillion through April of 2011. The debt has reached 98 percent of 2010 U.S. Gross Domestic Product.
The approximately $3.6 trillion that has been added to the national debt since the end of 2008 is more than double the market value of all private sector manufacturing in 2009 ($1.56 trillion), more than three times the market value of spending on professional, scientific, and technical services in 2009 ($1.07 trillion), and nearly five times the amount spent on non-durable goods in 2009 ($722 billion). Just the interest paid on the government’s debt over the first six months of the current fiscal (October 2010-April 2011), nearly $245 billion, is equal to more than 40 percent of the total market value of all private sector construction spending in 2009 ($578 billion)
This highlights the social cost of deficit spending, and the resulting addition to the national debt. Every dollar borrowed by the United States government, and the real resources that dollar represents in the market place, is a dollar of real resources not available for use in private sector investment, capital formation, consumer spending, and therefore increases and improvements in the quality and standard of living of the American people.
In this sense, the government’s deficit spending that cumulatively has been increasing the national debt has made the United States that much poorer than it otherwise could have and would have been, if the dollar value of these real resources had not been siphoned off and out of use in the productive private sectors of the American economy.
What has made this less visible and less obvious to the American citizenry is precisely because it has been financed through government borrowing rather than government taxation. Deficit spending easily creates the illusion that something can be had for nothing. The government borrows “today” and can provide “benefits” to various groups in the society in the present with the appearance of no immediate “cost” or “burden” upon the citizenry.
Yet, whether acquired by taxing or borrowing, the resulting total government expenditures represent the real resources and the private sector consumption or investment spending those resources could have financed that must be foregone. There are no “free lunches,” as it has often been pointed out, and that applies to both what government borrows as much as what it more directly taxes to cover its outlays.
What makes deficit spending an attractive “path of least resistance” in the political process is precisely the fact that it enables deferring the decision of telling voter constituents by how much taxes would otherwise have to be increased, and upon whom they would fall, in the “here and now” to generate the additional revenue to pay for the spending that is financed through borrowing.
But as the recent fiscal problems in a number of member nations of the European Union have highlighted, eventually there are limits to how far a government can try to hide or defer the real costs of all that it is providing or promising through its total expenditures to various voter constituent groups. Standard & Poor’s recent decision to downgrade the U.S. government’s prospective credit rating to “negative” shows clearly that what is happening in parts of Europe can happen here.
And given current projections by the Congressional Budget Office, the deficits are projected to continue indefinitely into future years and decade, with the cumulative national debt nearly doubling from its present level. In addition, whether covered by taxes or deficit financing, these debt estimates do not include the federal government’s unfunded liabilities for Social Security and Medicare through most of the 21st century. In 2009, the Social Security and Medicare trust funds were estimated to have legal commitments under existing law for expenditures equal to at least $43 trillion over the next seventy-five years. Others have projected this unfunded liability of the United States government to be much higher – possibly over $100 trillion.
The Federal Reserve and the Economic Crisis
The responsibility for a good part of the current economic crisis must be put at the doorstep of America’s central bank, the Federal Reserve. By some measures of the money supply, the monetary aggregates (MZM or M-2) grew by fifty percent or more between 2003 and 2007. This massive flooding of the financial markets with huge amounts of liquidity provided the funds that fed the mortgage, investment, and consumer debt bubbles in the first decade of this century. Interest rates were pushed far below any historical levels.
For a good part of those five years, according to the St. Louis Federal Reserve Bank, the federal funds rate (the rate of interest at which banks lend to each other), when adjusted for inflation – the “real rate” – was either negative or well below two percent. In other words, the Federal Reserve supplied so much money to the banking sector that banks were lending money to each other for free for a good part of this time. It is no wonder that related market interest rates were also pushed way down during this period.
Market interest rates are supposed to tell the truth. Like any other price on the market, interest rates are suppose to balance the decision of income earners to save a portion of their income with the desire of others to borrow that savings for various investment and other purposes. In addition, the rates of interest, through the present value factor, are meant to limit investment time horizons undertaken within the available savings to successfully bring the investments to completion and sustainability in the longer-term.
