“Need” for Social Security Indicates Coming Failure of Economy

Recently Don Watkins said that he was working on a book about Social Security. Without question, the book will be well informed and insightful. It will have information and arguments that will be very useful in the attempt to bring that program to its deserved end.Bureaucrats

One reason why Social Security is a prime candidate for the extensive treatment that Don will give it is the place the entitlement program has in the American attitude toward government’s role in our lives. It seems to embody the idea of government help for the poor and those no longer able to work. It also appeals to the idea that someone who has worked hard all of their lives deserves a little rest in their old age. All of those ideas have completely irrational elements, but I will leave their exposure to Don and other already written material.

However, focusing on Social Security should not leave out the much bigger threat of Medicare. Medicare alone will bankrupt us, while by itself, Social Security would probably just doom us to perpetual poverty. I would expect that Don will include Medicare in his book to some extent.

But I have a problem with focusing on government spending as a primary. While it is necessary to expose the evil of the underlying state-enforced altruism and that the spending will destroy us at some point in next decades, it is not the major reason for our economic problems. Even if we were to convince sufficient numbers of American somehow to ramp down the programs and kill them, we would still be in a very bad way, economically.

But the enormous numbers that Social Security and Medicare will rack up in required spending reveal much more than is normally considered. It isn’t just that the government can’t possibly tax or borrow the numbers required to support and care medically for the Baby Boomers. There is no other source for that care, even if medical costs were to stop growing. This economy cannot possibly support a generation that lives for decades without being productive. Our economy just does not have that capability. I am not sure that any economy could or should support a generation in that manner, but the U.S. economy, as it exists, will not.

Consider that by any measure the Baby Boomer generation, perhaps the wealthiest in the history of man, has a very small amount of savings compared to the cost of living without producing for a decade or more.

Consider that a great amount of our savings has been wiped out by the most recent financial crash, the constant, decades long reduction of purchasing power (2% a year for decades is a disaster for retirement savings), the failure of any but very aggressive, time- consuming investment strategies (which tend to ignore the underlying reality of the division of labor), the fact that savings in banks, cds, or money market funds do not grow at all after loss of purchasing power and taxes are figured in, etc.

Consider that there are no jobs for many who wants to work, and generally not for the retired. Indeed, the unemployment indicator that the government publishes monthly has gone down because it stops counting people who give up. Employment, from the perspective of a growing, high-tech, industrialized economy, has probably fallen since 2008.

It isn’t that the government can’t afford to support the Baby Boom generation in retirement, no one can, as the economy currently exists.

Further, even if you were able to convince sufficient Americans that Social Security and Medicare are wrong, they will resist ending them because they will realize that there is no replacement.

We have to have a replacement to be successful to overcome the problem of our aging population.

What is that replacement? Of course!

It is capitalism: freedom.

Which means the end of regulation. Capitalism means freeing up of the producer, the creator to be productive and profitable. Capitalism means productive work for anyone willing to do it. In capitalism, the primary shortage is people.

It means the recognition of individual rights: that man has to be able to act on his own judgment without requiring permission.

A free economy can solve our problem.

This is the economic side of the implication the DIM Hypothesis. Only the I mode supports an advanced, industrialized, high-tech economy. Any other mode will result in poverty and a much smaller population. There is a fundamental, reality-driven conflict between an economy with any freedom and a culture dominated by D or M. The result will be destructive, and the eventual crash will be very difficult. I don’t know if the crash we are facing will be soon or not, or will play out in a brief period or not. I suppose that the political situation will have some impact. But it will be nasty.

Basic Economics: Savings Accounts

Looking at the modern relationships between interest rates, taxes, and price inflation, I have wondered why anyone would put money into savings accounts or buy bonds, especially U.S. government bonds. A savings account, earning 1.6% (The top rate offered by my credit union recently.), after taxes of say 20% and price inflation of 2% gives you a guaranteed annual loss of 0.72%! The situation for bonds isn’t that much better, if at all. For someone with a higher income, with higher tax rates, the loss is substantially greater .

On the other hand, I know that savings accounts have historically been the primary savings vehicle in the U.S. I know from 100 Voices that Ayn Rand held her money from the sales of her novels in savings accounts. What is the difference between then, even as late as the 1970s and the 1990s, which is when I first realized the problem.

In thinking about this issue, one of the first things I saw is that interest rates have been declining as a trend since the spike in 1990. At that time I had a mortgage at 10.75%. The decline in interest rates since then has been the consequence of the Fed’s view that below market interest rates on loans encourages consumption and business activity and that if they don’t have the economic activity that they want, they decide they should lower rates more. Each round of recession and boom and financial crisis over the last twenty plus years has seen the Fed pushing short-term interest rates lower and lower. Today, the short-term rates are about as low as then can go. The rate the Fed controls directly, the rate it charges banks to borrow overnight funds for their Fed “reserves” (deposits) is zero to 0.25%. (Some recent auctions of German government short-term bonds have seen negative interest rates.) And, for the third time since 2009, they are trying to lower medium and long-term rates with “quantitative easing.”

So, first, the problem I am seeing is a very recent event. What are some of the consequences?

First there is the complete disassociation of savings and capital. The creation and use of capital is a vitally important activity in an economy. The creation and use of capital causes prosperity, not to mention the survival of our population. A population as large as ours cannot survive (or occur) without industrialization. Just to maintain industrialization requires capital. Economies either grow or contract. There is no equilibrium.

