“I cannot guarantee that those checks go out on August 3rd if we . . . → Read More: You Can Always Count On Politicians]]> To lie, that is:

President Obama on Tuesday said he cannot guarantee that retirees will receive their Social Security checks August 3 if Democrats and Republicans in Washington do not reach an agreement on reducing the deficit in the coming weeks.

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News.

The big . . . → Read More: Income Tax Cuts, Unemployment Benefits, and Social Security Relief]]> A deal appears near with President Barack Obama and congressional leaders. The pending bill will essentially give U.S. taxpayers a pay raise which will in turn pump money into the recovering economy almost immediately. The deal will also boost the creation of hundreds of thousands of jobs over the next two years.

The big surprise in the legislation: a one-year 2% tax cut in Social Security withholding. That cut alone will result in significant take-home upside for most wage earners.

Other income-tax cuts, that were set to expire at the end of 2010, will now remain for at least another year. Those cuts will continue to encourage small businesses to continue to hire as they have been in recent months.

The president and congressional leaders also agreed to extend benefits for the long-term unemployed for 13 more months. That aid had expired Nov. 30 and up to 2 million unemployed people would have run out of benefits by the end of the year.

One year examples for the extent of the cut in Social Security taxes:
For worker earning $40,000 a year the Social Security tax cut will result in an additional $800 in take home pay next year. A employee earning $100,000 will take home $2,000 more.

And on the jobs front, the Center for American Progress predicts that extending the unemployment benefits through next year will generate an additional 520,000 jobs — further under-girding an labor market that is steadfastly improving.

The origins of contemporary public pension schemes date back to 19th century when Bismarck Germany in 1881 first adopted a universal . . . → Read More: Public Pension Crisis in OECD Countries]]> The central aim of my bachelor’s thesis is to demonstrate the unsustainability of public pension system in OECD countries in the longer run through the lens of a rigorous theoretical and empirical analysis.

The origins of contemporary public pension schemes date back to 19th century when Bismarck Germany in 1881 first adopted a universal old-age public pension system based on pay-as-you-go (PAYG) funding principle. The principle itself captures full advantages of high (stationary) population growth rate. In the simplest form, PAYG pension scheme is based on the notion of generational solidarity upon which current generations pay mandatory social security contribution into the public scheme. Aggregate contributions are then paid out to current retirees. The cycle is then expanded through generations. However, PAYG funding scheme is sustainable as long as the population growth is high and above the marginal productivity of the capital. Back in 19th century, public pension schemes were adopted under unrealistic assumptions about future population prospects. In 19th century, advanced countries experienced high population growth rate, high fertility rate and an extremely low share of dependent old population that was receiving universal old-age support from PAYG pension schemes. These set of assumptions was crucial to the stability of government-provided old-age support embodied in the public pension schemes.

The sustainability of PAYG pension system requires the equivalence of population growth rate and real interest rate. In the early 20th century, the advanced world shifted towards aging population, declining fertility rates and lower labor market entry rate. In broad terms, a growing old-age dependency ratio led to the pure disequilbrium effects. In a theoretical framework, I re-examined the neoclassical framework of lifecycle hypotheses embodied in Samuelson and Cass-Yaari models of life-cycle utility maximization. The lifecycle hypothesis is based upon the assumption of the three-period model where individuals maximize the consumption in the course of a lifetime. In the first period, individuals do not discount the future consumption since, in this period, individuals acquire the human capital. In the second period individuals enter the working age and discount the future consumption. Hence, in the third period, individuals retire consume the output produced in the working-age period. Since future discounting is compounded, the lifetime consumption increases geometrically. In purely analytical terms, the individuals maximize the utility of consumption through time preference rate.

Considering the abovementioned equivalence between population growth rate and real interest rate, the stability of the equilibria requires the period discount rate to equal the population growth rate. If population growth rate decreases, the stability of the equilibria requires that individuals decrease the future discount rate by the same rate to keep the PAYG pension system within the theoretical limit. The rigorous theoretical formulation of the neoclassical model of lifetime consumption, which essentially captures the necessary conditions for equilibrium stability of public pension schemes, had been put forth by Paul A. Samuelson in his seminal contribution to the theoretical foundations of stationary “PAYG” public pension scheme .

In the course of the last decades, OECD countries have experienced a significant drop in fertility rates, population growth and, under the political climate of social democracy, a widespread adoption of early retirement schemes and generous social security benefits. In addition, labor market exit age dropped significantly, initiating a trend towards the unprecendent growth of generational indebtedness.

