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TWO
AMERICAS - DREAMS, DICHOTOMIES, AND DEFAULTS The definition of dream that suits our purpose according to Merriam-Webster is 4 a : a strongly desired goal or purpose. Somewhere between a third and almost one half of Americans have stated that they believe freedom is the American Dream. The Declaration of Independence tells all Americans that freedom, as a gift from God, is an unalienable right. This presents a clear dichotomy-1 : a division or the process of dividing into two especially mutually exclusive or contradictory groups or entities. Americans may have considered freedom to be a dream from July 4, 1776 until October 19, 1781; but after Cornwallis surrendered at Yorktown, freedom, thanks to the sacrifices of American patriots, was confirmed as an unalienable right. The reality was more clearly defined in 1789 with the ratification of the Constitution and its Amendments. Words mean things or they don't. If contracts and constitutions can be redrawn or amended by simply altering the definitions of the words used in crafting them, then the concept of the rule of law becomes progressively meaningless. If the rule of law is meaningless, civilization is doomed. If politicians are the world's second oldest profession, lawyers must be the third. Paraphrasing Reagan, there is very little difference from the first. Creating or changing law is the responsibility of legislatures, not courts. The duty of courts is to enforce the law. When courts argue that their duty includes the interpretation of law by defining the meanings of words, the courts have substituted the rule of men for the rule of law. The preservation of freedom requires the rule of law. The rule of men inevitably leads to tyranny. Most dichotomies are eventually resolved, particularly those that involve the dreams of nations. Let's look at some more dichotomies that involve large numbers of Americans and their dreams. Financial security was the second most cited American Dream. The word money comes from the Latin root moneta meaning "mint." In order for something to actually be money, it must have two essential characteristics. It first must conveniently serve as a medium of exchange, and secondly, it must serve as a store of wealth. The government of the United States undermined the financial security of its citizens and began stealing their wealth with the creation of the Federal Reserve and its unconstitutional, but "legal tender" Federal Reserve Notes. The distinction between "legal tender" and Constitutional money is an unresolved dichotomy. How can any American achieve financial security when government can steal the wealth of every American by simply printing more money? How can any American achieve financial security as long as government can control its own level of borrowing by means of a simple majority in Congress? We will be looking at more charts below and raise some other questions regarding financial security. If the Federal government lived within the constraints of the Constitution, Americans would have no difficulty in planning or providing for their own retirements. The other two dreams that Americans commonly cite are owning your own home and leaving a better America for your children than the one you inherited. As we all know, "homeowner" and homeownership equity can be relative terms. How relative?
Alan Greenspam, among others, tells us that more Americans own their own homes than ever before. Perhaps it would be more correct to say that more Americans than ever before have agreed to buy the home they are occupying, but if we are to be truly objective, "ownership equity" has slipped a bit.
Now let's look at the America we are going to leave to our children. Thanks to Contrary Investor, we have a graphic of household net worth.
This composite graph of our households balance sheet doesn't look too bad at first glance, but there are some other things to consider. By far, financial products dominate the asset side of the ledger. Many analysts consider stocks and bonds to be presently over-valued with some expecting both stocks and bonds to decline by 20%-30% with some expecting even greater declines. The recent escalation of real estate values has been extraordinary. Could real estate values fall by a similar amount? They did in the late 80's. What would happen if the US experienced a 25% across the board decline in asset values? Unfortunately, the debt or liability side of the ledger would not suffer any decline. The result of a 25% across the board asset value decline would cut household net worth by 35%. A 50% decline in asset values would cut net worth by 65%. The disturbing part of this chart is what is not portrayed. I suspect that a substantial part of the assets are concentrated in the hands of the wealthy and that the liabilities are concentrated in the American middle class. It would be very useful to have a graphic similar to the one above based on median household net worth. Next let's look at America as a whole and then make a few comparisons with American families.
Has America's debt been used to invest in the production of income or has it been used for consumption?
Family income adjusted for inflation has been essentially stagnant since 1970. The slight growth that is present could all be artifact because government has been making adjustments to inflation rates and productivity levels in recent years. These "adjustments" have had the net effect of under estimating inflation and over estimating GDP. Turning to family liabilities, it is clear that savings went off a cliff while expenses and liabilities are ballooning.