Due to the Fed’s policy, interest rates were not allowed to do their “job” in the market place. Indeed, Fed policy made interest rates tell “lies.” The Federal Reserve’s “easy money” policy made it appear, in terms of the cost of borrowing, that there was more than enough real resources in the economy for spending and borrowing to meet everyone’s consumer, investment and government deficit needs far in excess of the economy’s actual productive capacity.
The housing bubble was indicative of this. To attract people to take out loans, banks not only lowered interest rates (and therefore the cost of borrowing), they also lowered their standards for credit worthiness. To get the money, somehow, out the door, financial institutions found “creative” ways to bundle together mortgage loans into tradable packages that they could then pass on to other investors. It seemed to minimize the risk from issuing all those sub-prime home loans, which we now see were really the housing market’s version of high-risk junk bonds. The fears were soothed by the fact that housing prices kept climbing as home buyers pushed them higher and higher with all of that newly created Federal Reserve money.
At the same time, government-created home-insurance agencies like Fannie Mae and Freddie Mac were guaranteeing a growing number of these wobbly mortgages, with the assurance that the “full faith and credit” of Uncle Same stood behind them. By the time the Federal government formally had to take over complete control of Fannie and Freddie in 2008, they were holding the guarantees for half of the $10 trillion American housing market.
Low interest rates and reduced credit standards were also feeding a huge consumer-spending boom that resulted in a 25 percent increase in consumer debt between 2003 and 2008, from $2 trillion to over $2.5 trillion. With interest rates so low, there was little incentive to save for tomorrow and big incentives to borrow and consume today. But, according to the U.S. Census Bureau, during this five-year period average real income only increased by at the most 2 percent. Peoples’ debt burdens, therefore, rose dramatically.
The easy money and government-guaranteed house of cards all started to come tumbling down in the second half of 2008. The Federal Reserve’s response was to open wide the monetary spigots even more than before the bubbles burst.
The Federal Reserve has dramatically increased its balance sheet by expanding its holding of U.S. government securities and private-sector mortgage-back securities to the tune of around $2.3 trillion. Traditional Open Market Operations plus its aggressive “quantitative easing” policy have increased bank reserves from $94.1 billion in 2007 to $1.3 trillion by April 2011, for a near fourteen-fold increase, and the monetary basis in general has expanded from $850.5 billion in 2007 to $2,242.9 trillion in April of 2011, for a 260 percent increase. The monetary aggregates, MZM and M-2, respectively, have grown by 28 percent and 21.6 percent over this same period.
In the name of supposedly preventing a possible price deflation in the aftermath of the economic boom, Fed policy has delayed and retarded the economy from effectively readjusting and re-coordinating the sectoral imbalances and distortions that had been generated during the bubble years. Once again interest rates have been kept artificially low. In real terms, the federal funds rate and the 1-year Treasury yield have been in the negative range since the last quarter of 2009, and at the current time is estimated to be below minus two percent.
This has prevented interest rates from informing market transactors what the real savings conditions are in the economy. So, once again, the availability of savings and the real cost of borrowing is difficult to discern so as to make reasonable and rational investment decisions, and not to foster a new wave of misdirected and unsustainable private sector investment and financial decisions.
The housing market has not been allowed to fully adjust, either. With so much of the mortgage-backed securities being held off the market in the portfolio of the Federal Reserve, there is little way to determine any real market-based pricing to determine their worth or their total availability so the housing market can finally bottom out with clearer information of supply and demand conditions for a sustainable recovery.
This misguided Fed policy has been, in my view, a primary factor behind the slow and sluggish recovery of the United States economy out of the current recession.
Federal Reserve Policy and Monetizing the Debt
Many times in history, governments have used their power over the monetary printing press to create the funds needed to cover their expenses in excess of taxes collected. Sometimes this has lead to social and economic catastrophes.
Monetizing the debt refers to the creation of new money to finance all or a portion of the government’s borrowing. Since the early 2008 to the present, Federal Reserve holdings of U.S. Treasuries have increased by about 240 percent, from $591 billion in March 2008 to $1.4 trillion in early May 2011, or a nearly $1 trillion increase. In the face of an additional $3.6 trillion in accumulated debt during the last three fiscal years, it might seem that Fed policy has “monetized” less than one-third of government borrowing during this period.
