Every day we see signs of waning confidence. The politicians pontificate and the markets plunge. Talking heads rile the trading floors People are panicking, but are unsure as to what drives the panic. Lying behind this turmoil is the fundamental flaw in our economy: our money. The antidote is gold.
Over the last few months we have seen gold rally up to $1000. Suddenly it is being heralded as the investment. If you held it since 2001, you’d really be laughing at this, and rightfully so. Even mindless stock jockeys speak to the fact that in times of uncertainty, gold is the place where people should park their cash. It is the asset of last resort. Yet if this is considered the only safe place to put our money when times are hard, then why not just make this our currency? Why do we have a paper dollar whose intrinsic worth is equivalent to that of paper and ink, or alternatively your faith in Nancy Pelosi?
As the always pithy Daily Reckoning notes, over the last 2,500 years, an ounce of gold has maintained a value roughly equivalent to 350 loaves of bread. Seems like a pretty safe store of wealth to me. Alternatively, the value of the dollar has dropped over 95% since the government (under the auspices of the Federal Reserve) took control of our money less than one hundred years ago. You have to ask yourself, would you rather have your government constrained in the money it creates by a tangible asset that has always held its value, or a government that holds its heavy hand on the cranks of the printing press?
This brings into question another issue. The government does not control the bread supply, the iPod supply or the Kudlow supply. But when it comes to money, a good exchangeable for these other goods and services, we give the government free rein. Sure, one might argue that the central bank is technically private, but this is just the deceitful nature in which the government bends the rules of its Constitution. It is akin to Fannie and Freddie being “quasi-public” entities. But why should the government grant itself a monopoly on this product, while subjecting all private firms to its anti-trust laws?
And how does the government maintain this monopoly on money? Why, legal tender laws (PDF) of course. There was a time when money was coined privately, but those days are long gone. The question is, why shouldn’t the government allow a little friendly competition for the paper that it prints? The answer is that the power to control the money supply is great. Mainly, it allows the government to plunder the people. Here are a few politicians on the matter:
“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”
Daniel Webster’s disdain is matched by that of Thomas Jefferson:
“The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then, we must be content to return quoad hoc to the savage state, to recur to barter in the exchange of our property for want of a stable common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers.”
On the other hand, he asserts,
“Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”
What of Woodrow Wilson, the man who signed the Fed into existence?
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
How about an economist for good measure? Perhaps our old friend Mr. Keynes:
“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Thanks for that one, Johnny.
If paper money through inflation impoverishes the citizenry and destroys capitalism, then one has to wonder why this system continues to hold sway across all nations. Further, the historical track record of paper monies shows that every single one has failed. But we continue to entrust our money to our politicians. To be sure it is great for some — for the bankers, the war-profiteers and the debtors, inflation is a boon. Not to mention the fact that it allows the government to do whatever it wishes — to run up unlimited debts, fight endless battles and further extend its largesse to its favored sons. This is an immoral process and one that undermines the integrity of our nation.
As we see the flood of people to gold as the only safe asset, in a time without price inflation no less, we must question the paper money through which our politicians pilfer. Restore power to the rightful hands of the people to produce their own currencies, and we can give the central bankers a run for their money. Our liberty depends upon it.
To stem foreclosures and keep people in their homes in a socialist mind set is not
enough, we need to have a free market based stimulus plan to get people to come back to
the real estate market to ensure on-going prosperity. Our country’s and hence the global
economic prosperity hinges on the continuing consumption power of the American citizens.
Nothing is more effective than to shore up the home value for every American to fix this
global economic problem.
While we still have time to do so, the new economic leadership we need now is not just a
socialist bailout mentality for people to get to survive but rather a committed mission
to help bring back the global economic prosperity. Over the long run, only free market
incentives could accomplish that prosperity goal. When this current opportunity is missed
and American citizens get into desperation next, the worst form of socialism may most
likely take hold of our entire free society at that time. Ask any older Chinese or
Russian citizens, they may be able to give you plenty of explanations on how that was
done in the past.
While creating housing demand through free market incentive plans is plausible,
continuing to be restricted to manipulation of interest rates alone to encourage more
leveraging will simply bring us back to where and how the current mortgage troubles
started. Therefore, further leveraging is not the way to stimulate the economy, either by
homeowners, consumers, banks, the Fed or the US Treasury. It would only lead us into an
eventual total destruction.
As explained on the www.SwapRent.com home page, playing tricks or keeping artificially
low interest rates temporarily to provide relief is a fictitious housing affordability.
True housing affordability could only be accomplished through shared appreciation/shared
equity economic concepts, just like investing in or owning any other assets that you
could not afford. To summarize in a simple sentence, true housing affordability simply
means “don’t bite more than you could chew”. To allow people who do not have the income
capability to use high leverage to get rich quick is exactly what caused our current
economic crisis in our economic society.
