"Capitalism Has Failed!":
As concern grows about the ultimate ability of governments to borrow their way back to "prosperity", this claim is being heard and written with ever increasing frequency. Of course, the claim has been made for centuries by those who have a vested interest in the downfall of freedom and liberty. But over the past two years as the world has sunk into the grip of the financial crisis, the claim is even being made by opponents of government coercion. What these people have totally lost sight of is that CAPITAL in valid economic theory is not a synonym for "money" created by government or lent into existence by banks.
Finally - and this is what almost all of the modern "analysts" of economic "policy" overlook or ignore - is the absolute NECESSITY of a viable medium of exchange. The difference in attitudes held by the Pharaohs of ancient Egypt and the government behemoths which stand astride the world today is all but non existent. The difference is not between the rulers but between the ruled. While the ancient pyramid builders had wealth, they did NOT have money. We do have money. Our problem is that the money we must use is totally controlled by the government.
Wealth And Money - Separate But Intertwined:
One of the best books on the history of money from its inception nearly 3000 years ago is Money And Man by Elgin Groseclose. Right at the beginning of his book, Mr Groseclose makes this observation : "The difficulty of discussing money is the inherent one of separating the concept of money from the concept of wealth." This is the most crucial distinction in the entire field of economics and the one which MUST be nailed down before any fruitful discussion of "capitalism" or indeed of our current financial crisis can take place. For that precise reason, it is the issue which almost nobody talks about.
Wealth consists of everything human beings produce and consume to preserve and enhance the quality of their lives. Money is the means by which wealth can be exchanged in the most efficient manner possible. The fact that money is a medium of exchange means that the amount of wealth which exists can be enormously increased because people can SPECIALISE in the form of wealth creation they choose. Under the division of labour, each individual can use money to exchange the one specific form of wealth which he or she creates for ALL the other forms of wealth which he or she needs or desires. With money, I can do nothing but bake bread and easily provide myself with EVERYTHING else I need.
Money is not wealth, but money makes the creation of wealth immensely easier. Above a subsistence level, it makes the creation of wealth possible. Without the use of money, the creation of wealth sufficient to keep the nearly seven billion people in the world today alive would be utterly impossible.
Money is important because it hugely enhances the ability to create wealth. In that regard the two are intertwined. But money and wealth are two distinctly different things. Of all the "isms" which have been invented to describe different kinds of social systems, capitalism is the only one which recognises that fact. And because it is the only one which recognises it, it is the only one which enshrines freedom.
The Consequences Of Equating Money And Wealth:
The consequences include every man-made disaster which has befallen humanity in three thousand years. In all cases, the confusion was a contributing factor. In the majority of them, it was the decisive factor. In historic times, the fatal delusion was that one could print or mint one's way to prosperity. Today, the delusion is still deeper. Today, we are told that we can BORROW our way to prosperity.
If money and wealth are one and the same, then we can get richer by means of more money. Right? If money actually is based on a form of real wealth - like Gold for instance - then the way to get rich is to find more Gold or to "water down" the amount of Gold in a unit of money so that the same amount of Gold creates more "money". If money is based on nothing except the coercive power of government then the amount of money in existence is commensurate with the amount of that power.
If it is pathetic to pretend that wealth has doubled because half of what used to be a Gold coin is now composed of base metals, how much more pathetic is it to pretend that wealth can be expanded without limit simply by adding more zeros onto the end of the number which represents the "national debt"?
The US, for example, has added a mere three zeros to the government's funded debt since the birth of the Fed in 1913, increasing it from $US 3,000,000,000 (3 Billion) to $US 12,000,000,000,000 (12,000 Billion). The problem is that those three zeros equate to a four-thousandfold increase.
The consequence of equating money and wealth is to destroy the soundness of money and, in the process, hamstring the creation of wealth. The ONLY viable solution to the current crisis is to stop creating (out of thin air) money so that it can return to its VITAL function of facilitating the creation of wealth. Nothing short of that will suffice.