However, the Fed’s purchase of mortgage-backed securities, no less than its purchase of U.S. Treasuries, potentially increases the amount of reserves in the banking system available for lending. And since 2008, the Federal Reserve had bought an amount of mortgaged-backed securities that it prices on its balance sheet as being equal about $928 billion.
The $1.4 trillion increase in the monetary base since the end of 2007, from $850.5 billion to $2.2 trillion, has increased MZM measurement of the money supply by $2,161.1, or an additional $769 billion dollars in the economy above the increase in the monetary base. This is an amount that is 83 percent of the dollar value of the $927 billions in mortgage-backed securities.
Due to the “money multiplier” effect – that under fractional reserves, total new bank loans are potentially a multiple of the additional reserves injected into the banking system – it is not necessary for the Fed to purchase, dollar-for-dollar, every additional dollar of government borrowing to generate a total increase in the money supply that may be equal to the government’s deficit.
Thus, it can be argued that Fed monetary policy has succeeded, in fact, in generating an increase in the amount of money in the banking system that is equal to two-thirds of the government’s $3.6 trillion of new accumulated debt.
That the money multiplier effect has not been as great as it might have been, so far, is because the Federal Reserve has been paying interest to member banks to not lend their excess reserves. This sluggishness in potential lending has also been affected by the general “regime uncertainty” that continues to pervade the economy. This uncertainty concerns the future direction of government monetary and fiscal policy. In an economic climate in which it difficult to anticipate the future tax structure, the likely magnitude of future government borrowing, and the impact of new government programs, hesitancy exists on the part of both borrowers and lenders to take on new commitments.
But the monetary expansion has most certainly has been the factor behind the worsening problem of rising prices in the U.S. economy and the significant fall in the value of the dollar on the foreign exchange markets.
The National Debt and Monetary Policy
It is hard for Americans to think of their own country experiencing the same type of fiscal crisis that has periodically occurred in “third world” countries. That type of government financial mismanagement is supposed to only happen in what used to be called “banana republics.”
But the fact is, the U.S. is following a course of fiscal irresponsibility that may lead to highly undesirable consequences. The bottom line truth is that over the decades the government – under both Republican and Democratic leadership – has promised the American people, through a wide range of redistributive and transfer programs and other on-going budgetary commitments, more than the U.S. economy can successfully deliver without seriously damaging the country’s capacity to produce and grow through the rest of this century.
To try to continue to borrow our way out of this dilemma would be just more of the same on the road to ruin. The real resources to pay for all the governmental largess that has been promised would have to come out of either significantly higher taxes or crowding out more and more private sector access to investment funds to cover continuing budget deficits. Whether from domestic or foreign lenders, the cost of borrowing will eventually and inescapably rise. There is only so much savings in the world to fund private investment and government borrowing, particularly in a world in which developing countries are intensely trying to catch up with the industrialized nations.
Interest rates on government borrowing will rise, both because of the scarcity of the savings to go around and lenders’ concerns about America’s ability to tax enough in the future to pay back what has been borrowed. Default risk premiums need not only apply to countries like Greece.
Reliance on the Federal Reserve to “print our way” out of the dilemma through more monetary expansion is not and cannot be an answer, either. Printing paper money or creating it on computer screens at the Federal Reserve does not produce real resources. It does not increase the supply of labor or capital – the machines, tools, and equipment – out of which desired goods and services can be manufactured and provided. That only comes from work, savings and investment. Not from more green pieces of paper with presidents’ faces on them.
However, what inflation can do is:
- · Accelerate the devaluation of the dollar on the foreign exchange markets, and thereby disrupting trading patterns and investment flows between the U.S. and the rest of the world;
- · Reduce the value, or purchasing power, of every dollar in people’s pockets throughout the economy as prices start to rise higher and higher;
- · Undermine the effectiveness of the price system to assist people as consumers and producers in making rational market decisions, due to the uneven manner in which inflation impacts of some prices first and effects others only later;
- · Potentially slow down capital formation or even generate capital consumption, as inflation’s uneven effects on prices makes it difficult to calculate profit from loss;
- · Distort interest rates in financial markets, creating an imbalance between savings and investment that sets in motion the boom and bust of the business cycle;
- · Create incentives for people to waste their time and resources trying to find ways to hedge against inflation, rather than devote their efforts in more productive ways that improve standards of living over time;
- · Bring about social tensions as people look for scapegoats to blame for the disruptive and damaging effects of inflation, rather than see its source in Federal Reserve monetary policy;
- · Run the risk of political pressures to introduce distorting price and wage controls or foreign exchange regulations to fight the symptom of rising prices, rather than the source of the problem – monetary expansion.