The problem with the conventional practice of shared appreciation concept in the past is
that the shared appreciation component was stuck in the Shared Appreciation Mortgages
(SAM) and often managed in a socialist way through using taxpayer’s money by
municipalities. They are neither quantifiable nor extractable and there is no easy way to
attract free market investment money from private sectors. SwapRent with its embedded
mortgages HELM was a new methodology specifically created so that the shared appreciation
components could be quantified, exacted and therefore it would become feasible to create
a secondary market of these new tradable shared appreciation contracts. Economic benefits
such as pricing transparency, maturity term flexibility, early termination reversibility
and capital regeneration, … etc. could therefore be easily achieved. Therefore the free
market based investors would feel confident and be interested in getting involved
From a macro-economic perspective of solving the crisis, consumption power via home
equity gains would be restored and revitalized through these housing purchase incentive
and economic stimulus plans by simply letting the future home equity gains go to those
who have the current economic income means to buy these future appreciation through
SwapRent contracts. Consumption power produced from the home equity gains by these
investors will create jobs, tax revenue for states and municipalities and it will
increase economic activities again. Those who did not have the economic income means
before will have the chance to work to create the income capability. They can then save
and invest in future home equity gains again similarly through these same SwapRent
contracts. All these investment activities should be done within their economic income
capability and without any unscrupulous abuse of high leverage again.
From doing social good’s perspective, all the low income homeowners could get to continue
to occupy and enjoy the comfort of their homes through this new “economic renting”
concept via the use of the SwapRent contracts while the investment activities could go on
with or without these homeowners because of the separation of legal and economic
ownership inherent in the SwapRent concept.
Once these shared appreciation/shared equity concepts through SwapRent contracts have
become well accepted practices in the future, there won’t be any chances for
leverage-created asset bubbles any more since asset growth will become more legitimate
and healthier by only letting those who have the money to invest without the use of high
leverage. In another word, more rational low leverage investment to foster steady asset
growth and create wealth could be accomplished easily through introducing this new
SwapRent based reversible and tradable appreciation sharing concept.
The American Recovery and Reinvestment Act, commonly known as “the Obama stimulus plan” or “bailout plan” got signed into law recently, after weeks of haggling in the House. The stimulus plan has a total price tag of $787 billion, and represents 5.5% of gross domestic product (GDP), although its impact on the economy may be less and will be spread over several years.
The bill can be categorized into 3 major parts with a common goal of stimulating the economy:
1. Direct payments to individuals
2. Federal tax cuts
3. Purchases of goods and services
Outlining some parts of the bill as follows,
Direct payments to individuals:
- $41 billion to extend through December, 2009, the extended unemployment benefits program that was scheduled to begin phase-out in March; increases jobless benefits by $25 per week; includes a temporary suspension of taxation of certain unemployment benefits
- $14 billion in special one-time payments to recipients of Social Security, SSI, and disabled veterans
Reductions in federal taxes
- $116 billion for a refundable tax credit of up to $400 per worker ($800 filing jointly), phasing out beginning at $75,000 of income ($150,000 for joint filers)
- $15 billion expansion of the Child Tax Credit
- $70 billion for a one-year extension of the Alternative Minimum Tax patch
- $14 billion partially refundable $2,500 higher education tax credit
- $6.6 billion for an enhanced tax credit of $8,000 for first-time home buyers
- $5 billion for extended bonus depreciation and increased small business expensing for capital expenditures in 2009
- $20 billion in tax incentives for renewable energy and energy efficiency, including cost of renewable energy facilities, energy efficient home upgrades, purchase of plug-in hybrid vehicles
State and local governments:
- $22 billion for new bond program for school construction, rehabilitation and repair, and private activity purposes
Purchase of goods and services:
- $87 billion in matching Medicaid payments
- $30 billion for power grid improvements, advanced battery technology, and state and local government energy efficiency improvements
- $15 billion for scientific research
- $7 billion for broadband services to underserved areas
- $19 billion for improvements to healthcare information technology
- $25 billion Cobra subsidy for nine months
- $54 billion State Fiscal Stabilization Fund for schools and public safety
- $13 billion for Title I education grants
- $12.2 billion for IDEA education grants
- $29 billion for road and bridge construction
- $16.4 billion for mass transit
- $18 billion for clean water and flood control
So what can one say about this? When life was good in the American economy people generally spent money without thinking too much about it, pretty much spending money that was not really theirs to satisfy cravings that could have been subdued by discipline. Then a brief slowdown in the economy gave rise to the credit crunch, and then folks began to realize that money can’t be spent on every whim, because it wasn’t as freely available as it was. Now this plan suggests that the broke US government in debt to the tune of about $12 trillion wants to add another $1 trillion in debt to its books, with the hope that spending this “non existent” money, will help revive the economy. In other words let’s do what we did to get us in this mess to get us, only we’ll do it on a much larger scale. This thought process embraces the idea that if it was not really worth it before because it was stupendously expensive in the boom years, it is absolutely necessary in the contraction years, and we need to keep the price high still. Like everything that goes in simple into the House, it comes out much more complex and filled with pork, the bailout plan went in at approximately $700 billion, and came out closer to $1 trillion.
