Thursday, March 1, 2012

The Problem with My “Crazy Uncle Ron”

Part 2 – Economic Policy

The problem with my crazy uncle is that he, actually, isn’t crazy at all.

 He gets a lot of criticism from the MSM, his coworkers and the general population for a host of things, his economic ideals seem outrageous to most, but they do resonate with a host of people, across many different backgrounds.

 I have heard a wide range of criticisms regarding Paul’s policies, everything from,
 “Ron Paul wants to send us back into the Stone Age.”
 “Ron Paul would allow the same banks that created the mess we are in to do anything they want.”
And my all time favorite,
 “Ron Paul wants to abolish the Federal Reserve, the IRS and repeal the 16th amendment. The economy would collapse without the income taxes, because the government could not function without that revenue.”

 There is a plethora of disinformation, political opposition, ignorance and just plain confusion, propagated and perpetuated largely by the media and the American people’s penchant for believing everything they see and hear on TV regarding his views.

 I understand where the confusion comes from, but at the same time I do not understand where the confusion comes from. Let’s look at it from a completely objective perspective. Let’s just pretend for a brief moment that I do not support Dr. Paul, but I am trying to determine if he really is off-base with his positions. I have heard a lot about this guy running for president and I want to see what his deal is.

 We will consolidate and address just the four or five things mentioned above; the core issues and ask questions that any self-respecting American should ask concerning these things. Responsible adults are tasked with the duty to look at everything objectively to find the truth in anything. Children can be consumed by emotion because that is part of the growing process. Adults, however, cannot be consumed by emotions as that can and ultimately will lead to irrational thought processes, mistakes and the perpetuation thereof.

 It is our job to seek the truth in all things so that we in turn may pass these truths on to our children and their children. We do a great disservice to future generations when we abdicate our responsibility and accept any and all stories at face value. It is for this reason, chief among others, that I do not watch any of the MSM channels very often, nor do I rely on them for any form of reliable, unbiased news and information.

 The Idea and positions:
1.      Sound Money
2.      Zero Government intrusion or involvement in the economy
3.      Free market principles and regulations
That's a fairly accurate summation of his policies and at a glance, it doesn't really sound all that bad. Let's take a closer look at each of these and try to break them down into terms and analogies that not only myself, but also other layman can understand.

 After all, I think most Americans want a stable money supply, they think they government should stay out of the economy, among other things, because the government really only messes things up. It's like a big, lumbering elephant trying to eat those little eggs on sushi rolls with a 2x4, blindfolded and standing on an egg while the trainer shovels peanuts into the trash can.

 Most of us grew up hearing the phrase "Free Market" and believe that we actually work and consume in one. From what I have read, watched and heard over the last few years, it seems more and more like that is not the case.

Sound Money

 What is it exactly and why do we need it?

 As I understand this whole thing, Sound Money, is just that - sound. Meaning it is tied to some sort of commodity or "backed" by it, thereby reducing or preventing the opportunity for inflation to decrease its purchasing power.

 Now, it could feasibly be argued that the US Dollar is, in fact, tied to or backed by a commodity so therefore it should be shielded from inflation. As I am learning, half of this statement is a half truth. The US Dollar is tied to oil, which is why you sometimes will hear the phrase "petrodollar" but it is not actually backed by oil.

 The Dollar is tied to oil simply because the US entered into an agreement with some of the major oil producers (Saudi Arabia, etc) whereby they agreed the US Dollar would be the sole currency they would accept as payment for oil. In exchange, the US agreed that it would protect the oil fields from invasion by any other country. This is kind of complex and confusing, but in a nutshell, if you want to buy oil, you have to use US Dollars.

 The effect this had on the dollar was great and immediate. Demand for it as a currency shot up and so did the value of it.  So now, we have the US Dollar as the sole currency for buying oil, thereby granting it De Facto, so to speak, status as a reserve currency.

 Countries now had to purchase or exchange their own currencies for US Dollars if they wanted to buy oil. I'm not sure how it works exactly, but I do know that when there is a high demand for something, the cost and value of it increases.

 So, the dollar is tied loosely to oil, but that does not guarantee the value of it. The dollar can be devalued in two ways:
  • If oil-producing countries decide to allow the purchase of oil in any other currency than the dollar, or a barter system or an exchange for a commodity of similar worth or value. This will cause demand to drop and with it the value of the dollar. This is called Deflation and it is happening now. Iran, China, India and Japan have entered into an agreement to purchase/sell oil where they will not use the dollar.
  • Inflation. Inflation is caused when a supply of monetary instruments enter a system that already has an abundance of them in supply. It is also caused by increasing a monetary base artificially, because it is not backed by anything real therefore, no new real commodity has been introduced to support it, through the printing and introduction of monetary instruments.

 Confused yet? Don't feel bad, I was and still am. I don't want your head to explode, but now we are going to look at the half of a half-truth.

