He is still on the prowl, seeking who he may devour.
I read today an article by Stephen Roach of Morgan Stanley entitled, "The New Inflation." The basic premise of his article is that there are no mathematical constants with which to predict inflation. The rules have changed. He also points out that the current Fed chairman admits that we are in uncharted territories and that the Fed cannot see bubbles in time to stop them from growing out of hand. The old methods of fighting inflation no longer work.
Maybe they should try Austrian economics. Inflation is easily defined and controlled because inflation is the increase in the supply of money. The Federal Reserve has been increasing the money supply for several years now in ways easily seen and in ways not so easily seen.
The most open way that the Fed increases the money supply is by buying government bonds that the banks hold. This gives the banks more cash to lend and spend.
The Feds also lower the reserve requirements of the member banks. In 1863, with the passage of the National Bank Act, banks were given the opportunity to join a national organization to facilitate in the transfer of notes between member banks. In return, member banks were required to maintain reserve requirements at 25% of notes and deposits.
Today, thanks to loose Fed policy, banks' reserve requirements are below 2%. So for every $100 on deposit, a bank is required to have less than $2 held in reserve. This is not exactly the most secure position to be in; especially if several people decide that they need some or all of their money.
The effect of this loose reserve policy is an increase in the supply of money available for lending. Banks make money by lending their deposits at a higher rate than what they are currently paying, so the motivation for lending those freed up reserves is great.
Now it is true that we have not seen the effects of inflation trickling down through the system as we have in past years, but make no mistake, it is there. A couple of reasons exist for this slowing of the trickle down effect. First of all, the way that the government calculates the inflation rate hides the true inflation rate. As I've written about before, the adjustments and percentages used in the total calculation hides the true inflation rate. This allows the government to pay lower cost of living increases in their entitlement payments.
The second factor is simply an economic one. People like you and I are shoppers. We are always looking for a deal. We are price competitive. When local goods increase in price due to monetary inflation or supply shocks, like the current fuel situation, we will look elsewhere for better prices. Because of an expanding global economy, we have more choices today than ever before. You may have noticed that we hear very little of the "Buy American" program that used to be advertised on TV. That's because the ordinary consumer cannot afford American made products due to price inflation.
Of course, the results of our continually shopping elsewhere for our goods have a downside. Jobs are lost. Companies move production overseas to low labor countries. Our country runs a huge account deficit as we import far more goods than we export.
How bad is inflation? Well since inflation is the increase in the supply of money, let's look at some historical numbers. In January of 1959, the M3 or total measure of money stood at $292 Billion. As of September of this year, M3 stood at $9,958.2 Billion, increase of 3,300 percent.
On a related note, with the price of gold coming off of recent highs, I have read comments that suggest maybe gold is due for a correction in price. Well, dear reader, we cannot predict short-term prices, but we can get an idea of longer-term trends. If we take the high point of gold in 1981 at around $850 per ounce and we plug that number into any of the handy inflation calculators out on the Internet, we arrive at a projected current price of $1950. That number is based on government inflation numbers since 1981. Based on the numbers above, the real price could be much higher.
In light of these facts, folks, I would make sure that part of my investment portfolio contained gold, gold stocks, or gold funds. In my account, the value of my gold stock holdings has increased 162% since 2000, and that is after annual rebalancing to maintain my gold holdings at 10% of my portfolio.
Tuesday, October 25, 2005
Monday, October 24, 2005
What If There Was No Government?
Today, I provide for your reading enjoyment a great article obout governments. Why they are so strong and why they always fail in the end. I believe that the author answers all of the arguments for keeping the state around and makes some pretty strong arguments for what always happens when the state is in power for too long.
The Stateless Society
An Examination of Alternatives
by Stefan Molyneux
If the Twentieth Century proved anything, it is that the single greatest danger to human life are the thugs of the centralized political State, who extinguished more than 170 million souls during the bloodiest rampage in recorded history. By any rational standard, modern States are the last and greatest remaining predators – and that the danger has not abated with the demise of communism and fascism. All Western democracies currently face vast and accelerating escalations of State power and centralized control over economic and civic life. In almost all Western democracies, the State chooses:
where children go to school, and how they will be educated
the interest rate citizens can borrow at
the value of currency
how employees can be hired and fired
how more than 50% of their citizens’ time and money are disposed of
who a citizen’s doctor is
what kinds of medical procedures can be received – and when
when to go to war
who can live in the country
…just to touch on a few.
Most of these amazing intrusions into personal liberty have occurred over the past 90 years, since the introduction of the income tax. They have been accepted by a population helpless to challenge the endless expansions of State power – and yet, even though most citizens have received endless pro-State propaganda in government schools, a growing rebellion is brewing. State predations are now so intrusive that they have effectively arrested the forward momentum of society, which now hangs before a fall. Children are poorly educated, young people are unable to get ahead, couples with children fall ever-further into debt, and the elderly are finding State medical systems collapsing under the weight of their growing needs – and State debts continue to grow.
Thus, these early years of the twenty-first century are the end of an era, a collapse of mythology comparable to the fall of fascism, communism, monarchy, or political Christianity. The idea that the State is capable of solving social problems is now viewed with great skepticism – which foretells a coming change. As soon as skepticism is applied to the State, the State falls, since it fails at everything except increasing its power, and so can only survive on propaganda, which relies on unquestioning faith.
Yet while most people are comfortable with the idea of reducing the size and power of the State, they become distinctly uncomfortable with the idea of getting rid of it completely. To use a medical metaphor, if the State is a cancer, they prefer medicating it into an unstable remission, rather than eliminating it completely.
This can never work. A central lesson of history is that States are parasites which always expand until they destroy their host population. Because the State uses violence to achieve its ends – and there is no rational end to the expansion of violence – States grow until they destroy civilized interaction through the corruption of money, contracts, honesty, family, and self-reliance. As such, the cancerous metaphor is not misplaced. People who believe that the State can somehow be contained have not accepted the fact that no State in history has ever been contained.
Even the rare reductions are merely temporary. The United States was founded on the principle of limited government; it took little more than a century for the State to break the bonds of the Constitution, implement the income tax, take control of the money supply and the educational system, and begin its catastrophic expansion. There is no example in history of a State being permanently reduced in size. All that happens during a tax or civil revolt is that the State retrenches, figures out what it did wrong, and plans its expansion again. Or provokes a war, which silences all but fringe dissenters.
Given these well-known historical facts, why do still people believe that such a deadly predator can be tamed? Surely it can only be because they consider a slow strangulation in the grip of an expanding State somehow better than the quick death of a society bereft of a State.
Why, then, do most people believe that a society will crumble without a coercive and monopolistic social agency at its core? There are a number of answers to this question, but generally they tend to revolve around three central points:
dispute resolution;
collective services; and,
pollution.
Dispute Resolution
The fact that people still cling to the belief that the State is required to resolve disputes is amazing, since modern courts are out of the reach of all but the most wealthy and patient, and are primarily used to shield the powerful from competition or criticism. In this writer’s experience, to take a dispute with a stockbroker to the court system would have cost more than a quarter of a million dollars and taken from five to ten years – however, a private mediator settled the matter within a few months for very little money. In the realm of marital dissolution, private mediators are commonplace. Unions use grievance processes, and a plethora of other specialists in dispute resolution have sprung up to fill in the void left by a ridiculously lengthy, expensive and incompetent State court system.
Thus the belief that the State is required for dispute resolution is obviously false, since the court apparatus is unavailable to the vast majority of the population, who resolve their disputes either privately or through agreed-upon mediators.
How can the free market deal with the problem of dispute resolution? Outside the realm of organized crime, very few people are comfortable with armed confrontations, and so generally prefer to delegate that task to others. Let’s assume that people’s need for such representatives produces Dispute Resolution Organizations (DROs), which promise to resolve disputes on their behalf.