Over the last twenty years the number of households that have ownership in corporations, i.e., own stocks, has gone up significantly. One major reason is that people recognize that they have to have a more rapid growth in their retirement savings than can be provided by bank savings accounts. The need is two fold. With taxes and other restraints on creating wealth, they are not able to save enough. And then, price inflation has a double impact in that not only will it make the process of saving enough difficult, but it will also make the amount the retiree needs to live increase significantly and unpredictably. Even a 2% price inflation rate is a danger. That means that in just twenty years, a retiree would need 25% more cash for the same standard of living. Since many retirees live longer than that in retirement, and the percentage of people with such long lives is growing, the impact of even small amounts of price inflation is significant and ignored by the government planners. Bernanke has recently remarked that the effect of the Fed’s goal of 2% price inflation on retirees is unimportant in policy decisions.

You might think that a higher percentage of stockownerships is good for the economy. I’m not so sure. I was, but my view is changing. There is a difference between creating capital and owning existing capital. Saving and putting your money directly into a new or growing business is creating capital. Buying a stock from another owner is not.

Consider what should happen when you put your money into a bank savings account. (I am going to ignore the consumer loans and the loans to business for normal business activities.) Businesses come to banks for the purpose of borrowing money to start a new business or grow their existing company. This is the direct application of capital, i.e., new productive activity. Here we also see the division of labor at work. The person who saved the capital is engaged in his own profession or job and by saving, he is putting money into the hands of the banker whose profession is apprising risk and opportunity in expanding production. Then there are the businessmen who compete for funds by presenting their plans and expectations of profit.

The normal person does not have the expertise to appraise business opportunities. (Although in a rational culture he would have a better understand of the reality of business activity than people do today.) This is true in the case where people already know something about the industry. Some financial writers have advised investors to place their money in industries in which they are familiar. It isn’t a bad idea, but it does not address the additional need to be able to appraise the financial, managerial, and competitive strength of a company. Correctly understanding the context for investing is difficult enough for the professional, especially in today’s complex economy. For those who do not have the relevant education, experience or time, the prospects are very poor. No wonder everyone is so hopped up on the gambling metaphor for investing.

The need for non-professional investors to put their savings into asset markets is part of the make-up of the two recent booms: tech stocks and residential real estate. Without the amateur investor, both booms would have been less dramatic. Note that many of these investors lost lots of money, right along side the so-called professionals. This is over and above the normal losses that the non-professional investor tends to lose in the normal course of events. Some professionals use the activity of the individual investor as a contra indicator. If individual investors are buying, the reasoning goes, it is time to sell. Every study that I have seen clearly concludes that the non-professional consistently looses money investing in asset markets.

Then, over the last twelve years, as I have indicated in a previous post, the equity markets have failed to bring positive returns. Comparing equal dollars of purchasing power, today’s Dow (without including dividends or taxes) is 20% to 25% below the level at the end of the tech stock boom.

In fact, the only asset class that has shown consistent positive returns in the last decade is long-term bonds. But that brings us back to the beginning point, the Fed’s push to lower interest rates, because the reason long-term bonds have shown a gain is that interest rates keep falling. When interest rates begin to go up, watch out. Look at the returns of the bondholders of Greece, Spain, and Italy. When the interest rates on these dead bonds moved from less than 3% to near 6% or more, bond holders lost about 50% of their capital on the secondary market. To me, even 6% or 7% doesn’t seem very high when I wonder if the bonds will be repaid, or repaid with money worth anything.

There are surely lots of other consequences of the Fed’s disastrous decisions. Many are clearly visible, including the continued recession we are suffering through. (Officially the recession ended, but the psychology is still that of a recession, the unemployment level is that of a recession, and the government is doing all it can to keep us there, just like it did in the 1930s.) But the consequences that I have discussed are the ones I have recently added to my list.

But then there is the important question: Is the use of savings accounts by people who aren’t financial professionals a good thing in a laissez-faire economy and how?

The first thing to realize is that in a laissez-faire economy prices and wages tend to fall over time, which is the consequence of having a money immune from government manipulation. Prices fall faster than wages so that there is a continuous raise in the standard of living. That means that the dollar you place in a savings account will have a greater purchasing power over time even without consideration of interest paid.

The second important issue is the level of what is called the ordinary interest rate. That is the amount of return required for a person to delay consumption. This interest rate does not include consideration of risk, etc. I have seen suggestions that the rate of ordinary interest tends to be around 1%. That is, the normal person would be willing to put off spending $100 if in one year they had $101, assuming a laissez-faire economy. Other issues, such as the supply of physical capital (one market where supply does play a role in price) and risk factors, increase the interest rate within different market contexts.

So, if a savings account offered 2% interest, it was a great deal. The same is true for bonds issued by businesses. Saving for retirement would require much less of a struggle, later medical bills would be less of a problem, and our standard of living would continue to raise and we could have the flying car (see, my avatar means something – what we have lost due to government interference!).

Then, money placed into savings accounts was then loaned by banks to businesses who were credit worthy and had the best available plans for additional profits. Savings, that is capital, was accumulated and placed in the service of wealth creation, capitalism. That is basic banking.

I think much of the concern and fuss over fractional banking is based upon the view that banks are warehouses rather than institutions involved in the accumulation of capital. In the modern world, even ignoring the stupid, forced level of interest rates required by welfare state banking theory, savings have been diverted from banks and their major source of funds are demand deposits.

While unused demand deposits, and the goods represented by that money, are a kind of unintentional savings, real savings involves conscious decision and results in the funds being placed accordingly. When real savings is placed into profitable enterprise, and market rates of interest paid, investing and profit making activity would actually be a less risky activity.

