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If you are like many middle-class Americans today (2005), you probably feel like something is going wrong but you do not really know just what. In other words, you feel things have changed economically speaking, but you cannot quite understand why. When you grew up (if you are from the baby-boomer generation), your father worked and provided a decent lifestyle for the family, your mother stayed home and was there when you came home from school, and in general the future looked bright. Today, it takes two people working in a household (both husband and wife) just to try and break even. Housing costs have gone through the roof (even being able to afford the roof alone may be an issue), they tell you that Social Security is possibly on the rocks (maybe you will get a check, maybe you will not - maybe you will retire at 67, maybe they will tell you to must wait until you are 80 years old), and you might even now have to make the choice of paying for the college education of your kids or plan for your own retirement - but cannot do both. Sound familiar? Let us assume that it does. Let us also assume you want to understand why this happened and what you can do about it. . In order to figure something out, it usually helps to start at the beginning. So, let us take a walk down economic history lane to really understand what has gone on, and even where things might be going. Also, let us discuss some options or an action plan for the future as well. Some of the ideas presented may seem a bit radical, and many of the things you will learn here today may surprise you, simply because you were never told. Regardless, you need to know if you want to make a better future for yourself and your family. But before we begin, I often like to suggest some books for clients to read but I do realize not everyone is an avid reader. So, in place of a book, I have an excellent DVD to suggest that you buy and watch with your spouse and your teenage or adult children. The DVD is titled: Commanding Heights - The Battle for the World Economy (you can buy it from Amazon). . THE GREAT SOCIALIST EXPERIEMENT THAT
FAILED: 1933 - 1980
.During the period from about 1940 through or up until the decade of 1970, the major industrialized nations (and democracies) of the world got it into their head that an economist named John Maynard Keynes (a British Economist) and John Kenneth Galbraith (an American disciple of Keynes) were pure geniuses. Their idea was that capitalism and the free market was an untamed monster and that government ownership of major industries and or strict government control over the economy plus a new social welfare state was the way to go. For a short while, it seemed to work, especially as way to pull some countries out of the Great Depression (although in reality World War II served this purpose, at least for the victors). In the case of many European nations, many industries were nationalized (utilities, railroads, coal, airlines or other transportation industries, etc.) In the US, while not as drastic as outright state ownership, there was a new idea that government should severely regulate many industries and even dictate what prices can be charged (and punish those companies that try to offer lower prices if that were the case). . Coupled with that, the idea of the great social welfare state came into being as well. Meaning, government run pension programs (Social Security), health care and other kinds of social insurance (such as unemployment insurance or as the say in Ireland and the UK, the dole). All well and good, as the government takes care of everything. However, the question is how to pay for it? Well, you take a portion of money out of workers income in the form of contributions or taxes, and as a government, you periodically run deficits, or in other words you borrow the money in the times when the cash flow coming into the government coffers does not match up with expenditures. The logic to this idea is that when things are not so good with the economy, the government is pumping money in and running red ink. When the economy is doing well, in theory, the government is supposed to cut back on spending, move back to the plus column and save the excess funds they are taking in for the next when it is needed (assuming the politicians have the discipline to do so). In other words, the idea that the government could and should artificially tinker with the free market in order to smooth out the rough edges, so to speak. . In addition to all this, it was decided some time before to develop a central banking system that issued fiat paper money, and that the central bank was really the controller of these economic tinkering mechanisms. So, the longer-term result was that we also ended up with monopoly money if you like, or little scraps of paper with fancy engraving. It did not start out this way of course, and up until 1933 it was the case that even private citizens could redeem the paper money for gold (it was nice while it lasted). In reality, you now could take something without much inherent value in and of itself, namely paper, print some nice pictures on it and voila - something that some people are now willing to risk their life for. Whereas in the past, and throughout human history, a number of different actual