Going back to some basics in fiscal policy, the government can only raise money by:
1. Taxing it
2. Printing it
Now because the government is not a “for profit” organization and merely a regulatory one, ideally it has no business interfering in markets. However Keynesian economist believes that in times of economic contraction, the government ought to spend its way out of the contraction. Everything we see around today are evident of Keynesian economist in Washington. Are they wrong? I don’t know, but they do have a lot of excesses that don’t make sense in my basic understanding of free market capitalism.
With all that said, back to the issue, so this Act proposes to cut taxes and print more money, the first will create further deficit (make the broke government more broke) and the second will cause mega inflation (except you believe the government will print just enough money that the economy needs to be “stimulated”).
So the point of this Act is to facilitate spending, and get people back in jobs, which makes sense, but do the benefits outweigh the cost? I don’t think so. I believe these economists are acting like the economy should grow forever. The economy had grown malignantly in the past couple of years in a period of extreme prosperity and people developed bad habits, these habits are what the current recession is supposed to change, as well as clear all blocked atteries in the heart of the economy. Shouldn’t America allow the process of creative destruction to take place, given that America prides itself in her free markets? There have been extreme excesses in the economy that require an extreme contraction to clean up, should the big three really collect bailout money when they make CRAPPY cars? Should banks really get bailout money when they made UTTERLY STUPID investment decisions? Should consumers be given bailout for BAD CHOICES? Should pornographers be given bailout money because people are beginning to realize that they don’t need porn but their wives?
The system should clean itself up, and the government should do what it takes to make the process not as painful as it should be, but I don’t believe government should act like there’s something that can’t fail. Heck the system failed, why is that so hard to accept!
The government’s anti-terrorism ardour was endorsed again last week, as Section 76 of the new Counter Terrorism Act came into force on the 15th February. Section 76 in itself, seems to highlight the laudable extremes the government are willing to go to to ensure our safety. Although I understand that the government need something to show for the £3 Billion a year they invest in counter-terrorism, a part of me can’t help but wonder how much time and effort is spent on preventing terrorism, and what they are compromising as a result.
Although homicide has dropped in the UK since 2005, it is still very high compared to previous decades. In 2007 alone an average of over two homicides took place every day in Britain, leading to nearly one thousand deaths. In 2008, a total of 945 people were suspected of homicide. Firearms were used in 17,343 reported crimes, of which 42% were handguns and 172,989 violent offences were reported in London alone. For once I’m not going to slam the British judicial system’s lenient and ultimately devolutionary policies when it comes to crime. However, what does concern me is that in 2007 the government spent about £5.6 Billion on fighting crime and around £2 Billion on counter-terrorism, yet only one person was killed in a terrorist attack in the UK, Kafeel Ahmed, who, ironically, was one of the terrorists involved in the Glasgow International Airport Attack. In fact, since the beginning of the millennium, a grand total of 57 people have been killed as the result of terrorist attacks in the UK, compared to thousands of murders on the British streets by ‘non-terrorists’. So why is it, that when terrorism is so low (considerably lower that it was 10 years ago), the Home Office is investing more and more money in counter-terrorism, so much so that the cost is expected to rise to £3.5 Billion in 2010?
I think that most British citizens are under the impression from watching the news and reading the papers that they are under constant threat from terrorism, just from reading about the lengths the British government go to, and the amount of money they spend! And although a total of 57 deaths in nine years might justify a conservative estimate of around £10 Billion, let’s not forget the July 7th bombings which killed 56 of those 57 people.
The government would of course argue that the reason only 57 people have died as a result of terrorist attacks, is as a result of the massive investments they have made in counter-terrorism. This is something I would dearly like to believe and if it were true, would put my mind at rest when I consider what my taxes are being spent on. Unfortunately, though, a mere look at failed terrorist attacks over the past nine years proves it’s not the case.
On the 1st of June 2000, the Real IRA planted two bombs on Hammersmith Bridge set to detonate in the early hours of the morning. Funding in counter-terrorism was miniscule back then compared to the behemoth amounts thrown at it today, and the police had no knowledge of what was going to happen at all. A man named Maurice Childs found one of the bombs and hastily threw it over the bridge, it exploded, creating a 60ft column of water. The other bomb blew up a short while later, without achieving the desired effect nevertheless. Mr Childs, a hairdresser, was awarded an MBE for his courage.
On July 21st, 14 days after the 7/7 bombings, another attempt was made on London’s public transport system. At a time when you’d expect authorities to be at their most vigilant, the only thing which stopped the terrorists from blowing up trains at Shepherd’s Bush, Oval and Warren Street tube stations, and a bus on Hackney road, was shabby bomb making, not good police work. The police, having been caught off guard twice in two weeks and publicly humiliated, quickly stepped into action the following day, they accumulated their ‘intelligence’ and proceed in killing an innocent man: Jean Charles de Menezes.