With the manipulation of the money supply, the extensive regulation of the financial community, and the control of interest rates, none of the prices for savings or the factors of production reflect any part of the reality of business activity, market opportunities, or costs (not to mention political pull). Who knows what can or will happen when no facts are available for reason to evaluate.

So my conclusion is that in a laissez-faire economy, placing your money in savings accounts and buying bonds (of businesses) is a sane and personally beneficial decision.

In our economy, the government has pretty much taken way sane and beneficial opportunities. If you accept the idea that one should know what one is doing, then probably 90% of the investing public is acting irrationally. They do not understand the world as it currently functions, including the existing markets and the impact of government regulations and manipulations. Yes, I think that is true of many of my readers. Sorry.

Austerity versus Growth in Europe

In my last post I discussed the immediate lesson we could learn from the “austerity” programs occurring in Europe today. In this post I want to talk about some of the events in Europe and suggest some future results.

No doubt my readers aren’t really taken in by the emphatic declaration by European socialist politicians that the government planning must include growth, and not just reductions of government spending, otherwise known as “austerity.” All of this is government speak, that is, none of these terms mean what they rationally means when it comes out of the mouth of the European politician or bureaucrats. It reminds me of Clinton’s first term, when someone convinced Bill that investment was a vital element in the economy. For the next year or so every government initiative that Clinton proposed was called an investment. Every action that the European politician wants to take will be called a growth program.

We should know that the Europeans do not know and go out of their way to evade what it is that causes increases in production and wealth. In their minds the cause of all that is good is the government. They do not understand why their economies aren’t performing as they want them to. They don’t understand that all of their laws have cut down economic activity. In the way of what they are calling reforms they have done very little to make actual growth possible. I read somewhere recently that Greek bureaucrats require an overwhelming amount of stuff form someone applying for a business license, including a stool sample. On the episode of “No Reservations” filmed in Lisbon, I leaned that Portuguese agriculture was forced to stop profitable farming in several crops by EU protectionist regulations (protecting the French and Italians). The number of regulations and interference in business in Europe on the EU, country, and state level is many times what it is in the U.S. None of this is being addressed. What has been “reformed” to some small degree in a few countries is a few regulations that made it impossible to fire someone. There is probably more, but minor, and unreported in the general media.

Austerity has been the watchword in Europe recently. Let’s be clear on what that means. It means that the national government’s budget deficit has to be kept below a certain percentage of the country’s GDP, on the order of three percent, according to the recently passed EU law. It doesn’t actually mean that a surplus has to be achieved or that the country’s government debt has to be reduced. It only means that the debt can’t grow at more than a certain rate, which is deemed to be a level that an economy can comfortably service (which probably assumes interest rates kept artificially low). If a country was actually productive, keeping government spending to that level might not pose much of a problem, until the economy wasn’t productive any more. However, for different reasons in each country, with the exception of Germany and the smaller northern euro zone countries, they have been spending much more and driven their debts much higher (Italy’s debt wasn’t that high, but its deficit was, driving interest rates higher). Since their economies are very dependent upon government spending, when the spending slowed the economy began to contract, people’s income dropped, and greater numbers became unemployed. People became unhappy.

Within this context it makes sense to want to see the economy grow. Economic growth would create more jobs and ultimately move the economy to prosperity. Growth basically comes from letting people produce and seek higher income and wealth. That is not what the European politician calling for growth has in mind. He still sees the government as the prime mover. He wants to increase government activity and government spending. He wants to move away from austerity toward what was going on before this mess. He wants to pretend that the mess doesn’t exist. He wants that favorite of all government boondoggles and fountain of spoils, infrastructure projects. But building a bridge is not growth. (BO wants to fix schools and put in wiring for the internet.) So far, the programs that I have heard proposed will not cause economic growth.

The populations in Europe are apparently supporting these “pro-growth,” socialist politicians. France just elected one. Greece will at least come close to pushing out the politicians who voted in austerity. The Greek alternative is someone who wants to renege on the country’s sworn commitments. Spain is trying, but failing to reign in its spending and the population is angry about the results of that attempt. And in a recent German state election, a couple of socialist parties opposed to austerity won a solid election against the person leading Europe away from government spending, the German PM. Even one of the most emphatic pro-austerity governments in northern Europe, the Netherlands, has announced that it isn’t able to keep its spending below the required cap. They are going to have new elections soon and may become an over-spender.

We are faced with the amazing scenario in which the leading, European, social welfare, big party politicians are trying to keep their countries from going into bankruptcy, which is to say that they are at least paying attention, and the voting public is rejecting them and voting in complete, not just partial, idiots. Who would have expected the politicians to show some responsibility?

Why isn’t it working? Why can’t the politicians convince the public to go along with the “austerity?” There are two reasons. First, the public has been taught for years, by their parents, their schools, their churches, and their politicians that the government is the fount of all that is good and that private enterprise is evil. They believe that the government can just make things up and provide them with the long life of leisure and pleasure that they have been promised. They just don’t understand why things should change now.

One wonderful example of that is the apparent conflicting poll results in Greece. According to polls taken after the last election and the realization that no government could be formed from the relative strength of the parties, the Greek public wants to put into power a person who will reject all of the agreements connected to the bailout that result in “austerity” (the polls have fluctuated as to who is leading). On the other hand, the Greeks by a large majority want to keep the euro, which they would have to give up if they elect the guy they seem to like.