Let's return to our discussion of retirement and asset values for a moment. It should be fair to assume that financial security encompasses a planned retirement for most households. If it proves to be correct that financial assets, primarily stocks and bonds, are over valued now, and these are the primary assets of most pension funds or corporate retirement plans, what would happen to benefit payouts if financial assets declined significantly? There are really three separate problems threatening the retirement plans of many Americans. First, Congress has allowed plan sponsors to under contribute to plan assets by making unrealistic assumptions about plan earnings from investments. Second, there is no provision for a margin of safety in the event the value of plan assets declines. Third, the Pension Benefit Guaranty Corporation is a government created entity that insures pension plans. Predictably, PBGC has never charged adequate premiums for the risks to be insured. There has been a rash of recent articles about the falling dominoes that could be triggered if more of the airlines default on their pension plans and that if enough companies default, then PBGC itself would be bankrupted as a result. Cascading liabilities and falling dominoes run together. If stocks and bonds fall in value, then defined benefit plans will become progressively more under funded. If enough companies end up in bankruptcy, PBGC will go bankrupt. If interest rates rise, stocks and bonds will decline in value. If rates fall, lower plan returns could mean contributions will need to be increased threatening the solvency of plan sponsors. These are not dichotomies, but could represent a potential disaster in the making. So Much For The Good News Default is a harsh word. We have just been through a discussion that points out that there could be many retirement plan defaults in the not too distant future. The risks are high enough that analysts are worried about PBGC defaulting and that government would get stuck with the tab. Now it is time to look at government.
Since government produces nothing, working Americans and Americans with savings will be forced to pay for the defaults. As the insurer of last resort, government will be faced with funding the insured's defaults through taxes, borrowing, printing more money and/or some combination of all three. Now For The Bad News Gokhale-Smetters have estimated the amount of the unfunded liabilities that will accrue under Social Security and Medicare when the 78 million members of the baby-boom generation become eligible to be somewhere between $44 Trillion and $71 Trillion dollars. For each year that we do not change the law between now and 2012, the amount will increase by an additional $1.6 Trillion at current rates. Parabolic trends are unsustainable. Look at the two graphs above of federal debt and compare it to the debt for our nation as a whole reproduced again in the two charts below:
Unsustainable trends end. The United States Comptroller of the Currency is on record stating that our economy has never grown at a rate capable of funding such a shortfall. History tells that all democracies end in bankruptcy or hyperinflation whenever voters learn to vote themselves benefits from the public treasury. President Reagan and others have repeated this same admonition. If you accept the premise that trends showing parabolic rises are going to end, and if you have looked at the Gokhale-Smetters report, you already know that either Medicare default is inevitable or hyperinflation is inevitable. Increasing our national debt to the level required to fund Medicare is out of the question; the full faith and credit of the United States will have reached the end of its rope long before Medicare reaches insolvency. Do you remember the Cold War's famous Doomsday Clock? President Reagan gave his famous "Time For Choosing" speech in 1964. Economically speaking and looking at the graphs above, what time is it now? Politically, what time is it? If you are rational and have considered the trends in place, you should have reached the conclusion that the United States government is going to be forced to default not only on Medicare, but also most of its other socialistic programs as well. Default on Social Security is not only unthinkable, but it is also politically and morally unacceptable. The Cato plan to voluntarily privatize Social Security can be made to work even if it requires some modification. But this is true only if, we start soon and if we eliminate all of the other socialistic programs, including Medicare, as quickly as is humanly and politically possible. The other alternative, hyperinflation, is even more unthinkable. If you believe socialism in the United States is not coming to an end, you are more than likely a member of Group B. If you are concerned, but not sure, then you are probably not a member of either group and should reread these articles from the beginning before it is too late. All democracies end in bankruptcy or hyperinflation when voters learn to vote themselves benefits from the public treasury. Socialism is an economic model that fails every time it is tried because the incentives are backwards. Socialism is not compatible with capitalism. Socialism inevitably leads to over consumption and under savings. Capitalism requires savings and investment of those savings to increase productivity which leads to higher incomes which can then be used to increase both consumption and savings. Ever growing savings can then be compounded. Savings and compounding are the economic miracles of capitalism that will allow even the poor to become rich. The United States has had seventy years of socialism and is clearly on the verge of default. The mistakes that have already been made have lain the groundwork for there to be a Perfect Financial Storm in our future. The Reagan Renaissance offers the United States a second chance, not to avoid the storm, but to survive it. Until socialism ends in the United States, freedom and the other Dreams American share will remain out of reach. After this election is over, we will discuss how you can make the Reagan Renaissance a reality. President Bush could become a very helpful ally before the end of a second term. The task will be that much more difficult if John Kerry becomes President. If you have friends or family in Group A, send them a link to this page and ask them to read the series. We are going to need all the help we can get. Please feel free to send a link to members of Group B as well, but be forewarned, ""Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." – Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, 1841. I would like to thank Contrary Investor and Mike Hodges at the Grandfather's Economic Report for the use of their charts.
Author's
Note The Reagan Renaissance is being moved to the launch pad. It will not be long before we are ready to begin the count down. Have you contacted friends, family and other interested parties? Leveraging the power of the internet will be a vital part of the rocket fuel needed to power our engines to overcome gravity and reach escape velocity. Please send your friends, family and people that you know that are conservative, or to anyone who wants to restore the Constitution's limits on government or to end socialism, this link to the Reagan Renaissance Archive. Please post links to the Reagan Renaissance Archive at internet forum groups, on internet bulletin boards, and internet newsgroups. How far and how wide you spread the word about the Reagan Renaissance will be a major determinate for its success. My thanks again to Financial Sense Online and the Puplavas for allowing me the opportunity to make these views publicly available. CONTACT
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