The OECD estimated that between 2000 and 2050, old-age dependency ratio is forecast to increase to the largest extent in Japan (193 percent), Spain (136 percent), Portugal and Greece (135 percent). The astonishing increase in the estimated old-age dependency ratio directly reflects the declining fertility rate in OECD countries from 1960s onwards. I estimated the ratio of fertility rate between 1960-1970 and 2000-2006 for OECD countries at around 2, which means that average fertility rate between 1960-1970 was twice the fertility rate between 2000-2006. The highest fertility ratios were found in Spain (2.23), Italy (1.96), Ireland (2.00) while the lowest ratios were found in Denmark (1.37), Netherlands (1.72) and the United States (1.46).

High and stable effective retirement age is the main assumption underlying the stationary stability of PAYG pension system. In the 20th and 21st century, OECD countries have experienced an unprecendent decline in effective retirement age. Blöndal and Scarpetta (2002) estimated the decline in labor market exit age for OECD countries between 1960 and 1995. The female labor market exit age had declined significantly in Ireland (10.7 years), Spain (9.1 years) and Norway (8.8 years). Male labor market exit age exerted persistent decline in all developed OECD countries except for Iceland. The exit age declined significantly in the Netherlands (7.3 years) and Spain (6.5 years).

In a large part, declining labor market exit age has confluenced the rapid growth of unemployment and disability benefits and early retirement incentives from the second half of the 20th century onwards. As the OECD correctly contemplated, in a number of countries, disability pensions and unemployment benefits can be used as de facto early retirement schemes. In a large part, widespread growth of early retirement schemes and implicit incentives for moral hazard in retiring too early via unemployment and disability schemes is held responsible by generous welfare states in the aftermath of the World War II.

When I examined various features affecting early retirement choices, I came across an interesting finding. I regressed labor market exit age and marginal tax rate in a cross section of 23 OECD countries in 2007. I estimated the relationship between exit age and marginal tax rate using a classical OLS linear regression model. The estimate suggests that, holding all other factors constant, if marginal tax rate increases by 1 percentage point, average labor market exit age decreases by 1.88 months. Surprisingly, 51.74 percent of sample variation is explained by marginal tax rate alone. The sample constant is statistically significant, suggesting that if the hypothetical marginal tax rate were zero, the average labor market exit age in randomly chosen country from OECD sample would be 69.65 years. The sample constant is consistent with a prior theoretical expectations since it concurs with the “substitution effect” hypothesis that higher marginal tax rate leads to lower labor supply and fewer working hours.

Fiscal imbalances arising from unsustainable PAYG public pension systems in OECD countries cannot be assessed without a sufficient estimate of economic costs of unfunded pension liabilities. I approximated the cost of early retirement using Auerbach-Kotlikoff-Gokhale (1999) methodology that directly estimates the size of generational imbalances created by public social security systems. Large and rapidly unsustainable net pension liabilities occured in late 1980s. Van den Noord and Herd (1993) estimated the size of net pension liabilities in seven major OECD countries. The results suggest that continental European countries have had the largest net pension liabilities in terms of GDP. The size of pension liabilities in France and Italy had been about 2.5 times the size of their respective GDPs and twice the stock of the public debt.

Gokhale (2008) directly estimated fiscal imbalances arising from unfunded pension liabilities to current and prospective generations. The size of generational fiscal imbalance, as a share of the GDP, is extremely large and rapidly unsustainable in all OECD countries. In fact, the size of the imbalance is the most severe in Greece (875 percent of the GDP), France, Finland and the Netherlands (500 percent of the GDP) while it is more than twice the size of the GDP in all OECD countries except for the United States, Canada, Australia and New Zealand.

I built the econometric model of public pension expenditure for a cross section of 23 OECD countries in 2007 to assess which variables might explained the cross-country variation in public pension expenditures. I’ve been aware of the possible drawbacks of choosing a cross-section model since it might be vulnerable to specification errors and the unbiasedness of regression coefficients. To account for possible specification bias, I conducted Kolmogorov-Smirnov, Shapiro-Wilk and Jarque-Bera normality tests. By performing normality tests, I have examined whether the normality assumption of normally distributed error terms is valid in the studied sample of 23 OECD countries considering error terms as identically and independently distributed.

In the set of explanatory variables that might yield consistent and robust estimates of regression coefficients I chose 10 various demographic, economic and institutional independent variables. Apart from demographic and economic variables, institutional variables are dichotomous since the institutional features can be captured by binary modes of choice. The dependent variable is the size of public pension expenditures in the share of the GDP.