Then, you ask, why do the Greeks want to stay in the euro zone? Again there are two answers, a bad one and a better one. The bad reason is that the Greek prosperity of the last decade began with their entrance to the euro zone. Having the same currency as the Germans, the Greeks were able to borrow to support the government’s crazy spending at very low rates. Their wages climbed to become thirty percent higher than German wages. They think the euro lays golden eggs!

The second, better reason for wanting the euro is that the common currency does facilitate trade. If governments behaved at all sensibly, a common currency in open trading blocs is an excellent idea. The problem in Europe is that each country insisted on having certain protections. It isn’t actually a free market but a highly controlled one. Really, the common market, the EU, is an illusion.

Getting back to the initial discussion, the second reason why the voters want to reject the “austerity” candidates is that “austerity” as a government program is a failure. It is a failure because all it is doing is collapsing their economies. As I have implied above and in my last post, their economies have insufficient capacity for the readjustment of prices and wages and to move assets into productive endeavors. In short, their economies are not capitalistic but controlled.

We have seen the European politicians struggling for an extended period of time to cope with their problem. We have seen several announcements that they have taken major steps and that things would be better only to see the exact same problem continue: concern by lenders that they aren’t going to be paid back. Hundreds of billions of euros have been given or committed to several different countries. The European Central Bank injected nearly one trillion euros into the banking system in loans at 1% interest which resulted in almost no new commercial lending and about five months of better terms for loans in Spain and Italy. The collapse of inter-bank lending, which was supposedly the justification for the loans, has continued to be a problem. Interest rates controlled by the European Central Bank continue to be near 1% and yet the entire bloc is heading into recession, including Germany. Nothing that has been done has dented their problems. Covered them over for a short period of time, perhaps, but done nothing to move the European Community toward growth and prosperity.

The voters do not understand the importance of capitalism, but they do see that with “austerity” their prospects are very poor. Jobs of all kinds are disappearing, wealth is leaving the country when it can, and no one has the leeway to do anything about it. There appears to be a fatalism about their daily lives. They foresee nothing good happening in the foreseeable future. Unfortunately, that is what happens when you give government all the power.

So we see that Europe seems to be faced with the alternative of severe recession with “austerity” with no real way out and going back to the government spending that got them into trouble in the first place. Surely, this problem will be blamed on capitalism and politicians who want to have greater control will be successful. Ignorance of capitalism will lead to contraction, probably bankruptcy, and further reduction of freedom. The effects of decades of social welfare state policies will become obvious.

I am not one for disaster scenarios. When people write about upcoming collapse of our economy I tend to yawn. Yet very bad things are happening. Greece is in a depression, although no one else is willing to say so. Spain isn’t that far away from a depression and they haven’t even gotten to the bottom yet. Neither of those countries are particularly large and so far they have had friends who have been able to keep them afloat. Then we must realize that Italy and France are tittering. Italy has set a course that will keep it going for a while, but France has just rejected “austerity” and has already begun new commitments for ongoing spending. Their choice seems to have been made. It isn’t good. I suggest we all reread The Ominous Parallels by Leonard Peikoff to get an idea of what could happen.

So, then the question becomes, what are we going to do? We don’t want to live through the same thing here. Obviously, in order to avoid it people will have to learn what capitalism is, in some detail. I think that many people are willing to listen. ARI has several good programs and books that do that. Let’s help them. The more voices explaining capitalism the better.

The Right Way to Solve the Entitlement Problem

It is important that I first am clear that I am against the use of government, i.e., the use of force, against the inhabitants of our nation, to provide for benefits of the retired, the sick, the unemployed, business, anyone. Such action by the government is wrong morally, wrong politically, and very bad economics. It should be stopped. It must be stopped. Okay? Is there any question about my position on this (for the justification see Ayn Rand’s “The Nature of Government”).

What I am concerned with in this post is that I have seen people, good, solid, rational people, suggesting solutions to the entitlement problem that I think are not good choices. It is possible that they are not completely setting out their solutions, but what has been offered are insufficient to change the situation.

I want to begin my comments with a question: What do we want to achieve? My answer to this question is that, ultimately, what we want to achieve is a productive, rational society in which we are free to pursue our own goals based upon our own judgment. We want to achieve freedom, capitalism.

Further, we want to achieve this result with the least chaos and human suffering as is possible. We see that if capitalism isn’t achieved we and our fellow man will be in for a lot of suffering, and possibly worse. We may completely lose our freedoms. We may completely lose our stand of living. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

Our goal is capitalism, not merely lower government debt or fewer people depending upon the government. Anything but actual capitalism would not be safe or permanent, but would merely delay reinstatement of the government activities that we had managed to reduce. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

More broadly, capitalism is the only system in which anyone who puts forth effort can and will find a way to maintain themselves, and to achieve the success they are capable of. Those who do not or cannot put forth the effort will be dependent upon the voluntary support of someone who does. There is prosperity. Capitalism does not support suffering. Contrary to criticism, capitalism does not support poverty, hunger, hopelessness.

The problems with entitlements, in addition to the moral issue, is that in the present situation, entitlements and other government wealth transfers, such as unemployment insurance, are necessarily resulting in massive government borrowing and are moving us inextricably to bankruptcy (in one form or another) and depression. Depression for an advanced country like the United States will be an unprecedented event.

It is obvious to anyone who is honest enough to look that the current situation will result in disaster. The entitlements and wealth transfer payments have to be eliminated. The rapid, dramatic growth in the government debt has to be stopped and brought down. There is no choice. Not doing so will result, as I indicated above, in disaster.

