Free Markets, Free People

collapse

We’re gonna ride this puppy down in flames

It’s no secret that my optimism well has about run dry. Signs like this don’t make the level rise any. Read the whole thing. Go on. I’ll wait.

You see here’s the thing: I’ve been writing about how close we are to and economic and currency meltdown, but not a lot about societal meltdown. But troubling signs are there, too. There’s a fundamental and growing lack of respect for the government. Not because we’re bad people, but because we recognize the growing divergence between what the government does and what common sense tells us.

So, as the linked article points out, we engage in an endless list of violations. It’s estimated that in perhaps in the course of a day, and almost certainly in the course of a week, all of us commit some act that, statutorily, makes us criminals. The range of government powers, and the scope of activities they cover, make it almost possible to obey the law in it’s entirety. We know this, and we know, just as surely, that there is something wrong about it at a very basic level. And we respond to that knowledge.

It’s not civil disobedience that I’m talking about. It’s the opposite: Civil disobedience is meant to be noticed. It is a price paid in the hope of creating social change. What I’m talking about is not based on hope; in fact, it has given up much hope on social change. It thinks the government is a colossal amoeba twitching mindlessly in response to tiny pinpricks of pain from an endless army of micro-brained interest groups. The point is not to teach the amoeba nor to guide it, but simply to stay away from the lethal stupidity of its pseudopods.

The amoeba does not get smarter but it does get hungrier and bigger. On the other hand, we get smarter. More and more of our life takes place outside of the amoeba’s reach: in the privacy of our own homes, or in capital accounts in other nations, or in the fastest growing amoeba avoidance zone ever created, cyberspace. We revolt decision by decision, transaction by transaction, because we believe deep down that most of what government tells us to do is at bottom illegitimate.

In other words, in a thousand small ways, an increasing number of us are learning the power of "no". We just haven’t started acting on it seriously yet. And, of course, it’s not all of us. There are still a fair number of people whose faith in the government to be everyone’s mommy and daddy would be touching, if it weren’t so frightening. But a lot of people are waking up to the fact that the government, in matter both large and small, is increasingly incompetent.

Now we might never act on the increasing size and scope of government, if we felt we were getting some value out of it. If it could keep the trains running on time, we might think we’d gotten a fair trade-off, or, at least, enough of us would that society would keep humming along in a fairly stable trajectory. Sadly, it’s increasingly obvious that ever-larger government not only can’t keep the trains running on time, it actively prevents them from doing so.

Nowhere is this more clear than in the economy, and the government’s response to an increasingly irrational monetary and fiscal policy.

After World War II, the debt:GDP ratio stood at 128%, approximately 24% higher than it is now.  How did we reduce that debt? First, the entirety of wartime regulation was eliminated practically overnight. Rationing, wage and price controls, industrial production controls, confiscatory business and personal taxes…all gone. And, in the three years after the war, government spending was cut by half.

That would be impossible today, of course. Social Security and Medicare alone make up more than half of government spending. Unless we gut entitlements—along with everything else—we will never have a balanced budget again. This is especially true when you consider that, though debt service is just under 6% of the Federal Budget today, that’s only true because we have artificially low interest rates. If interest rates return to the 1996 levels, then over 20% of the budget will have go to debt service payments alone…a percentage that will steadily increase as the amount of debt increases. That means 80%+ of the federal budget will be Social Security, Medicare, and interest payments on the debt.

Today, the Treasury announced that the June fiscal deficit was $904 Billion for the year so far. So, we’re going to have another $1 trillion deficit this year. Just like last year. Just like next year. And as far as the eye can see.

It doesn’t take any advanced math to see what’s going to happen. We’re going to default on our debt. Or, considering that, according to today’s announcement of the money supply, by next week, there’ll be $10 Trillion in M2 floating around out there, we’ll simply monetize it through inflation, which amounts to the same thing. But we’re clearly not going to restrain spending, which means we are years, if not months, from an economic and monetary collapse.

It shouldn’t come as a surprise to anyone when it comes. Anyone who can do simple math has the capability to see it coming. Anyone with common sense can see what we have to do to avoid it. Everyone knows that maintaining a reasonable fiscal policy and sound currency are two of the government’s primary domestic responsibilities, and everyone know that they simply aren’t doing it, and, worse, seem incapable of ever doing it again.

The excuses for not cutting government are innumerable. We can’t eliminate the Department of Education, or our children will become stumbling morons. We can’t cut Social Security, or seniors will be eating Alpo. We can’t cut the Department of the Environment, or we’ll die choking in the stinking gasses of industrial effluvia. We can’t cut Defense, or foreigners will walk openly on the streets of Washington. We can’t cut the DEA, or we’ll all be jumping out of windows from some sort of of acid-fueled illusion that we can fly over the pretty colors we smell. We can’t, in short, cut anything, because every penny of it is vital and necessary, and without it, we’ll be reduced to just a lucky few who flee from the zombie hordes inhabiting the stark, post-apocalyptic landscape brought on by smaller government. Assuming, of course, that anyone can "flee" with the acute diabetes they’ve acquired by lugging along an extra couple of hundred pounds they’ve gained from unrestricted access to 64-ounce Big Gulps.

