Like many proponents of the Austrian School of Economics, I am pessimistic about the economic future of the US. I believe that we are paving the road for our own demise. I hope people begin to pay attention, because it's your future that's at stake here: that of you and your family. I'll be discussing my economic theory, and will be quoting heavily from Peter Schiff's Crash Proof (Henceforth denoted with "Schiff") along with many other sources.
The Problem
First off, what's the problem with the American economic system? Well, I'm sure most people have heard about our soaring national debt, inflationary policies of the Federal Reserve, and adherence to failed economic theories. As I write this, our current national debt is $12.5 trillion ... Which amounts to $40.6k per US citizen. Counting social security, medicare, medicaid, and other unfunded government liabilities, our debt is estimated at or above $60 trillion. This debt is unsustainable. If we are unable to quickly turn things around and cut federal spending.. We will suffer a depression the likes of which haven't been witnessed in 70 years. Why would anyone hold US treasuries or dollars? Why do you think China will continue to buy our debt?
One reason our deficit is so high, is that we have a trade deficit. Each year, we export wealth to India, China, Japan.. We simply aren't producing in this country.
My favorite of Schiff's analogies is the "Tale of Two farmers". It's long, so I'm simply going to paraphrase (Schiff, 21-23):
Finding the Source of the Problem
Where can the beginning of the demise of our economy be traced back to? 2000? It's all George Bush's fault, right? To the contrary, FDR and his socialist policies wrecked havoc on the Free Market system. The eventualities of social security, medicare, and medicaid plague our current financial system with enormous cost.
But, that's another issue. I'm mainly looking at the creation of the Federal Reserve in 1913 and the replacement of the gold standard for Federal Reserve Notes and a fiat monetary system. Since the Federal Reserve Act of 1913, the purchasing power of the US dollar has fallen by 95.41% (the data can be found all over the web):
The US was on track to recovery after the market crash of 1929 (Another Great Depression? By Thomas Sowell)
My point being, the recovery was abruptly halted when FDR made it illegal for US citizens to own gold.. He essentially repealed the gold standard in place of a fiat currency.. A currency that the government could control through the federal reserve, and thus, "tax" the people through inflation.
Since then, the value of our currency has plummeted as the Federal Reserve has devalued our currency. There's no doubt the government is doing much more harm than good. The only solution is to replace Federal Reserve notes with something that actually has intrinsic value.. Something that all people agree has value.. something that will NOT diminish nor fall to control of government. IE) Gold.
The CPI and government numbers are actually quite inaccurate, so your loss may even be more than if you calculated using CPI numbers. In any case, we're delving heavily into economics.. From here, I suggest you pick up Peter Schiff's "Crash Proof", read up on the Austrian school of economics, or other means of self-education. The concepts of macroeconomics, including inflation, the business cycle, the gold standard and fiat currencies are too complex to adequately discuss here, and this post has gotten long enough already. Perhaps at a later time :-)
A Few Words on Keynesianism
Before I leave you to wander the interwebz in search of Peter Schiff and Ron Paul videos, I'd like to touch on another root cause of our current dilemma: You.
The Keynesian ideas of spend, spend, spend are greatly flawed. Savings is truly key. The invention of consumer credit has greatly hampered our economy. Previous generations lived below their means, saving wealth for retirement or the occasional big purchase. I believe government involvement and especially social security have given people a false sense of security.
Now, people are taking out second and third mortgages, ramping up thousands of credit card debt, and essentially spending well above their means. The purpose of credit was to make an investment that you believed would net you a nice return. People and businesses took out loans and used money they did not currently possess to make investments that were thought to earn them enough money to pay off the original loan and interest, as well as plenty for their own profits. IE) College education, purchase of capital goods-- Say, stoves for cooking companies, renovation, etc.. were all investments in which a return was anticipated. Nowadays people take out loans to buy cars when they have perfectly functional vehicles.. Purchase big screen TVs and gaming systems to keep up with the Joneses.