What is To Be Done?
The bottom line is, government is too big. It spends too much, taxes too heavily, and borrows too much. For a long time, the country has been trending more and more in the direction of increasing political paternalism. Some people argue, when it is proposed to reduce the size and scope of government in our society, that this is breaking some supposed “social contract” between government and “the people.”
The only workable “social contract” for a free society is the one outlined by the American Founding Fathers in the Declaration of Independence and formalized in the Constitution of the United States. This is a social contract that recognizes that all men are created equal, with governmental privileges and favors for none, and which expects government to respect and secure each individual’s right to his life, liberty, and honestly acquired property.
The reform agenda for deficit and debt reduction, therefore, must start from that premise and have as its target a radical “downsizing” of government. That policy should plan to reduce government spending across the board in every line item of the federal budget by 10 to 15 percent each year until government has been reduced in size and scope to a level and a degree that resembles, once again, the Founding Father’s conception of a free and limited government.
A first step in this fiscal reform is to not increase the national debt limit. The government should begin, now, living within its means – that is, the taxes currently collected by the Treasury. In spite of some of the rhetoric in the media, the U.S. need not run the risk of defaulting or losing its international financial credit rating. Any and all interest payments or maturing debt can be paid for out of tax receipts. What will have to be reduced are other expenditures of the government.
But the required reductions and cuts in various existing programs should be considered as the necessary “wake-up call” for everyone in America that we have been living far beyond our means. And as we begin living within those means, priorities will have to be made and trade-offs will have to be accepted as part of the transition to a smaller and more constitutionally limited government.
In addition, the power of monetary discretion must be taken out of the hands of the Federal Reserve. The fact is, central banking is a form of monetary central planning under which it is left in the hands of the members of the Board of Governors of the Federal Reserve to “plan” the quantity of money in the economy, influence the value or purchasing power of the monetary unit, and manipulate interest rates in the loan markets.
The monetary central planners who run the Federal Reserve have no more or greater knowledge, wisdom or ability that those central planners in the old Soviet Union. The periodic recurrence of the boom and bust of the business cycle demonstrates that there is no way for them to get it right – in spite of them saying, again and again, that “next time” they will get it right.
It is what the Nobel Prize-winning, Austrian economist, Friedrich A. Hayek, once called a highly misplaced “pretense of knowledge.” That is why in a wide agenda for reform, the goal should be to move towards a market-based monetary system, the first step in such an institutional change being a commodity-backed monetary order such as a gold standard.
And in the longer-run serious consideration must be given the possibilities of a monetary system completely privatized and competitive, without government control, management, or supervision.
The budgetary and fiscal crisis right now has made many political issues far clearer in people’s minds. The debt dilemma is a challenge and an opportunity to set America on a freer and potentially more prosperous track, if the reality of the situation is looked at foursquare in the eye.
Otherwise, dangerous, destabilizing, and damaging monetary and fiscal times may be ahead.
 The 2011 Statistical Abstract: The National Data Book (Washington, D.C., U.S. Census Bureau, 2011), Table 669.
 Richard M. Ebeling, Why Government Grow: The Modern Democratic Dilemma,” AIER Research Reports, Vol. LXXV, No. 14 (Great Barrington, MA: American Institute for Economic Research, August 4-18, 2008); James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977); and earlier, Henry Fawcett and Millicent Garrett Fawcett, Essays and Lectures on Social and Political Subjects (Honolulu, Hawaii: University Press of the Pacific,  2004), Ch. 6: “National Debts and National Prosperity,” pp. 125-153.
 The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (Washington, D.C.: Congressional Budget Office, January 27, 2011)
 Richard M. Ebeling, “Brother, Can You Spare $43 Trillion? America’s Unfunded Liabilities,” AIER Research Reports, Vol. LXXVI, No. 3 (Great Barrington, MA: American Institute for Economic Research, March 2, 2009), pp. 1-3.
