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.

Personal Responsibility

Recently, Don Watkins, in a blog posting (I can’t find the specific post for some reason, but it was on http://capitalism.aynrand.org/, which is very good), referenced an article arguing that anyone who tries can succeed, at least to some level. This article was written recently and not one hundred years ago. Now, I don’t disagree with its basic sentiment. I especially agree that one should take responsibility for one’s welfare and future. Further, I emphatically agree that we live in a world where it is possible to make our own way, metaphysically speaking. But, as I read the article, I kept wanting to ask the author if he’d been paying any attention to what has been happening in our economy and culture now, and for the last one hundred years.

I know why Dr. Watkins referred to the article. It is rare to find anyone who is willing to say anything good about personal responsibility today. Any such sentiment needs to be encouraged. But, in fact the article is wrong in its application to today’s America. Personal responsibility is not encouraged. Personal success is often disparaged (not by business people, but certainly within the culture). Most important, the government has been actively attacking personal success and making it more difficult for a long time.

I think that it is difficult to succeed today and becoming more so. I think that the article should have had some important provisos. I mean, haven’t we been saying that it matters what the government does? Haven’t we been arguing that man needs to have certain conditions to succeed and that the U.S. government has been moving away from those conditions.

Now, in order to make sense of the issue of personal responsibility in our context certain basic notions have to be made plain. Most important, and thus first, is that if man’s life is the standard of value, the actions by individuals based upon their own understandings and judgment is the only way in which human survival is achieved and prosperity or progress, in any rational sense, occurs. It isn’t the action, or the amount of effort, or the “work” done that is the cause of success, but the use of reason and the resulting ideas, and their correspondence with the real world. Nor does good reasoning guarantee success. A rational man can fail, even in a rational or free environment.

But, we are not living within a rational environment. We are living within an advanced welfare state with millions of regulations, probably a million regulators, and an endless number of imposed government costs of doing business. In business after business, the risk of failing to meet some idiotic government regulation or expense has become greater and greater. Starting a business was always risky. Small businesses have always failed at very high rates.

And then there is the issue of what our personal responsibility is.

Some guy on facebook told me that people on Social Security were deadbeats, and we shouldn’t care what happens to them. But after nearly one hundred years of regulation of the financial sector, the chances that most Americans can save sufficiently for retiring, at nearly any age (not to mention the costs of health care after fifty plus years of government interference in the medical industry), is nearing zero (see my blog post). Many people, if not most, who are dependant upon government retirement money are victims.

Most importantly, the facebook guy had the cause and effect backwards. While it is true that there are some people who duck personal responsibility, at least in America that percentage is a minority. It is also true that some people are misled by the claim that their forced savings by the Social Security tax, for example, does lead to some level of personal protection at retirement. Neither type of group explains the large numbers of people who end up dependent upon Social Security.

What does explain those figures is the consequences of government actions in the economy. Just to point the finger at one element (out of a list of hundreds), look at the disconnection between savings and capital entailed in the policies of the Federal Reserve Board. The Fed thinks that the economy works best with an annual increase of price levels at two percent. This means that in just ten years, a dollar loses well over twenty percent of its purchasing power. At the same time, the Fed has driven interest rates down to very low levels. The interest rate offered by the standard savings account will not allow the saver to keep up with price inflation, especially after income taxes. To try to make ones savings work and grow, people have been forced to become investment professionals. However, the Fed’s policies have resulted in asset booms that have in fact left Americans with considerably less wealth.

The facebook guy is blaming the victim for the consequences of government actions.

Ayn Rand didn’t write about this issue directly. But she was asked about it. One response is on point. She was asked about unemployment insurance. The questioner clearly expected that Miss Rand would condemn the person taking the government money, but she didn’t. She said, “Government controls create unemployment. No matter what happens to your employer, if you are out of work today, why should you protect him and starve? There cannot be individual responsibility for something that is the government’s fault. In any situation where the government creates a hardship that pushes you into a position of martyrdom, you are morally justified to take advantage of whatever money is offered to you, provided you don’t spread the kind of ideas that created the trouble.” (Ayn Rand Answers, p. 124) (Note that Ayn Rand kept her wealth earned from her writing in savings accounts.)