The results suggest that public pension expenditures are positively correlated with the share of population aged 65 and older (0.746**), difference in life expectancy after age 65 between 1960 and 2005 (0.477*) and dichotomous variable for continental European countries (0.697**) where * and ** indicate the statistical significant of the sample correlation coefficient at the 5% and 1% level. The estimates suggests that the probability of higher pension expenditures in the share of the GDP is likely to occur in a continental European country known for a relatively large share of older population and a high difference in life expectancy after age 65 between 1960 and the present. On the other hand, public pension expenditures are negatively correlated with average effective retirement age (-0.475**), private pension funds as a share of GDP (-0.658**), labor market exit age (-0.523**), dichotmous variable for Anglo-Saxon countries (-0.544**) and a dichotomous variable for private pension system (-0.672**), where ** denotes the statistical significant of the sample correlation coefficient at the 1% level. Again, the estimates suggest that the probability of lower pension expenditure is likely to occur if a randomly chosen country from the OECD sample is Anglo-Saxon and has a high effective retirement age, large private pension funds as a share of the GDP, high labor market exit age and a mandatory private pension system. The coefficients suggest that in repeated sampling, the estimated sample correlation coefficient will include the true or correct population value in 99 percent of cases.

I conducted the econometric model which consisted of 8 regression specifications. I chose double-logarithmic model which yields direct elasticities as regression coefficients. However, I added two exceptions. In regression specifications 5 and 6, I chose a mixed specification mostly due to the inclusion of private pension funds (assets) variable in the regression specification. Unfortunately, but the share of private pension funds in Greece in 2007 equals 0 percent of the GDP which does not enable the researcher to apply double-logarithmic model as the basis of regression specification.

The estimates suggest that the share of population aged 65 and older is statistically singificantly positively related to the share of public pension expenditures in the GDP. Hence, the elasticity of public pension expenditures with respect to effective retirement age ranges from -1.465 to -4.935, suggesting that an increase in effective retirement age by an additional year leads to per unit increase in public pension expenditures by more than a unit increase in the share of the GDP. The coefficient of private pension funds is highly statistically significant. The elasticity of public pension expenditures with respect to private pension funds (as a share of the GDP) ranges from -0.34 to -0.38 and is statistically significant at the 1% level. The elasticity suggests that a 10 percentage point increase in the share of private pension funds reduces the share of public pension expenditures in the GDP, on impact, by 3.4-3.8 percent, holding all other factors constant. In addition, the estimates of coefficients for dichotomous variables suggest the following: the probability of higher public pension expenditures (as a share of GDP) is likely to occur in continental European countries with mandatory private pension system. Five estimates of dichotomous coefficients are statistically significant at the less than 10% level.

The significance of dichotomous (dummy) coefficients has been tested by beta coefficient analysis to rank the magnitudes of separate effects of explanatory variables on public pension expenditures as dependent variable. The results suggest that continental European countries are significantly more likely to face higher public pension spending in the share of GDP compared to Anglo-Saxon countries.

Earlier I mentioned the necessity of normality assumption in yielding robust, consistent and unbiased estimates of regression coefficients. The assumption has been questioned by conducting Kolmogorov-Smirnov test (K-S), Jarque-Bera test (J-B) and Shapiro-Wilk (S-W) normality test. The aim of the testing the normality assumption is to observe whether error terms distribute normally so that estimated test statistics, standard errors and confidence intervals are reliable. In setting test statistic, I set the normality assumption as null hypothesis. The results from K-S, J-B and S-W tests show that the null hypothesis cannot be rejected at 5% level, suggesting that the normality assumption is valid in the studied sample. Hence, test statistics, standard errors and confidence intervals are both valid and reliable.

The meaningful question to evaluate the prospects of the coming public pension crisis is how to reverse the growth of fiscal imbalances and reform public pension system as to avoid erratic generational indebtedness. Aging population and the growth of old-age dependency ratio trigger an enormous future burden on public finances in OECD countries. Lower fertility rate and population growth shall place an incurable burden on the stability of PAYG public pension systems. The estimates suggest that life-expectancy after the age of 65 is likely to increase by 2050 and gradually approach the age of 90 for both male and female. Assuming the effective retirement age is 65, the remaining life expectancy is 25 years or almost one-third of the average lifetime. As Alemayehu and Warner (2004) suggest: “Old-age health care costs thus will impose increasingly severe pressure on private finances and government coffers. Indeed, applying our age-specific estimates to the age distribution anticipated for the year 2030, we find that if nothing is done to alter current patterns of health care, per capita health care expenditures will rise by one-fifth due to population aging alone.”

The long-term pension reform that aging societies of the West should undertake is a complementary measures of three key policy features of the reform.