So, not only are we gonna ride this puppy down in flames, anyone with any sense already knows that we’re gonna do it, if we stay on the current path.

The thing is: it’s no longer just some whacko fringe or criminal class who are turning into everyday scofflaws, it’s the middle class. The very people we depend upon for stability in society are the people who are now realizing that "society" is increasingly turning into a confidence game played to promote the interests of the politically powerful and their clients at the expense of the middle class. The people who aren’t rich enough to insulate themselves from the vagaries of fortune, but who are rich enough to have something to lose are supposed to be the stolid citizens, the defenders of the status quo. Increasingly, they aren’t.

So, the interesting question then becomes, what response will we see to the sort of entirely foreseeable and preventable collapse that is coming from a middle class that increasingly knows the government is a huge pile of fail? And how will they respond to the bleats of the not inconsiderable portion of their fellow citizens who will blame it not on government, but on "rootless cosmopolitans", "the 1%", "banksters", et al., and demand an even more powerful government to "fix" the problem?

Here’s another interesting question. Social Security and Medicare are about the only benefits the middle class has left. It’s almost the last thing they can expect to get back from all the money they’ve poured into the system their whole lives. How will they respond when you tell them that we can’t afford those entitlements anymore, and the only way to fix the fiscal disaster we’re facing is to take away the only skin they’ve got left in the game? What do they do when the advantages they receive from government are outweighed by the burden government puts on them?

Those are questions that really bear thinking on. Because if you lose the middle class, then their response to a crisis may not be to repair and reform the existing edifice in an attempt to return to status quo ante. Instead, it may be to simply burn the whole thing down, and start rebuilding something else from scratch. After all, when you’ve got nothing left to lose…what’ve you got to lose? What happens if the middle class are turned into revolutionaries?

Somebody may want to start figuring that out.

~
Dale Franks
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It has come to this–China mocks West’s political system and economics

And, at the moment, rightfully so.  That’s not to say theirs is a superior system by any stretch.  Theirs just happens to be thriving at this moment in history.  But that doesn’t change the correctness of the basic kernel of their assessment:

In extensive talks with a series of Chinese leaders, an oft-cited point of criticism is the gridlock and “dysfunction” they see in Washington. They say fawning by U.S. political leaders seeking re-election has created an “entitlement culture” where the public has grown dependent on government largesse. Now, with the United States facing monumental economic and debt problems, the political system has been unable to curb generous entitlement programs or counter the economic downturn.

I really hate to say “I told you so”, because a) as Megan McArdle said yesterday it is “so … bleeding … obvious” and b) it really doesn’t take a rocket scientist to figure this was going to happen.  No, not China mocking us – they have their own economic problems ahead of them so I’m not particularly impressed with their mocking attitude.  The idea that running huge deficits, encouraging an entitlement culture, redistributing wealth and running up unpaid future welfare obligations was sustainable.

Heck, people like me and other authors on this blog have been saying that for years – decades even – that it was just a matter of time before it all collapsed like a wet paper box.  And we always get the hand wave from the so-called enlightened that we just don’t know what we’re talking about.

To them I say, “welcome to reality”.   Like gravity, the laws of economics will finally assert themselves.

And they have.

However, the performance of the Chinese economy in the global recession has had a beneficial effect for them among other nations.

China is now at a pinnacle of global leadership and influence as a result of its emergence as an economic superpower, even as the U.S. and other major industrial powers fell into disrepair as a result of the 2008 financial crisis, said Guo Zhenyuan, an analyst at the institute.

China gained the admiration of developing nations around the world with its ability to weather the crisis emanating from the U.S., even emerging from the downturn as the world’s main engine of growth, while its superior economic performance provoked jealousy in the U.S. and other developed nations, he said.

With that said, here’s what they’re now selling:

Mr. Chan said U.S. political leaders are so focused on short-term gains that they fail to make the painful long-term choices and changes in social programs needed to ensure the solvency of the government and vitality of the economy.

Chinese leaders, by contrast, lay out plans for the long term and systematically achieve them, producing unprecedented gains in living standards and a remarkable two decades of uninterrupted growth at nearly double-digit annual rates.

This proves that the Chinese system is better than the democratic system that the U.S. promotes around the world, Mr. Chan said.

And the dictators and totalitarians around the world take heart.  

Only because Western leaders, decades ago, perverted the true meaning of Western democracy and did exactly what the critique above says – began trading goodies for votes and created the social welfare state which was destined for failure.

Whether or not you agree that democracy is the problem is a rather moot point.  That’s what China is pitching and apparently there are eager listeners.  And we all know there are those out there who think they too can implement the Chinese model.    As Dr. Kissinger said they call it, “Socialism with Chinese characteristics”.   The rest of us call it totalitarianism, but like I said, in the face of the epic failure of Western Social Democracy and the rise of China, it’s a tough argument to fight at the moment.

~McQ

Twitter: @McQandO

The death of the social democratic welfare state

Margret Thatcher boiled it down to its essence years ago – “the problem with socialism is you eventually run out of other people’s money”.