Thus, if Stan is hired by Bob, they both sign a document specifying which DRO they both accept as an authority in dispute resolution. If they disagree about something, and are unable to resolve it between themselves, they submit their case to the DRO, and agree to abide by that DRO’s decision.
So far so good. However, what if Stan decides he doesn’t want to abide by the DRO’s decision? Well, several options arise.
First of all, when Stan signed the DRO agreement, it is likely that he would have agreed to property confiscation if he did not abide by the DRO’s decision. Thus the DRO would be entirely within its right to go and remove property from Stan – by force if necessary – to pay for his side of the dispute.
It is at this point that people generally throw up their arms and dismiss the idea of DROs by claiming that society would descend into civil war within a few days.
Everyone, of course, realizes that civil war is a rather bad situation, and so it seems likely that the DROs would consider alternatives to armed combat.
What other options could be pursued? To take a current example, small debts which are not worth pursuing legally are still regularly paid off – and why? Because a group of companies produce creditratings on individuals, and the inconvenience of a lowered credit rating is usually greater than the inconvenience of paying off a small debt. Thus, in the absence of any recourse to force, small debts are usually settled. This is one example of how desired behaviour can be elicited without pulling out a gun or kicking in a door.
Picture for a moment the infinite complexity of modern economic life. Most individuals bind themselves to dozens of contracts, from car loans and mortgages to cell phone contracts, gym membership, condo agreements and so on. To flourish in a free market, a man must honour his contracts. A reputation for honest dealing is the foundation of a successful economic life. Now, few DROs will want to represent a man who regularly breaks contracts, or associates with difficult and litigious people. (For instance, this writer once refrained from entering into a business partnership because the potential partner revealed that he had sued two previous partners.)
Thus if Stan refuses to abide by his DRO’s ruling, the DRO has to barely lift a finger to punish him. All the DRO has to do is report Stan’s non-compliance to the local contract-rating company, who will enter his name into a database of contract violators. Stan’s DRO will also probably drop him, or raise his rates considerably.
And so, from an economic standpoint, Stan has just shot himself in the foot. He is now universally known as a man who rejects legitimate DRO rulings that he agreed to accept in advance. What happens when he goes for his next job? What if he decides to eschew employment and start his own company, what happens when he applies for his first lease? Or tries to hire his first employee? Or rent a car, or buy an airline ticket? Or enter into a contract with his first customer? No, in almost every situation, Stan would be far better off to abide by the decision of the DRO. Whatever he has to pay, it is far cheaper than facing the barriers of existing without access to a DRO, or with a record of rejecting a legitimate ruling.
But let’s push the theory to the max, to see if it holds. To examine a worst-case scenario, imagine that Stan’s employer is an evil man who bribes the DRO to rule in his favour, and the DRO imposes an unconscionable fine – say, one million dollars – on Stan.
First of all, this is such an obvious problem that DROs, to get any business at all, would have to deal with this danger up front. An appeal process to a different DRO would have to be part of the contract. DROs would also rigorously vet their own employees for any unexplained income. And, of course, any DRO mediator who corrupted the process would receive perhaps the lowest contract rating on the planet, lose his job, and be liable for damages. He would lose everything, and be an economic pariah.
However, to go to the extreme, perhaps the worst has occurred and Stan has been unjustly fined a million dollars due to DRO corruption. Well, he has three alternatives. He can choose not to pay the fine, drop off the DRO map, and work for cash without contracts. Become part of the grey market, in other words. A perfectly respectable choice, if he has been treated unjustly.
However, if Stan is an intelligent and even vaguely entrepreneurial man, he will see the corruption of the DRO as a prime opportunity to start his own, competing DRO, and will write into its base contract clauses to ensure that what happened to him will never happen to anyone who signs on with his new DRO.
Stan’s third option is to appeal to the contract rating agency. Contract rating agencies need to be as accurate as possible, since they are attempting to assess real risk. If they believe that the DRO ruled unjustly against Stan, they will lower that DRO’s contract rating and restore Stan’s.
Thus it is inconceivable that violence would be required to enforce all but the most extreme contract violations, since all parties gain the most long-term value by acting honestly. This resolves the problem of instant descent into civil war.
Two other problems exist, however, which must be resolved before the DRO theory starts to becomes truly tenable.
The first is the challenge of reciprocity, or geography. If Bob has a contract with Jeff, and Jeff moves to a new location not covered by their mutual DRO, what happens? Again, this is such an obvious problem that it would be solved by any competent DRO. People who travel prefer cell phones with the greatest geographical coverage, and so cell phone companies have developed reciprocal agreements for charging competitors. Just as a person’s credit rating is available anywhere in the world, so their contract rating will also be available, and so there will be no place to hide from a broken contract save by going ‘off the grid’ completely, which would be economically crippling.
The second problem is the fear that a particular DRO will grow in size and stature to the point where it takes on all the features and properties of a new State.
This is a superstitious fear, because there is no historical example of a private company replacing a political State. While it is true that companies regularly use State coercion to enforce trading restrictions, high tariffs, cartels and other mercantilist tricks, surely this reinforces the danger of the State, not the inevitability of companies growing into States. All States destroy societies. No company has ever destroyed a society without the aid of the State. Thus the fear that a private company can somehow grow into a State is utterly unfounded in fact, experience, logic and history.
If society becomes frightened of a particular DRO, then it can simply stop doing business with it, which will cause it to collapse. If that DRO, as it collapses, somehow transforms itself from a group of secretaries, statisticians, accountants and contract lawyers into a ruthless domestic militia and successfully takes over society – and how unlikely is that! – then such a State will then be imposed on the general population. However, there are two problems even with this most unlikely scare scenario. First of all, if any DRO can take over society and impose itself as a new State, why only a DRO? Why not the Rotary Club? Why not a union? Why not the Mafia? The YMCA? The SPCA? Is society to then ban all groups with more than a hundred members? Clearly that is not a feasible solution, and so society must live with the risk of a brutal coup by ninja accountants as much as from any other group.
And, in the final analysis, if society is so terrified of a single group seizing a monopoly of political power, what does that say about the existing States? They have a monopoly of political power. If a DRO should never achieve this kind of control, why should existing States continue to wield theirs?
Collective Services
Roads, sewage, water and electricity and so on are also cited as reasons why a State must exist. How roads could be privately paid for remains such an impenetrable mystery that most people are willing to support the State – and so ensure the eventual and utter destruction of civil society – rather than cede that this problem just might solvable. There are many ways to pay for roads, such as electronic or cash tolls, GPS charges, roads maintained by the businesses they lead to, communal organizations and so on. And if none of those work? Why, then personal flying machines will hit the market!
The problem that a water company might build plumbing to a community, and then charge exorbitant fees for supplying it, is equally easy to counter. A truck could deliver bottled water, or the community could invest in a water tower, a competing company could build alternate pipes and so on. None of these problems touch the central rationale for a State. They are ex post facto justifications made to avoid the need for critical examination or, heaven forbid, political action. The argument that voluntary free-market monopolies are bad – and that the only way to combat them is to impose compulsory monopolies – is obviously foolish. If voluntary monopolies are bad, then how can coercive monopolies be better?
Due to countless examples of free market solutions to the problem of ‘carrier costs’, this argument no longer holds the kind of water it used to, so it must be elsewhere that people must turn to justify the continued existence of the State.