You see, when you make those "investments", you end up paying more for those purchases through interest. Sometimes, a whole lot more. So, why not be patient and buy the item when you can afford it? You end up paying much more for it, just to have it sooner. This overspending cannot be sustained. Eventually, like in the housing crisis, something you depend on for income will vanish. Then what?
What happens if there's a natural disaster or some other emergency? Whatever happened to saving for a rainy day? Savings, and the wealth accumulated through interest paid to you through investments (stocks, bonds, etc..) will result in much higher gross wealth than those who overspend. Blessed are those who are thrifty and live at or below their means :) These people are predominantly those in Asia. Their patience will be rewarded. Our demise is their resurrection.
The Time is Now!
If we don't take some drastic measures now, then we are doomed. The world reserve currency status is the ONLY thing keeping us alive at the moment. As previously discussed, our overspending and high debt will eventually lead to other banks and countries to dump the dollar for something more credit-worthy. Federal Reserve notes are nothing but fiat currency, essentially dependent on the growth and prosperity of the United States.
But, if we cannot recover from our deficits, we will no longer be prosperous, or have a perfect credit rating. The dollar will fall... And I'm not talking 5-6%, I'm talking hyperinflation. Why would anyone own Federal Reserve notes when the US economy isn't even producing anything? Our golfing has run its course.
Again, we are saved by one thing: World Reserve Currency status. Other national banks are required to keep dollars on hand to trade in commodities. This creates artificial demand for the dollar -- a demand that would not otherwise exist. Hence, as long as other countries accept this and want dollars, we will be fine.
However, I would not count on sheer ignorance for long. We will eventually be found out, and the dollar will fall. Your investments, retirement plans, and life savings will be worth nothing. The only true hedge is to invest in gold, silver, or some other precious metal-- Something of intrinsic value. Once the shit hits the fan, gold will appear to skyrocket relative to the dollar (I like to think of gold as the standard, and any movement of the price of gold in dollars as movement of the dollar. The price of gold is fairly stable.).
And my favorite video of all time. A clever "rap" pitting Hayek and the Austrian school of economics up against Keynes and Keynesian economics. Enjoy :)
The Problem
One reason our deficit is so high, is that we have a trade deficit. Each year, we export wealth to India, China, Japan.. We simply aren't producing in this country.
People seem to think China will suffer the most from selling US treasuries, which consequently devalues the dollar. This theory is far from the truth. To illustrate a parallel, I'll quote one of Peter Schiff's brilliant analogies (Schiff, 14):The popular notion that in the postindustrial service economy money-valued services are an acceptable substitute for goods because both generate money ignores the distinction between money and wealth. Money is a medium of exchange. Wealth is what is received in that exchange. (Schiff, 10)
Let's suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend to the fire. The sixth, the American, is given the job of eating.The Asians, and Chinese in particular, would benefit from our demise. As a nation of purely services, we basically exchange services among ourselves (Hence, the American is a customer of himself). The few things we export are easily overtaken by our vast imports. The manufacturing and exporting of Televisions, gaming systems, computer systems, building materials, food, etc... actually involve the exchange of wealth. We are exporting wealth to other nations as we sit on our asses and enjoy their toils. This can't last for long.
So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.
Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day's labor.
Modern-day economists would have you look at the situation just described and believe that the American is the lone engine of growth driving the island's economy; that without the American and his ravenous appetite, the Asians on the island would all be unemployed.
My favorite of Schiff's analogies is the "Tale of Two farmers". It's long, so I'm simply going to paraphrase (Schiff, 21-23):
There are two farmers: Chang and Jones. Chang grows only oranges and Jones grows only apples. Each grows only the fruit he produces most efficiently, trading his surplus for the fruit grown by the other. Obviously, this free trade allows both farmers to benefit. They can eat both apples and oranges simply via bartering. Anyway, this process continues for many years until a flood wipes out Farmer Jones' apple crop. Jones proposes that Chang sell him oranges in exchange for IOUs and 10 percent interest in apples for the next year. Since Jones has efficiently grown apples in the past, Chang accepts (Jones has a great credit rating ;-)). Note that the IOUs are a promise to pay, similar to treasury bonds, and do not possess any intrinsic value themselves. Payment cannot actually be made until the next year when Farmer Jones redeems his notes by giving Chang all the apples his IOUs obligate him to pay. Only then can the notes be retired and the transaction completed.What a wonderful analogy, no? He writes them much better than I.