 For more details, see, Richard M. Ebeling, “The Financial Bubble was Created by Central Bank Policy,” American Institute for Economic Research, November 5, 2008, http://www.aier.org/research/briefs/667-the-financial-bubble-was-created-by-central-bank-policy (accessed on May 5, 2011).
 See, Richard M. Ebeling, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies,” in Richard M. Ebeling, Timothy G. Nash, and Keith A. Pretty, eds., In Defense of Capitalism (Midland, MI: Northwood University Press, 2010) pp. 57-60; http://defenseofcapitalism.blogspot.com/2009/12/market-interest-rates-need-to-tell.html
 Thomas Sowell, The Housing Boom and Bust (New York: Basic Books, 2010); Johan Norberg, Financial Fiasco (Washington, D.C.: Cato Institute, 2009).
 Richard M. Ebeling, “Is Consumer Credit the Next Bomb in the Economic Crisis?” American Institute for Economic Research, October 22, 2008, http://www.aier.org/research/briefs/599-consumer-credit-the-next-qbombq-in-the-economic-crisis (accessed May 5, 2011).
 Monetary Trends (St. Louis, MO: St. Louis Federal Reserve, May 2011)
 See, Richard M. Ebeling, “The Hubris of Central Bankers and the Ghosts of Deflation Past” July 5, 2010, http://defenseofcapitalism.blogspot.com/2010/07/hubris-of-central-bankers-and-ghosts-of.html (accessed May 5, 2011)
 See, Richard M. Ebeling, “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, Vol. XLVIII, No. 11 (Great Barrington, MA: American Institute for Economic Research, November 2008), for a detailed example of the German and Austrian instances of monetary-financed inflationary destruction following the First World War.
 See, Richard M. Ebeling, “The Cost of the Federal Government in a Freer America,” The Freeman: Ideas on Liberty (March 2007), pp. 2-3; http://www.thefreemanonline.org/from-the-president/the-cost-of-the-federal-government-in-a-freer-america/ (accessed May 5, 2011).
 See, Richard M. Ebeling, “The Gold Standard and Monetary Freedom,” March 30, 2011, http://defenseofcapitalism.blogspot.com/2011/03/gold-standard-and-monetary-freedom-by.html
 See, Richard M. Ebeling, “Real Banking Reform? End the Federal Reserve,” January 22, 2010, http://defenseofcapitalism.blogspot.com/2010/01/real-banking-reform-end-federal-reserve.html
May 11, 2011 8:26pm GMT
L: So Doug, we’re on the cusp of a major turning point of U.S. Federal Reserve policy. “QE or not QE?”, that is the question. What do you think, is The Bernanke going to pull the handle on the toilet he’s thrown the dollar into, or let it mellow for a while?
Doug: I think he’ll be forced to pull the handle, and create trillions more dollars. The government has over a trillion of debt it has to roll over in the months to come, plus it has to finance a trillion-dollar deficit – at a minimum. The Chinese and the Japanese want to get rid of the paper they have – they’re not going to buy more. The only logical buyer is the Fed, so the dollar’s fate is sealed, as far as I’m concerned. Meanwhile, there’s something else important on my mind I’d like to talk about: the U.S. so-called Civil War.
L: [Blinks] Ah… Okay. Why now?
Doug: Several reasons. For one thing, we’ve just passed the sesquicentennial, or 150th anniversary of its start. For another, it’s one of the most misunderstood events in American – and world – history, with consequences that still affect us today. And also, because we might be within a few years of seeing trouble on that level in the U.S. again.
L: Are you saying the economic crisis will turn into a revolution?
Doug: No, not necessarily, but it could. I think Stephen Jay Gould was right with his concept of punctuated equilibrium in terms of geological history. Basically, it holds that things progress very slowly for long periods of time, then evolve very quickly after some catastrophic event upsets the balance. You can make the case that human history is like that too. A good example is France of 1789. Nothing had really changed, politically, for centuries. Then a tipping point was reached, and the totally dysfunctional and corrupt monarchy was overthrown. Unfortunately, it was replaced with something even worse – Robespierre and the Terror – and then Napoleon, who was really just a beta version of Hitler or Stalin.