Every nation has or has had its version of a Ron Paul or a Henry Hazlitt, men who shared a deep understanding of economic and political freedom with a great facility to explain it simply and clearly to others.
In the US, the leading practitioners of economic obscurantism are Ben Bernanke, Tim Geithner and Barack Obama. Sadly, every other nation has its share and more than its share of "like minded individuals". But these are the three powers that be in the US and the US is still the international arbiter.
The Man In The Middle:
Fed Chairman Ben Bernanke is an exemplar of that form of humanity - and there are and always have been legions of them - which has never let a fact interfere with a cherished "theory". Mr Bernanke's claim to fame, and ironically his "entre" into his present post as Fed Chairman, is his reputation as a "scholar" of the great global economic depression of the 1930s.
Mr Bernanke does indeed know all there is to know about the politically acceptable explanation for the depression. He is a tireless advocate for the proposition that the cause of all economic depressions is a combination of inadequate "supervision" of markets and insufficient provision of money. So expert is Mr Bernanke in his field that he has recreated the 1930s in almost perfect detail, the only difference being that the scale of his achievement dwarfs the era he has so assiduously examined.
Consider the record. A little over a year ago, mortgage-backed securities made up 0.6 percent of the Fed's balance sheet. Now, they make up almost half (45.6 percent) of it. The Fed's acknowledged capital is just under $US 53 Billion. On that "foundation", it is carrying almost $US 2.2 TRILLION of debt. All this with Fed mandated interest rates which have been at zero percent for a whole year.
The Most Powerful Man In The World:
That would be Mr Barack Obama, the President of the United States of America. The "Yes We Can" man himself. Mr Obama is both the most frenetic and the most "outspoken" US President in a very long time. He seems to give "major" speeches on a weekly basis and has spent more time in the air and on the ground in foreign nations in his first year on the job than any president in US history.
There is one very good reason for Mr Obama's globetrotting that is seldom mentioned. It is simply that the US is no longer the power it was. Ten or even five years ago, the US President stayed at home and presided over the world while foreign potentates came to him. No longer. Nearly a decade of constant and fruitless war coupled with an utter dependence on foreign creditors has made the US a dwindling shadow of its former self. Indicative of this is Mr Obama's "style" of governance and his failure to achieve any of his significant goals in either foreign or domestic policy.
Mr Obama's insoluble problem - and the one that will haunt him increasingly for the rest of his term - is that he is "in charge" of a government which is attempting to do the impossible. He is trying to borrow his way out of a debt crisis. True enough, so are most of his counterparts in the rest of the world. But consider this. Whenever one sees yet another diatribe about the failure of "capitalism", it is implicitly or explicitly "American capitalism" which is said to be failing.
What is in fact failing is the US-centric global financial and banking system which, since 1971, has had no connection to "capitalism" whatsoever. Capitalism requires individual freedom, property rights, unencumbered exchange and a viable medium of exchange in order to function. Today's global system provides none of these things. Mr Obama's misfortune is that he has become president just as that fact is beginning to dawn on Americans.
A Simple And Unassailable Proposition:
This is The Privateer's last issue for 2009. In less than three weeks, the first decade of the 21st century will be over. So will the second year of the economic malaise which has gripped the US and the world. By their own official reckoning, the US government counted six straight quarters of "negative" economic growth from the beginning of 2008 to the middle of 2009. That string was broken by the 3.5 percent growth figure for the third quarter of this year. The "growth" figure for the third quarter was brought about entirely by government "stimulus", as proudly touted by the US government itself.
By other measures, the malaise has lasted far longer. The Dow, for example, is languishing at the same levels today as it was in mid 1999. US house prices in many major cities are back down to their levels of the mid 1990s. One in six Americans - and again these are the government's own figures - are said to be not only living in poverty but to be going hungry. Today, 44 percent of Americans say that China - a "Communist" nation - is the world's leading economic power compared to 27 percent who pick the "Capitalist" US. Less than two years ago, the score was the US at 41 percent vs China at 30 percent. Ten years ago, the question would have been laughed at by any American who was asked it.