Fundamentally, we are not individually responsible for the consequences of government actions. Nor can we hold other individuals responsible by demanding that they suffer when they are victims. In a society that is attacking the innocent, we are now in a lifeboat context, and the rules of morality apply differently. Condemning the victim, the innocent, is joining the government. It is corrupt. It is evading the cause. It makes finding the correct solution nearly impossible.

If we tell someone who can’t find a job because of government interference, say minimum wage laws or restrictions starting a new business, that he isn’t taking personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. If he is to have a future he needs to live within capitalism.

If we then tell someone who wasn’t able to save for retirement and sees the cost of living and their medical expenses rising beyond reach that they didn’t take personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. That if he is to be able to live, and even enjoy his old age, he needs to live within capitalism.

If we then tell someone who is poor and uneducated that they are failing to take personal responsibility, just because they are poor and uneducated, we are doing the liberal’s job. We need to be telling him that if he does not want to remain poor and if he wants an education of any kind, he needs to live within capitalism.

The only other option besides capitalism is a declining economy and ultimately depression and perhaps the collapse of civilization.

Let’s keep the cause and effect clear. Let’s not advocate policies that will further harm the victims. For example, declaring that we must first stop the entitlement programs before we have a functioning economy (meaning one that can create wealth) only means that we are telling people that they will have to suffer without hope. Yes, there will be some suffering in any event. But telling anyone that will have to suffer is only justified if we are moving toward capitalism, which means a free economy. So first we have to liberate the economy. Then we can cut the entitlements. But if we don’t begin with freeing the economy, we will only add suffering without the possibility of a prosperous future.

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.

WE CANNOT IGNORE OBAMA’S ATTACK ON BANKS

For many very good reasons Objectivists and others became very active and vocal on the issue of health care. Destroying our health care industry, in this case by attacking the health care insurance industry, gives the government more power in fundamental ways and undercuts our ability to enjoy our lives, or actually stay alive. ObamaCare needed to be stopped. It needs to be reversed.
In very much the same ways, Obama’s attack on our economy will have the same effect. With an economy hindered, we will have less time and strength to fight for our freedoms, we will have more people dependent upon the government and thus reluctant to stand up to him. We will have more lawlessness. We will have a bigger fight to wage.
Central to a modern economy is the financial industry. We have seen how important a sick financial industry is and what the results can do to not just the U.S. economy, but to the world economy. At this time, Obama’s main target is the banks. He is threatening to hamstring them, shrink them and limit their size, and place even more controls on them than any sector of our economy has seen. He is encouraging the international community to do the same.

In a recent radio speech, Obama said, "Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities. And if we don't change what led to the crisis, we'll doom ourselves to repeat it. Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again."

All of that is true, but it isn’t the loopholes and liabilities in the banks that create the problem, but the government. This story needs to be told and distributed. We need the Tea Party people to know this, we need the population to know this.

I see two parts to our problem. One, many people see the health care fight as a universal one in which everyone has a stake. They do not see the same for the attack on the bankers. This is a case where Obama is using the standard tactic of divide and conquer. Not only that, but many people who support the resistance to ObamaCare view the bankers as villains, or view regulation of banks to be a minor, separate issue that will have little effect on themselves. It is an ignorance of economics and of how business functions.

Second, Objectivists have no better understanding of economics and the importance of finance. Generally, our understanding of economics is little better than that of the man in the street, and for basically the same reasons. Further, most have not seen a reason for looking into economics. We understand the importance of knowing something about capitalism as a political system. We also understand the importance of business creativity, production, and markets. But we know little about how it all works and how the various parts will effect our daily life. We are thus vulnerable.

Expanded bank regulation, especially the attempt to shrink the banks needs to be opposed with significant effort. We need to make clear that our ability to have freedom and prosperity depends upon strong, market-driven banks. That government interference in banking is detrimental to everything we hold dear. We cannot let Obama have a unopposed path to destroying the economy.

What to do? The same things we have done already for healthcare. Plus, learn. Ask questions.

In a recent PJTV program discussing the mid-April Tea Parties, Dr. Yaron Brook said that this is the time to stand and work for freedom. This point in time is the best opportunity that he has seen. He also said that it might be our last chance, that is, if we fail now, it will be more difficult and perhaps impossible in the future. He means that in the future we will be too busy trying to stay alive and the forces opposing us would be armed and unwilling to let us speak. One vital key to our economic health and political freedom is the financial industry. We must try to save it.