First, the transition to fully-funded retirement savings accounts is the only viable and sound pension reform that can alleviate the damage generated by the growing fiscal imbalances. The theoretical foundation of the transition from public pension systems to fully-funded pension system has been laid down by Feldstein and Liebman (2001). The authors derived an algebraic solution which suggests that keeping a PAYG public pension system does not attenuate the persistence of a growing demographic pressure on the stability of public pension system. As I discussed earlier, PAYG system crucially depends on three key assumptions: high fertility rate, very low share of population older 65+ and high population growth. These assumptions are incompatible with actual demographic parameters and, hence, OECD countries should undertake a drastic transition towards fully-funded pension systems based on individual savings accounts. Otherwise, the growing demographic pressure will inevitably result in the exponential growth of generational debt, creating an enormous deadweight loss for current and prospective generations.

Fully-funded pension system is based on the premise of investing pension contributions into the capital market, earning a compound interest over time. The stock of individual’s lifetime earnings is paid in the form of annuities upon individual’s withdrawal from the labor market. In addition, there is a growing disparity between the implicit return of PAYG public pension system and real rate of return in the capital market. Under realistic assumptions, such as that the marginal product of capital (MPK) is below the welfare-maximizing level and the real rate of return exceeds the implicit return from PAYG system, fully-funded pension system would not create a deadweight consumption loss to the working-age population. In fact, Feldstein and Liebman (2001) derived an analytic solution for the transition to fully-funded pension system in which the transition induces a short-term consumption loss in the next period while, at the same time, it creates a geometrically-growing future consumption for both retired and working-age population.

The only remaining question is whether the real rate of return would compensate the consumption loss of working-age population and, hence, increase the stock of future consumption to all generations. According to Feldstein and Liebman (2001), assuming 6.5 percent inflation-adjusted rate of return, the payroll cost of fully-funded pension system would represent only 27 percent of the payroll cost incured under PAYG public pension system. Tax rate, required to bear the cost of current stock of pension liabilities is 12.4 percent respectively.

According to Congressional Budget Office, the average real rate of return for large-company stocks between 1926 and 2000 is 7.7 percent, 9.0 percent of small-company stocks and 2.2 percent for long-term Treasury bonds. Feldstein (1997) estimated that PAYG implicit rate of return is 2.6 percent.

Assume an individual wants to maximize the lifetime earnings in the capital market. An individual is offered 2.6 percent implicit return from PAYG system. The individual enters the labor market at certain age, say 25, and intends to retire upon the age of 65. Assume he invests $10.000 annually in the capital market to create retirement annuities upon labor market withdrawal. Assuming the implicit rate of return (2.6 percent), the stock of overall annuity would be 10 times the initial investment in 90 years. Assuming the average long-run real rate of return from large-company stocks (7.7 percent), the the overall annuity would be 10 times the initial stock of investment in 31 years. Therefore, the individual would reach the desired level of lifetime earnings at the age of 56 or 9 years before the targeted retirement age.

I assumed the distribution of lifetime investment portfolio is weighted average of availible asset types: large-company stocks (33 percent), small-company stocks (19 percent), long-term corporate bonds (20 percent), long-term Treasury bonds (20 percent) and 3-month Treasury bills (8 percent). According to the average annual real rates of return in the United States (1926-2000), I calculated the weighted average real rate of return (5.247 percent). Investing $10.000 annually at the age of 25 would buy $100.000 annuity at 5.247 real rate of return in 45 years (the age of 70) compared to 90 years (the age of 115) under the PAYG implicit rate of return (2.6 percent). Of course, the time to buy the annuity would shift alongside the changing composition of portfolio.

In addition, OECD countries should immediately increase the effective retirement age. I believe the solution suggested by Gary Becker is both meaningful but sustainable in reversing the growth of generational debt. Becker (2010) suggested “One simple and attractive rule would be to raise retirement age by an amount that makes the ratio of years spent in retirement to years spent working equal to the ratio that existed at the beginning of the social security system.”

When President Roosevelt signed the notorious Social Security Act in 1935, the normal retirement age was 65. However, life expectancy after the age of 65 was significantly lower than is today. In 1940, average life expectancy after 65 in the U.S was 13.7 years. In 2006, it stood at 18.6 years, according to OECD. In 1935, the average life expectancy at birth in the United States was 61.7 years. We assume that individuals in 1935 worked for 35 years and spent 12 years in retirement. The ratio is thus 0.4 (12/ 35=0.34). Today, if individuals retire at the age of 65, they can expect further 18.6 years in retirement. To equalize the ratio to the 1935 level, (18.6/x=0.34), individuals should spend 54.7 years working. The estimate time is an equivalent measure of years required to spend working if PAYG public pension system is left intact. Assuming the individuals enter the labor market at the age of 25, then the expected effective retirement age is the age of 80.

In the long run, PAYG public pension system is unsustainable since demographic parameters do not suffice the assumptions under which the PAYG system is possible without distortions of labor supply incentives. The future of OECD countries will be marked by aging population, lower fertility rates and a growing demographic pressure on public finances. Without bold and decisive pension reform, OECD countries will experience increasing pension deficits and, hence, an explosive growth of generational indebtedness.