What is failing today, and not before time, is the global "experiment" in REPLACING capitalism with government control. In the US, this experiment has been played out continuously for almost a century. The cost has been enormous, inexorably transforming the US from the freest and most prosperous nation in history into the overstretched and indebted hulk which Mr Obama presides over today.
The simple and unassailable proposition is that the freedom, prosperity and happiness of a people is inversely proportional to the size and power of its government. To blame "capitalism" for the current financial and political situation in the US is grotesque. At a time when governments everywhere are baying for more regulation, more power and more control over the lives and wealth of their citizens, capitalism has never been more conspicuous by its absence. And THAT is the whole problem.
On December 9, the US Senate effectively killed the centrepiece of the Obama administration's number one domestic legislative priority, their health care plan. While a "reform measure" for health care will likely still be passed, it will NOT include Mr Obama's cherished proposal to set up a government-run "health insurance" scheme. Similar schemes have been proposed before in the US and have foundered on ideological grounds. So did this one, but this time a new item was added. Simply put, a majority of Senators voted the proposal down because the US government could not afford it.
Mr Obama had just signed off on a further 30,000 US troops for Afghanistan at an annual cost of (at least) $US 30 Billion. On top of this, his latest policy imperative is the high level of US unemployment. Mr Obama is facing increasing pressure from Congressional Democrats to be seen to be doing something about unemployment. It is the number one issue for Americans and the US mid-term elections are less than a year away. On December 8, the day before his health policy was biting the dust, Mr Obama was telling the American people that his government must continue to "spend our way out of this recession". As always, he came up with numerous "stimulus" proposals. As always, he said he would work with Congress on deciding how to pay for it. And as always, his proposals for more spending came almost in the same breath as more rhetoric about holding down the government's deficits.
Speaking Of Deficits:
On December 4, the Congressional Budget Office reported that government deficit spending over the first two months of fiscal 2010 officially totalled $US 292 Billion. This is higher than the total for the first two months of fiscal 2009 when the total deficit for the year came to $US 1.4 TRILLION. At the pace of the first two months, the US government is on track to borrow about $US 1.75 TRILLION this fiscal year.
On December 10, House Speaker Nancy Pelosi announced that the legislation to raise the debt limit would be "attached" to the military spending bill to be voted on next week. The report is that the limit will be increased by $US 1.8 or 1.9 TRILLION, bringing it to or very near the $US 14 TRILLION level.
An About Face By The Treasury Secretary:
On December 2, in a speech in front of the Senate Agriculture Committee, Treasury Secretary Tim Geithner affirmed the intent of the Obama administration to "soon" end the $US 700 Billion big bank bailout program known as the TARP. "Nothing would make me happier", said Mr Geithner. He went on to assure his audience that the "substantial resources" remaining in the TARP fund would be used to pay down the US national debt.
Exactly one week later, on December 9, Mr Geithner sent a letter to Congressional leaders confirming that the Obama administration had decided to EXTEND the TARP program until October 2010. The original TARP bill mandated it be shut down on December 31, 2009, but gave the Treasury Secretary authority to extend it to October 2010 by informing Congress. Mr Geithner has now done just that. His reason? "...it is imperative that we maintain this capacity to respond if financial conditions worsen and threaten our economy." What a backflip in ONE week. Mr Geithner clearly doesn't like what he can see coming
Japan - At The Start Of The THIRD "Lost Decade":
On December 8, the Japanese government announced the fourth "stimulus plan" since September 2008, this one for $US 7.2 TRILLION Yen ($US 81 Billion). Since October 2008, Japan has rolled out about $US 330 worth of "stimulus", less than the US and China but Japan has been doing it for 20 years.
On December 2, the Bank of Japan announced a 10 TRILLION Yen program of three-month loans to commercial banks at a rate of 0.1 percent after estimates for Japanese third quarter "growth" were drastically revised from 4.8 percent to 1.3 percent. Japanese wages fell for the 17th straight month and prices fell a near record 2.2 percent in October. After two decades, Japan is sinking faster than ever.