Anyway, things can change rapidly and radically when they reach a certain point. It’s like water; when it heats to 212° Fahrenheit, it changes into steam, which is totally different. I think a case can be made that we may be at a point like that now in the U.S. I think that 1861-1865 was like that for the U.S as well. Anyway, today’s world is a different topic. Let’s retro-rock for the moment.
L: Right then; where to start?
Doug: First, as always, with definitions. It’s incorrect to call it a “civil war.”
L: Can a war ever be civil, anyway?
Doug: No, but that’s not the point. A civil war is a conflict between two factions for control over the government. The Spanish Civil War of the 1930s was a real civil war. The unpleasantness of 1861-65 in America wasn’t. It was a war of secession – albeit a failed one. The Confederates never wanted to take over the government in Washington. To the contrary, they wanted no part of it.
L: Or as L. Neil Smith puts it, it was the “Second American Revolution.”
Doug: That’s a good way to look at it as well. Just as the 13 colonies wanted to shake off their rulers in London in 1776, four-score and five years later the 11 states of the South wanted to shake off their rulers in DC. In 1865, however, the wrong side won.
L: I understand what you mean about the wrong side winning, but many of our readers don’t share our context. Honest Abe freed the slaves. “A house divided cannot stand.” America wouldn’t exist today – QED.
Doug: To the victors go the spoils, but what’s more important, the writing of the history books. A whole complex of myth has been created about the War Between the States, and it’s politically incorrect to hold that there was any justice to the Southern cause. As with most everything everyone believes, a great deal of it is inaccurate – sometimes wildly inaccurate, or even the complete opposite of accurate.
First, Honest Abe (who we debunked a little in our conversation on presidents) didn’t care about the plight of the slaves. He did not free them right away, and when he did free them, his “Emancipation Proclamation” did so only in the South. He was losing an unpopular war – his move was a desperate attempt to incite insurrection in the south, and thereby debilitate his enemy. So, although slavery was a bone of contention, it was only one cause for the war. Myth incorrectly portrays it as the cause. That makes the victors look righteous. More important, and basic, were the economic causes. The U.S. had significant tariffs on imported machinery and goods, which benefited Northern manufacturers and penalized Southern planters. I urge anyone who’s interested in the whole area to get Lincoln Unmasked by Thomas DiLorenzo.
Second, a house divided should not stand. The argument was that America needed to remain one strong country to fight off powerful European nations that might turn hostile. That’s bunk. America had already fought off the mighty British Empire twice, and Europe – as always – was embroiled in its own problems. If peaceful secession had been allowed, the two countries would have been each other’s largest trading partners and allies. But even if the danger of foreign aggression had been real, it would not justify forcibly keeping people in a union they no longer wanted to be part of. It’s like a husband forcing a wife he loathes – and who despises him – to stay married to him because their crops will fail if they don’t work together on the farm. Other solutions could be found. But even if true, nothing justifies the use of force on someone who does not consent and does not aggress.
L: Well, the South did start the fight by firing on Ft. Sumter.
Doug: Yes – a stupid move. If they had just gone about their business, and waited for the North to fire the first shots, people around the world would have seen it as they themselves described it: the “War of Northern Aggression.” Hubris is the root cause of so many unnecessary failures throughout history. Hubris was behind the first battle of Ft. Sumter. Anyway, even though nobody was killed in the battle, it inflamed the North, and the war was on. And it’s very hard for a small agrarian society to beat a large industrial society.
But the point I was making was a matter of principle – the right of secession. I have zero inclination to defend the South in any other way. The Confederate government turned the South into a police state, just as the Federals did the North. But they had a right to secede. If any group of people decides to leave a larger group, that is not aggression and there is no ethical way to stop them. Secession may have costs, and there may be contractual obligations to be dealt with, but secession itself is not violence.
L: I would call it a fundamental human right. No one should be forced to be part of a group they don’t want to belong to. The same is true if it’s a marriage, a church, a labor union, or a nation.
Doug: Right. So, if the South had been allowed to secede, there would have been two Americas, the USA and the CSA. If that had happened, the enormous loss of life and destruction of property would have been avoided. Both North and South would have been far richer and more free – and the South would have avoided being a backwater for hillbillies for the next century. The war was a total disaster in every way, and if Europeans or others had wanted to attack, the war so weakened America, it actually created the most appealing invitation possible to do so.