Parametric pension reforms are not a substitute for the postponement of paradigmatic pension reform. Thus, implementing the transition to fully-funded pension system essentially requires higher effective retirement age. A comprehensive pension reform cannot be made possible without these measures. At last, but not least, the major challenge in the systematic pension reform in OECD countries to address the burden of global aging, is whether political courage will withstand the pressure of interest groups to maintain the status quo of early retirement incentives. Nonetheless, eliminating early retirement incentives is the essential step towards creating retirement system without perverse incentives to retire too early. Unless political leaders encourage a transition to fully-funded pension system, OECD countries will be unable to withstand the deadly consequences of an enormous generational indebtedness.

“Although there are several expenditures in this category, the one that stands out high above all others is outlays for social security and pensions. Practically one-third of the federal budget . . . → Read More: Productivity Growth in Brazil]]> Carlos Pereira of the Brookings Institution (link) has reviewed the dismal productivity growth and the consequent macroeconomic indicators in Brazil in the last decade.

“Although there are several expenditures in this category, the one that stands out high above all others is outlays for social security and pensions. Practically one-third of the federal budget is devoted to these expenditures, whereas expenditures in investments were less than 6 percent in 2003. Pensions in Brazil since the 1988 constitution have been notably generous, especially in the civil service. A new group of non-contributing rural pensions was added, contributing to systematic deficits. With about 11.7 percent of GDP, Brazil has one of the highest social security expenditures in the world, especially considering that the Brazilian population is much younger than that of most countries with similar levels of expenditure.“

I am trying not to laugh as I tell you this, but a lot of people are idiotically-unaware that this is a lot of . . . → Read More: National Income Decline: Time to Put Your Kids to Work?]]> The fact is that Social Security is seemingly doomed, as, for the first time, this year more money will be paid out to beneficiaries than will be collected from workers.

I am trying not to laugh as I tell you this, but a lot of people are idiotically-unaware that this is a lot of bad news for many reasons, one of which being that the federal government has always spent all those excess Social Security contributions of the last half century or so, by simply taking the money and exchanging some new Treasury bonds for it! Hahahaha!

I laugh because it reminds me of when I tried that crap with my kids. I mean, how could I not? They had all this “idle” money in their piggy banks, or stashed in their “secret hiding places”, or stashed in their college funds, or jingling in their pockets, or left in their wallets and purses which were just lying around unattended.

Naturally, as they are all moronic Democrats, I thought they would appreciate my kindness in exchanging my personal IOUs for their money, under the theory that everyone could have a nicer life by my spreading their money around, and as a result, my esteem would grow, and my income would grow so that I could later redeem the IOUs, with interest, and everyone would live happily ever after.

Well, I will save you all the hysterical screaming and death threats when they discovered my scheme and they tried to force me to redeem the IOUs, which I couldn’t do because I didn’t have any money, which caused their crying and wailing to get worse, even after I patiently explained to them, so that they would understand and just shut up, “If I had any money, I would not have taken yours, you morons! You think the money to support a drinking problem and a golfing problem grows on trees or something?”

Well, the same thing is happening to Social Security, as there are now trillions and trillions of Social Security contribution dollars tied up in these bonds, some of which must now be, theoretically, sold to get the money to pay the Social Security beneficiaries, and soon the wailing and whining and finger-pointing will begin, making me live that nightmare all over again.

This at the same time that the idiotic Marxist-yahoo Obama administration is deficit-spending $1.6 trillion this year – 12% of GDP! – and almost another $9 trillion over the next 10 years! And then these trillions in ObamaCare on top of that! The utter preposterousness of it makes me laugh again! Hahahahaha!

So, at a stroke, the federal government has less money to spend and they are supposed to find buyers for bonds clogging up the Social Security system, although, of course, nothing like that will happen, as that is the magic of a fiat currency!

The government can just force the Federal Reserve to print up as much money, to buy up as many bonds, as is needed or even wanted, plus more to give itself as much money in excess of receipts as the government wants to spend, right up until the day when prices are so high because the buying power of the dollar is so low as a result of this monetary and fiscal insanity that the dollar falls to, literally, worthlessness! Hahahaha! Easy!

And don’t count on making more money to offset the higher prices that are coming as a result of all this massive expansion of the money supply by the Federal Reserve, as a new analysis by the US Bureau of Economic Analysis finds that the average per capita (every man, woman and child) personal income fell a whopping 2.6% nationally in 2009, which means that a man with a job and a woman with a job raising two kids who do not have jobs saw their income fall by 5.2%.