On the 29th June 2007 two car bombs were discovered and deactivated in Haymarket and Cockspur Street. A year in which around £2 Billion was spent on counter-terrorism, the police had no intelligence whatsoever prior to the bombs being found. The first bomb, in Haymarket, was discovered by an ambulance crew attending a minor incident at a nightclub near where the car was parked, and the second one was transported to a pound at Park Lane for illegal parking! The staff at the pound noticed a strong smell of petrol coming from the car, and reported it to the police having heard about the first car bomb.
There have been two planned terrorists attacks publicly thwarted by the authorities, both in February 2007. The 2007 Plot to Behead a Muslim Soldier which entailed a six month investigation under codename: Operation Gamble and lead to five men being sentenced. And later that month, Police reportedly thwarted a plot to kill Abdullah of Saudi Arabia, after intercepting $330,000 from a courier at an Airport. It is suspected the money was going to be distributed around the UK based Saudi dissidents. It’s worth mentioning however, that nobody was arrested, including the courier, according to the Israel News “Detectives said there was insufficient evidence to bring charges against the cash smuggler.”
So, my question to Mrs Smith is simple: What are the billions of pounds allocated to counter-terrorism being spent on? When the police have yet to publicly foil a terrorist bombing in the UK, and a mere two innocent lives have been saved by the police (assuming the $330,000 was going to be spent on the murder of Abdullah of Saudi Arabia), and one taken away, how can the government justify such a huge ‘investment’?
Surely the real terror can be found in underpasses and subways, at train stations after dark, not from religious extremists, but hoodies with knives looking for a buck for their next fix. Real terror can be found on your high street, on your doorstep even. Isn’t this the terror we should be focusing on?
And surely, before spending billions upon billions of pounds on intelligence, equipment and training in counter-terrorism, shouldn’t we first train our government officials to stop leaving private data on trains?
Amid cheers, President Obama showed his true colors when it comes to his plan to deal with the recession (soon to be a depression). Valiantly fighting off all takers on his stimulus, Mr. Obama exclaimed,
“Then there’s the argument, well, this is full of pet projects. When was the last time that we saw a bill of this magnitude move out with no earmarks in it? Not one. (Applause.) And when you start asking, well, what is it exactly that is such a problem that you’re seeing, where’s all this waste and spending? Well, you know, you want to replace the federal fleet with hybrid cars. Well, why wouldn’t we want to do that? (Laughter.) That creates jobs for people who make those cars. It saves the federal government energy. It saves the taxpayers energy. (Applause.) So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That’s the whole point. No, seriously. (Laughter.) That’s the point. (Applause.)”
Now I understand that President Obama was speaking in front of a group of Democrats, trying to rally his comrades, but this type of message should outrage American citizens. Mr. Obama promised the people change, yet he makes the argument that since there are always earmarks in bills, the government should get a free pass for porking up its latest monstrosity. Apologies to the already suffering American people that have to pay for this.
When it comes to buying a new fleet of green cars, the true politician in Obama comes out, spinning this ridiculous confiscation of private money as creating jobs. If this creates jobs, why doesn’t the government buy every taxpayer a Prius? Why not throw in some solar panels for every taxpayer too? Because this money has to come from somewhere of course. This is a textbook example of the broken window fallacy in action. Basically, Obama will be taking taxpayers’ money and transferring it to the auto sector. All of the taxpayers are going to be subsidizing one particular industry. One interest gains at the cost of all others. This is what American democracy has become. It is not about the public good; it is about the good of a specific set of interests.
As to Mr. Obama’s final point that spending bills and stimulus are synonymous, one has to wonder how much longer this country will be able to stay afloat. Can Mr. Obama explain how taking $800 billion or most likely more money out of the private sector, and using some of it for pork, some for income redistribution and the rest for “shovel-ready” projects is stimulative? Can Paul Krugman or Larry Summers point to a situation in which wealth taken from the hands of the people has ever been used more productively by the government? Government spending has NEVER — not once pushed an economy out of a recession or depression. Even for those who acknowledge that the New Deal failed to bring us out of the Depression, most argue that it was only World War II that got the economy back rolling. Yet even this is false, another example of the broken window fallacy that somehow you can mobilize all resources under a command economy, and by allowing the government to channel them towards specific uses (in the case of war, towards bombs and fighter planes) leave yourself better off. As Robert Higgs shows, our productivity did not recover until after the war, when productive forces were released into the free market. The government cannot plan our economy and allocate resources profitably. Let me repeat this: THE GOVERNMENT CANNOT PLAN OUR ECONOMY AND ALLOCATE RESOURCES PROFITABLY. Not in the Soviet Union, not in Nazi Germany, not in Cuba, not in the United States. Even if I leave out the moral issue that people should have the right to choose how they use their money, productively or unproductively, and grant that somehow, some way, President Obama can spend the money as the people would, it is a proven fact that we are going to have to issue hundreds of billions of dollars in Treasuries to fund this.