Getting back to the point about Honest Abe, if the South had split off, slavery wouldn’t have lasted long anyway. It was an uneconomic, dying institution. Chattel slavery is an economic institution, not to be confused with the abduction and imprisonment of individuals for other criminal purposes. It only works for brute labor – in other words, in an agrarian economy. The industrial age put an end to slavery the world over – I think Brazil was the last to give it up, in 1888. It would have happened even sooner in the South. So the war was unnecessary and pointless from every angle.
L: Okay, but you spoke of lingering effects… This is all very interesting, but why does it matter now?
Doug: Well, principles always matter, and I do believe in the right to secession. Oddly, so does the U.S. government, when it suits it – when it comes to other peoples in far-off lands, like Kosovo and Sudan. Consistency has never been Uncle Sam’s strong suit. But to answer your question, there are two things that I think are important legacies that may become even more important in the years to come.
First is that since the slavery issue was settled by force, instead of by consensus, it wasn’t truly settled – one side’s views were imposed on the other’s by force, and, predictably, the losers dug their heels in and did everything possible to resist the foreign solution. That resulted in the Jim Crow laws, the Ku Klux Klan, and general race hatred that bedeviled the former slaves for more than 100 years. It still divides the U.S. along racial lines today.
People who think this was all solved by Martin Luther King and believe we now all live happily in one big multicultural family are sticking their heads in the sand. These forcibly united states are not one homogeneous culture. The melting pot has stopped working. The U.S. is perhaps now more deeply divided than ever, along several different cultural lines, race being a part of the mix. Yes, blacks and whites are getting along better now than they did 50 years ago. But that’s not a function of anti-discrimination laws and forced integration. It’s a function of technology and communication. I’m of the opinion that the U.S. would never have had the kind of serious race problems its had if Lincoln had simply let the South go its own way. Blacks in Canada or Brazil haven’t had the kind of problems we’ve seen in the U.S. The War Between the States created hatreds and distortions that lingered for generations.
L: Just to make sure we’re clear here; you are not saying that abolishing slavery was a bad thing, nor that every day the laws enabling slavery were on the books was not a horrific violation of human rights. All you are doing is pointing out – as a matter of history and economics – that the way the matter was dealt with has consequences. Right?
Doug: Right. Slavery is an institution of pre-industrial societies. It existed all over the world, across countries, cultures, and races, for thousands of years. It only really started disappearing with the beginning of the Industrial Revolution, in the mid-1700s. It’s completely inconsistent with a free-market, capitalist society, partly because capitalism rests on strict property rights. And the primary and most basic form of property is your own body. One person can’t own another.
But another legacy of the war is that it turned what had been a confederation of sovereign states, joined together out of mutual interest, into one super-state. That set the stage for the vast and destructive expansions of central government power we’ve seen since then, including the Federal Reserve Act, the Income Tax, Prohibition, involvement in the World Wars, FDR’s New Deal, Lyndon Johnson’s Great Society, the Forever War on Terror, and the current government’s mind-boggling fiscal irresponsibility. One thing flows from the other.
At this point the Super State is out of control. It took a long while for the whole contrivance to build up the head of steam it now has. I think it’s overheating and looks close to blowing. The War Between the States was a major turning point, and unfortunately the country turned in the wrong direction.
L: Good grief, Doug. You make me feel like I really am sitting on a powder keg with the fuse lit…
Doug: Well… You are. A close friend, who’s a generation older than I am, was just telling me that I never have anything nice to say. I can see that it seems that way, but I didn’t fill the keg, and I didn’t light the fuse. I’m just trying to warn people of what I see; every thinking person should take immediate steps to protect their property and person. If I’m wrong, you might spend more than necessary on some “insurance” – but you buy insurance because the future is uncertain.
L: It is what it is, and if the world is in trouble, speaking the truth is going to sound negative. Here’s something positive: as bad as it’s gotten, the state has not locked you up. They use the so-called General Welfare clause of the U.S. Constitution for everything else, why not use it as a justification for arresting you for undermining the economic recovery with your negative commentary? They think the economy’s engine runs on confidence, not production (though we both know it’s just a con job). So you’re a threat to national security. When they arrest you for being an “attitude terrorist,” we’ll know things have gone unmistakably and undeniably too far. You’re more than a gadfly, you’re our canary in the coal mine – watching for what happens to you could give us our last signal to head for the exits before they are slammed shut.