This is, beyond the catastrophe of a huge fall in income, but also a clear, clarion call to reexamine those pesky child-labor laws and put those kids to work!

It makes you wonder how we have done as well as we have when you read that they also found that the national average of net earnings declined 3.7% in 2009, too.

I’ve said it before and I’ll say it again; buy gold, silver and oil to protect yourself against terrifying, bankrupting, ruinous inflation in prices that is surely coming, or be the kind of person who stands around, terrified, bankrupted and ruined, muttering, “I should have bought gold, silver and oil, but I was too stupid to listen to that Wonderful Mogambo Fellow (WMF), or I could have looked at what happened all the other times in the last 4,500 years of history when thousands of other governments did this Same Stupid Crap (SSC)!”

If you had done either, you would know, clear as a bell, “Whee! This investing stuff is easy!”

National Income Decline: Time to Put Your Kids to Work? originally appeared in the Daily Reckoning.

John: Hey Trace! How are you?

Trace: Great, great. You’re the author of The Collapse of the Dollar.

John: Co-author.

Trace: Yeah, co-author with James Turk, the founder of Gold Money, and then . . . → Read More: Interview With John Rubino]]> Trace: Welcome back to the 65^th episode of the RunToGold.com podcast. This will be an interview with John Rubino. Welcome John!

John: Hey Trace! How are you?

Trace: Great, great. You’re the author of The Collapse of the Dollar.

John: Co-author.

Trace: Yeah, co-author with James Turk, the founder of Gold Money, and then you also run your own website, www.DollarCollapse.com, which is a good hub in the gold niche.

We were talking a little bit before the call about how the stock market’s kind of topped off and the capital seems to be moving out of the stock market into the dollar, which seems to be pressing the price of gold down a little bit. Is there anything else you’d like to add to that initial nugget?

John: Yeah. The stock market, especially in the U.S., has had a really nice run from the 2008 bottom. It’s up about 65% overall. Just that by itself will tell you that a correction is coming, but at the same time we’ve got a lot of big bombs waiting to off out in the world.

Greece is on the verge of defaulting, and several other European countries are having a lot of trouble living within the Euro regime as Germany has defined it. So you’ve got a lot of trouble there, and the potential break-up of the Euro zone, which will send the currency markets into turmoil.

Then you’ve got Japan financially imploding, and a lot of other stuff going on that could send us back into worries about a 1930’s-style deflationary crash.

If that happens, you’ll see the stock market tank and you’ll see a lot of safe haven money as well flowing into the dollar, even though the dollar is obviously not a safe haven anymore. It’s just relative to a lot of these other currencies right now a little bit safer.

The question is what happens to gold in that kind of a scenario. It could be that it gets a lot of the safe haven money that’s flowing into the dollar as well. A lot of people will buy gold at the same time they’re buying dollars in a flight to safety, and that’s good for gold.

Or if we start worrying about a deflationary crash, that’s bad for inflation hedges – which a lot of people see gold as being one of the best – so we could see commodities in general and gold in particular really tank going forward.

As gold investors we need to be aware that the tide might be shifting once again back towards worries about deflation, so we need to be prepared in case there’s a big crack in the price of gold, which would just be the one final buying opportunity before everything takes off, because governments will respond to this.

If we do see Greece implode and the stock market tank, governments will really ramp up the printing presses then. If we’re running a trillion dollar deficit this year in the U.S., they’ll make it five trillion going forward, because they’ll be so worried about a deflationary crash. At some point that just totally destroys the value of the paper currencies out there.

So if gold drops below $1,000 an ounce here in the coming turmoil, then it’s time to load up the wagon. We’ve got a lot of dry powder right now, just in case we see that. I’d love one more chance of getting it in triple instead of quadruple digits.

Trace: Right. Now obviously you’re familiar with My Great Credit Contraction Pyramid. We’ve got gold and silver and then Federal Reserve Notes right above them. They abut each other in the liquidity pyramid.

I’ve often written about what adds so much value to a currency is its velocity, its ability to be used in the ordinary daily transactions. That’s one of the reasons the dollar is treated as a valuable instrument, because we’re able to exchange it in so many daily uses.

It’s kind of like a language. If you speak Swahili, like Monex or hawala, that’s nowhere near as valuable as if you speak English, only because so many other people also speak English.

So one of the problems that we have – because I definitely see this deflationary issue, it is the issue, it’s the great credit contraction – one of the problems I see for the gold investor is that gold isn’t really used in an ordinary daily transaction. It doesn’t really have that velocity.

You could say not very many money “speak gold” in their economic transactions, which leads us right into that massive article I wrote about Ron Paul’s bill H.R. 4248 Free Competition In Currency Act of 2009.