As George Melloan noted in the Wall Street Journal recently, this will inevitably prove inflationary. Our friends in China and Japan, already strapped for cash given their own economic problems will not be able to subsidize our profligacy much longer. They might even sell some of their existing Treasury holdings to raise cash. As has been noted repeatedly, Ben Bernanke may have to come in and buy Treasuries issued by his own government. Quite a queer concept. To carry out this plan, helicopter Ben will have to print up more dollars and thus we will see inflation in prices. You can also bet that with the collapse in demand for treasuries abroad, and the government’s inflationary actions, interest rates will rise for all of us. We will suffer from stagflation, and the government will have no way to pay for all of its entitlements without printing more money, generating more inflation and higher and higher interest rates. We will be crushed under our own debt. While the proper solution to all of this would be to allow ourselves as a nation to deleverage, paying off our debts and liquidating the bad assets, and forcing the government to reduce its spending and cut taxes, instead the President and the congress are sealing our fate to depression. The above steps would be the true stimulus. What the President proposes is no stimulus. As the Wall Street Journal quips, “The spending portion of the stimulus, in short, isn’t really about the economy. It’s about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The “stimulus” is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.”
One has to wonder if the reason Mr. Obama keeps telling us that things are going to get worse is intentional, a self-fulfilling prophecy. Perhaps he knows the true history of the Depression, that the more the government intervened the worse things got. He knows that this crisis will allow him to cement his place as President for at least eight years. As is the government’s wont, it will exploit any situation to gain more power.
Every single citizen must realize that in allowing our representatives to pass this bill, we are dooming our children and our children’s children to pay for our mistakes, sacrificing our property without just compensation and allowing our representatives to further imperil our economy. This is taxation without representation. This is immorality. This is the death knell of a once great nation.
So far the hopes of a rebound in the economy appear slim in 2009. The markets have steadily traded downwards since the beginning of the year, wiping out all the gains that were seen last month of 2008. The question on everyone’s mind is where does the value exist currently? With deflation being the new buzz word thrown around, and the government seeking to “combat inflation at all cost”, by spending multiple billions of dollars that have been created from thin air, buying treasuries now doesn’t seem reasonable. Current yields for US treasuries are not particularly exciting/attractive, we have 3 month Treasuries sitting at a yield of 0.13%, 5 Year Treasury yield at 1.48%, one has to lock up funds for a 30 year period to get an interest rate close to 3%.
Many investors and fund managers have justified their loans to the US government at 0% by stating that it’s much safer to have your money whole at the end of three months, as opposed to investing in an extremely volatile market or in a bank that may collapse anytime soon. News from RBS and Bank of America have not provided any warm fuzzy feeling in the market, and may have exacerbated the fear of the market dipping below it’s November lows, so very few dollars are flowing back into the stock market currently because of the perceived increased volatility.
(click to enlarge chart)
With that being said, it’s worth taking a look at intermediate and long-term Treasury Inflation Protected Securities, or TIPS. Taking a look at the chart of the 10 Year Treasury constant bond vs. the 10 Year Treasury Inflation adjusted bond, we see the market is technically pricing in deflation as the major concern, hence the near 0% rates being seen. This in itself is misleading, technically from the chart inflation is a concern, but fundamentally billions of dollars that were initially parked in stocks and money market accounts in the face of this economic crisis have been moving into US Treasuries as a safe haven. With the economic bailout looking more like a 2 or 3 Trillion dollar job, long term inflation is a certainty.
Based on the chart above, the market is projecting approximately 0% cumulative inflation over the next 10 years, but the Fed projects that we’ll see a negative number for inflation, or rather deflation, and they have employed a few mechanisms to fight this by setting the target Fed Funds rate to 0.25%, bailout monies, and absorbing bad debt from the balance sheet of financial companies, all of which will be monetized (by increasing reserves).
The graph below from the St. Louis Fed shows the progress being made in increasing reserves.
The Austrian school and the Keynes school both have varying perspectives on how to deal with the current economic situation. From a Keynesian view, and this is where the current Fed stands, printing money (or stimulating a moderate monetary inflation, which symbolizes economic growth) is the right way to handle the current economic situation.
The question then becomes how much money is too much money? Since economics is not an exact science, and many times various policies put in place to stabilize the economy usually have a delay before results are seen. More than likely, the government will continue to print more money until economic data begins to show a rebound in the economy, at this point the Fed would have injected enough money in the system to stabilize the economy, or more than is necessary to provide stability in the system, the result of which is inflation, the latter is often the case.
With this in mind, a safe haven investment will be an investment in TIPS, the value may not be seen in the short term, but inevitably as time goes, the effects of inflation will be seen and the value in TIPS will have added premium.