Janet Daley, writing the the UK’s Telegraph, hits a proverbial homerun with her macro look at the “situation” in which both the US and Europe find them selves.  It’s not a pretty picture, but quite accurate.   Per Daley, what we’re going through right now, at least on the European side of the pond, isn’t some esoteric debate about a crisis that will eventually be solved, it is the predictable endgame of the premise that a capitalist system can support an ever expanding social welfare state.  Per Daley, the  answer seems to be a pretty obvious “no”. 

Her reasoning for her conclusion is painful for those who want to believe that such a premise is actually attainable.  Let’s take a look:

The truly fundamental question that is at the heart of the disaster toward which we are racing is being debated only in America: is it possible for a free market economy to support a democratic socialist society? On this side of the Atlantic, the model of a national welfare system with comprehensive entitlements, which is paid for by the wealth created through capitalist endeavour, has been accepted (even by parties of the centre-Right) as the essence of post-war political enlightenment.

This was the heaven on earth for which liberal democracy had been striving: a system of wealth redistribution that was merciful but not Marxist, and a guarantee of lifelong economic and social security for everyone that did not involve totalitarian government. This was the ideal the European Union was designed to entrench. It was the dream of Blairism, which adopted it as a replacement for the state socialism of Old Labour. And it is the aspiration of President Obama and his liberal Democrats, who want the United States to become a European-style social democracy.

The left in this country can deny this all they wish, but Daley succinctly lays out the Democrat’s “ideal” in plain English.  Any attempt to deny that is simply counter-factual.  European-style social democracy has been the ideal of Democrats for years.   And the fight over entitlements makes the point.   The difference between the US and Europe is two-fold.   We thankfully began pursuing that ideal much later than did Europe and the basic difference in make up between Europe and the US is the primary reason:

But the US has a very different historical experience from European countries, with their accretions of national remorse and class guilt: it has a far stronger and more resilient belief in the moral value of liberty and the dangers of state power. This is a political as much as an economic crisis, but not for the reasons that Mr Obama believes. The ruckus that nearly paralysed the US economy last week, and led to the loss of its AAA rating from Standard & Poor’s, arose from a confrontation over the most basic principles of American life.

Contrary to what the Obama Democrats claimed, the face-off in Congress did not mean that the nation’s politics were “dysfunctional”. The politics of the US were functioning precisely as the Founding Fathers intended: the legislature was acting as a check on the power of the executive.

Precisely.  None other than Cokie Roberts noted the “problem” we have here that Europe doesn’t on one of the Sunday shows.  

 

That “problem” and a different but eroding view of the role of government.  And all though we’re on the precipice, that “problem” is  all that have kept us from sliding into the pit Europe has dug for itself over the decades. 

What is going on now is not the fault of the Tea Party, no matter how hard the spinners like David Axlerod and John Kerry attempt to make it so.  In fact, the Tea Party contingent actually represents that fundamental but eroding view of the role of government and the “problem” Cokie Roberts refers too.

The Tea Party faction within the Republican party was demanding that, before any further steps were taken, there must be a debate about where all this was going. They had seen the future toward which they were being pushed, and it didn’t work. They were convinced that the entitlement culture and benefits programmes which the Democrats were determined to preserve and extend with tax rises could only lead to the diminution of that robust economic freedom that had created the American historical miracle.

And, again contrary to prevailing wisdom, their view is not naive and parochial: it is corroborated by the European experience. By rights, it should be Europe that is immersed in this debate, but its leaders are so steeped in the sacred texts of social democracy that they cannot admit the force of the contradictions which they are now hopelessly trying to evade.

Facts are a stubborn thing.  They have a tendency to destroy beliefs and perceptions.  The belief and perception of the “premise” that a capitalist system could forever support an expanding social welfare state is in the throes of being dashed upon the rocks of economic reality.  That’s a harsh thing to see if it is your belief.  And we all know the various stages of grief.   Right now, the true believers are in the “denial” stage.  The only one’s dealing in reality are the Tea Partiers.  Like the canary in the coal mine, they’ve alerted us to a mortal danger that has been acted out in Europe and is now collapsing from within.  They’ve accurately pointed to our problem and how it will lead to the very same conclusion.  They’re demanding we stop pursuing that reckless and doomed “ideal” and return to our fundamental governing ideals – limited government, less costly government, less intrusive government.

And, of course, the true believers in the social welfare state, those who’ve gotten us into this mess and want to deny the problem and continue the pursuit of their destructive ideal are resisting with every fiber of their being and ironically, calling the Tea Partiers the radicals.

What the left can’t control though is the example of our future that Europe provides, like it or not:

No, it is not just the preposterousness of the euro project that is being exposed. (Let’s merge the currencies of lots of countries with wildly differing economic conditions and lock them all into the interest rate of the most successful. What could possibly go wrong?)

Also collapsing before our eyes is the lodestone of the Christian Socialist doctrine that has underpinned the EU’s political philosophy: the idea that a capitalist economy can support an ever-expanding socialist welfare state.

Phenomenally, while the problem becomes more and more undeniable, the solutions being considered are precisely the opposite of what is needed.

As the EU leadership is (almost) admitting now, the next step to ensure the survival of the world as we know it will involve moving toward a command economy, in which individual countries and their electorates will lose significant degrees of freedom and self-determination.