 So the dollar is tied to oil and is used as a reserve currency of the world because it is the only currency with which you can buy oil. However, it is not really backed by anything. For a monetary supply to have a commodity backing that same supply can only be increased or decreased in conjunction with the backing commodity.

 Is the dollar backed by anything? No, it is not.
 Is the dollar subject to inflation? Yes, yes it is.

 Our current money supply is a faith/demand based currency, which means two things. If demand is up for our dollars, then the value of our dollars will also be up, but if the demand falls, then...

 We have faith in our dollar because the government tells us that we should and because, well, it's been like this for so long. What the average American doesn't realize, and what I didn't for so many years is, that our dollars really are not worth anything. They have no intrinsic value and they are only as valuable as they are limited in supply.

 If a dollar can buy a cup of coffee today, because there are only 10 trillion of those dollars in the system, what do you think happens to the value of each dollar when the Federal Reserve prints another trillion or so? That's right, now that same dollars value is decreased by that same percentage of money that has been created and introduced into the system. The effects of inflation are not felt immediately, but they have a tendency to slowly creep up before they slam the dollar.

 This is what is sometimes referred to as a "loss of purchasing power."

 If a monetary supply is backed by gold, silver, land or any other valuable, permanent commodity, then it can only be increased by introducing a matching volume of the same commodity. In simple, if you have 100 tons of gold worth 100 dollars, you cannot create or introduce another 100 dollars until you find and introduce another 100 tons of gold.

 Demand and inflation are prevented from wreaking havoc on any permanent, valuable commodity backed monetary system.

 Now knowing this, I can honestly say that I am all for a gold standard monetary system for the US. I now find it completely ridiculous that we, as Americans, have accepted inflation in our monetary base and that we have and are continuing to allow our purchasing power to be decreased, literally every day.

 In the 1970's a "luxury" car cost about $3500.00
 Today a "luxury" car costs about $35000.00
 In 1913 the cost of one troy ounce of gold was less than $20.00
 Today that same ounce costs close to $2000.00

How is this acceptable?

Zero Government intrusion or involvement in the economy

This one is fairly short, because after all, there really isn't a lot of digging to be done if you want to know whether or not the government should be involved in the Economy.

 I have been looking and as of yet, I have not found a single positive thing the government has done with respect to its involvement in the economy. Really, I can't.

 They tax and over tax. They spend and over spend. They regulate and over regulate. They show preferential treatment to businesses of their friends. They removed us from the gold standard in the seventies. They waste money profusely and they created, foster and protect the Federal Reserve System that is killing our dollar.

 I now understand that the government cannot "stimulate" the economy because the government has nothing with which it can stimulate. It never really occurred to me that the government really has nothing because it produces nothing, everything they do have they have taken from the taxpayers. Therefore, in reality, they are stimulating the economy with our own money, yet we do not get to see the benefits of it because the money they took from us; they gave to their friends and the banks that are perpetuating these problems.

 "You cannot legislate the poor into freedom by legislating the industrious out of it. You don't multiply wealth by dividing it. Government cannot give anything to anybody that it doesn't first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving. The worst thing that can happen to a nation is for half of the people to get the idea they don't have to work because somebody else will work for them, and the other half to get the idea that it does no good to work because they don't get to enjoy the fruit of their labor."

 Dr. Adrian Rogers

So now, I understand that the government should stay out of the economy completely. It should let the consumers stimulate it, should it need to be stimulated and that it should not take our money to stimulate the economies of a few banks or corporations.

Free market principles and regulations

I have already researched sound money and government involvement in the economy and so far, Paul seems to be making a lot of sense on these issues. It really is just common sense and I have a hard time understanding why or how others cannot see this.

 We need to have policies in place that protect our monetary base or money supply from inflation and deflation. It just makes sense, I don’t want to wake up tomorrow to find out that it now takes one and a half dollars to buy a cup of coffee, when yesterday, it was only one dollar. To me that’s ridiculous, and I have to call it as I see it. Someone, other than the IRS is stealing my money, that’s the only way I can rationalize it. Whether it’s the retail store or the Federal Reserve, some one is not playing fair or anything that could even be loosely referred to as fair.

 Okay, so now let’s move on to the Free Market and those principles. For the longest time I was under the impression that our economy was, in fact, a Free Market – I was wrong. You have to look at it from a realistic and objective perspective. Party lines aside, whenever the government gets involved in anything, that anything is no longer free. It’s that simple.

 What we see today is the government getting involved way too often and instituting far too over reaching and over bearing regulations upon the people that actually work in the market. It has, essentially, created a “closed” market in which certain entities garner special treatment. It’s true, just look at Halliburton, GE and Boeing. These large companies and those similar to them, get the lion’s share of government contracts, not because they are the most efficient or proficient at what they do, but because they have friends in high places.