Doug: Glad to be of service. Actually, I may not be such a great coal-mine canary, because I have every intention of staying out of the U.S. when it gets that bad. Going back to the Civil War, if you’re smart you’ll follow the lead of Rhett Butler who – as I recall in Gone with the Wind – spent most of the war in Europe.
L: What would be your signal that it’s time to head for an extended stay in Argentina, Panama, Switzerland, Thailand, or wherever people have set up their vacation homes/redoubts?
Doug: Hm. Good question. It already makes my skin crawl every time I arrive in the U.S. and have to go through Customs and Immigration… The recent conviction of Bernard Von NotHaus for economic terrorism for circulating warehouse receipts for gold and silver comes pretty close. The use of black-armored riot police to crush an annual block party at Western Illinois University comes close as well. There’s something new every day. Since the death of Osama, the U.S. has ramped up its terror fear factor several notches. Boobus americanus is being trained to “See something, say something.” You’ve now got nincompoops like Alberto Gonzales saying domestic terrorists are everywhere, and Charles Schumer saying the TSA has to monitor trains like it does airplanes.
The writing on the wall is pretty clear.
L: And the pressure is building. But you still come back to the U.S. for conferences – what would it take to make you stay away completely?
Doug: I’m not sure, but fighting in the streets would show that the pressure cooker is blowing its gaskets. What happened in Wisconsin a while back is a straw in the wind. I’ll be interested to see how things go this summer. There’s a good chance we’ll start out of the eye of the storm and back in to the hurricane before the year is out.
L: Something to think about. Okay Sunshine, you say you always like to look on the bright side – any investment implications you can comment on constructively?
Doug: Well, you could invest in private prison corporations; they will probably do well as the state incarcerates an ever-larger fraction of the population. You could look for companies that sell weapons and armor to law enforcement agencies. But those things are intolerably slimy in today’s world – entirely apart from the fact that stocks are generally overpriced.
I’m sticking to basics: go short government bonds and long on vital commodities: energy, agriculture, and precious metals. And I’m keeping my eyes open for the appearance of new bubbles, which will arise from the trillions of new currency units The Bernanke will create. This is nothing new, but that doesn’t make it any less important.
L: Commodities took it on the chin last week, with oil and gold correcting pretty sharply. That doesn’t make you nervous?
Doug: Not at all. The dips are buying opportunities. As you know, when the prices of the underlying commodities correct, the prices of the shares in the related companies – especially the junior exploration companies you focus on – correct even more sharply. As long as you believe the trend remains solid, that extreme volatility creates terrific bargains.
L: And we do believe the trends we’re betting on remain very solid. Everything the governments of the world have done in response to the economic crisis is only making the situation worse. The world is slipping into an inflationary spiral that’s going to send commodities prices much higher.
Added to this volatile mix are uprisings in the Muslim world, fear of technology in the wake of the Japanese earthquakes, and all sorts of other black swans settling around us. Each one sends shock waves of panic through the global financial system, and gold, which I’ve always seen as a “fear barometer,” responds.
Doug: Agreed. Gold is not in a bubble as some of the talking heads like to say – but it will be, and a huge one, at that. We have not yet entered the Mania Phase of this bull cycle for precious metals, making the weakness we see now – and are likely to see over this summer – a great opportunity to build positions in great gold speculations before the mania hits.
L: You’re singing my song. Well, if things have to get worse before they can get better, I guess we could say that the gathering, darkening storm-clouds are a sign that a clearer new dawn may not be that far off.
Doug: There you go – and if you plan well enough, there’s no need for you to wait right in the path of the hurricane. We can’t control the whole world, but we can control ourselves and prepare for what’s coming.
L: Indeed. As the saying goes, in life, there are drivers, passengers, and road kill. I am doing my best to drive my life in the direction I want it to go.
Doug: That’s the best any of us can do, and, not to be overly promotional, that’s the goal of our publications. We want to increase personal freedom by helping people attain greater financial freedom.
L: There’s a great, positive note to end on, so let’s stop there.
Doug: Until next week, then.