Now, assume similar natural disasters plaque Jones for several more years, and he and Chang make the same agreement each year. Suddenly, Farmer Jones realizes he's eating well without actually farming. He can import oranges without working, and without exporting any apples. He therefore decides to turn his apple orchard into a golf course, and simply play golf all day while enjoying Farmer Jones' oranges. In other words, Farmer Jones now operates as a service economy. (He, representing a single country, is primarily a service economy-- and exchanges services within the country-himself.)
Farmer Chang, by contrast, is so busy growing all those oranges that he never gets a chance to play Farmer Jones' course. In fact, he has been accepting IOUs for so long, he no longer remembers his original reason for doing so. Though, knowing no other life style, he is content. Chang now counts his wealth based solely on his accumulation of Farmer Jones' IOUs. Since Farmer Jones has such a good reputation among all the other farmers (credit rating), Farmer Chang is able to exchange those IOUs for the goods and services of other farmers. However, as a result of Farmer Jones' good reputation, no one notices that his apple orchard has been turned into a golf course. His IOUs are essentially worthless since he no longer possesses the ability to redeem them with actual apples.
Some might argue that the entire community now depends on Farmer Jones and his worthless IOUs, and that Farmer Chang and the others will simply accept them indefinitely to avoid acknowledging the reality of their folly. Of course, were these revelations to occur, the unfortunate holders of Farmer Jones' IOUs would officially be forced to realize their losses. However, their true financial situations would improve, as any future accumulation of worthless IOUs would end. As for farmer Jones, without a viable apple orchard or the ability to buy oranges on credit, he would starve. It would take years to transform his golf course back into an orchard, and regain his knowledge of farming, and replace his obsolete and dilapidated farming equipment (IE transformation of a services economy back to an industrial one). In the end, Farmer Jones' only alternative might be to sell his golf course to Farmer Chang and take a job picking fruit in his orange grove.
Finding the Source of the Problem
Where can the beginning of the demise of our economy be traced back to? 2000? It's all George Bush's fault, right? To the contrary, FDR and his socialist policies wrecked havoc on the Free Market system. The eventualities of social security, medicare, and medicaid plague our current financial system with enormous cost.
But, that's another issue. I'm mainly looking at the creation of the Federal Reserve in 1913 and the replacement of the gold standard for Federal Reserve Notes and a fiat monetary system. Since the Federal Reserve Act of 1913, the purchasing power of the US dollar has fallen by 95.41% (the data can be found all over the web):
- US Dollar Purchasing Power
- The Long Goodbye: The Declining Purchasing Power of the Dollar
- US Inflation Calculator
The US was on track to recovery after the market crash of 1929 (Another Great Depression? By Thomas Sowell)
The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December-- but then began a generally downward trend, subsiding to 6.3 percent in June 1930.
That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.
Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.
This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.
My point being, the recovery was abruptly halted when FDR made it illegal for US citizens to own gold.. He essentially repealed the gold standard in place of a fiat currency.. A currency that the government could control through the federal reserve, and thus, "tax" the people through inflation.Since then, the value of our currency has plummeted as the Federal Reserve has devalued our currency. There's no doubt the government is doing much more harm than good. The only solution is to replace Federal Reserve notes with something that actually has intrinsic value.. Something that all people agree has value.. something that will NOT diminish nor fall to control of government. IE) Gold.
The bottom line is that rather than representing legitimate IOUs redeemable in specified weights of gold or silver, US Federal Reserve notes became IOU nothings, mere pieces of paper that bearers were free to circulate themselves, but which did not constitute any liability on the part of the issuer.That pretty much sums up the extent of government involvement, and its destructive power over our economy. Through regulation via the Federal Reserve, the US government is able to control inflation, and dwindle the purchasing power of the dollar. All for what, you ask? Why, simple. When the dollar loses value, the interest and payments made on bonds and other government loans are also much less. In a way, the government is able to tax its people through this tricky tactic. The people are not even aware that their dollars are losing value, and that the money paid through bonds and other securities may actually place the investor at a loss due to high inflation.