Pollution
This is perhaps the greatest problem faced by free-market theorists. It’s worth spending a little time on outlining the worst possible scenario, and see how a voluntary system could solve it. However, it’s important to first dispel the notion that the State currently deals effectively with pollution. Firstly, the most polluted resources on the planet are State-owned, because State personnel do not personally profit from retaining the value of State property (witness the destruction of the Canadian cod industry through blatant vote-buying). Secondly, the distribution of mineral, lumber and drilling rights is directly skewed towards bribery and corruption, because States rarely sell the land, but rather just the resource rights. A lumber company cannot buy woodlands from the State, just the right to harvest trees. Thus the State gets a renewable source of income, and can further coerce lumber companies by enforcing re-seeding. This, of course, tends to promote bribery, corruption and the creation of ‘fly-by-night’ lumber companies which strip the land bare, but vanish when it comes time to re-seed. Auctioning State land to a private market easily solves this problem, because a company which re-seeded would reap the greatest long-term profits from woodland, and so would be able to bid the most for the land.
Also, it should be remembered that, in the realm of air pollution, governments created the problem in the first place. In 19th century England, when industrial smokestacks began belching fumes into the orchards of apple farmers, the farmers took the factory-owners to court, citing the common-law tradition of restitution for property damage. Naturally, the capitalists had gotten to the State courts first, and had more money to bribe with, employed more voting workers, and contributed more tax revenue than the farmers – and so the farmers’ cases were thrown out of court. The judge argued that the ‘common good’ of the factories took precedence over the ‘private need’ of the farmers. The free market did not fail to solve the problem of air pollution – it was forcibly prevented from doing so through State corruption.
The State, then, is no friend of the environment – but how would the free market handle it? One egregious example often cited is a group of houses downwind from a new factory which works day and night to coat them in soot.
When a man buys a new house, isn’t it important to him to ensure that it won’t be subjected with someone else’s pollution? People’s desire for a clean and safe environment is so strong that it’s a clear invitation for enterprising capitalists to sweat bullets figuring out how to provide it.
Fortunately, since we have already talked about DROs and their role in a free market, the problem of air pollution can be solved quite easily.
If the aforementioned group of homeowners is afraid of pollution, the first thing they will do is buy pollution insurance, which is a natural response to a situation where costs cannot be predicted but consequences are dire. Let’s say that a homeowner named Achmed buys pollution insurance which pays him two million dollars if the air around or in his house becomes polluted in some predefined manner. In other words, as long as Achmed’s air remains clean, the insurance company makes money.
One day, a plot of land upwind of Achmed’s house comes up for sale. Naturally, his insurance company would be very interested in this, and would monitor the sale. If the purchaser is some private school, all is well (assuming Achmed has not bought an excess of noise pollution insurance!). If, however, the insurance company discovers that Sally’s House of Polluting Paint Production is interested in purchasing the plot of land, then it will likely spring into action, taking one of the following actions:
buying the land itself, then selling it to a non-polluting buyer;
getting assurances from Sally that her company will not pollute;
paying Sally to enter into a non-polluting contract.
If, however, someone at the insurance company is asleep at the wheel, and Sally buys the land and puts up her polluting factory, what happens then?
Well, then the insurance company is on the hook for $2M to Achmed (assuming for the moment that only Achmed bought pollution insurance). Thus, it can afford to pay Sally up to $2M to reduce her pollution and still be cash-positive. This payment could take many forms, from the installation of pollution-control equipment to a buy-out to a subsidy for under-production and so on.
If the $2M is not enough to solve the problem, then the insurance company pays Achmed the $2M and he goes and buys a new house in an unpolluted neighbourhood. However, this scenario is highly unlikely, since the insurance company would be unlikely to insure only one single person in a neighbourhood against air pollution – and a single person probably could not afford it!
So, that is the view from Achmed’s air-pollution insurance company. What about the view from Sally’s House of Polluting Paint Production? She, also, must be covered by a DRO in order to buy land, borrow money and hire employees. How does that DRO view her tendency to pollute?
Pollution brings damage claims against Sally, because pollution is by definition damage to persons or property. Thus Sally’s DRO would take a dim view of her polluting activities, since it would be on the hook for any property damage her factory causes. In fact, it would be most unlikely that Sally’s DRO would insure her against damages unless she were able to prove that she would be able to operate her factory without harming the property of those around her. And without access to a DRO, of course, she would be hard-pressed to start her factory, borrow money, hire employees etc.
It’s important to remember that DROs, much like cell phone companies and Internet providers, only prosper if they cooperate. Sally’s DRO only makes money if Sally does not pollute. Achmed’s insurer also only makes money if Sally does not pollute. Thus the two companies share a common goal, which fosters cooperation.
Finally, even if Achmed is not insured against air pollution, he can use his and/or Sally’s DRO to gain restitution for the damage her pollution is causing to his property. Both Sally and Achmed’s DROs would have reciprocity agreements, since Achmed wants to be protected against Sally’s actions, and Sally wants to be protected against Achmed’s actions. Because of this desire for mutual protection, they would choose DROs which had the widest reciprocity agreements.
Thus, in a truly free market, there are many levels and agencies actively working against pollution. Achmed’s insurer will be actively scanning the surroundings looking for polluters it can forestall. Sally will be unable to build her paint factory without proving that she will not pollute. Mutual or independent DROs will resolve any disputes regarding property damage caused by Sally’s pollution.
There are other benefits as well, which are almost unsolvable in the current system. Imagine that Sally’s smokestacks are so high that her air pollution sails over Achmed’s house and lands on Reginald’s house, a hundred miles away. Reginald then complains to his DRO that his property is being damaged. His DRO will examine the air contents and wind currents, then trace the pollution back to its source and resolve the dispute with Sally’s DRO. If the air pollution is particularly complicated, then Reginald’s DRO will place non-volatile compounds into Sally’s smokestacks and follow them to where they land. This can be used in a situation where a number of different factories may be contributing pollutants.
The problem of inter-country air pollution may seem to be a sticky one, but it’s easily solvable. Obviously, a Canadian living along the Canada/US border, for instance, will not choose a DRO which refuses to cover air pollution emanating from the US. Thus the DRO will have to have reciprocity agreements with the DROs across the border. If the US DROs refuse to have reciprocity agreements with the Canadian DROs – inconceivable, since the pollution can go both ways – then the Canadian DRO will simply start a US branch and compete.
The difference is that international DROs actually profit from cooperation, in a way that governments do not. For instance, a State government on the Canada/US border has little motivation to impose pollution costs on local factories, as long as the pollution generally goes north. For DROs, quite the opposite would be true.
Finally, one other advantage to DRO’s can be termed the ‘Scrabble-Challenge Benefit’. In Scrabble, an accuser loses his turn if he challenges another player’s word and the challenge fails. Given the costs of resolving disputes, DROs would be very careful to ensure that those bringing false accusations would be punished through their own premiums, their contract ratings and by also assuming the entire cost of the dispute. This would greatly reduce the number of frivolous lawsuits, to the great benefit of all.
The idea that society can only survive in the absence of a centralized State is the greatest lesson that the grisly years of the Twentieth Century can teach us. Our choice is not between the free market and the State, but between life and death. Whatever the risks involved in dissolving the central State, they are far less than the certain destruction which will result from its inevitable escalation. Like a cancer patient facing certain demise, we must open our minds reach for whatever medicine shows the most promise, and not wait until it is too late.
October 24, 2005
Stefan Molyneux [send him mail] has been an actor, comedian, gold-panner, graduate student, and software entrepreneur. His first novel Revolutions was published in 2004, and he maintains a blog.
Copyright © 2005 LewRockwell.com
Find this article at:
http://www.lewrockwell.com/orig6/molyneux1.html
The Stateless Society
An Examination of Alternatives
by Stefan Molyneux
If the Twentieth Century proved anything, it is that the single greatest danger to human life are the thugs of the centralized political State, who extinguished more than 170 million souls during the bloodiest rampage in recorded history. By any rational standard, modern States are the last and greatest remaining predators – and that the danger has not abated with the demise of communism and fascism. All Western democracies currently face vast and accelerating escalations of State power and centralized control over economic and civic life. In almost all Western democracies, the State chooses:
where children go to school, and how they will be educated
the interest rate citizens can borrow at
the value of currency
how employees can be hired and fired
how more than 50% of their citizens’ time and money are disposed of
who a citizen’s doctor is
what kinds of medical procedures can be received – and when
when to go to war
who can live in the country
…just to touch on a few.