Fitch downgraded the sovereign debt of Greece (one of the "Club Med" Europeans) one step to BBB+ which is the third lowest rung on its "investment grade" scale. Greece has a public sector deficit of 12.5 percent of GDP, a bit lower than the one in the UK and a bit bigger than the one in the US.
Just to make sure that the message of the ratings agencies was not missed by anyone, Standard and Poor's officially ruled out any possibility that Greece would go bankrupt. Meanwhile, the Greek government was pledging to "drastically" cut their deficit by slashing spending in all areas including defence. Of course there has been no announcement of any like measures from either the UK or US governments. Why should they? They have not lost their AAA rating - seven grading steps above Greece's current rating.
The day after the Greek ratings cut, it was Spain's turn. Standard and Poor's had cut Spain's rating from AAA to AA+ back in January 2009. This time, they didn't actually downgrade their AA+ rating for Spanish sovereign debt but they did change the outlook from "neutral" to "negative". The result of these ratings cuts have so far been higher borrowing costs for Greece and Spain, a recovery of the US Dollar and a near $US 100 fall in the Gold price. All in a week's work for the ratings agencies - the same ratings agencies which never wavered in their outlook on Bear Stearns, Lehman, AIG etc.
We very much doubt whether anyone in Greece or Spain or anywhere else for that matter will politely ask the ratings agencies if they will guarantee that the US won't go "bankrupt" if and when the Congress raises the Treasury's debt ceiling by nearly $US 2 TRILLION as they are reported to be doing next week. Truly, the global financial system is still being orchestrated by and from the US.
Over the past ten years in the US, we have seen one (housing) bubble and two giant busts. The first was the dot com crash in 2000-02. The second has been the crash in almost all markets as the Global Financial Crisis (GFC) took hold just over two years ago.
In fact, for the US and the world, the decade just ended has been the second "lost decade" of the fiat currency era. The first decade was the 1970s, the decade of moribund paper markets, skyrocketing interest rates and consumer prices and a huge spurt in government deficit spending. It is hard for a young American today to believe, let alone visualise, what it was like at the end of the 1970s with US interest rates soaring towards the 20 percent plus levels and their fathers and mothers abandoning US Dollars and US investments in favour of precious metals and foreign currencies.
It would be hard for ANY American to imagine a repeat of the "cure" that was applied to the US financial system by Fed Chairman Paul Volcker at the end of that first "lost decade". In October 1979, Mr Volcker stopped targeting interest rates and started to target the US money supply. The consequence was an 18 month period of 20 percent plus interest rates and a deep recession. The final result was the successful luring of the world back to the US Dollar. Today, that "cure" would kill the patient stone dead.
Over the past decade, the US Treasury has added more than $US 6 TRILLION to its debt. Nearly HALF of that total has been added over the last quarter of the decade, the period since mid 2007. In 1979, the Fed funds rate soared from 10 to 17 percent. In 2009, it has not budged from ZERO percent. If Mr Volcker had chosen Mr Bernanke's path, the paper US Dollar would have died thirty years ago.
A Collapse Merely Waiting To Happen:
In the 1970s, the US Dollar was supported (reluctantly) by Treasury debt buying out of Europe. In the 1980s and most of the 1990s, the major buyer was the Japanese. At the beginning of the 1990s, the Japanese financial system keeled over under the strain. By the late 1990s, all of Asia went through a near death financial collapse as investments were repatriated to keep the boom in the US (and to a lesser extent in Europe) going. After that, Asia decided that they were going to build up their "foreign exchange reserves" to prevent a recurrence. Over this decade, the major buyers of the debt issued by the US Treasury have been the Asians. Since about 2002, China and India have come to the fore as the major suppliers of consumer goods to the US. While some of these goods have been paid for with huge exports of raw resources by nations like Australia, the situation is different for the US. All of the REAL goods exported to the US over this decade have been "paid for" with Treasury IOUs.