 The free market is just that – free. It is free to regulate itself and free to operate in a true supply and demand cycle. Before I get into the specific arguments that I have heard, I just want to touch on the actual vs. artificial supply and demand cycles we see in our economy today.

 Free Market:
 If a base of consumers desires a product, then a demand is created for said product. Companies will compete and the consumer will decide what companies are successful based on the quality of the product and the value-for-dollar-exchanged it offers. When demand increases, prices are also likely to increase in the short term, simply because “everybody wants one” and the demand puts a strain on the supply of not only raw materials, but the actual supply of product being created.

 Prices will increase over the short term, but in most cases will ultimately peak and begin a decline into stabilization. They will remain stable until a newer version of the product is introduced into the market causing another increase in demand. One the older product version is no longer in such high demand; we will begin to see prices for it begin to drop, sometimes dramatically. We see this everyday on “Clearance” racks and end of the year car “Sales”. Out with the old and in with the new.

 This is the way the free market should operate. To a certain extent, it does have the illusion of operating in this fashion, but a deeper look can and will reveal the tell tale signs of government intervention and market oppression.

 Closed Market:
  This type of market is actually what we operate and consume in today, and have for some years. I think most of us don’t even bother to look deep enough at certain things and because of that, we are unable to recognize the tell-tale signs of this closed market system.

 In a closed market, the supply and demand cycle is still present, but it is, for the most part - an illusion. Demand is still a driving force behind production and consumption, but the demand is all too often artificially created or propped up by government interactions and regulations. Let’s take a look at a few examples of an artificial demand cycle created by government interaction within the market.

 A great example is the auto industry. We need look no further than the bail-outs of 2007 and 2008 to see this interference. Car companies, namely US car companies, were in bad shape. They were increasingly becoming unable to compete in the market due to foreign manufacturers producing superior products with better prices. There are three prongs to this issue of government interference and will address the most prevalent first.

 Financial dire straits
These manufacturers found themselves literally on the verge of insolvency as they had mounting debt and a consumer base that could no longer support their business. In addition to the shrinking consumer base, the general market had been, for some time, rejecting their products as inferior, resulting in an ever shrinking base of support.

 Unable to generate enough revenue to sustain the businesses they turned to the federal government for help. Public outcry was indeed great and I, myself, was among those enraged by the bail outs they received. The influx of much needed capitol by the Federal Reserve by way of government decree is one example of government interference in the market. If this truly were a free market, the unviable business would have been unable to attract private investor support and would ultimately become totally insolvent. It would have filed for bankruptcy and most likely restructured, becoming again a viable company in the after math.

 The company would have lost little to no blue collar jobs in the end and would have shed a few needless middle and upper management positions. This is the way it works in America everyday, and this is the way to should have been allowed to work in this instance. The market will force a change or correction to any industry unwilling or incapable of imposing that correction upon itself, when the market, or consumers, decide it is necessary.

 The US automakers would most likely be in a much better position than they are now and they would most likely be offering new and better products to the market. Instead, they are offering the same old bucket of bolts with fresh paint. The market isn’t buying it.

 Government sponsored union influence
The introduction of the unionized workforce was a good thing, once upon a time, but it is no longer necessary. Unions were successful and they should be given some credit and praise for influencing and bringing about changes in work place safety and overall conditions. However, the time of the union is over and it should be recognized that, while they once sought legitimate protections for their workers, they now only succeed in hampering any production advances in the majority of industries.

 When a union of workers demand safer working environments and fair pay, I have no issue with that. When a union of workers demand, dictate and hold a company or agency hostage or seek to extort monetary gains and relaxed production goals via an organized strike, I have an issue with that. Take a look at some of the union contracts for the auto industry and you will see some truly ridiculous things.

 These things range form disciplinary action to production speeds to salary and wage earnings whether or not on the job – as in lay-offs.

 I have knowledge of more than one or two outrageous things contained in SEIU’s bargaining unit contracts.

 The government sponsors these labor unions through the passage of legislation favoring these organizations and through the establishment of labor relations boards. When a union can tell a company that they cannot move their business to another state, and the government backs the union - that is an issue. When a union can tell a company, they cannot fire a worker for a reason that would be justified in a non-unionized workforce - that is an issue. “So he was only caught selling drugs at work once? Well, did he kill anybody? If he had killed someone then we would say you have to provide anger management training to him at no cost and continue to pay his normal wages while he is in training.”

Artificial Demand
 The other example of government interference and influence upon the market is the artificial demand cycle that it creates. A great example of this is the recent housing bubble and subsequent collapse. The federal government passed legislation and instructed financial institutions to relax their lending guidelines so more Americans would be able to acquire financing and purchase homes. This is all well and good, for a time, but look what it ultimately led to. The lax lending guidelines enabled people to finance homes, cars, boats, RV’s and a host of other things that they, under normal circumstances and guidelines would not have been able to finance – let alone afford.