It is at this point that people are then offering some suggestions as to how the entitlement programs could be stopped. However, solutions that focus on the entitlement programs as the main issue are making an error. Stopping these programs at this point will not achieve anything but chaos and massive poverty and illness.

Consider the numbers of people who are dependent upon government programs today. The number of unemployed, (very) underemployed, and that have given up looking for work is close to thirty million people. If you add in their dependents you probably have forty to fifty million. The number of people receiving Social Security is currently sixty million (over forty million aged 65 and older). The number on Medicare is nearly forty million. Those receiving food stamps is nearly forty million. Some of these numbers overlap. Some are gaming the system and fraudulent. But the totals are overwhelming.

Another group of people dependent upon government transfer payments are government employees, federal, state, and local. A fairly recent figure for this group (excluding the military) is nearly twenty million. If you also add in the employees in the private sector who’s responsibility is keeping up with government regulations, you have another large group who are not engaged in productive work and whose indirect reliance on government money has to come to an end. (The government figure does include some who are rationally required, but it is a small percentage, I think.)

In a country of over 313 million people, over thirty to thirty-five percent are wholly dependent upon government funds and are immorally living off the productiveness of others and are an enormous drag on the economy.

The bad news is that if they all, or just the most obvious. were turned loose from their dependency and the government money were turned off, their desperate situation would become a major, immediate cause of riots and distress.

You might say a couple things, for example, that the money freed up will enable the economy to do better, or that the change will happen more slowly. The current problems in the economy is not a question of money, employment, or actually resources but government controls and interference. The constant stream of new government orders, crises, and attacks is finally, after nearly a century, dragging down the possibility of growth in the economy. Merely stopping some government transfers would not be sufficient. It would only possibly delay the result. Nor would the speed of change matter. The economy still couldn’t handle it. That is to say that these people would not be put to productive use. New, productive jobs would not appear in the numbers needed. There would be constant pressure to reinstate the programs or for something worse.

For those people who are retired, the suggested methods of replacing Social Security and Medicare, that is, putting money into their hands based upon some calculation relating to what was taxed in the past would not be sufficient to support them over the remainder of their lives, even if there were no additional general consumer price increases. Nor would they know what to do with the money, since few ever acquired the necessary knowledge.

But besides those points, very important consideration is that the economy would not be productive enough to support the massive number of people who are expected to retire.

All of the problems are interconnected. It is one economy. No freedom, no productive economy, no support in any fashion for the large number of retired people that are in the baby-boomer generation. The issue of the debt hides the fundamental problem of the welfare state. It saps the productive ability of the economy to the point that it can no longer support itself. The build up of government debt is the easiest way for today’s welfare state to finance its programs, but it could use other ways such as massive taxation and high levels of inflation, which would also lead to failure. The problems are the result of the welfare state: its morality and its economics combined.

Let me say this again. The point needs to be emphasized. Our economic structure today and into the foreseeable future will not support the expected number of people retiring over the next decade or two. That is so with or without the entitlement program. Something more has to be done than just ending the programs.

But, more important, the focus is wrong, confused, and misleads us into forgetting our goal. The entitlement programs are a symptom of the wrong philosophy supporting today’s trends in government and the economy. Do not focus on the symptoms. Focus on the philosophy and our goal.

Focusing only on the entitlement programs is also terrifying to those immediately affected and their families. It would terrify anyone who does not want to see wide spread poverty and illness. I am certain that we don’t wish to see that either.

Taking the steps to achieve the establishment of capitalism will also allow us to easily, cheaply, and happily eliminate the negatives (which we should expect would be the result of the achievement of productive values).

The initial steps of establishing capitalism would be the freeing of the productive, creative businessmen. When asked what should be done first to change the economy, Ayn Rand answered, “Start decontrolling the economy as fast as rational economic considerations permit. I speak of “rational economic considerations” because today, every part of the population is dependent on government controls. Most professions have to function under controls, and their activities are calculated on that basis. So if anyone were to repeal all controls overnight, by legislative fiat, that would be a disastrous, arbitrary, dictatorial action. What a free country needs to give all the people concerned sufficient notice to readjust and reorganize their economic activities. Therefore, after working out with economists the kind of program necessary to decontrol the country, and what controls should be repealed first, I would then advise passing legislation announcing that certain controls will be abolished within three years, say – the period calculated to allow people the opportunity to readjust their activities. In a free economy, no change happens out of the blue and overnight. Every economic change, every development, is gradual. Therefore, in a free society, there are no immediate and disastrous changes. But given our present situation, any sudden changes could create disastrous dislocations, and so we should decontrol gradually.” (Ayn Rand Answers, p. 49) She goes on to suggest that the anti-trust laws can be gotten rid of immediately, especially laws that jail businessmen. She points out that the decontrol of the economy will then pretty much eliminate our economic problems. That means, today, that the debt issues and the economic aspects of the entitlement programs will be come easier to solve. Decontrol would also result in the creation of lots of new, productive jobs.

This prospect, the resulting productivity, prosperity, and creation of wealth, will be the foundation, along with the morality of self-interest, for convincing people that ending the entitlements is going to cause, at worst, only a brief period of difficulty and the long-run result will be significantly better than Social Security and Medicare. (I have written about how these programs can be funded for those unable to rejoin the job market.)