Most of these amazing intrusions into personal liberty have occurred over the past 90 years, since the introduction of the income tax. They have been accepted by a population helpless to challenge the endless expansions of State power – and yet, even though most citizens have received endless pro-State propaganda in government schools, a growing rebellion is brewing. State predations are now so intrusive that they have effectively arrested the forward momentum of society, which now hangs before a fall. Children are poorly educated, young people are unable to get ahead, couples with children fall ever-further into debt, and the elderly are finding State medical systems collapsing under the weight of their growing needs – and State debts continue to grow.
Thus, these early years of the twenty-first century are the end of an era, a collapse of mythology comparable to the fall of fascism, communism, monarchy, or political Christianity. The idea that the State is capable of solving social problems is now viewed with great skepticism – which foretells a coming change. As soon as skepticism is applied to the State, the State falls, since it fails at everything except increasing its power, and so can only survive on propaganda, which relies on unquestioning faith.
Yet while most people are comfortable with the idea of reducing the size and power of the State, they become distinctly uncomfortable with the idea of getting rid of it completely. To use a medical metaphor, if the State is a cancer, they prefer medicating it into an unstable remission, rather than eliminating it completely.
This can never work. A central lesson of history is that States are parasites which always expand until they destroy their host population. Because the State uses violence to achieve its ends – and there is no rational end to the expansion of violence – States grow until they destroy civilized interaction through the corruption of money, contracts, honesty, family, and self-reliance. As such, the cancerous metaphor is not misplaced. People who believe that the State can somehow be contained have not accepted the fact that no State in history has ever been contained.
Even the rare reductions are merely temporary. The United States was founded on the principle of limited government; it took little more than a century for the State to break the bonds of the Constitution, implement the income tax, take control of the money supply and the educational system, and begin its catastrophic expansion. There is no example in history of a State being permanently reduced in size. All that happens during a tax or civil revolt is that the State retrenches, figures out what it did wrong, and plans its expansion again. Or provokes a war, which silences all but fringe dissenters.
Given these well-known historical facts, why do still people believe that such a deadly predator can be tamed? Surely it can only be because they consider a slow strangulation in the grip of an expanding State somehow better than the quick death of a society bereft of a State.
Why, then, do most people believe that a society will crumble without a coercive and monopolistic social agency at its core? There are a number of answers to this question, but generally they tend to revolve around three central points:
dispute resolution;
collective services; and,
pollution.
Dispute Resolution
The fact that people still cling to the belief that the State is required to resolve disputes is amazing, since modern courts are out of the reach of all but the most wealthy and patient, and are primarily used to shield the powerful from competition or criticism. In this writer’s experience, to take a dispute with a stockbroker to the court system would have cost more than a quarter of a million dollars and taken from five to ten years – however, a private mediator settled the matter within a few months for very little money. In the realm of marital dissolution, private mediators are commonplace. Unions use grievance processes, and a plethora of other specialists in dispute resolution have sprung up to fill in the void left by a ridiculously lengthy, expensive and incompetent State court system.
Thus the belief that the State is required for dispute resolution is obviously false, since the court apparatus is unavailable to the vast majority of the population, who resolve their disputes either privately or through agreed-upon mediators.
How can the free market deal with the problem of dispute resolution? Outside the realm of organized crime, very few people are comfortable with armed confrontations, and so generally prefer to delegate that task to others. Let’s assume that people’s need for such representatives produces Dispute Resolution Organizations (DROs), which promise to resolve disputes on their behalf.
Thus, if Stan is hired by Bob, they both sign a document specifying which DRO they both accept as an authority in dispute resolution. If they disagree about something, and are unable to resolve it between themselves, they submit their case to the DRO, and agree to abide by that DRO’s decision.
So far so good. However, what if Stan decides he doesn’t want to abide by the DRO’s decision? Well, several options arise.
First of all, when Stan signed the DRO agreement, it is likely that he would have agreed to property confiscation if he did not abide by the DRO’s decision. Thus the DRO would be entirely within its right to go and remove property from Stan – by force if necessary – to pay for his side of the dispute.
It is at this point that people generally throw up their arms and dismiss the idea of DROs by claiming that society would descend into civil war within a few days.
Everyone, of course, realizes that civil war is a rather bad situation, and so it seems likely that the DROs would consider alternatives to armed combat.
What other options could be pursued? To take a current example, small debts which are not worth pursuing legally are still regularly paid off – and why? Because a group of companies produce creditratings on individuals, and the inconvenience of a lowered credit rating is usually greater than the inconvenience of paying off a small debt. Thus, in the absence of any recourse to force, small debts are usually settled. This is one example of how desired behaviour can be elicited without pulling out a gun or kicking in a door.
Picture for a moment the infinite complexity of modern economic life. Most individuals bind themselves to dozens of contracts, from car loans and mortgages to cell phone contracts, gym membership, condo agreements and so on. To flourish in a free market, a man must honour his contracts. A reputation for honest dealing is the foundation of a successful economic life. Now, few DROs will want to represent a man who regularly breaks contracts, or associates with difficult and litigious people. (For instance, this writer once refrained from entering into a business partnership because the potential partner revealed that he had sued two previous partners.)
Thus if Stan refuses to abide by his DRO’s ruling, the DRO has to barely lift a finger to punish him. All the DRO has to do is report Stan’s non-compliance to the local contract-rating company, who will enter his name into a database of contract violators. Stan’s DRO will also probably drop him, or raise his rates considerably.
And so, from an economic standpoint, Stan has just shot himself in the foot. He is now universally known as a man who rejects legitimate DRO rulings that he agreed to accept in advance. What happens when he goes for his next job? What if he decides to eschew employment and start his own company, what happens when he applies for his first lease? Or tries to hire his first employee? Or rent a car, or buy an airline ticket? Or enter into a contract with his first customer? No, in almost every situation, Stan would be far better off to abide by the decision of the DRO. Whatever he has to pay, it is far cheaper than facing the barriers of existing without access to a DRO, or with a record of rejecting a legitimate ruling.
But let’s push the theory to the max, to see if it holds. To examine a worst-case scenario, imagine that Stan’s employer is an evil man who bribes the DRO to rule in his favour, and the DRO imposes an unconscionable fine – say, one million dollars – on Stan.
First of all, this is such an obvious problem that DROs, to get any business at all, would have to deal with this danger up front. An appeal process to a different DRO would have to be part of the contract. DROs would also rigorously vet their own employees for any unexplained income. And, of course, any DRO mediator who corrupted the process would receive perhaps the lowest contract rating on the planet, lose his job, and be liable for damages. He would lose everything, and be an economic pariah.
However, to go to the extreme, perhaps the worst has occurred and Stan has been unjustly fined a million dollars due to DRO corruption. Well, he has three alternatives. He can choose not to pay the fine, drop off the DRO map, and work for cash without contracts. Become part of the grey market, in other words. A perfectly respectable choice, if he has been treated unjustly.
However, if Stan is an intelligent and even vaguely entrepreneurial man, he will see the corruption of the DRO as a prime opportunity to start his own, competing DRO, and will write into its base contract clauses to ensure that what happened to him will never happen to anyone who signs on with his new DRO.
Stan’s third option is to appeal to the contract rating agency. Contract rating agencies need to be as accurate as possible, since they are attempting to assess real risk. If they believe that the DRO ruled unjustly against Stan, they will lower that DRO’s contract rating and restore Stan’s.
Thus it is inconceivable that violence would be required to enforce all but the most extreme contract violations, since all parties gain the most long-term value by acting honestly. This resolves the problem of instant descent into civil war.
Two other problems exist, however, which must be resolved before the DRO theory starts to becomes truly tenable.