What that meant was that any value the dollar had would depend purely on its purchasing power, which in turn would depend on the financial strength of the US economy and how the supply of dollars was regulated. (Schiff, 54)
The CPI and government numbers are actually quite inaccurate, so your loss may even be more than if you calculated using CPI numbers. In any case, we're delving heavily into economics.. From here, I suggest you pick up Peter Schiff's "Crash Proof", read up on the Austrian school of economics, or other means of self-education. The concepts of macroeconomics, including inflation, the business cycle, the gold standard and fiat currencies are too complex to adequately discuss here, and this post has gotten long enough already. Perhaps at a later time :-)
A Few Words on Keynesianism
Before I leave you to wander the interwebz in search of Peter Schiff and Ron Paul videos, I'd like to touch on another root cause of our current dilemma: You.
The Keynesian ideas of spend, spend, spend are greatly flawed. Savings is truly key. The invention of consumer credit has greatly hampered our economy. Previous generations lived below their means, saving wealth for retirement or the occasional big purchase. I believe government involvement and especially social security have given people a false sense of security.
Now, people are taking out second and third mortgages, ramping up thousands of credit card debt, and essentially spending well above their means. The purpose of credit was to make an investment that you believed would net you a nice return. People and businesses took out loans and used money they did not currently possess to make investments that were thought to earn them enough money to pay off the original loan and interest, as well as plenty for their own profits. IE) College education, purchase of capital goods-- Say, stoves for cooking companies, renovation, etc.. were all investments in which a return was anticipated. Nowadays people take out loans to buy cars when they have perfectly functional vehicles.. Purchase big screen TVs and gaming systems to keep up with the Joneses.
You see, when you make those "investments", you end up paying more for those purchases through interest. Sometimes, a whole lot more. So, why not be patient and buy the item when you can afford it? You end up paying much more for it, just to have it sooner. This overspending cannot be sustained. Eventually, like in the housing crisis, something you depend on for income will vanish. Then what?
What happens if there's a natural disaster or some other emergency? Whatever happened to saving for a rainy day? Savings, and the wealth accumulated through interest paid to you through investments (stocks, bonds, etc..) will result in much higher gross wealth than those who overspend. Blessed are those who are thrifty and live at or below their means :) These people are predominantly those in Asia. Their patience will be rewarded. Our demise is their resurrection.
The Time is Now!
If we don't take some drastic measures now, then we are doomed. The world reserve currency status is the ONLY thing keeping us alive at the moment. As previously discussed, our overspending and high debt will eventually lead to other banks and countries to dump the dollar for something more credit-worthy. Federal Reserve notes are nothing but fiat currency, essentially dependent on the growth and prosperity of the United States.
But, if we cannot recover from our deficits, we will no longer be prosperous, or have a perfect credit rating. The dollar will fall... And I'm not talking 5-6%, I'm talking hyperinflation. Why would anyone own Federal Reserve notes when the US economy isn't even producing anything? Our golfing has run its course.
Again, we are saved by one thing: World Reserve Currency status. Other national banks are required to keep dollars on hand to trade in commodities. This creates artificial demand for the dollar -- a demand that would not otherwise exist. Hence, as long as other countries accept this and want dollars, we will be fine.
However, I would not count on sheer ignorance for long. We will eventually be found out, and the dollar will fall. Your investments, retirement plans, and life savings will be worth nothing. The only true hedge is to invest in gold, silver, or some other precious metal-- Something of intrinsic value. Once the shit hits the fan, gold will appear to skyrocket relative to the dollar (I like to think of gold as the standard, and any movement of the price of gold in dollars as movement of the dollar. The price of gold is fairly stable.).
And my favorite video of all time. A clever "rap" pitting Hayek and the Austrian school of economics up against Keynes and Keynesian economics. Enjoy :)
(Original Publication: Pedbsktbll; Edited by: HPB)
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