That’s right – those who, through the years, have managed to put us in this situation now think they need more control, intrusion and command, not less.  Those who’ve managed, through their policies and ideology, to wreck the best economies on earth, want more power.  They won’t let go of the belief, despite the reality.  Take for example the Democrats almost single focus on higher taxes.   They still believe they can have their cake (or your cake actually) and eat it too.

We have arrived at the endgame of what was an untenable doctrine: to pay for the kind of entitlements that populations have been led to expect by their politicians, the wealth-creating sector has to be taxed to a degree that makes it almost impossible for it to create the wealth that is needed to pay for the entitlements that populations have been led to expect, etc, etc.

The only way that state benefit programmes could be extended in the ways that are forecast for Europe’s ageing population would be by government seizing all the levers of the economy and producing as much (externally) worthless currency as was needed – in the manner of the old Soviet Union.

That is the problem. So profound is its challenge to the received wisdom of postwar Western democratic life that it is unutterable in the EU circles in which the crucial decisions are being made – or rather, not being made.

Daley speaks of the EU, but listen carefully to the left and the Democrats in this country.   They’re offering exactly the same “solutions” and this administration is attempting that solution by executive fiat through regulation.   Look at the health care grab as well.  We’re headed down exactly the same road Europe has traveled and the left in this country is telling everyone to ignore the road signs telling us so.

The Tea Party has figured that out as have many on the right.  But the left wants to go right on pretending it isn’t so:

We have been pretending – with ever more manic protestations – that this could go on for ever. Even when it became clear that European state pensions (and the US social security system) were gigantic Ponzi schemes in which the present beneficiaries were spending the money of the current generation of contributors, and that health provision was creating impossible demands on tax revenue, and that benefit dependency was becoming a substitute for wealth-creating employment, the lesson would not be learnt. We have been living on tick and wishful thinking.

Couldn’t agree more.  We ‘radicals’ who’ve been saying this for years have been proven to be factually correct.  It is an inconvenient truth the left doesn’t want to either accept or admit.   So the still hold on to the belief that if they could only make the ‘rich’ pay their fair share, they’d find utopia still achievable.  Reality, however, in the guise of the European experiment now imploding, already provides proof their theory has no basis in truth.

So what is the solution?  Well in the short term Daley prescribes some bitter but necessary medicine:

So what are the most important truths we should be addressing if we are to avert – or survive – the looming catastrophe? Raising retirement ages across Europe (not just in Greece) is imperative, as is raising thresholds for out-of-work benefit entitlements.

Lowering the tax burden for both wealth-creators and consumers is essential. In Britain, finding private sources of revenue for health care is a matter of urgency.

More importantly though:

The hardest obstacle to overcome will be the idea that anyone who challenges the prevailing consensus of the past 50 years is irrational and irresponsible. That is what is being said about the Tea Partiers. In fact, what is irrational and irresponsible is the assumption that we can go on as we are.

Dead on. Fundamental change.  Backing government out of our lives.  And we’re dead meat if we don’t heed and act on the fact that the social welfare state is a zombie (but doesn’t yet know it) and we need to finally and irrevocably kill it, never let it rise again, and return to the ways which made us great and are enshrined in our founding documents.

~McQ

Twitter: @McQandO

Watching the Kangaroo

This morning on the Opie and Anthony show, Aussie comedian Jim Jeffries was a guest, and he told an amusing story.  It seems that he and some fellow comedians were travelling from Perth to Kalgoorlie for some sort comic event.  Things went well for a bit, until, about three hours outside of Perth, they ran into an emu. The poor emu didn’t die immediately, and, tragically, had to be dispatched with a large rock.  Their car, however, did die, due to radiator damage.

They were stuck in the Australian desert with no transportation.  Fortunately, in Australia, they do keep cell towers along the major roads, so Jeff and the boys were able to call a fellow they knew back in Perth, to ask if he could come help them out, and if he did, they’d try to see if they could get him some mike time at the comedy show.

He agreed, and told them he’d be on his way in about an  hour.

So, four hours later, Jeff saw his car, coming down the road a couple of miles away.  He also saw, anbling slowly towards the road, a large Red Kangaroo.  As he watched, the car get closer, he also watched the kangaroo come closer and closer to the road.  And in what must have been sort of a horrified fascination, he watched the convergence until BOOM!  The car and kangaroo collided.

Fortunately for them, their friend’s car was still driveable after the accident, although the ‘roo was a total write off.

But, the story really encapsulated the way I’ve been feeling watching the economy over the last several months.  You can see the elements coming together for some sort of horrible wreck, but there’s not really anything you can do to stop it.

And it looks like the kangaroo is coming closer.

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department…

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding…

The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.

Let’s examine the implications of this.  TheFDIC fund is now depleted, and needs to be recharged.  Not with $30 billion, but with $500 billion. Banks howled at premiums being increased, saying it could damage their business even further.  So now Sec. Geithner, Chmn. Bernanke, and Chmn. Bair are asking for the federal government to open their credit line, which is currently restricted to $30 billion.

Does this mean that the SecTreas, FDIC, and Federal Reserve all believe the FDIC may need to come up with half a trillion dollars to pay back depositors for bank failures?  If so, that’s…disturbing.