The first is the challenge of reciprocity, or geography. If Bob has a contract with Jeff, and Jeff moves to a new location not covered by their mutual DRO, what happens? Again, this is such an obvious problem that it would be solved by any competent DRO. People who travel prefer cell phones with the greatest geographical coverage, and so cell phone companies have developed reciprocal agreements for charging competitors. Just as a person’s credit rating is available anywhere in the world, so their contract rating will also be available, and so there will be no place to hide from a broken contract save by going ‘off the grid’ completely, which would be economically crippling.
The second problem is the fear that a particular DRO will grow in size and stature to the point where it takes on all the features and properties of a new State.
This is a superstitious fear, because there is no historical example of a private company replacing a political State. While it is true that companies regularly use State coercion to enforce trading restrictions, high tariffs, cartels and other mercantilist tricks, surely this reinforces the danger of the State, not the inevitability of companies growing into States. All States destroy societies. No company has ever destroyed a society without the aid of the State. Thus the fear that a private company can somehow grow into a State is utterly unfounded in fact, experience, logic and history.
If society becomes frightened of a particular DRO, then it can simply stop doing business with it, which will cause it to collapse. If that DRO, as it collapses, somehow transforms itself from a group of secretaries, statisticians, accountants and contract lawyers into a ruthless domestic militia and successfully takes over society – and how unlikely is that! – then such a State will then be imposed on the general population. However, there are two problems even with this most unlikely scare scenario. First of all, if any DRO can take over society and impose itself as a new State, why only a DRO? Why not the Rotary Club? Why not a union? Why not the Mafia? The YMCA? The SPCA? Is society to then ban all groups with more than a hundred members? Clearly that is not a feasible solution, and so society must live with the risk of a brutal coup by ninja accountants as much as from any other group.
And, in the final analysis, if society is so terrified of a single group seizing a monopoly of political power, what does that say about the existing States? They have a monopoly of political power. If a DRO should never achieve this kind of control, why should existing States continue to wield theirs?
Collective Services
Roads, sewage, water and electricity and so on are also cited as reasons why a State must exist. How roads could be privately paid for remains such an impenetrable mystery that most people are willing to support the State – and so ensure the eventual and utter destruction of civil society – rather than cede that this problem just might solvable. There are many ways to pay for roads, such as electronic or cash tolls, GPS charges, roads maintained by the businesses they lead to, communal organizations and so on. And if none of those work? Why, then personal flying machines will hit the market!
The problem that a water company might build plumbing to a community, and then charge exorbitant fees for supplying it, is equally easy to counter. A truck could deliver bottled water, or the community could invest in a water tower, a competing company could build alternate pipes and so on. None of these problems touch the central rationale for a State. They are ex post facto justifications made to avoid the need for critical examination or, heaven forbid, political action. The argument that voluntary free-market monopolies are bad – and that the only way to combat them is to impose compulsory monopolies – is obviously foolish. If voluntary monopolies are bad, then how can coercive monopolies be better?
Due to countless examples of free market solutions to the problem of ‘carrier costs’, this argument no longer holds the kind of water it used to, so it must be elsewhere that people must turn to justify the continued existence of the State.
Pollution
This is perhaps the greatest problem faced by free-market theorists. It’s worth spending a little time on outlining the worst possible scenario, and see how a voluntary system could solve it. However, it’s important to first dispel the notion that the State currently deals effectively with pollution. Firstly, the most polluted resources on the planet are State-owned, because State personnel do not personally profit from retaining the value of State property (witness the destruction of the Canadian cod industry through blatant vote-buying). Secondly, the distribution of mineral, lumber and drilling rights is directly skewed towards bribery and corruption, because States rarely sell the land, but rather just the resource rights. A lumber company cannot buy woodlands from the State, just the right to harvest trees. Thus the State gets a renewable source of income, and can further coerce lumber companies by enforcing re-seeding. This, of course, tends to promote bribery, corruption and the creation of ‘fly-by-night’ lumber companies which strip the land bare, but vanish when it comes time to re-seed. Auctioning State land to a private market easily solves this problem, because a company which re-seeded would reap the greatest long-term profits from woodland, and so would be able to bid the most for the land.
Also, it should be remembered that, in the realm of air pollution, governments created the problem in the first place. In 19th century England, when industrial smokestacks began belching fumes into the orchards of apple farmers, the farmers took the factory-owners to court, citing the common-law tradition of restitution for property damage. Naturally, the capitalists had gotten to the State courts first, and had more money to bribe with, employed more voting workers, and contributed more tax revenue than the farmers – and so the farmers’ cases were thrown out of court. The judge argued that the ‘common good’ of the factories took precedence over the ‘private need’ of the farmers. The free market did not fail to solve the problem of air pollution – it was forcibly prevented from doing so through State corruption.
The State, then, is no friend of the environment – but how would the free market handle it? One egregious example often cited is a group of houses downwind from a new factory which works day and night to coat them in soot.
When a man buys a new house, isn’t it important to him to ensure that it won’t be subjected with someone else’s pollution? People’s desire for a clean and safe environment is so strong that it’s a clear invitation for enterprising capitalists to sweat bullets figuring out how to provide it.
Fortunately, since we have already talked about DROs and their role in a free market, the problem of air pollution can be solved quite easily.
If the aforementioned group of homeowners is afraid of pollution, the first thing they will do is buy pollution insurance, which is a natural response to a situation where costs cannot be predicted but consequences are dire. Let’s say that a homeowner named Achmed buys pollution insurance which pays him two million dollars if the air around or in his house becomes polluted in some predefined manner. In other words, as long as Achmed’s air remains clean, the insurance company makes money.
One day, a plot of land upwind of Achmed’s house comes up for sale. Naturally, his insurance company would be very interested in this, and would monitor the sale. If the purchaser is some private school, all is well (assuming Achmed has not bought an excess of noise pollution insurance!). If, however, the insurance company discovers that Sally’s House of Polluting Paint Production is interested in purchasing the plot of land, then it will likely spring into action, taking one of the following actions:
buying the land itself, then selling it to a non-polluting buyer;
getting assurances from Sally that her company will not pollute;
paying Sally to enter into a non-polluting contract.
If, however, someone at the insurance company is asleep at the wheel, and Sally buys the land and puts up her polluting factory, what happens then?
Well, then the insurance company is on the hook for $2M to Achmed (assuming for the moment that only Achmed bought pollution insurance). Thus, it can afford to pay Sally up to $2M to reduce her pollution and still be cash-positive. This payment could take many forms, from the installation of pollution-control equipment to a buy-out to a subsidy for under-production and so on.
If the $2M is not enough to solve the problem, then the insurance company pays Achmed the $2M and he goes and buys a new house in an unpolluted neighbourhood. However, this scenario is highly unlikely, since the insurance company would be unlikely to insure only one single person in a neighbourhood against air pollution – and a single person probably could not afford it!
So, that is the view from Achmed’s air-pollution insurance company. What about the view from Sally’s House of Polluting Paint Production? She, also, must be covered by a DRO in order to buy land, borrow money and hire employees. How does that DRO view her tendency to pollute?
Pollution brings damage claims against Sally, because pollution is by definition damage to persons or property. Thus Sally’s DRO would take a dim view of her polluting activities, since it would be on the hook for any property damage her factory causes. In fact, it would be most unlikely that Sally’s DRO would insure her against damages unless she were able to prove that she would be able to operate her factory without harming the property of those around her. And without access to a DRO, of course, she would be hard-pressed to start her factory, borrow money, hire employees etc.
It’s important to remember that DROs, much like cell phone companies and Internet providers, only prosper if they cooperate. Sally’s DRO only makes money if Sally does not pollute. Achmed’s insurer also only makes money if Sally does not pollute. Thus the two companies share a common goal, which fosters cooperation.