A Flight of Fancy (Not Fantasy)

If we think about the economic problems that confront us, now at the beginning of the 4th quarter, 2009, we might think that we could be overwhelmed. There are several major, dramatic, colossal problems. At least a partial list includes:
-As John Lewis pointed out, soon we will see the backbone of the welfare state come rolling in to beat the living hell out of us. The potential cost of Medicare and Social Security will take up every dime that isn’t nailed down.
-Obama wants to completely destroy the medical profession and our health. The cost will be far beyond what anyone has been willing to mention in the current “debates”.
-Our trade deficit, which has pumped over $10T out of the country over the last 30 years, has brought down the value of the dollar significantly in the last few years. I don’t think that anyone is foolish enough to actually dump dollars, but the dollar-sell side of international currency markets is going to be continuously stronger as long as there is such an abundance of dollars. Don’t forget that the trade deficit is still occurring, and that the reasons for it existence are still in place.
-The national debt is growing at an unbelievable rate. We will have an amazing debt.
-The amount of money that will needed to support Obama’s programs, and the other run away “entitlements”, plus the fall of the dollar, will lead to a pressure on retail prices that we have not seen since the 70’s.
-We may have another oil price spike, or maybe a little longer one.
-Needless to say, life will be tough, or could be.

But, and this is the biggest “but” I think I could ever write, there is a solution. To many of you, this won’t be a surprise. It is an easy solution. It is no secret. It is the easiest thing in the world. All we need is freedom.

There is actually only one problem. It is the philosophy that gives us the government in place now. If we get rid of that, we are home free. All of these problems will be quickly dealt with and forgotten, except as history. We always want to remember the mistakes in history.

Why do I say that these economic problems will be swept away? After all, for example, those citizens that have become dependent on government programs cannot be just abandoned. I am not claiming that we have a “duty” here. No. But every discussion that I have seen begins with the premise that the change to freedom needs to have some elements of a transition.

Of course, some things would happen immediately, e.g. we would get rid of regulations, market limitations, certain kinds of government spending, property restrictions, ecology controls, and so on. Many government departments would just be liquidated. No unemployment insurance would be in place. The Fed would be taken out of the money manipulation business. As we work back to a gold standard, the dollar will stablize.

But think of it. We would be free to produce. Think of the level of production we could achieve if we were not encumbered. Remember the later Clinton years, when the only stimulus was the lack of new rounds of regulation, and maybe a little half-hearted deregulation (still with enormous amounts of inflation). The economy grew at a pace that “theorists” thought impossible for a “mature” economy. Without restrictions, our growth rate will astound everyone.

A good economist will tell you that the only actually limited resource is people. Guess what, all of a sudden we will find that we have a 10% to 20% increase in our working population, our productive population. All of those people, who have been involved with regulations, taxes, controls, etc., will have to find productive work. Many of these people work for private enterprise today. A significant percentage of businesses’ budgets and personnel will be available for production, not government work.

Yes, a lot of the ex-government employees will not be fit to work. Should we be concerned about them?

The federal deficit will be taken care of in two different methods. Taxes will ramp down. How fast is strictly a practical matter. With real production in our economy, tax rates will not need to be high.

What may not come to mind immediately is that the federal government has considerable assets. Actually, real assets. It has buildings. Thousands of buildings. Most of these buildings are in valuable locations. The buildings themselves may not be worth much, but the locations are. Plus, the government has lots of other stuff that can garner some cash.

Most of all, the assets of our federal government include land. West of the Mississippi, the government owns 66% of all land. Yes, lots of that is in Alaska. Even so, managed properly, the federal land could probably pay off the federal debt all by itself.

Perhaps the biggest problem will be the Medicare mess. Even if we were to start ramping that program down now, it would still be a mess for a couple decades. However, we shouldn’t discount the consequences of bring back freedom, including eliminating the Medicare bureaucracy and all of the limitations that have been placed on the practice of medicine and insurance. There may be some price pressure in the medical sector for a while, but it think that it is something that free men can handle.
So, we do not need to worry about the afterwards, not really. We just need to get rid of Obama and his mentors and followers and let freedom reign.