Learn more about TIPS and buying here at Treasury Direct.
One of the most draconian and counterproductive interventions of the New Deal was the Glass-Steagall Act of 1933. Not only did it effectively end the gold standard and establish a fascistic regulatory environment that undermined the global competitiveness of the U.S. banking industry, it also established the sham known as the FDIC (Federal Deposit Insurance Corporation). Although most of Glass-Steagall were repealed in 1987, the FDIC remains—for now, at least. The good news is that the FDIC, like the entire banking system it allegedly insures, may be on its deathbed.
What is the FDIC?
Before we can explore why the FDIC is so bad, we must first understand what exactly it is. Most people are familiar with the FDIC’s supposed “insurance” of bank deposits up to $100,000 per account. This number was actually raised to $250,000 recently, in a typically asinine move by the political establishment to make bank accounts “more secure.” In reality, of course, raising the cap made accounts less secure, but depositor wealth has never been safe since the passage of the Federal Reserve Act in 1913 anyway. After all, it doesn’t take a genius to figure out that you can “game the system” by putting exactly $250,000 in any number of separate accounts, and a loophole that huge is typically indicative of a sham system—and that’s exactly what the FDIC is.
Why? Because banks are required to deposit just a tiny fraction of customer deposits into the FDIC fund. Since fractional-reserve banking makes every bank technically insolvent, it doesn’t take much for a bank to lack the physical funds necessary to redeem demand deposits. Each time a customer deposits $10 in his checking account, a bank can lend up to $9 of that money—effectively creating it out of thin air. What happens when the customer writes a $10 check and the borrower who was lent the $9 defaults on his loan? The FDIC doesn’t have even close to enough money to cover widespread defaults and bank runs.
The FDIC’s Books
How much does the FDIC have? About $35 billion. What is the total value of all FDIC-insured accounts? About $8.8 trillion, or over 250 times the size of the FDIC insurance fund.
The takeaway from this is that your money is not safe—the FDIC is a joke. Its purpose is political, to give cover to the legalized counterfeiting of the Federal Reserve. Bank customers are given a false sense of security that there is a “fund” somewhere that insures them against bank failure, when in reality, that fund can only cover a couple of small bank failures a year. If bank failure becomes an epidemic, then it will be the Fed that will make good on customer deposits—by firing up the printing press. Sure, you’ll get every last dollar of your deposit (up to $250,000) back, but the purchasing power of each of those greenbacks will be lessened by the Fed’s monetary expansion. Inflation, of course, is the Fed’s day-to-day business.
Could there really be a nationwide run on the Federal Reserve System and its member banks? Sure, there could be. A handful of bank runs typically produces a domino effect, which is why FDR needed to declare a “bank holiday” in 1933 as a precursor to Glass-Steagall. But setting that aside for a moment, the fact is that it wouldn’t—or should I say won’t—take too many bank failures to totally bankrupt the FDIC.
It Won’t Take Much to Break the Bank
In 2008, there were twenty-five bank failures. The FDIC itself now lists 117 banks as “troubled.” LewRockwell.com blogger Chris Brunner estimates the number of “vulnerable” banks at 424, with 95 “in very serious danger of collapse.” But going back to the FDIC’s own list of 117 troubled banks, Brunner estimates their total insured deposits to be $76 billion, or more than twice the FDIC’s entire insurance fund of $35 billion.
Fractional-reserve banking is an inherently bankrupt system. It allows a bank to lend $9 for every $10 it has on deposit. The borrower can then deposit his $9 check with a second bank, which can then lend $8.10 of it, etc. Each time the bank issues a fractional-reserve loan, it is effectively creating new money out of thin air. Ultimately, as much as $90 can be created for every $10 on deposit in the banking system.
The Federal Reserve Act established a system whereby this process of counterfeiting would be legalized and controlled. Once the dollar’s last remaining ties to gold were severed in 1971, the writing was on the wall. The chickens are finally coming home to roost: the dollar is going to zero, and there’s nothing the sham known as the FDIC can do about it.
The governments of the richest nations, as well as those nations who’s populations are poor but their leaders stashed reserves of funds, “invest” in the richest companies of this world that mismanaged their and our wealth in the first place and then ask for a bailout pretending to help us, by mainly hoping to help themselves, to step back on the road of economic “recovery”.
Although it is a seemingly rational response presented by “the world leaders” to satisfy surprised by the crisis public, but in effect the action by the governments through financial intervention is rewarding the inefficiency which is at the root of the present economic recession.
I think that big companies whether banks, investment firms, and hedge funds that run their businesses on a pro-forma basis because of weak regulation; or large manufacturers of non-competitive products, mainly located in the west, who were outmaneuvered by more inventive and agile competitors should be let to fall flat on their face and break into peaces. Indeed I understand that the consequence will be great for the host nations in terms of unemployment and human sacrifice but by putting more money into their hands it is just delaying the inevitable
Indeed there is no reason to believe, based on their past record, that they will improve, become more agile, and competitive because they will continue to operate within the same environment, with the same labor costs, with spending more money on employee benefits then on research and development, and spending even more money on lobbying and fighting regulation.