Finally, even if Achmed is not insured against air pollution, he can use his and/or Sally’s DRO to gain restitution for the damage her pollution is causing to his property. Both Sally and Achmed’s DROs would have reciprocity agreements, since Achmed wants to be protected against Sally’s actions, and Sally wants to be protected against Achmed’s actions. Because of this desire for mutual protection, they would choose DROs which had the widest reciprocity agreements.
Thus, in a truly free market, there are many levels and agencies actively working against pollution. Achmed’s insurer will be actively scanning the surroundings looking for polluters it can forestall. Sally will be unable to build her paint factory without proving that she will not pollute. Mutual or independent DROs will resolve any disputes regarding property damage caused by Sally’s pollution.
There are other benefits as well, which are almost unsolvable in the current system. Imagine that Sally’s smokestacks are so high that her air pollution sails over Achmed’s house and lands on Reginald’s house, a hundred miles away. Reginald then complains to his DRO that his property is being damaged. His DRO will examine the air contents and wind currents, then trace the pollution back to its source and resolve the dispute with Sally’s DRO. If the air pollution is particularly complicated, then Reginald’s DRO will place non-volatile compounds into Sally’s smokestacks and follow them to where they land. This can be used in a situation where a number of different factories may be contributing pollutants.
The problem of inter-country air pollution may seem to be a sticky one, but it’s easily solvable. Obviously, a Canadian living along the Canada/US border, for instance, will not choose a DRO which refuses to cover air pollution emanating from the US. Thus the DRO will have to have reciprocity agreements with the DROs across the border. If the US DROs refuse to have reciprocity agreements with the Canadian DROs – inconceivable, since the pollution can go both ways – then the Canadian DRO will simply start a US branch and compete.
The difference is that international DROs actually profit from cooperation, in a way that governments do not. For instance, a State government on the Canada/US border has little motivation to impose pollution costs on local factories, as long as the pollution generally goes north. For DROs, quite the opposite would be true.
Finally, one other advantage to DRO’s can be termed the ‘Scrabble-Challenge Benefit’. In Scrabble, an accuser loses his turn if he challenges another player’s word and the challenge fails. Given the costs of resolving disputes, DROs would be very careful to ensure that those bringing false accusations would be punished through their own premiums, their contract ratings and by also assuming the entire cost of the dispute. This would greatly reduce the number of frivolous lawsuits, to the great benefit of all.
The idea that society can only survive in the absence of a centralized State is the greatest lesson that the grisly years of the Twentieth Century can teach us. Our choice is not between the free market and the State, but between life and death. Whatever the risks involved in dissolving the central State, they are far less than the certain destruction which will result from its inevitable escalation. Like a cancer patient facing certain demise, we must open our minds reach for whatever medicine shows the most promise, and not wait until it is too late.
October 24, 2005
Stefan Molyneux [send him mail] has been an actor, comedian, gold-panner, graduate student, and software entrepreneur. His first novel Revolutions was published in 2004, and he maintains a blog.
Copyright © 2005 LewRockwell.com
Find this article at:
http://www.lewrockwell.com/orig6/molyneux1.html
Wednesday, October 19, 2005
Mania vs. Reality: The Choice Is Yours
Here are the basic warning signs of a mania mentality:
1.This time, it's different.
2.Making big money is easy for the average guy.
3.Buyers really have to own this item.
4.This is the wave of the future.
5.Money is cheap.
6.Money will stay cheap.
7.Even when it isn't cheap, this market is secure.
8.I can get out at any time.
9.This market is liquid.
Recognize any of these? When you read or hear statements like these, there is a good chance that you are looking at market mania. What is a mania? It is a situation that occurs regularly throughout history when common people allow greed to defeat common sense. These people beginning investing in anything because it seems that everyone is making money. It doesn't just happen with stocks either. It can be something as odd as tulip bulbs. I recently read a newspaper article about a couple in Florida, a cab driver and a hairdresser, who were investing in real estate because everyone is getting rich in real estate. Notice how this comment fits under item number two on the list above.
So, what does reality look like? Take a look at the following statements:
1. Things can change without much notice.
2. You must remain flexible.
3. Consumers prefer low prices.
4. Competition is international.
5. The government cannot protect your investments.
6. Your pension plan is vulnerable.
7. Your trade union cannot help you.
8. You must have a backup plan.
Now, when you compare the two lists, most people would rather live under the guidance of the first list and in fact most do. The problem with that is that sooner or later those people will get burned. When the economy tanks (notice I said when not if) and more bankruptcies and layoffs occur, people will find that there is no one out there who can help them make their credit card or mortgage payments. No one will volunteer to pay the utility bills or the doctor bills. It will be every person for themselves. So again, my question to you is; are you ready? If you have not done so already, get my free report entitled, 5 Things You Must Do Now to Protect Your Investments. Simply send a blank email to investoralert@freefollowup.com. I do not sell, rent, or give away any email addresses. I hate spam as much as you do.
Friday, October 14, 2005
As GM Goes, So Goes the Country
I have heard this comment for years. General Motors is considered a bellwether company. If you want to know how the overall economy is doing, just look at GM.
Is it accurate? I dont know. I believe there have been times that the economy and General Motors tracked each other pretty well. With the recent news about GM, lets hope that rule no longer applies.
For one thing, General Motors has found itself in a bit of a fix with regard to each pension obligations. The company reported in 2004 that total obligations were in excess of $57 billion. At the time the total market capitalization of GM was only $17 billion.
Additionally GM is saddled with $300 billion in debt. In fact in 2003, GM had to sell $17.6 billion in bonds just to meet pension obligations. No wonder Standard and Poors reduced GMs bond rating to junk status. Who would want to own stock in a company with those kinds of outstanding obligations? In fact, who would want to work for a company in that condition?
Now yesterday, Delphi Corp. CEO Steve Miller, while announcing that his company was declaring bankruptcy warned that if GM could not renegotiate contracts with the company's unions, it would follow in Delphi's footsteps. Bankrupt General Motors...bankrupt United States. You read it here.
For those of you who keep track of the economic indicators that the government releases, yesterday the BLS announced CPI numbers for September. There are two numbers that they release and only one is important. The overall CPI for the year ending September was 4.7%.
The core CPI, which excludes fuel and food costs, actually shows a decrease. From my previous posts you know what I think of the core CPI. It's a waste of time. Where are the people that do not spend money every month on food and fuel? My point exactly.
In a recent article, Bill King, author of the "King Report," at M. Ramsey King Securitites provided evidence of how the government manipulates the CPI data. The Bank of America has a fairly accurate breakdown of the typical monthly expenses incurred by typical Americans. What Bank of America found is that the BLS alters the percentage mix of those monthly expenses. For example, healthcare expenses typically represent about 17% of our monthly expenditures, but the BLS only weights healthcare costs at 6%. In this way, the huge increase in insurance premiums is lessened in the CPI calculations.
Using this information, Bill King believes that instead of the annual inflation numbers coming in around 3%, they are probably more like 6%.
Now if you plug 6% into the governments Gross Domestic Product calculations, you will find that our economy is only growing at about 1% annually. Not exactly robust growth.
All of this is further proof that our economy is faltering and when you put all of the pieces together, you arrive at a market risk assessment that is extreme at this point in time. When will it all come tumbling down? No one knows. There is no one who can time the market or the economy, but with the risk assessment as high as it is, we have no doubt that it will happen.
That is why it is so important to prepare yourself financially for tough times.
I have written a special report entitled, "5 Things You Must Do Now to Protect Your Investments." To get your free copy, send a blank email to investoralert@freefollowup.com.
Is it accurate? I dont know. I believe there have been times that the economy and General Motors tracked each other pretty well. With the recent news about GM, lets hope that rule no longer applies.
For one thing, General Motors has found itself in a bit of a fix with regard to each pension obligations. The company reported in 2004 that total obligations were in excess of $57 billion. At the time the total market capitalization of GM was only $17 billion.