What effect do you think this bill, which will eliminate Federal legal tender law, which will prohibit states from assessing taxes on bullion, which will remove any of the criminal code for these types of tax-related problems and then also nullify any convictions, like the Kahre case in Nevada –

What type of effect do you think this bill could have on gold and silver and platinum becoming a more widely spoken economic language, or more widely-used monetary instrument?

John: A few things.

First of all, that’s a really good article, a brilliant piece of history and very educational.

Second, Ron Paul is by far the most interesting politician out there. He’s the only guy doing anything worth watching in Washington right now. As you say in the article, his bill to audit the Fed looked like it was a joke to begin with, because the powers that be would never let that happen, and yet it seems like it might happen.

There are still a lot of roadblocks in front of it, but because it’s resonating with the public, it’s generating enough votes to have an outside chance of passing.  That means you have to take seriously his new bill that you just explained.

Even though it’s even more of a long shot than auditing the Fed, it’s still a very powerful and very interesting idea that could capture the imagination of people, once they understand it.

If it ever passed – and it’s still a huge long shot, because the powers that be will never voluntarily give up control of the money supply – but if it did happen, it would be really interesting in a lot of ways, because if the dollar faced real competition, it would be shown to be the sham that it is.

It’s not based on anything. The government can and does print basically as many new dollars as they need to finance their re-election every year, and because of over-supply its value is plunging.If you put that up against other currencies that are circulating that don’t have those problems, the differences become really stark.

However, it also might activate Gresham’s Law, in which bad money chases good money off the field, so we still might end up just hoarding gold and silver, because as a store of value they’re so superior to dollars that we’ll want to spend dollars.

If there are gold coins around, we’ll take them and put them in a safe deposit box and spend our dollars. So we’ll still get massive dollar velocity at the same time that it’s losing its value.

Trace: I think a lot of people don’t realize the costs that are imposed on business by the current monetary and banking system. We’ve not only got the inflation tax but as I discussed H.R. 627 The Credit Card Act we have also got the transaction tax that Visa is just making an absolute killing with, and the credit card industries, which of course are all backed by the bank.

All of these things add so many additional costs to using that particular medium of transaction that if we were to remove even the 28% rate gain tax on gold, all the sudden you’ve got a currency that’s now 30% more efficient than the other one. It’s 45% more efficient just in 2009. That was the gold price rise.

But then you take into account say a 3% credit card fee. How much is it, 8 cents for every gallon of gas goes to Visa? So if we could eliminate some of these transaction costs using much more efficient tools, like gold money for example, which has a maximum fee of $2, and yet I just sent $100 with Paypal, and Paypal charged $3.80. If I’d sent $1,000, it would have been $30. There’s a lot of opportunity for competing currencies to really make a lot of change in the system.

However, I think I agree with you that the powers that be, the ones that currently have the legal right to counterfeit while everybody else is prohibited in that type of currency production activity – they don’t really want to give that up, especially not voluntarily.

So where we place the issue of revolution, you can do it with money, as Dr. Edwin Vieira Jr. says, or you can do it with guns.

I thought this was really interesting in my article. I don’t know if you remember, I had the quote from Bernanke about the U.S. government has a printing press so it can create as many dollars as it wants at virtually no cost, so I had that quote.

Then I had Section 19 of the 1792 Coinage Act, which provides that anybody who debases or makes worse the currency shall be guilty of a penalty and shall suffer death.

Wouldn’t it be interesting if – in addition to H.R. 4248 – we were also to start floating the idea politically to start implementing the death penalty for these types of counterfeiting activities that the Federal Reserve and the banks are currently engaged in.

We could perhaps start revoking bank charters for these types of violations, which would be the equivalent of executing a corporate entity, removing their bank charter status or things like that.

Goldman-Sachs – boom – you guys lose your bank charter. Your corporation is dissolved and you don’t get to do business anymore because you’re engaged in the type of behavior that China just executed one of their rogue derivative traders over.

This could be very interesting to see how we evolve politically in this sphere.

John: I agree, it’s a really attractive idea, but it’s sort of in the realm of gold bug porn. It would be so great, but they have such a long hard road to travel before they become even conceivable in the mainstream, because the bankers are basically in charge.

The idea that this kind of thing would become law over their objection means, like you said, a revolution. If we tried to do it with money it means that it would evolve into having to do it with guns probably to get to that point, but it’s a nice idea.

Trace: You know what we’re starting to see, especially with these Tea Party activities that are going on, with the banks and their massive PR nightmare, we’re really starting to see the zeitgeist, the culture that we swim in, we’re starting to see it really change.

A lot of popular sentiment is being directed in anger towards the Wall Street banks. How much longer is it going to take, how many more people’s retirements and pensions are just going to evaporate before they really get fed up with this stuff?