Over the past two years, these Treasury IOU's - especially the short-term ones, have paid next to no rate of return. In addition, the US Dollar has fallen nearly 40 percent on a trade-weighted basis since the Chinese and the Asians became the major Treasury creditors early in this decade. There is no chance whatsoever of this state of affairs lasting through the next decade, the one which begins in just over two weeks.
The US Dollar Legacy - With Gold - And Without It:
As already reported in our "Inside The United States" section in this issue, US Treasury debt is now hovering just below its present "limit" of $US 12.104 TRILLION. Next week, Congress considers a bill to raise that limit by nearly $US 2 TRILLION, by far the biggest "one off" increase in debt limit history.
Over 30 years, between the start of the modern Treasury "debt limit" in 1940 and 1970, the limit climbed by $US 328 Billion. $US 251 Billion or 76.5 percent of that total took place over the four years (1941-45) of US participation in WW II. In 1944, the US Dollar became the world's sole "reserve" currency.
In August 1971, the US Dollar ceased to be redeemable in Gold by anyone. The global fiat money era began. For Americans, it had begun in 1933 when they were prohibited by their government from redeeming US Dollars with Gold or from owning Gold at all except in tightly controlled circumstances.
Over the 40 years since 1970, the Treasury's debt limit will have been raised by $US 13,623 Billion once the proposed increase in the current limit of $US 12,104 Billion is passed by Congress and signed into law by Mr Obama. When that happens, debt limit increases since 1970 will make up 97.3 percent of the total.
This debt limit increase will be the FIFTH since September 29, 2007. In the five years between August 1997 and June 2002, the debt limit was not increased at all. The momentum is nothing short of awesome and cannot be maintained. The almost 40 year "experiment" of money without Gold is nearing its end
Look at the last two decades of the pre global fiat currency era in the US, the 1950s and 1960s. The total increase of the Treasury's debt "limit" over those TWENTY years was $US 102 Billion. At the end of the 1960s, the population of the US was two-thirds of what it is today. Because the US government still faced the possibility of having to redeem its Dollars for Gold, that was as much as they dared borrow to "govern" just over 200 million people.
But the US government has not faced that possibility now for almost four decades. Look at the cost deemed necessary to govern just over 300 million people today. Over the first two months of fiscal 2010 (October - November 2009), US Treasury debt increased by $US 292 Billion. That's an average of $US 4.8 Billion every single DAY - 365 days per year! In the 20 years between 1950 and 1970, the debt "limit" increased at an average rate of $US 5.1 Billion every YEAR! Such is the damage which has been done by removing the discipline of Gold convertibility from the monetary systems of the world.
There is no "cure" for the present situation short of an almost instant reversion to GENUINE budget surpluses, an act which would cut the spending of the US federal government by well over 50 percent instantly. Both the welfare state and any vestige of "stimulus" packages would have to be totally jettisoned. There is neither the political will nor the demand from Americans for ANY of this to take place. The situation is very simple. We have seen the last full decade of the fiat currency era. The only question now is how much of the next decade will pass before it collapses.
There has never been a time since Gold and the US Dollar were finally parted in 1971 when Gold has not come down in a correction faster than it went up. This correction is no exception. It took Gold From November 13 to December 3 to climb from (just under) $US 1120 to (just under) $US 1220. It has taken a mere six trading days - December 4-11 - for it to give that $US 100 rise back again.
And, of course, we do not know whether Gold has more to give back in coming days.
The situation is delicious. Gold began its precipitous fall last Friday on news that US unemployment had fallen from 10.2 percent to 10.0 percent in November. It continued this week on a string of US government-provided statistics which were all above what is so archly called "market expectations". The fact is, of course, that "market expectations" are designed to be exceeded and they usually are.