Within a few years the older population will be the majority of voters. Many of the arguments for changing the system have to be aimed at them. They have to be shown that they will not be abandoned, that they will do okay. Merely coming up with a nice sounding set of steps will not work. It shouldn’t. Do you expect the average American retired person to accept an idea that requires him to live in abject poverty for the remainder of his life? If you want the support of intelligent people you need to show precisely how it will work. You say that they can’t expect that things will go wonderfully. No. And if you do your job right and make clear that if they don’t allow the change to happen, if they do not clamor for the change to capitalism to happen, they necessarily will live in abject poverty for the rest of their lives, then they will be able to put up with some discomfort.

Let me say this again: People have to learn that the current situation is going to result in misery. It can not survive. Depression is our future. That is their choice: depression or capitalism.

Winning the war to put man on a rational course requires both the moral and the economic argument, with full knowledge of the consequences for everyone of each step. We have to communicate and justify the idea that capitalism will be a real road to prosperity and that there is no other road. The argument is not just the moral. It is about all of reality, with a major focus on the economics. People do not know the economics of capitalism (or the world they live in now) any more than they know the morality. Neither will be a strong enough argument by itself. Combined, they are intellectually overpowering. All it takes is finding people who are willing to look at reality and showing it to them.

Volatility

In the week of August 8th to the 12th, the world saw the equity markets swing very wildly from up to down and around again. It was, I am sure, very disconcerting, probably frightening. And people are confused because after a lot of reforms, laws, regulations, planning, stimulation, and quantitative easing, which was suppose to make things better, we are having big, dangerous, damaging swings.

In recent days I have seen several suggestions in the media that volatility would continue, at least for a while, because of the uncertainty as to what direction the stock market would take. These comments have a very narrow focus and fail to recognize wider causes and implications. They do not recognize that it is not just the stock market that has volatility. Currently, well, in fact I am not aware of any international market that isn’t suffering higher levels of volatility. Currency markets, commodity markets, bond markets (except very short term, which are basically pegged by Fed policy), you name it, are all experiencing significant volatility.

The biggest reason is “uncertainty”. What is meant by uncertainty is much more than an understanding that the future is not known. The future is unknowable, but, in many circumstances, it is predictable and can be expected to behave in a comprehensible manner when unexpected changes do occur. If you are a competent investor or businessman, you have confidence in your ability to respond to change. No, this uncertainty goes way beyond the basic unknowable future.

Nor is it just that the international community faces problems. There are always problems, issues that need to be addressed and dealt with. Again, competence leads to confidence.

What is causing the foundation of today’s uncertainty is the lack, one could say the nonexistence, of ideas, solutions, intelligence, willingness, leadership of governments around the world. It is as if there was a contagious disease that has afflicted every ranking member of most of the major governments of the world. They fight, they seek their own political advantage, they evade, they do nearly anything except face the reality of the problems facing them. For months we have been waiting for the leaders of the governments of the eurozone to solve the sovereign debt problem facing several of their members. Several times they have announced triumphantly that they had solved the problem only to see that the market regarded those steps as insufficient. Now a few countries are in extreme recessions. As their economies shrink, their bond problems become worse. No one in Europe (or in most countries) seems to understand how an economy grows, with or without heavy debt. The stimulus steps are not working (as they aren’t in the US, as we shall see shortly). Data released this last week showed that the German economy was not growing as fast as thought. Germany is generally regarded as the backbone, best source, the money source of last resort of the euro system. If it isn’t strong, the eurozone will have much more difficulty in solving the problem of sovereign debt, let alone actually experiencing growth.

It also appears that the US has not grown much at all in the first half of 2011. Nearly everyone was expecting that because of QE2 the economy would be on its way to a normal recovery with growth powering along toward 6%. Now many people are talking about a recession this year. The government policy has failed. People don’t know what to make of that. They are confused, and uncertain.

It is being recognized, slowly, that the Fed has run out of options. In the last couple weeks in announced that it would not raise interest rates above effectively zero for at least two years. Obviously, the charge of uncertainty was heard. But this is recognized as a dumb move. The stock market tried to rally, went up wildly, and then continued downward, just as wildly. There are some at the Fed who understand some of the problems facing banks and businesses in America. For example, read this speech (not saying it is perfect, but he recognizes some important points.)

In addition, and as important, in most of the developed world, laws passed over the last few years have unleashed massive new regulations and restrictions on banks and businesses. Most of these new regulations have yet to be formulated and announced. Bankers and businessmen have little idea as to what to expect, except that it will not be supportive of normal, intelligent, profitable banking and business practices. Everyone is waiting for the shoe to drop – on their heads.

So we have uncertainty hounding us from two angles, the failure of the government policies that were suppose to save us and the impact of new, arbitrary regulatons.

With the Fed’s hands tied from all but the most crazy ideas (The Fed is run by helicopter Ben, after all.) and the Administration and Congress tied up over the astonishingly large deficit already on the books, one wonders what the government could think that it could do if we go into another recession. Will they try to enforce wage and price controls? Will they try to force a command economy? Will they watch in wonder?

Let’s say that they find that they can do nothing. Let’s say that Geither in the Treasury doesn’t go off into nether-nether land as he did in 2007-9 and write lots of checks he can’t pay. Let’s say the economy is on its own (I expect that even the Republicans will try to do something.). Is the economy strong enough and free enough to recover? If it doesn’t, will that give the anti-capitalism crowd more leverage? Is our time to fight shorter than any of us figured?