We are indeed spinning fast in the whirlwind of the destruction of individuals and small business who will have, if any, only small benefit of few hundreds of dollars per year as a result of the tremendous bailout package. The largest portion of the benefit will go to the large firms at the expense of small businesses and those individuals who will also often loose their jobs and as a result most that they have owned.
Inefficiency and unethical behavior should not be rewarded by the political machine. But let us not forget that this machine is oiled by funds from those big companies –unregulated and inefficient or not. Sadly, the race to the bottom will continue its course.
Joseph Schumpeter was right writing early in the past century that to make capitalism work we must allow inefficiency to fail and more innovative enterprises will pick up the pieces – that is where the bail out package should be spent. Since the resources are always limited they should be spent where they produce the most of results. Otherwise we are running a high risk of putting a bandage on a gaping wound that will only have a short lived minimal effect, if any, on the patient that is contemporary economy.
Long term planning is necessary and the solution can not be to outsource all manufacturing to China and customer service to India, or elsewhere. If the imbalance of production and trade is such that some nations can not afford to produce, because it is much cheaper to order their products to be produced in the developing nations, they must have alternative means of sustaining their own populations by providing them with sufficient and adequate opportunities to remain competitive. And it can not be by simply printing more currency. One can not perpetually consume without producing, earning, saving, and investing in the future.
A strategy for the recovery is complex and when developed it should not be final. It should be revised and transformed as we observe and measure the results of our investment – bailout. Although this option is not politically practical because altering the proposed maybe construed as flip-plopping or not knowing what one is doing and very costly when the next election campaign comes about.
The stakes are high however, and only the most innovative and agile should prevail. I am worried about those small businesses and large alike, and individuals who are able to innovate, offer efficiency, and are responsible in running sustainable businesses that they will be taxed out and disadvantaged by the machine of our governments and big business.
If the last worry will become true we will only temporarily delay the inevitable while piling up a tremendous debt and passing it to our children and grand children to pay off while at the same time not taking necessary steps to equip them, with the necessary technological and efficiency advancements, for that task in the future. Regardless of the recession it may be a time of opportunity if we will support the most prepared, and let them pick up the pieces.
President Obama is taking a harsher stance on antitrust and monopoly than President Bush did. According to a New York Times story, the president will “take a more active approach than his predecessor in scrutinizing deals that could hurt consumers.”
Hurting consumers presumably involves restricting output and raising prices, as antitrust theory goes. Preventing that sounds heroic, like being the champion of the people, but the reality is that antitrust actions have a much better record of protecting inefficient companies at the expense of more efficient competitors and consumers. It is a fact that most antitrust actions have been brought about not on behalf of customers but, rather, on behalf of competitors. Many businesses support antitrust laws because they serve to cripple and break up their more effective competitors. The Microsoft antitrust case was concocted in a secret meeting between competitor Netscape, their state’s Senator and justice department representatives. It wasn’t about customers, but about using political power to deal with competition. The late Yale Brozen from the University of Chicago concluded that antitrust was almost always anticompetitive.
Think for yourself what your boss would say to you if you worked for an auto manufacture and said “I’ve got a great idea. Let’s use predatory pricing and drive our competitors out of business. We will sell each car at a loss and lose billions of dollars a year, but in 5 or 10 years we could capture the entire market and then charge double the price we charge now to make up for the losses.” Before your boss signed your pink slip, he would probably remind you that, once you raised the prices, the door would be open for competitors again and the losses would never be made up.
All of this is not to say that monopolies or cartels don’t or haven’t existed. Of course they have, but if you look at the record, those that have remained for any length of time are either government operated or private organizations that are protected from competition by the government. AT&T was the sole long distance provider for many decades, not because it had any special technological advantage or operational efficiency. It was only because all competitors were excluded by law. You will find that to be the general case for any monopoly or cartel.
You will also find that the sectors of the economy that are in the worst shape are those dominated by government cartels. The banking system is one of the largest cartels, with the United States system dominated by the Federal Reserve Bank. The financial meltdown, not surprisingly, rests on the manipulations by the cartel of the money supply and interest rates. The educational monopoly is failing the millions of students growing up in America. The science monopoly is producing dangerous and damaging politically motivated pseudo-science. And on and on.
The whole antitrust-monopoly industry, a multi billion dollar a year lawyer enrichment program, is based on entirely false premises. The idea that anti-competitive behavior consists in doing things that make it difficult for your competitors is an absurdity. That is what competition is. You become more efficient to get more customers. That includes economies of scale. The very things that bring prices down and increase production in a free market economy are precisely those things that are considered anti-competitive. The government should actually be congratulating those businesses that have low unit costs and efficient processes, and thus are able to offer customers lower prices.