Then there was the ratings downgrade of Greece and the lowering of the ratings "outlook" for Spain and Portugal. There is no denying that all three of these nations are facing dire financial problems with large budget deficits and whopping public sector debt. There is also no denying the fact that none of these nations are in the G-20 or have deficits or debt levels which greatly exceed the nations which are - notably the US and especially the UK.
But something must be done to try to "prove" that the ratings agencies - discredited throughout the GFC so far - are "on the ball". And something must be done to push investors away from "risk" and towards "safety"
Finally, the US mint has run out of Gold with which to mint its bullion coinage. Last week, they announced the cessation of the minting of the most popular one ounce "Eagle" and "Buffalo" coins. That led to a huge run on the "fractional" coins (0.5, 0.25 and 0.10 oz). This week, the Mint announced that their stocks of 0.10 oz coins were "depleted" and their stock of 0.25 and 0.50 oz coins were "very limited".
Clearly, "supply and demand" for physical Gold do not weigh heavily on the paper Gold futures markets in the US. Nor is there any reason why they should, since transactions in this market are not done by means of physical Gold. Anyone into futures Gold contracts on margin had a VERY bad week this week. For most physical Gold holders, this week merely provided an opportunity to buy at a bargain price
...End Quote
Don't Cry For Me, America
hotair.com
In the early 20th century, Argentina was one of the richest countries in the world. While Great Britain 's maritime power and its far-flung empire had propelled it to a dominant position among the world's industrialized nations, only the United States challenged Argentina for the position of the world's second-most powerful economy.
It was blessed with abundant agriculture, vast swaths of rich farmland laced with navigable rivers and an accessible port system. Its level of industrialization was higher than many European countries: railroads, automobiles and telephones were commonplace.
In 1916, a new president was elected. Hipólito Irigoyen had formed a party called The Radicals under the banner of "fundamental change" with an appeal to the middle class.
Among Irigoyen's changes: mandatory pension insurance, mandatory health insurance, and support for low-income housing construction to stimulate the economy. Put simply, the state assumed economic control of a vast swath of the country's operations and began assessing new payroll taxes to fund its efforts.
With an increasing flow of funds into these entitlement programs, the government's payouts soon became overly generous. Before long its outlays surpassed the value of the taxpayers' contributions. Put simply, it quickly became under-funded, much like the United States ' Social Security and Medicare programs.
The death knell for the Argentine economy, however, came with the election of Juan Perón. Perón had a fascist and corporatist upbringing; he and his charismatic wife aimed their populist rhetoric at the nation's rich.
This targeted group "swiftly expanded to cover most of the propertied middle classes, who became an enemy to be defeated and humiliated."
Under Perón, the size of government bureaucracies exploded through massive programs of social spending and by encouraging the growth of labor unions.
High taxes and economic mismanagement took their inevitable toll even after Perón had been driven from office. But his populist rhetoric and "contempt for economic realities" lived on. Argentina 's federal government continued to spend far beyond its means.
Hyperinflation exploded in 1989, the final stage of a process characterized by "industrial protectionism, redistribution of income based on increased wages, and growing state intervention in the economy."
The Argentinean government's practice of printing money to pay off its public debts had crushed the economy. Inflation hit 3000%, reminiscent of the Weimar Republic . Food riots were rampant; stores were looted; the country descended into chaos.
And by 1994, Argentina 's public pensions - the equivalent of Social Security - had imploded. The payroll tax had increased from 5% to 26%, but it wasn't enough. In addition, Argentina had implemented a value-added tax (VAT), new income taxes, a personal tax on wealth, and additional revenues based upon the sale of public enterprises. These crushed the private sector, further damaging the economy.
A government-controlled "privatization" effort to rescue seniors' pensions was attempted. But, by 2001, those funds had also been raided by the government, the monies replaced by Argentina 's defaulted government bonds.
By 2002, ".government fiscal irresponsibility. induced a national economic crisis as severe as America 's Great Depression."
In 1902 Argentina was one of the world's richest countries. Little more than a hundred years later, it is poverty-stricken, struggling to meet its debt obligations amidst a drought. |
