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IRRATIONAL
EXUBERANCE AND SOCIALISM
People who read editorials generally do so with a presumption that the author may have the answers regarding the subject of the editorial. Let me be completely up front with you about this editorial. If the head of the most important central bank of the largest economy on earth can't recognize a stock market bubble in real time, then it would be presumptuous on my part and unfair on your part to expect me to know whether socialism in the United States is a bubble or is in danger of becoming a bubble. I want to use this editorial only to ask a few questions, but please do not expect me to provide the answers. Some questions simply cannot be answered in real time, but not to worry, the Maestro and his associates have assured us that Tomorrow Land will not be a problem. And besides, answers should not be required or expected in Never Never Land where the Fed can choose between allowing anybody enough credit to borrow themselves into prosperity or it can unleash that new digital printing press technology enabling virtually everybody to live happily ever after at the government's expense. My Webster's defines a bubble as: "4. anything that lacks firmness or substance, or permanence; a delusion; a worthless deceptive matter. 5. an inflated speculation, esp. if fraudulent.... 10. Archaic, to cheat; deceive; swindle. WordIQ.com offers this from their encyclopedia: An economic bubble occurs when speculation in a good causes the price to increase, thus producing more speculation. The price of the good then reaches absurd levels and the bubble is usually followed by a sudden drop in prices, known as a crash. Economic bubbles are generally considered to be bad things because they cause misallocation of resources into non-productive uses. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise. From WordIQ's dictionary: 2: a speculative scheme that depends on unstable factors that the planner cannot control; 3: an impracticable and illusory idea. With these definitions and encyclopedic descriptions in mind, here are a few of my questions:
As far as I can ascertain, Jim Puplava was the first to point out that the global economy could be headed for a "Perfect Financial Storm." Now the term is being bandied about by practically anybody who recognizes that financial risk could be something that actually exists in spite of the Greenspan put. Many of the problems addressed by Jim Puplava and other financial analysts, including Mr. Greenspan, are what physicians would call symptoms and signs. Symptoms are complaints expressed by the patient. Signs are actual observations made by the physician. Ferreting out the signs and symptoms are not the only means for establishing a diagnosis, the specific identification of a patient's illness. Given an array of symptoms and signs, a physician should be able to use various scientific tests to confirm the actual diagnosis that is causing the patient's symptoms. Only then is there a reasonable certainty that the physician will adopt the correct treatment. Testing requires the existence of stabile standards. In some cases, quantifying of the symptoms or signs can be useful in both the diagnosis and treatment of disease. Stabile standards and a consistent stabile means of measurement are absolute requirements for monitoring to be useful, especially for the identification of genuine trends. Magicians, understandably, object to the description of the subject of their art as "tricks," preferring the term, "illusions." Recognizing illusions in real time is very difficult, unless we "know" that what we seem to be witnessing is impossible. If the observer is not sufficiently knowledgeable or confident about what is or might be possible, distinguishing between illusions and reality can be very difficult. In our first article we touched on the absolutely essential premise of being able to measure things against stabile standards. Another somewhat undefined term that we are seeing with increasing frequency is the "illusion of wealth." Definitions, like standards, must be unchanging if they are to be meaningful over time. In order for something to actually be money, it must have two essential characteristics. First, it must serve as a medium of exchange. Over the centuries, there is almost nothing that has not served as a medium of exchange, but it is an illusion to consider a medium of exchange as money if that particular medium cannot perform the absolutely vital function of money as a means of storing wealth. For the time being, the dollar is still a medium of exchange, but it stopped being real money in 1913 when it was transformed into the illusion of money. In a country where there is only the illusion of money, it follows that there can only be the illusion of wealth. I am not an economist or a financial analyst or planner. I have no financial credentials of any kind and managing my own assets is the sum total of my financial experience. My training and experience are as a medical doctor; I am a retired physician. When I look at our government and our economy, I see what I would recognize as signs and symptoms of disease. Lacking a stabile standard for measurement and lacking the means for standardized testing, my working diagnosis of what ails our government and what ails our economy is the same. It's socialism. The nearest thing that I can see to a diagnostic x-ray or a diagnostic testing trend is this chart:
I have asked others, but now I am asking you or anyone you would like to consult about the economic significance of this graph. The red line and the blue line progressively diverge and never converge. To my untrained and unknowing economic eye, this is a picture of an economy that has been consuming capital for roughly fifty years. And the consumption of capital is now going parabolic. This is exactly what would be expected from a socialistic economy. Socialism and capitalism are incompatible. Socialism is a form of economic cannibalism. Socialism can only exist as long as there is saved capital that can be consumed and/or sufficient numbers of capitalists financially able to bear but physically or lawfully unable to escape the burden of the existing level of parasitism on their incomes. The trend you see in the graph above is unsustainable. Existing law mandates (a contradiction in a supposedly "free" country) a set of facts that would create a 150% acceleration in the growth rate of the excess liabilities portrayed in the chart above. Just as unsustainable trends end, some things that seem impossible, actually are, even in La-la-land. My condolences to the Buffett family regarding the unfortunate death of Susan Buffett and let me extend my apologies for my taking issue with Mr. Buffett's political views during the time of their grief. But this is also the time of America's political season and I believe that Mr. Buffett's apparent political tendency to preferentially support Democrats is ill advised and should not be allowed to go unchallenged. The Democratic Party is the home of socialism in the United States. And in general, the endorsement of Democrats is an implicit endorsement for socialism. In contrast to Mr. Buffett himself, Warren's father was a Republican Congressman and reportedly one of the staunchest Constitutional conservatives to ever hold office. I acknowledge that Warren Buffett has been the most successful investor in human history. But in my opinion, even the great Warren Buffett was fooled and has failed to see through the illusions of socialism. Mr. Buffett has said, "Price is what you pay; value is what you get." Socialism subsidizes sloth, rewards failure, increases consumption and discourages savings. The incentives (values) are all backwards. And the growing liabilities charted above when added to the accruing liabilities of Gokhale-Smetters have shifted the price to be paid onto the backs of future generations. Socialism consumes today, but shifts the price to be paid for today's consumption on to the backs of others and into the future. Mr. Buffett has complained about political shifting of relative tax burdens. Socialism is the ultimate burden shift and the ultimate form of taxation without representation. More importantly, it is ultimately a loss of personal freedom. This may be your or Mr. Buffett's view of what constitutes virtue or even some people's view of the American dream of leaving a better America for their children, but both views are profoundly wrong. With minor exceptions, Democrats basically controlled Congress which gave them control of US law and US budgets from 1932 until 1994. Mr. Buffett is a recognized expert at evaluating businesses and their managements. How would he rate the management and business of a company whose balance sheet looks like the graph above? Mr. Buffett is on record as calling derivatives financial weapons of mass destruction. Democrats passed the Social Security Act in 1935 and the Medicare Act in 1965. As a result, the company above now has off balance sheet liabilities with a net present value estimated at 55 Trillion dollars. Medicare represents more than 80% of the unfunded liabilities and is what I would consider to be a double-barreled derivative. I say estimated because Medicare represents an unlimited call option for health care benefits. And double-barreled because Medicare also represents an unlimited put option on the insurance premium to be paid. The options metaphor for Medicare is in fact a model for socialism in general. Only politicians and some Democrats do not see the harm in creating a demand for unlimited goods and services while shifting the burden for the payment for those goods and services to a third party. The crisis in funding health care in America will not be solved until the responsibility for payment for health care services rests directly on the parties receiving the health care and the government is divorced from any role as a premium payer and completely removed from the insurance business. Mr. Buffett has also complained about Americans' failure to save; if he wonders where our savings went, he should look down the socialism drain. Because the incentives are reversed, socialism ends up harming the very people it was designed to help. Because socialism destroys capital, everybody loses. The Founders left us with two major flaws in the Constitution. The Founders knew slavery was wrong. It may have been their one politically expedient compromise of doing what they knew to be wrong, but what they believed to be the only thing that was politically possible. Apart from the price paid by the slaves and the price of slavery's legacy, future generations of Americans paid for the Founder's mistake with the Civil War. The Founder's second major mistake appears to have been a simple oversight from a lack of relevant experience. Socialism is the price we are paying now for a lack of term limits for members of Congress and the federal judiciary. "Professional" politicians are the only people that actually benefit from socialism. It follows then that "professional" politicians are the sole cause of socialism and the sole means of spread. I suspect the Founders are blameless for their omission of term limits in the Constitution. We are not. And now that Gokhale-Smetters have provided us with a projected amortization schedule, it is time that We recognize irrational exuberance for what it is because Americans cannot afford to pay and should not get gored by a bill for which there is no constitutional authority. Future articles will contain questions about dealing with "professional" politicians, how we might end socialism quickly, and how we might survive the gathering financial storm that the graph above virtually guarantees is just over the horizon out of the sight and recognition of the irrationally exuberant.
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