Additionally GM is saddled with $300 billion in debt. In fact in 2003, GM had to sell $17.6 billion in bonds just to meet pension obligations. No wonder Standard and Poors reduced GMs bond rating to junk status. Who would want to own stock in a company with those kinds of outstanding obligations? In fact, who would want to work for a company in that condition?
Now yesterday, Delphi Corp. CEO Steve Miller, while announcing that his company was declaring bankruptcy warned that if GM could not renegotiate contracts with the company's unions, it would follow in Delphi's footsteps. Bankrupt General Motors...bankrupt United States. You read it here.
For those of you who keep track of the economic indicators that the government releases, yesterday the BLS announced CPI numbers for September. There are two numbers that they release and only one is important. The overall CPI for the year ending September was 4.7%.
The core CPI, which excludes fuel and food costs, actually shows a decrease. From my previous posts you know what I think of the core CPI. It's a waste of time. Where are the people that do not spend money every month on food and fuel? My point exactly.
In a recent article, Bill King, author of the "King Report," at M. Ramsey King Securitites provided evidence of how the government manipulates the CPI data. The Bank of America has a fairly accurate breakdown of the typical monthly expenses incurred by typical Americans. What Bank of America found is that the BLS alters the percentage mix of those monthly expenses. For example, healthcare expenses typically represent about 17% of our monthly expenditures, but the BLS only weights healthcare costs at 6%. In this way, the huge increase in insurance premiums is lessened in the CPI calculations.
Using this information, Bill King believes that instead of the annual inflation numbers coming in around 3%, they are probably more like 6%.
Now if you plug 6% into the governments Gross Domestic Product calculations, you will find that our economy is only growing at about 1% annually. Not exactly robust growth.
All of this is further proof that our economy is faltering and when you put all of the pieces together, you arrive at a market risk assessment that is extreme at this point in time. When will it all come tumbling down? No one knows. There is no one who can time the market or the economy, but with the risk assessment as high as it is, we have no doubt that it will happen.
That is why it is so important to prepare yourself financially for tough times.
I have written a special report entitled, "5 Things You Must Do Now to Protect Your Investments." To get your free copy, send a blank email to investoralert@freefollowup.com.
Tuesday, October 11, 2005
Are You Ready?
Back in August I recommended that everyone should perform a financial checkup as a part of the financial planning process. Well, did you get your checkup? I would guess that probably fewer the 1% of the population does any kind of annual financial planning.
Recently I discovered a handy little tool that you can use to calculate your retirement income. http://www.dinkytown.net/java/RetirementIncome.html It will only take you a few minutes to fill in the blanks. For starters just use a general estimate of your retirement savings and your yearly contributions. When you work through the process do not use your estimated Social Security payments. It wont be around anyway. Ill talk more about that in a minute.
Use a reasonable return percentage for your investments. Based on my research, most people should reduce their estimates to 5% annually. That a big drop from the 10% we are told by investment advisors that we will get, but I believe it is more accurate for the immediate future.
What most people will find when they work through this process is that they are woefully under funded when it comes to retirement. We have mistakenly been told that we can save one day of earnings to pay for two days of retirement.
The problem is the Federal Reserve continues to inflate the money supply and this results in increased costs for those things we will need during our retirement years.
You should not consider your house as a retirement asset either. If you need a place to live, you cannot sell the house to raise funds without buying or renting something else.
Additionally, we are being warned on all fronts that the housing market has become a bubble and in light of the current market conditions, ripe for the popping.
Consider this. In two weeks a new law goes into effect that drastically limits who can declare bankruptcies. The law also requires credit card companies to change their payback requirements, which will double most peoples minimum monthly payments.
Lenders have begun tightening standards and increasing the margins on all risky home loans. It is estimated that 70% of all loans this year fall into the risky category. Risky loans include option ARMs, short-term ARMs like 5/1s, and interest-only loans. We are definitely entering a more challenging and unstable housing market where prices could drop in many areas of the country by 25-35%.
Ask yourself these questions, if the value of my house drops by 30% how will it effect my retirement, my ability to refinance, my ability to sell, my ability to buy, and my ability to access cash?
There are other factors, which are going to weigh heavily on the economy in coming months or years. As I have been saying for some time, Social Security is not going to be around when most of us reach retirement age. I know that the politicians promise that everything is ok, but they are only trying to protect their jobs until they are ready to leave office and retire.
Lets look at some facts. For the past 13 years the federal government has been borrowing all of the surpluses from the Social Security Trust Fund. All $1.4 billion dollars. Instead of investing in marketable securities such a government bonds, the Social Security Trust Fund has been accepting non-marketable notes, which are nothing more than IOUs.
Social Security cannot sell those notes on the open market; they must redeem them from the government. Fed Chairman Greenspan, in a recent speech warned that the Social Security Fund would begin operating in the red in 2008. At that point, the SSA will have to begin to redeem those IOUs in order to meet demand for retirement benefits, but where will the government get the necessary funds to pay up?
That brings us to our next factor. Lets take a look at the financial condition of our own government. These numbers are available at the governments own web site. http://www.publicdebt.treas.gov/opd/opdint.htm The US National debt is $7 Trillion. US Government Income is $1 Trillion. (This number does not include funds that go into Social Security or Medicare) The US annual deficit is $.5 Trillion. The current interest rate for all of this debt is right at 5%.
Now if we assume that these numbers are fairly accurate and if they remain constant over the next few years, which means no new debt, and if interest rates continue to increase at a rate of just 1% per year, by the year 2011, 100% of the total US income will be paid out as interest to the holders of US debt instruments. Thats just five years from now and if interest rates increase at a faster rate, the day of reckoning will arrive sooner.
Does that put the fear of God in you? It should. It sure does me.
How do we prepare for such an event? More on that in my next post.
Recently I discovered a handy little tool that you can use to calculate your retirement income. http://www.dinkytown.net/java/RetirementIncome.html It will only take you a few minutes to fill in the blanks. For starters just use a general estimate of your retirement savings and your yearly contributions. When you work through the process do not use your estimated Social Security payments. It wont be around anyway. Ill talk more about that in a minute.
Use a reasonable return percentage for your investments. Based on my research, most people should reduce their estimates to 5% annually. That a big drop from the 10% we are told by investment advisors that we will get, but I believe it is more accurate for the immediate future.
What most people will find when they work through this process is that they are woefully under funded when it comes to retirement. We have mistakenly been told that we can save one day of earnings to pay for two days of retirement.
The problem is the Federal Reserve continues to inflate the money supply and this results in increased costs for those things we will need during our retirement years.
You should not consider your house as a retirement asset either. If you need a place to live, you cannot sell the house to raise funds without buying or renting something else.
Additionally, we are being warned on all fronts that the housing market has become a bubble and in light of the current market conditions, ripe for the popping.
Consider this. In two weeks a new law goes into effect that drastically limits who can declare bankruptcies. The law also requires credit card companies to change their payback requirements, which will double most peoples minimum monthly payments.
Lenders have begun tightening standards and increasing the margins on all risky home loans. It is estimated that 70% of all loans this year fall into the risky category. Risky loans include option ARMs, short-term ARMs like 5/1s, and interest-only loans. We are definitely entering a more challenging and unstable housing market where prices could drop in many areas of the country by 25-35%.
Ask yourself these questions, if the value of my house drops by 30% how will it effect my retirement, my ability to refinance, my ability to sell, my ability to buy, and my ability to access cash?
There are other factors, which are going to weigh heavily on the economy in coming months or years. As I have been saying for some time, Social Security is not going to be around when most of us reach retirement age. I know that the politicians promise that everything is ok, but they are only trying to protect their jobs until they are ready to leave office and retire.