Economist Dominick Armentano conducted a study of the most famous antitrust cases and published the work in the book “Antitrust and Monopoly: Anatomy of a Policy Failure. It details the cases and highlights the lack of evidence of consumer injury. The conclusion was that the entire antitrust system has worked “to lessen business competition, and lessen the efficiency and productivity associated with the free market process.”
In his book “How Capitalism Saved America”, Professor Thomas DiLorenzo described the state of the sectors that were the most subject to early 1900’s antitrust hysteria: “Those industries targeted as “monopolies” grew seven times faster than the rate of the economy as a whole.” Prices decreased significantly faster than in the rest of the economy. States legislation was actually passed to suppress “unhealthy competition”, by which they meant low prices.
The late 1800’s and early 1900’s was the heyday of anti-monopoly sentiment. Big businesses were definitely formidable organizations. Standard oil controlled 88% of the infant oil industry in 1890. By the time the Supreme Court reaffirmed the ruling that Standard Oil was a monopoly in 1911, its market share had dropped to 64%. By 1911, there were 147 oil companies. Costs were continuously declining and prices dropped to a fraction of what they were a couple of decades earlier. Output was increasing, not just for Standard, but for most of growing number of producers. The core justifications for antitrust were false.
The epitome of antitrust irrationality was the 58,000 page Alcoa decision. It concluded that Alcoa’s skill, foresight and industry were exclusionary. It forestalled competition by stimulating demand and then supplying it. Judge Learned Hand opined that “…we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connection and the elite of personnel.” Quite obviously, if they faced each opportunity with new capacity, they were not restricting supply in the least. Others could not compete because Alcoa was so efficient and prices were so low. To antitrust lawyers and judges, up always seems to be down. Very smart people can say and do very dumb things.
Obama has apparently surrounded himself with very smart people. Unfortunately for the citizens of the United States, the smarter they are, the more arrogant the approach seems to be, and the dumber the things they do. Larry Summers, chief economic advisor to the president, intends to use “behavioral economics” in antitrust cases, the use of psychology to determine how “real people” should act. This opens new avenues of attack, and will possibly add billions of dollars to the tabs of taxpayers and to the customers who have to pay for the defense and the increased prices due to crippled competitiveness of the top producers.
I am sure Mr. Summers and his bureaucratic colleagues are sincere, and may even think they are doing the right thing. Being smart and powerful, however, doesn’t make you right, and it doesn’t make sense out of nonsense.
In economics, inheritance means transfer of unconsumed assets from one generation to the next. The goal of estate tax is to reduce the volume of such transfer. Adam Smith in his work, The Wealth of Nations, commented that all taxes upon the transference of property of every kind, so far as they diminish the capital value of that property, tend to diminish the funds destined for the maintenance of productive labor.
Estate tax is nothing but another tax on savings and investments which are already under heavy taxation – income is taxed when it is earned, interest derived from investments and savings is taxed, appreciated value of an asset is taxed (capital gains tax).
A study by well-known economists Henry Aaron and Alicia Munnell concluded that estate taxes are unfair, raise little revenue, impose excess burdens, and have failed to achieve their intended purposes.
Estate taxes reduce the amount of capital available in the economy and thereby reduce the wealth ultimately available to the society. It encourages consumption and discourages savings. It reduces the after-tax return on investment. This causes the capital stock growth to decrease. Capital is vital to economic growth. Estate taxes impede the accumulation of capital. This has a negative impact on economic growth.
Estate tax liquidates and transfers to government control privately held assets which could otherwise be used for maximizing economic efficiency. Instead they are transferred to consumption-intensive government uses.
Estate taxes discourage entrepreneurial activity, hinders entry into self-employment, and breaks up family-owned businesses – a critical component of the U.S. economy. For people of lower income households to move to higher income groups, entrepreneurship is the key. Estate tax prevents upward income mobility by disrupting the transmission of a family business to succeeding generations.
Studies have shown that the estate tax continues to be a primary reason why small businesses fail to survive beyond one generation. Many heirs have cited the need to raise funds to pay estate taxes as the reason why their family business failed. Planning for estate taxes reduces the resources available for investment and employment. Business owners tend to keep liquid assets available to pay off future estate taxes. Estate tax imposes large cash demands on family businesses that generally have limited access to liquid assets.
In a tax system that is fair, individuals with fewer resources pay less taxes than those with greater resources, and all taxpayers with the same amount of resources pay the same tax. However, the rich can afford to use various estate planning options to reduce or avoid estate taxes, and the poor who cannot afford estate planning end up paying more. There are many tax avoidance options available to the general public. To avoid estate taxes, capital owners shift resources from their most productive uses into less efficient but more tax-friendly uses.
Estate tax is extremely primitive and can result in inefficient allocation of resources. The maximum rate for estate tax is presently 45%. It discourages savings and investments and lowers the after-tax return on investments. Estate tax violates the basic principles of an efficient tax system.