What do they know about the health of banks that we do not in order to come up with that number?  What will the general public do if they figure out the implications of this?  How will the markets respond?

Hop.  Hop.  Hop.

King Eddie’s Funeral (Updated)

Let me clarify something in the previous post.  Some commenters are saying that they don’t understand how government will allow private money to be created, and relinquish the death hold they want to keep on the economy.  The short answer is, I don’t think they’ll have a choice.  We’ll concentrate  on the US here, but keep in mind that the rest of the developed nations are in even worse shape than we are.

What allows the government–any government, but democratic ones in particular–to operate as they do is the consent of the people.  Even totalitarian governments have to worry about that, ultimately, although they can keep the lid on for a time, even for a couple of generations. But even totalitarian regimes often run into explosions which topple them, eventually.

But the loss of faith in a liberal, democratic government is the kiss of death for that government.  It doesn’t take a full scale revolution.  it just takes people to stop cooperating.  India was liberated through non-violent action.  So was South Africa.  nce the people say, “You’re done.” the government is done.

Right now our economic system is built on nothing more than the “full faith and credit” of the US Government.  And that will last only as long as we, the people, have faith in it.

Now this particular recession may not be the one that kills that faith.  It may be just one of the warning signs of a coming collapse.  But a crash is coming, and, I think sooner, rather than later.  We cannot continue indefinitely to fund the spending of the richest country on earth with the savings of one of the poorest.

Consider:

The total debt and future obligation of the US government now exceeds, by a substantial percentage, the total with of the country’s assets.  We have a mountain of debt and payment obligations that exceeds our ability to  meet, even if we were able to liquidate the entire country.

If we wish to retire those obligations we have essentially two alternatives:  We can repudiate them, or we can pay them off through hyperinflation, which, as a practical matter, amounts to the same thing.

For instance, let’s take social security and medicare.  We simply don’t have enough money to pay those obligations.  We can slash benefits, or eliminate cost of living increases, which is nothing more than  repudiating the debt.  We can raise the payroll tax to 30% or more, but that will slow economic growth so much that the increase in revenue will be more than offset by the increased unemployment  and slower GDP growth that would result, which would make it even more difficult to pay off other obligations, such as Treasury Bonds.  Or we can simply print the money, and pay off the paper obligation with money that has signifigantly less purchasing power than the face value of the obligation.

However we go about it, it amounts to a repudiation of all or part of our obliations, and reveals that the government is both faithless and, as investors take note of the repudiation and decide not to buy government paper any more, creditless as well.  What paper they have, they will attempt to unload on any idiot stupid enough to take them.

The dollar will collapse to the point that imported goods, even cheap, shoddily made Chinese ones, might as well be made of unobtainium.

The life savings of million upon millions of Americans will evaporate overnight.

There will be serious hardship, and massive unemployment.

That’s the kind of hardship I’m talking about.

So, how much trust will there be in a government who, after all that, comes back and says, “We’ve learned our lesson.  Trust us now.  It’ll all be different this time.” among a people who’ve watched the government repudiate all of the promises made over the last 70 years?

And how much more will this be true if there is a feasible, private alternative, consisting of hundreds, perhaps thousands of independent sources of money, and credit?  One whose reliability can be publicly judged every minute of every day, and which has no coercive power?

It wouldn’t take a revolution to force the government out of the money and economics business.  Or the retirement or health care business.  All it will take is a lack of trust. Who will want to do business with an entity that has utterly failed to deserve any trust?

The collapse itself will be the revolution.

UPDATE:  By the way, the government’s repudiation of its obligations has already begun, in regards to Social Security.  If you are in my age cohort or younger, you are not allowed to retire at age 65.  Your retirement age is now 72.  The government changed the deal.  For us, we have to wait an additional 7 years to begin collecting our benefits.  Those of us who do not die before age 72, that is.

That wasn’t the deal we had when we started our working lives.  The government unilaterally changed the terms of our Social Security compact.  They didn’t call it “repudiation” but, that’s certainly what it was.

Dead Ed, the Collapse, and eBay Saves Us All

My first reaction to Pres. Obama’s speech last night was depression.  Here were the Democrats giving the president standing O’s for completely converting the Republic into a social democracy.  I mentioned that on Facebook, and one of my readers said it reminded him of Amidala’s line from Star Wars Episode III:  “So this is how liberty ends…with thunderous applause.”

But on more careful review, I find that I am not, in fact, depressed over the long-term.  Indeed, last night’s speech seems to me not to herald the beginning of a new era for big government and socialism, but rather the last gasp of a dying ideology.

We are, I think, at the cusp of a new era, but it isn’t the one that Pres. Obama and his acolytes in the Congress are thinking it is.  Neither the Democrats nor the Republicans, it is clear, have any idea about what is happening.  Very few people do.  I am going to try and explain something very complicated, and do so very simply, and as briefly as I can.  So, with the realization that all simplifications are inevitably wrong in some particular, let me explain.