Lets look at some facts. For the past 13 years the federal government has been borrowing all of the surpluses from the Social Security Trust Fund. All $1.4 billion dollars. Instead of investing in marketable securities such a government bonds, the Social Security Trust Fund has been accepting non-marketable notes, which are nothing more than IOUs.
Social Security cannot sell those notes on the open market; they must redeem them from the government. Fed Chairman Greenspan, in a recent speech warned that the Social Security Fund would begin operating in the red in 2008. At that point, the SSA will have to begin to redeem those IOUs in order to meet demand for retirement benefits, but where will the government get the necessary funds to pay up?
That brings us to our next factor. Lets take a look at the financial condition of our own government. These numbers are available at the governments own web site. http://www.publicdebt.treas.gov/opd/opdint.htm The US National debt is $7 Trillion. US Government Income is $1 Trillion. (This number does not include funds that go into Social Security or Medicare) The US annual deficit is $.5 Trillion. The current interest rate for all of this debt is right at 5%.
Now if we assume that these numbers are fairly accurate and if they remain constant over the next few years, which means no new debt, and if interest rates continue to increase at a rate of just 1% per year, by the year 2011, 100% of the total US income will be paid out as interest to the holders of US debt instruments. Thats just five years from now and if interest rates increase at a faster rate, the day of reckoning will arrive sooner.
Does that put the fear of God in you? It should. It sure does me.
How do we prepare for such an event? More on that in my next post.
Monday, October 03, 2005
Top 10 ways to reclaim liberty
I ran across this very interesting article. Pretty much sums up how I think this country ought to operate.
Top 10 ways to reclaim liberty
BY HOWARD J . BLITZSep 28, 2005
There are a myriad of activities that can be done in today's world in order for individual liberty to exist, especially the amount of individual liberty that existed for our ancestors 200 years ago. However, taking a queue from David Letterman, here is a list of the Top 10 ways to reclaim liberty:
10. Practice the golden rule no not the one that states, He who owns the gold makes the rules. The one that says, Treat others as you want to be treated. By practicing this rule, aggression in the world is substantially reduced. Since government is aggressive force, then very few individuals ever ask, beg, request or demand that government do anything for them, thereby allowing individual liberty to flourish.
9. Promote the idea that individuals be allowed to seek their own medical care in their own way. By eliminating Medicare, the cost of health care decreases, making it affordable for more individuals and allows individuals to seek their own solutions to their own medical needs.
8. Promote the idea of individuals seeking their own method of accumulating funds for retirement. By eliminating Social Security, individuals are free to accumulate as much money as they desire through their own means for their retirement years.
7. Allow true free trade to exist without any barriers. By eliminating trade restrictions, the cost of goods and services to consumers is reduced, resulting in more individuals sharing in the world's wealth substantially reducing the number of individuals living in poverty.
6. Allow individuals to establish their own business without having to obtain permission from government. By eliminating licensing laws, again the costs to consumers of goods and services is reduced and individuals are taught to be responsible for their own actions.
5. Allow individuals to use their property as they wish without interference from government. By eliminating zoning laws, individuals are encouraged to speak with their neighbors before changing the use of their property, resulting in less litigation and antagonism.
4. Allow individuals to seek the best type of education for their children. By eliminating government from the education equation, individuals are allowed to find the proper type of education for their families, and teachers and administrators are in a better position to design an educational program to fit the needs of individual families without being forced to serve a one size fits all program. Since there is less tax to pay, education is more affordable and additional sources of funds become available from which families could tap.
3. Allow individuals to protect their own life and property without fear of incrimination. By allowing individuals to defend themselves without necessary approval from government, there is less need for inspections at airports, less crime and more individual freedom.
2. Allow individuals to decide what money is and how much of it ought to be in circulation. By eliminating the Federal Reserve System, the business cycle is unheard of, inflation is reduced to practically zero and more individuals are able to share in the productive wealth produced by others.
1. And the number one way to reclaim liberty is to allow individuals to keep all of the income they earn and to spend it as they wish. Eliminating the income tax allows for the opportunity for the previous nine activities to take place, especially the golden rule.
Social Security, Medicare, public welfare, public spending, public schooling, income taxation, economic regulation, trade restrictions and central banking were all characteristics of 1938 Germany. As a matter of fact, they are all characteristics of today's Cuba, North Korea, Iran and other places where individual liberty is rare.To help reclaim liberty stop by The Freedom Library Tuesday evenings from 6 to 8 p.m. to learn and understand the principles of liberty, and/or consider a contribution to The Freedom Library so that more individuals can learn and understand these principles.
---Howard J. Blitz is a local libertarian andpresident of The Freedom Library Inc.,2435 S. 8th Ave. His e-mail address isinfo@freedomlibrary.org.
© Copyright, YumaSun.com
Top 10 ways to reclaim liberty
BY HOWARD J . BLITZSep 28, 2005
There are a myriad of activities that can be done in today's world in order for individual liberty to exist, especially the amount of individual liberty that existed for our ancestors 200 years ago. However, taking a queue from David Letterman, here is a list of the Top 10 ways to reclaim liberty:
10. Practice the golden rule no not the one that states, He who owns the gold makes the rules. The one that says, Treat others as you want to be treated. By practicing this rule, aggression in the world is substantially reduced. Since government is aggressive force, then very few individuals ever ask, beg, request or demand that government do anything for them, thereby allowing individual liberty to flourish.
9. Promote the idea that individuals be allowed to seek their own medical care in their own way. By eliminating Medicare, the cost of health care decreases, making it affordable for more individuals and allows individuals to seek their own solutions to their own medical needs.
8. Promote the idea of individuals seeking their own method of accumulating funds for retirement. By eliminating Social Security, individuals are free to accumulate as much money as they desire through their own means for their retirement years.
7. Allow true free trade to exist without any barriers. By eliminating trade restrictions, the cost of goods and services to consumers is reduced, resulting in more individuals sharing in the world's wealth substantially reducing the number of individuals living in poverty.
6. Allow individuals to establish their own business without having to obtain permission from government. By eliminating licensing laws, again the costs to consumers of goods and services is reduced and individuals are taught to be responsible for their own actions.
5. Allow individuals to use their property as they wish without interference from government. By eliminating zoning laws, individuals are encouraged to speak with their neighbors before changing the use of their property, resulting in less litigation and antagonism.
4. Allow individuals to seek the best type of education for their children. By eliminating government from the education equation, individuals are allowed to find the proper type of education for their families, and teachers and administrators are in a better position to design an educational program to fit the needs of individual families without being forced to serve a one size fits all program. Since there is less tax to pay, education is more affordable and additional sources of funds become available from which families could tap.
3. Allow individuals to protect their own life and property without fear of incrimination. By allowing individuals to defend themselves without necessary approval from government, there is less need for inspections at airports, less crime and more individual freedom.
2. Allow individuals to decide what money is and how much of it ought to be in circulation. By eliminating the Federal Reserve System, the business cycle is unheard of, inflation is reduced to practically zero and more individuals are able to share in the productive wealth produced by others.
1. And the number one way to reclaim liberty is to allow individuals to keep all of the income they earn and to spend it as they wish. Eliminating the income tax allows for the opportunity for the previous nine activities to take place, especially the golden rule.
Social Security, Medicare, public welfare, public spending, public schooling, income taxation, economic regulation, trade restrictions and central banking were all characteristics of 1938 Germany. As a matter of fact, they are all characteristics of today's Cuba, North Korea, Iran and other places where individual liberty is rare.To help reclaim liberty stop by The Freedom Library Tuesday evenings from 6 to 8 p.m. to learn and understand the principles of liberty, and/or consider a contribution to The Freedom Library so that more individuals can learn and understand these principles.
---Howard J. Blitz is a local libertarian andpresident of The Freedom Library Inc.,2435 S. 8th Ave. His e-mail address isinfo@freedomlibrary.org.
© Copyright, YumaSun.com
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