 In essence the government allowed the banks to artificially prop up demand for homes and other consumables in a bubble of prosperity that would, ultimately burst and leave all who were exposed, in a terrible position. Artificial Demand…

 On the surface, before the bubbles pop, it’s all well and good, but what people simply don’t understand is that the Federal Reserve, with the blessing of the federal government has created and is fostering a moral hazard with respect to investing. Look at the derivatives market, who knows how much that junk is actually worth, but who cares about that. Look at what the investors made off the initial sales and how the taxpayers like you and I got the shaft when the bills came due.

  The second instance is, and has been, going on for some time. It’s real simple; take a look at any local, state or federal employee cars. It’s an interesting thing to note that they are all American made cars, meaning they are either, Chevy, Ford, GMC or…well I can’t even remember the other one. See what I mean? The demand cannot support the business so they run to the government and say, “Help us or we will go out of business” and the government obliges. In the free market, they would go out of business or be absorbed by another viable company.

 This is an artificial demand created by governments. They use our tax dollars, or borrow money from foreign governments or agents to purchase and prop up companies that the market would not purchase from or support. The auto industry is not the only industries the government does this to. Remember Solyndra?

 The other side of artificial demand and one that I really do not care to get into – because it makes me sick – is subsidies. There is so much to them and they are so prevalent that when you actually look at them – all of them – you have no other choice but to accept the fact that our market is not, a free market.

 Did you know there is an agribusiness in southern California that brings in more in government subsidies than its product is worth? What I mean is if they received no money from any government they would actually lose money every year! And they don’t even grow necessary food stuffs.

 It is true that whenever you subsidize something, you get more of it. If the government creates an artificial demand by subsidizing a particular industry or product, then there will be an increase in the supply for that product. Simply because as more and more producers become aware of the subsidy, they will want to climb aboard that gravy train. Just look at corn, cotton, soy, cars and green energy.

 The problem with subsidies is at least two fold. In addition to having serious moral and ethical problems, they also lead to a false sense of security for the industry. They create a false demand for a product that the open market, or consumers, cannot or will not sustain.

 The other issue is price setting or fixing and price deflation. Cotton producing countries have sued the US and won over unfair price advantages due to subsidizing of crops and products. When a producer receives a subsidy from the government, it essentially allows the producer to charge whatever price he wishes because he knows he will receive that check form the government to cover his “losses”. This creates an unfair advantage in the market and can and most often will lead to the loss of another market competitor that does not receive subsidies. Look to the Flood Insurance market for proof of this.

 The second part to this is when government subsidies created the artificial demand and the market does not or cannot respond to it quickly. What this does is establishes an over abundance of supply, which in turn, causes the prices of these products to decrease. The price depreciation requires that the government increase the amount of each subsidy to cover losses. It’s a self perpetuating cycle that can only be corrected when the market is given sufficient time and means to react to the problem. However, the reaction and correction is often severe or at least unlike any realistic correction a free market would impose. For an example, look at the corn-ethanol-subsidy relationship.

 A few years ago the demand for corn to produce ethanol increased dramatically due to a broadened filed of government subsidies. But here is the idiotic part; the government paid these farmers to grow corn that was ultimately made into ethanol and then added to gas. So we essentially grew a bunch of corn, and then burned it up. That caused the price of corn and corn based products to spike. Moronic…

 The ironic thing about most of this free market stuff is that I have never read any books written by Mises or Paul or any other economist. Most of the stuff I have learned, I learned from a fishing website. Talk of water rights led to the subsidy issue, which led to the demand issue, which led to the market question. All of that led to government intervention and then I took a look at our monetary policy and the fiat instrument we use.

 It is literally mind blowing when you start to actually go down into the rabbit hole. Most of this stuff I started looking into before I listened to Ron Paul. Before I watched that first youtube video at my brother’s house back in 2007, I knew about subsidies, free market principles and government intervention. I started looking more deeply because my wife and I were looking to buy our first home together.

 If we are serious when we ask ourselves questions related to the economy, then we can really only come up with answers that support Ron Paul.

Should we have sound money?
 Yes. My son can drink a gallon of milk a day. Do you know how expensive milk has become?

Should the government be involved in, try to stimulate or regulate the economy?
 No. Let me spend my money the way I see fit. Stop taking our money and giving it to you friends or spending it on things we don’t need or want.

What style of market will best benefit me and others like me?
 A free Market will be beneficial to all that operate or consume in it. The closed market that we now operate and consume in only benefits a select few and I can tell you, we the 99%, are not among them.

Should we have a truly free market?
 Yes, yes we should. Freedom is always best. Freedom is popular.

 I have since looked into quite a bit and now, honestly, I have to say - Ron Paul isn’t as crazy as they make him out to be.