“Ed’s dead, baby.  Ed’s dead.”*

We stand now, I think, in a very historically similar position to the one described by Barbara Tuchman, in the beginning chapter of her monumental work on the outbreak of Word War I, The Guns of August:

20 May 1910:  The past passes in review

20 May 1910: The past passes in review

So gorgeous was the spectacle on the May morning of 1910 when 9 kings rode in the funeral of Edward VII of England that the crowd, waiting in hushed and black-clad awe, could not keep back gasps of admiration. In scarlet and blue and green and purple, 3 by 3 the sovereigns rode though the palace gates, with plumed helmets, gold braid, crimson sashes, and jeweled orders flashing in the sun. After them came 5 heirs apparent, 40 more imperial or royal highnesses, 7 queens, and a scattering of special ambassadors from uncrowned countries. Together they represented 70 nations in the greatest assemblage of royalty and rank ever gathered in one place and, of its kind, the last. The muffled tongue of Big Ben tolled 9 by the clock as the cortege left the palace, but on history’s clock it was sunset, and the sun of the old world was setting in a dying blaze of splendor never to be seen again.

Four years later, the world order of 1815-1914 was drowned in fire and blood.  The Age of Royalty was over, and the Age of Democracy had begun.  I believe that Pres. Obama’s speech of last night may very well be the historical equivalent to Edward VII’s funeral.

Ever since it began in late 2007, a blog called Fabius Maximus has been arguing that we are watching the decline and fall–indeed, collapse–of our current economic and financial system.  A précis of the argument can be found here, and a more comprehensive archive can be found here.  Just as the black-clad crowds lining the streets of the capitol of the British Empire on the morning of May 20, 1910 might have found it inconceivable that their generation would witness the collapse of both the European geopolitical regime, and, ultimately, the British Empire itself, so it may be inconceivable to us that we are witnessing the collapse of the Post-WWII economic and political regime.  But I believe it is nevertheless true.

“MONEY! Doesn’t it make you feel good just to say that, Jerry?”

Let me start by explaining what money is.  Money is a medium of exchange, that is, it is an object of some kind that I can exchange for goods and service, rather than trying to barter with people to obtain what I need.  It may consist of elaborately carved cowry shells, tiny beads painstakingly stitched to strips of leather, round pieces of metal with the image of guys named Julius or Claudius hammered into them, or little pieces of high-quality paper that say “Federal Reserve Note” on them.

But whatever it is, money has certain minimal characteristics.  It must be convertible, i.e., if I do a job for you, I have to be willing to accept it as payment, and whoever I buy bread or clothes from has to be willing to accept it in exchange, too.  It also has to be difficult to replicate, so that when I accept it, I am reasonably assured that it is the genuine article.

Get 'em while they last.

Get 'em while they last.

For nearly all of recorded history “money” has been synonymous with gold or silver.  And right up till the late 18th century, it was more or les the perfect money.  It was intrinsically valuable, in that raw silver or gold was as easily convertible as hammered or minted coins.  It was also practically impossible to counterfeit, the best efforts of alchemist to convert dross into gold notwithstanding.  It was also relatively rare, and it difficult to obtain new supplies of it without intensive–and extremely expensive–mining operations.

Additionally, there simply wasn’t much to buy.  Most people grew their own food, produced their own clothes from flax or wool, and built their own houses by hand.  Money was essentially a luxury, and it bought mainly luxury goods for fat cats.  Kings could raise and equip armies with it.  Merchants could buy nice clothes. But for the most part, money was a tool for use by the rich, and by the relatively few urban dwellers.  And, as such, gold or silver was perfect for that level of economic activity.

By the 19th century, though, there were lots more things to buy, and lots more city dwellers, and that trend was increasing rapidly.  Hard money became…problematic.  The thing about having a hard currency based in gold or silver is that, at the end of the day, whether you run a fully convertible gold standard, or some sort of fractional reserve system, the size of the money supply is always constrained by the amount of gold or silver on hand.

If the economy takes off on a tear, it’s extremely difficult to expand the money supply to meet the demand.  When the supply dries up, the economy just shudders to a quick stop, because nobody has enough spare money to fund more expansion.  So the economy collapses until it reaches equilibrium with the available money supply, and the cycle starts again.  Look at a chart of US economic activity in the 19th century and you see it’s a system of booms and busts, which were far steeper than any we’ve seen since the depression.  So the fundamental problem with a gold standard is that it’s relatively inflexible when used by a vibrant, diverse economy.  When everybody needs gold, and the demand is unpredictable, gold is very difficult to use unless you’re willing to live with severe booms and busts.

The Great Depression was the death knell for the gold-based world economic system.  Those nations that jettisoned gold the fastest, recovered the most.  Of course, WWII intervened in the depression, so it took a decade or so to get back to the business of commerce–as opposed to the business of building things to kill Nazis.   But, by 1944, everyone–on the Allied side, at least–had recovered enough breathing room to meet at Bretton Woods, NH, and hammer out a new economic system.

What they came up with was a system of fiat currencies, all freely convertible in the FOREX market.

Now, governments could adjust their money supplies appropriately by printing more money or less of it, and taxing their populations more leniently or more severely, as needed.  This is the system most of us have grown up with…and it’s dying.

It’s dying because of something innate in human nature that the gold standard was better equipped to deal with:  the urge to loot the system.