Many are thinking that foreign currencies and businesses are safe havens from the problems in the US. Actually, these safe havens are more in Asia or the BRICs. But, this is the era of globalism, of international markets and money movement. When the US and Europe are in recession Asia and the BRICs do not have markets to sell to and their economies also decline. Some of the stronger currencies may still be relatively stronger (Japan is a disaster waiting to happen.), but you need to be very careful. If and when recession comes to China, for example, and the real estate market crumbles, it will be interesting to see what the Communist government does, that is unless you live there, they it could be frightening. Remember too, that the government leaders and central bankers all went to the same schools, read the same books, heard the same speakers, and hold the same ideas as those in Washington. There is no country that is a financial and intellectual island. Differences are relative, in degrees, not fundamentals.

So the volatility we see is the result of the confusion and dismay. People see the failure of the promises of the political, economic, and intellectual leaders and do not know what to think. Even the more experienced traders are suffering whiplash by news and promises. People rush from hope to fear, back and forth. They have no foundation for understanding what is happening. The mainstream media is just as ignorant.

The hole that Keynesian policies have dug for us is very deep. The process of fighting over who will be heard and who will lead will cause constant turmoil. The inept attempts at solutions will add to the problems. Lost time in actually solving the problems will result in the problem becoming larger and exerting more strain on the international economy. Volatility will continue, sometimes becoming wilder, sometimes hitting a lull, but as the confusion and fear will not be reduced and the problems will reemerge, the volatility will return, probably in greater, wilder swings.

There will competitors offering answers and solutions. The Christian right, fascists of Christ, will offer answers. There could be an even more extreme, pro-government Democrat emerge who would rival BO in his willingness to use force to achieve the ends of destruction promised by altruism. Competition for the minds of Americans could become fierce.

People are looking for answers. This is an opportunity. Objectivism and capitalism have answers, good ones, ones based on reality. The books and ideas of Ayn Rand need to be spread further. People might be willing to listen.

Truth must be heard.

Combating Altruism

In a previous blog posting I argued that it is important for the supporters of capitalism, freedom, and reason to know what capitalism is from the economics standpoint and to understand the economy in which they live. If we want people to support it, we must be able to explain it. That position is still a correct one. Many supporters of capitalism do not know the economics and certainly do not know what is happening in today’s economy.

Recently I reread Ayn Rand’s 1960 speech, “Faith and Force: The Destroyers of the Modern World” and had the opportunity to deeply examine chapters 2-5 of Andrew Bernstein’s The Capitalist Manifesto. These writings have again underscored to me the importance of the moral arguments. The central point in both works regarding the morality of the altruist is that altruism is independent of reality, of reason. Pointing out the necessarily disastrous consequences of the policies proposed by an altruist will not influence his commitment to the irrational.

In recognizing that position, we must realize that the altruist politician and policy maker and their supporters are somewhat immune to our direct, pointed statements about the consequences of those policies. That group of people includes many of their supporters in the electorate. We must recognize that that we need to attack their own closely held beliefs. I don’t think that they will be influenced by our arguments, but they will be harder for them to ignore, perhaps. They seem to be able to ignore nearly anything.

More useful will be making those attacks when arguing publicly, i.e., articles, editorials, and lte. I don’t think that a philosophical discussion of altruism is helpful. Generally there isn’t enough word count to do so and readers might not stay with you. I propose that instead we use the consequences, that is, we spell out the “human” cost of these policies in the context of morality: We talk of the suffering of countless Americans. We talk of the loss of the ability to acquire the items that make our lives better or even comfortable. We talk of the potential of depression and hardship. We talk of the recent dire recession we are living in. We talk of human sacrifice. We spell out how these policies are going to make life harder and worse. We talk of how the politicians do not care about the consequences of their policies, only that they fit with their morality of human suffering. We talk about the disconnect between reality and their policies. But these consequences must be discussed within a moral perspective. The discussion has to focus on specific consequences of the morality being used. It seemed to me that the accusation that ObamaCare included “Death Panels” was effective. It carried the idea and the real meaning of ObamaCare. This type of tactic needs to be carried further. We must not mince words or be “nice” or polite. Being nice and polite allows the evader wiggle room.

Clarity and the relation between the altruist’s policies and the welfare of the reader are what are important. We don’t talk about their rational self-interest, but the values that are rational that they have, for example, their families. We talk about how these anti-man policies are going to impact their families. How their hopes for their futures and the futures of their children are being destroyed by the specific, destructive policies being offered and made into law. We talk about how their children will not have their parents around as long as they expected. We talk about how their children are not going to have a better life. We talk about their children’s shorter life span. We talk about their children’s not receiving the inheritance either expected. We talk about the lower standard of living that their children will have. We talk about the fact that this will be the first American generation to leave their children worse off.

Offer real images to the reader contrary to their general morality, i.e., what are they going to say to their child when they complain about their illness and the government run health plan won’t help? Are they going to tell them that morally it is good for them to suffer? Are they going to give them stories about helping poor people when in fact they themselves are now poor and there is no help for them? Being too nebulous will not bring the point home. Talking about paying back the current debt will not be useful mainly because these predictions in the past have not had an impact on the current economy (at least that people have realized).

What we must keep in mind is that the explicit or implicit holder of the morality of altruism does not regard consequences of his actions as pertinent. That is why Congress rarely examines the consequences of the laws it passes. Consequences are not important. What is important is taking actions consistent with altruism, “helping others”, sacrificing for the good of others. We know that this cannot be practiced successfully. We know that individuals cannot and do not practice this morality personally. They just support their government’s actions. What can only break through this compartmentalization by concretizing the consequences they will connect to themselves. Using concretization in a directed manner, utilizing our reader’s own values will help bring the real meaning home.