John: I think we have to have the crash, basically, because we’re still immensely self-centered and selfish – especially baby boomers.

We’ve always voted for free stuff, we expect to get free stuff, and we expect someone else to pay for it, and that hasn’t changed. In fact, it’s gotten more extreme. As the economy tanks, more and more people start demanding more and more stuff from the government to help them.

Trace: More and more free stuff.

John: More and more free stuff at someone else’s expense. Unless things get so extreme and the powers that be are so completely discredited that we actually have a national conversation in which these ideas come up and are debated and win out, this stuff, at least in its more extreme form, is not going to be enacted.

I think the system has to fall apart before enough people start paying attention and asking why it fell apart before we get to that point. The really interesting discussion happens two or three years out, when things have just totally tanked and when the whole concept of paper money is actively being debated, and then we have a chance to win.

Then we can put the original constitutional idea of sound money out there, forming a consensus around limited government, free enterprise, private property, sound money, and going back to constitutional principles.

But until that time, it looks to me like we’re still a childish selfish society that is going to run itself off a cliff before it really comes to grip with the mistakes.

Trace: You raise a great point there. You’ve got this baby boom generation that has just kind of moved through the garden hose like a basketball.

Now in 2016 you’re going to have 78 million baby boomers going up against 112 million millennials, and the baby boomers buying into this idea of government, which is just the fiction that everybody can live off everyone else.

They’re going to want to live off all the millennials, who are going to start entering their prime earning years and they’re going to say, “Why in the world am I paying 15% for Social Security when I know I’m never going to see any of it?”

And that’s the millennials that are actually able to find jobs or get employed, because the economy will just be that much further in depression because of all the preventing of the credit liquidation and trying to keep wage prices up and things like that that the Obama administration has implemented.

It’s going to really, I think, contribute dialogue with the ideas – assuming the internet stays relatively free and open, which I don’t really see any idea why it wouldn’t, because we enshrine free speech so much in our Western democracies on all sides of the aisles –

We’re going to have videos like Peter Schiff was right, and all the people who voted for Obama will have just lived through four or maybe eight years of this grind economically, and they’re going to want new ideas.

What are the ideas going to be? They’re going to be Peter Schiff or Ron Paul, who will look like seers that foresaw and forecasted all this happening, so we might see a big shift of the zeitgeist towards that.

In the 2004 election we didn’t really have YouTube as a functional usage, and now everybody watches YouTube. The same thing with Facebook. It’s gone from being absolutely nothing to having hundreds of millions of users in just a few short years. I think we could see quite a bit of change happen so quickly because of these technological advances that we have.

John: Oh, absolutely. We will have a national and a global discussion about this stuff. I just hope Ron Paul stays healthy so he’s around to lead the good guys.

But we won’t have the discussion, I don’t think, until enough people have been shaken out of their complacency and realize that they just can’t have free stuff. [laughing] We aren’t there yet.

Right now you and I get this, and we see Peter Schiff and Ron Paul and a few other guys out there making these really good points, but 99% of the people in the U.S. are still not paying attention.

They’re worried about their 401Ks, a little less worried now than they were a year ago, and they’re worried about their job and they’re worried about the value of their house, but they’re mostly looking to the government for help.

They expect that help to come from somewhere. They expect the government to get the money and to give it to them. That’s as far as they go in terms of thinking about how the world works.

Over time, when things really fall apart, that 1% will grow to 15-20% of people who actually understand what’s going on. Then we’re going to have an interesting debate, because 15-20% of a group, if they’re committed enough and knowledgeable enough, can change the nature of the group itself.

That’s our challenge three or five years from now, to be part of a well-educated, seriously committed group of people who want free markets, free minds, limited government, sound money – the constitutional principles – and it will be a huge battle, but it’ll be interesting.

Trace: Seth Godin talks about being this lynchpin that leads the tribe. We’ve got our little gold bug tribe, and we were talking about this before the call, how the traffic to our websites is so small compared to the other large websites out there, like the Huffington Post or some of these other really large blogs.

Our little gold niche is a relatively small niche despite the silver price and platinum price rises, and yet we could see this huge influx of people who are going to need to be educated and need to have this discussion.

I’d really encourage people to try and get involved at the local level with your local businesses. I guess if you can hold your nose and put on a Teflon suit, maybe go down to some political meeting and try to really make a difference and educate one’s neighbors on these issues.

Is there anything else that you’d like to add?

John: No, I think we’ve covered the high points. We’ll have to get together and do this again.

Trace: Yeah, we’ve covered quite a bit. Thanks, John, for coming over to the RunToGold.com podcast and I hope everyone gets a copy of The Collapse Of The Dollar.

John: Thanks for having me on, Trace.

DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., Euros or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.