Common Sense and Courage: Lost American Virtues

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“Removing governmental power to manipulate money removes the temptation for government to spend, print and cheat. Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.

The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden. The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world. As a consequence, there is more talk of economic isolation and war.

The vicious cycle of spending, fighting and inflating is not what Americans want. Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight.” Congressman Ron Paul, August 30, 2008

Why does only one man out of 435 members of Congress and 100 Senators speak this way? Why is he a pariah and a “nut case” among his fellow political “leaders” and most of the public as well? Perhaps the severity of the upcoming financial crisis will force the public to re-examine the underlying common sense of Dr. Paul’s words.

thomas jeffersonAs we have thoughtlessly mortgaged our future over the last 30 years, our leadership has consistently ignored the lessons of history. Our country has enjoyed a wonderful success story, but like so many other empires that rise and fall, it is not immune to hubris and over-confidence. Our founding fathers had common sense and the courage to make unpopular decisions, two elements missing in our leaders today. Unfortunately, common sense seems to be a dwindling virtue among the populace as well.

“No generation can contract debts greater than may be paid during the course of its own existence” Thomas Jefferson to James Madison, 1789

More than 100 years of stable purchasing power

“It was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess." (emphasis added) – Fed Chairman Alan Greenspan before the Economic Club of New York, New York City December 19, 2002 "Issues for Monetary Policy"

While an amusingly ironic quote, Mr. Greenspan doesn’t give deserved credit to the Federal Reserve for starting the inflation wheels turning in 1913. Throughout the 19th century and into the early 20th century, the inflation rate in the United States was essentially zero. Admittedly, there were nasty bouts of inflation (particularly during the Civil War when the U.S. went off the gold standard), as well as periods of deflation. But in the aggregate, a dollar in 1929 could buy approximately the same amount of goods or services as in 1800. Money in those days was “as good as gold” since one could redeem the paper note for gold at a fixed rate at the local bank.

Using a small measure of common sense, one would think that a system that kept price levels absolutely flat for over 100 years might be worth revisiting, even in a partial form. The overriding problem is that fiat currency means immense power to those in control of it. Why would politicians ever want to loosen their grip on the power of the purse?

With a gold-backed dollar, the Federal Reserve would have been constrained from flooding the globe with excessive liquidity. Politicians will always seek self-preservation by the spending and channeling of money. The only way to control the money supply is to take that power out of politics with a self-correcting system. With a gold-backed dollar, GDP growth may have been slower since 1971 (when the US left the international gold standard), but it would have been sustainable. Debt would likely be much lower, as would inflation. People could have planned their lives with much more certainty than today. The growing mountain of overhanging debt is our “Sword of Damocles.” And unfortunately, the sword finally seems to be falling.

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The Disappearing Middle Class

Looking back into the dark ages of the 1950’s and 1960’s, single-income middle class families lived fairly well (albeit in smaller homes), built savings for retirement, paid off their mortgages, and college-educated their children without massive loans. Is this feasible today for most two-income families? Not a chance. It’s a good thing inflation has been “under control” since 1982.

As the air has now rapidly exited the real estate bubble, housing values are reverting back to their historic trend line, and the “savings” of millions of Americans have been vaporized. The government is desperate to “stabilize real estate values” to save the banking system. The problem is real estate is still unaffordable to most of the population. Millions bought homes earlier this decade only because of “creative lending products” and a complete lack of lending standards. If common sense is going to return to the economy, real estate will have to find its true market level, which is likely much lower.

Is the Middle Class better off than in 1960?

The middle class family in 1960 may not have been as blessed with the technological advances available to the middle class family today, but it was blessed with much less debt, and much more purchasing power. The same is true for the retired seniors in 1960. And unfortunately, the ultimate price for all those years of fiat currency-driven inflation is starting to be paid.