It’s an urge that has always been there.  Sometimes it has been the result of intentional government action to cheapen the currency.  If you were, say, the king of Persia, you didn’t need to consult the priests of Ahura Mazda to know that if you changed from using 10 grams of gold per coin, to using only 9 grams per coin, you could stretch your gold supply by 10%.  You could then take the extra gold, and buy yourself a nice hat.  Or use the extra gold to make one.  Whatever.

Of course, people would notice this pretty quickly, and items that used to cost 9 gold pieces would cost 10 pieces–inflation!–but because gold had an intrinsic value, the same weight of gold could be exchanged.  It was still pernicious, of course, but because gold had an intrinsic value–and because the supply of gold was relatively inflexible–it wasn’t usually seriously pernicious.

Sometimes, the urge to loot the system has been done by private individuals, who figured out that if they shaved a bit off the edges of their gold pieces, they could accrue enough gold shavings to buy themselves a nice hat, too.  This, by the way, is why when we began minting coins instead of hammering them out. They were minted with milled edges, making shaving attempts immediately obvious.

By the 19th century, the looting attempts became widespread, populist movements, like the “Free Silver” movement.  At the time, gold was real money.  If you took a bunch of gold to a Minting facility, the mint would return you an equal weight in gold coins–minus a nominal minting fee.  After huge silver deposits were discovered at places like the Comstock Lode, populist agitation began for minting silver in the same way, at a ratio of 20 ounces of silver for 1 ounce of gold.  The massive amount of silver floating around would, of course, have made this an extremely inflationary policy, and the farming and borrowing interests would have benefited by paying off bills for less than they had borrowed…enabling themselves to use the extra saving to buy a nice hat.

But during the First Age of Money, the looting was always constrained by the fact that gold had an intrinsic value, and that the supply of gold was inelastic.  There were, therefore built-in constraints to the looting impulse.

When the Bretton Woods Agreement launched the Second Age of Money, it solved the problem of the inelasticity of the money supply, and enabled monetary authorities to fine-tune the money supply in response to economic activity.  That was a good thing in the sense that it flattened–although did not eliminate–the business cycle fluctuations.

But the bad thing was that it completely removed any physical restraint on the money supply.  It depended on governments and monetary authorities to exercise self-restraint, rather than impersonal, externally imposed constraints.  The result has been 65 years of continually expanding credit, more or less constant inflation to a greater or lesser degree, and unrestrained spending and borrowing.

Governments–and their democratic (small “d”) constituencies quickly learned that they could loot the system.  Social insurance, medical care, military expansion…whatever the Big Idea of the minute was, we could have it.  And if we didn’t want to pay the taxes to the government to pay for it–and, mostly, we didn’t–we could simply borrow it.  We could obtain a whole bunch of little green pieces of paper now in exchange for a promise we’d pay back more little green pieces of paper sometime in the future.  In the meantime, we could buy all the hats we wanted!

But now, we are obligated to pay back various people about fifty trillion pieces of green paper.  Unfortunately, the entire household worth of everyone in the country is worth about forty trillion pieces of green paper.

How can the current economic and financial system possibly be considered solvent at this point?  How will re-expanding the cycle of debt re-invigorate it?

No, we’ve had our fun.  We got to loot the system for 65 years.  Now, the hat bill is coming due.

I suspect we’ll pay the hat bill the same way that Germany repaid their war reparations debt after WWI.  “Hey, you remember that reparations bill for 3 billion marks that we’re supposed to pay next week?  Yeah.  I just wanted to let you know that we’ve sent that order off to the printers, this week, and we should have that printed up for you by Tuesday.”

The result was massive hyperinflation, the collapse of credit, and 5 years of compete economic stagnation, serious economic pain, severe unemployment…and the ability to start over in the mid-20s with a clean balance sheet.  Clean enough, in fact, that by 1936 Germany had more or less completely emerged from the Great Depression, while the employment rate in the United States hovered at around 18%.

What Pres. Obama is proposing may result in nothing more than additional spending that helps bring about the collapse of the Post-WWII economic regime, while at the same time providing–temporarily–a social safety net that will provide some help as we pass through a difficult transitional period.

“I was there at the dawn of the Third Age of Mankind…”

OK.  Maybe it’s not that grandiose, but I think we are seeing the dawn of the Third Age of Money.

No one in the government realizes how the economic world is changing.  So their proposed solutions are likely to be exposed over time as ineffective and, perhaps even counter-productive.  The credibility of governments around the world is now invested in staving off an economic collapse.   When their failures become evident, and their “solutions” are exposed as fantasies, that credibility will collapse.  Who will want to buy government bonds, or use worthless government money?  Who will trust the governments who lead us into the economic abyss?

Unfortunately, rather that realizing that we are entering a transition, and trying to discover how to shepherd us through that transition, they are invested in preserving the dying system of government-regulated money supply and credit.  And even if they realized that we were in a transitional period, they would still do nothing about it because it would require voluntarily releasing their power over the economy.

Governments have always been in charge of money; determining what money is, how it will be exchanged, how new money will be created, etc.  In part, this is traditional, in that only government had the resources and ability to fund and oversee mining and exploration activities, regulate what legal tender consisted of, and all of the other monetary functions.  There simply were no other large organizations in existence to perform those tasks.