It will help you to also keep clearly in focus the consequences of failing to stop the direction of the federal government. Too often we are seeing the future in terms of economic consequences, i.e., reduced standard of living and opportunity. We are thinking in terms of loss of being able to state our views. These images are too peaceful and mild. This is the most complex, interconnected economy in mankind’s history. It will not be able to maintain its cohesion if several parts come apart. In Atlas, the trains stopped. Food could not reach New York City. Food shipments stopped. In our world, oil deliveries will be imperiled and food deliveries will become undependable. What will happen in our cities if food is not readily available, not to mention other requirements of living? Digital systems will prove to be fragile. As the economy comes apart, so will the society. There is much more anger, fear, and resentment today than during the 1930’s, for example. We have riots today over court cases. Just think about food riots. Just think of a lack of food and starvation in American cities. This is what human sacrifice looks like in practice. That’s right, human sacrifice. Not ritual sacrifice, but the human sacrifice that results from the government’s practice of altruism.

I am not trying to be alarmist here. I am not projecting a crash within the next few months, or even the next couple of years. The election coming up will give us a good indication of what our immediate future holds. I am only saying that our arguments must keep in mind the fact that holders of the morality of altruism (or the god oriented version) do not consider consequences to be an issue. To be effective and meet the threat, we must shape our arguments accordingly. The moral context and the real consequences have to be pared and driven home.

If in the next election we have a Republican Congress, we will then talk about the Christian right and that they have the same mind frame. They are not interested in the welfare of individuals. They are interested in making their god happy. Human happiness doesn’t help. They require suffering, just as the progressives do.

To reduce the role of altruism as the dominant political philosophy and replace it with reason and capitalism, we need to make our arguments as effective as possible.

Learn About Capitalism

Capitalism is a major value for a rational person. It is the political system of freedom. It requires property rights and thus the individual rights that are necessary for man to live as a man and pursue happiness. Without rights and capitalism, man is a miserable, sacrificial animal.

Not known until the last century, and the writings of Ayn Rand, capitalism is the only moral economic/political system. It is the only such system that is consistent with man’s need to make decisions based upon his own judgment and create values. In our current world that is flooded with pleas, demands, and commands to be altruistic, to be a human sacrifice, the morality of capitalism is truly unknown. This knowledge, the reality of the moral purity of capitalism, needs to be broadcast loudly and constantly.

Yet, I have found that those who know of the moral stature of capitalism often have less knowledge of how capitalism works. They do not know the issues of trade, finance, money, and business. They do not know how the nuts and bolts fit together.

I think that it is vital that the supporters of capitalism know the economics of capitalism, for the same reasons.

You see, unfortunately, the rest of the population doesn’t know either.

The effort to deny the moral stature of capitalism also has succeeded in hiding the efficaciousness of capitalism as well.

People in general do not know that capitalism works.

People in general believe that capitalism leads to boom and bust, to keeping the poor poor, to the exploitation of the under privileged, to overproduction, to producing things that will fall apart, to destroying the Earth. They do not know anything, or at least very little, about what capitalism actually does for mankind.

I think that this lack of knowledge extends to just about everyone, including “economics professor”. Certainly, almost no journalist, few blogger, no commentator, and few TV talking heads have an idea of how capitalism works. I wouldn’t put the “pro-business” conservative or Republican in the category of the pro-capitalist, since most of them would be terrified of the idea of doing away with any of the New Deal restrictions on business. Capitalism is fine, they think, as long as it isn’t allowed to go full bore.

It isn’t just that capitalism is the unknown ideal, capitalism as a system is literally unknown, too (even among many who support it). If you sit down and argue capitalism’s moral worth, you could easily get the answer, “Okay, it may be moral, but it doesn’t work!”

I have read and heard surprise that people are ready to discard this wonderful system that has brought about our unprecedented standard of living. But people do not know that capitalism is responsible. They see the health care industry failing, for example. It seems that the market is failing. They do not know that capital is required for production. They do not actually know what capital is. They do not know how money works, or finance, or markets. Their ignorance is amazing until you realize that there is no source in our educational system to learn about capitalism.

So, if you want to argue for capitalism, you need to be able to explain what it is, that it is moral, that it works (and how), and, I am sorry to say, how and why what is currently going on is so bad for America. This last point is like having to look deeply into very shameful, evil, and often, boring issues. But it is necessary. I do mean necessary. If we are going to beat this thing, we need to root it out and kill it. And we have got to know our enemy to succeed.

Our biggest enemy today, the one with the most impact on our daily lives and that undercuts our prosperity is the Federal Reserve Board. There are very few who have a clue as to what it is and how it works. Start there. Read Meltdown by Thomas Woods. (I just finished it and will have a review here shortly.)

Read the business section of your newspaper. Read The Capitalist Manifesto. Read Ludwig von Mises. Read the Fed website. Read the few blogs dedicated to capitalist economics.

Learn how the Fed manipulates the money supply and how much it has done. Pick an industry and learn how it is manipulated and regulated. Learn how pervasive federal, state, and local governments are in every area of our daily lives. You will become a fountain of knowledge and moral condemnation.

I know that this sounds like a lot to do. Economics texts tend to be big and filled with jargon. If you took economics in college you may be scared for life! But knowing how capitalism works is important. You know, if you actually lived in a capitalist economy, you would want and need that knowledge. The more you knew about the rational world you lived in, the better off you would be. The same is true in this context. Speaking about your personal situation, the more you know about what is happening, especially when it is bad, the better off you will be. So there are two excellent reasons to follow up.