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Bankrupt Retirees

“Trusting in government for financial security in retirement is not a safe option. Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older have more than quadrupled since 1991. This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality. Even with the pittance that Social Security pays to seniors, it is bankrupt and bringing the economy to its knees. It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment! No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years. That is the way it could be and is supposed to be. However, the government's thirst for power will not be easily, or cheaply, quenched. Fiat currency is one tool governments have to extract wealth quietly from the working class. It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.” Congressman Ron Paul 9-8-08

A Painful Adjustment

The oft-mentioned “unsustainable” trends of debt growth may finally be unwinding. The unpleasant reality is our country will be forced to produce more and consume less in the future. This will be a necessary but painful adjustment for millions of Americans. But delaying the adjustment, through government bailouts, will only prolong the pain. But isn’t that how we reached this predicament in the first place? If the market were truly “free” and the economy had been allowed to go through wrenching, but cleansing recessions in the last 25 years, this crisis would likely have been avoided. But that would have required tough, unpopular decisions and a bit of common sense from our leadership.

The financial “alchemists” have finally blown up their lab. The game is over. During the credit bubble of the last quarter century, the US could create seemingly unlimited safe and liquid financial claims to trade for imported goods. In the future, nervous foreigners will increasingly want tangible goods, not just depreciating paper created at will. Unfortunately this means a lower standard of living for Americans as we adjust to a real world economy and wave farewell to the phony credit-bubble economy. We will have to learn to live with fewer new houses, new cars, new boats, new shoes, etc.

Silver Lining

A potential silver lining is this adjustment period will hopefully re-energize small manufacturing and other entrepreneurial ventures within our boarders. With the price of energy likely to rise dramatically in future decades, globalization may be thrust into reverse. The US could enter a rebirth in getting “back to the basics,” with local agriculture, start-up manufacturing and infrastructure projects returning to prominence. These trends won’t occur without a period of economic pain, but they may ultimately lead to a better, more satisfying life for millions of dispirited service workers. The hope is that our government will have the common sense to encourage this transition as quickly as possible and stay out of the way.

A Defining Moment

“Mr. Chairman, I believe that our economy faces a bleak future, particularly if the latest $700 billion bailout plan ends up passing. We risk committing the same errors that prolonged the misery of the Great Depression, namely keeping prices from falling. Instead of allowing overvalued financial assets to take a hit and trade on the market at a more realistic value, the government seeks to purchase overvalued or worthless assets and hold them in the unrealistic hope that at some point in the next few decades, someone might be willing to purchase them.” Congressman Ron Paul before the Joint Economic Committee, September 24, 2008

“Do we care about freedom? Do we care about responsibility and accountability? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Times like these have a way of telling us what kind of a people we are, and what kind of a country we shall be.” Congressman Paul

With the failure of the bailout vote today, perhaps a more responsible bill will be forthcoming. Unfortunately, the voting decisions by politicians are seemingly much more about saving their own skins in the upcoming election than any new found fiscal responsibility.

One can only hope and pray that these trying times will lead to a renaissance of common sense in America. Many have said there will never be real change in our country without crisis. We are about to find out.

Today’s Markets

With the failure of the bailout vote in Congress, the markets turned south with a vengeance in a sharp blow to the administration and bipartisan leaders in Congress who warned that the country is on the brink of an economic precipice.

The Dow plunged 777.68, or 6.98 percent, to 10,365.45. The decline also surpasses the 721.56-point intraday decline record also set during the first trading day after the terror attacks. Still, in percentage terms, the decline remained well below the more than 20 percent drops seen on Black Monday of October 1987 and the Depression. The broader stock indicators also tumbled. The Standard & Poor's 500 index declined 106.85, or 8.81 percent, to 1,106.42. The technology-heavy Nasdaq composite index fell 199.61, or 9.14 percent, to 1,983.73.

Gold futures rose Monday as investors sought safe-haven in the precious metal amid fresh bank woes across the Atlantic and after the U.S. House of Representatives voted against the $700 billion bailout plan. Gold for December delivery rose $5.90, or 0.7%, to close at $894.40 an ounce on the Comex division of the New York Mercantile Exchange. After market closed, gold continued to rise more than $15 to above $910 in electronic trading.

Crude futures closed with a loss of more than $10 per barrel Monday, ending the session at a nearly two-week low with the rejection of the U.S. government's bailout plan to stem the banking crisis feeding concerns about slowing global economic growth and weaker demand for oil.

Wishing you a good evening,

Tony Allison

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