It wasn’t until the 17th century that organizations began to emerge that could begin performing those tasks, and not until the 18th century that it became practical.  Private money of various types began to sprout up everywhere.  18th-century America was, for a time, replete every decent-sized bank issuing its own currency based on deposits.

Eventually, the Federal government cracked down on that private money, not so much from jealousy of the government’s role as the issuer of currency, but because private banks suffered from the same tendency to loot the system, issuing more and more inflated currency until it was worthless, and they ended up wiping out their depositors in the collapse as their obligations came due.  There were some solid money banks of course, but the spectacular failures of so many private currency attempts led the government to tax them so heavily that private currency issuance became uneconomic. Governments may not have been perfect, but the constraints of the gold system meant that they didn’t fail as completely and spectacularly as private banks did.

What was missing in private currency of the time, and what has been missing in the current post-WWII financial system is feedback.  Yes, there is some, but it takes a long time to filter into the monetary authority, and is derived indirectly from statistics on economic activity, rather than by any sort of direct observation.  The Fed raises interest rates today, for instance, and it takes around eight months to observe the indirect effects of the monetary policy change.   This is why the role of the Fed, has often been described as steering a car by looking through the rear-view mirror.  Based on seeing where you’ve been, you make decisions about where you must go.  That may be a form a feedback, but it is so separated in time from the inputs that it’s an inherently unstable system.

By the same token, what killed depositors in banks that issued private money was a lack of feedback.  It wasn’t possible to see that bankers were looting the system in time to withdraw your money.

We call this lack of feedback asymmetrical information.  We’ve never been able to even approach the ability to have full information about what a bank or government is doing that may affect the money supply, or economic activity as a whole.  We’ve never been able to see all sides of the story, as it were.  So, we’ve had to more or less leave it in the hands of government, simply because governments have been the only organizations with the size and scope to reduce, even partially, the problem of feedback.

So, it seems pretty hopeless, doesn’t it?  The financial world we’ve grown up with is collapsing under the sheer weight of looting.  If governments can’t do it, and a return to the gold standard can’t do it, then where are we?  At the edge of another dark age?

Not quite.

I foresee the rise of private money once again, and returning in such force as to negate the government’s role in the economy.  In fact, the pieces for creating the Third Age of Money are already there.

Your new ATM

Your new ATM

The Internet will be the platform for the new money.  But it’s just the platform; the communications media.  The actual objects that make up the Third Age of Money will almost be located in cyberspace.

First, there is encryption.  In the not-too-distant future, you will go online with a persona, i.e., an online identity with a unique, highly encrypted digital signature.  No more logging in with different user names and passwords at 100 different web sites.  Your persona will be uniquely identified as you through the use of 4096-bit or 8192-bit public key encryption.  Your persona will be impossible to forge or duplicate.  It will be unique.  Your “bank” and your “money” will be similarly encrypted.

Second, is your ATM/debit card.  It won’t be exactly the same, of course.  It will be far more secure, probably through the use of biological identification systems to verify authorization, such as retinal scans.  It will be linked directly to your persona’s bank account.

Third, is the ability of all the major banks and credit card companies to do online transactions, and to convert one system of private money to another at a publicly known exchange rate.  So, you can pay directly to your account–or withdraw from it–in Discover Dollars, or MasterBucks, or Credit Suisse Francs.  Or perhaps there might even be a universally acknowledged unit of currency–the “Credit”–that all the private companies agree to use.

But, the most important element of creating a reliable private money system that is resistant to looting the system is feedback. The reduction of asymmetrical information.  And that exists, too.  eBay has been using it for years.  Indeed, in no small way, the system implemented by eBay may be a key element of our future.

Imagine a system where, every time I do business with your persona, I rate your reliability, and it doesn’t matter of the persona is an individual or a bank…or a government.  Every day, millions of people who do transactions in MasterCard can rate the reliability and value of the MasterBucks system.  Private companies like Standard and Poors or Moody’s would not only rate MasterBucks, but consumers would rate the reliability of S&P or Moody’s judgments.

And not only are the bank’s persona’s being rated, but your persona is as well, by every one who does business with it.

Put them all together and you have a secure form of private money that’s convertible, impossible to forge, and is subject to constant feedback about its value and performance.  Does MasterBucks have too high a debt ratio or too much exposure to non-performing loans at MasterCard?  No problem.  It’s instantly convertible to Credit Suisse Franks.  And the conversion rate lowers MasterBucks reliability ratings even more, signaling the company to correct its course, or lose its depositors.

Think of the implications this has for taxation, especially income taxation.  Keep all your money in Credit Suisse Francs, say, and the US government will never even be able to see a record of your deposits or withdrawals.  How will they track your income?  And who will want to pay governments that failed to prevent the collapse for…well…anything?  Who will accede to the demand for money by governments that repudiated their debts, and destroyed the life savings of millions?

I can foresee huge implications for the future that are very pro-liberty.  In the long term.  In the short term, though, if I’m right, and the current financial system is collapsing we will be in for a very rough decade or so.  Very rough indeed.

_________________

*Apologies to Quentin Tarantino.