commodities that offered some utility or value were used as a medium of exchange or money (gold, silver, wheat, beads, shells, cattle, whatever), now we have paper. And this is no to say that there is anything inherently wrong with that, but there are some consequences that occur as a result (the Chinese, by the way toyed with paper money 1,400 years ago, so it is nothing new at all). . The number one problem with socialism as an idea and the printing of fiat paper money as well is the human nature factor. Which is to say, the human beings that control all of these things are the politicians, who are people just like you and me with all the same prejudices, greed, selfishness, corruption and other qualities we humans can posses (along with all the other good things about us as well). So, if we humans have the tendency to spend more than we make, to seek excess instead of caution or thrift, to look at the short-term rather than the long-term, and to possibly be tempted to do things for our own personal benefit when we have control over the means to do so in terms of the public coffers - what does that say or mean about those in control and how can we combat that tendency? Democracy is supposed to offer a system of checks and balances to keep this from happening, but does that truly happen in the real world? Are politicians more tempted to do things for their own gain (re-election) using the central bank and government policies towards that purpose or are they more likely to do the right thing for the country and the economy, even though some people may not like it? . This is a very important point simply because those people that believe in socialism or the welfare state do not say so, but they do assume that all citizenry get religion, so to speak, at the same time and keep it. Meaning, the idea behind welfare state beliefs and socialism is that we are all working towards the benefit of our fellow man, but are we? Is it in our nature? We are not corrupt or evil in general as individuals or a society, but then again, we are not exactly getting up at 5:00 AM in the morning to work so someone thousands of miles away can get the benefit of what we do - for free or because of our own goodwill. We work, we toil and we sweat in order to provide a comfortable life for our family. This is normal and human nature. We want to help other people and do so if we possibly can, but we are working to obtain things for our own direct benefit first. Hopefully we are not doing someone else harm in our daily pursuit of earning a living, but we are of course working with our own benefit in mind, and this is normal in terms of what motivates us. . Socialists would like to convince you that you should work for the greater society and sacrifice yourself for others. Again, a nice idea, but this is sort of like believing in and even more to the point, practicing the tenants of a religion. However, even religious institutions have trouble convincing members to follow the true dictates of the Bible, Torah or the Koran 24 hours a day, seven days a week. Which is to say, as a client of mine has reminded me, the good book has been around for a very long time and many people even have a copy in their home - but do they read it? Even better, do they follow what it says ALL the time? Once again, we are human and socialists have the tendency to forget that very important point (if we work harder or work less and get the same amount of salary regardless - why bother going above and beyond?). If we as Christians, Jews and Muslims always followed what was preached all the time, what a wonderful world it would be. If we as citizens truly always did things and engaged in self sacrifice all the time for the constant benefit of others, what a wonderful world that would be. However, that is not reality, and that is surely why socialism has failed (no financial incentives, no way to better oneself under such a system). . . THE REAGAN, CLINTON, BUSH YEARS: 1980
and BEYOND
.Most of you probably never heard of a man called Frederich Von Hayak, Milton Friedman, or Ludwig Von Mises either for that matter (but you should). There are some of the gentlemen that have been clamoring for a truly free market, limited government kind of society for some time. These are the gentlemen that have been the champions of Libertarian thought and related economic ideas, which supposedly were embraced finally in the 1980s by Ronald Reagan, Margaret Thatcher and even a number of other foreign governments at the time - and the forerunner to globalization policies in general. . However, it is very different to talk the talk and walk the walk, at least completely. So, while it is true former President Ronald Reagan delivered on his tax cut promises, the reality was that most of the tax cuts and new loopholes applied to large incorporated companies. Incredibly enough, it is also true that while US government tax revenues went down (the government collected less money than before due to the tax cuts) they actually kept on spending even more - increasing the national debt. This was really the time the national debt started to balloon and it has kept going ever since. So during the course of the next twenty years (1980 until today), in the long run it has not mattered what political party was in control. Corporate income taxes have gone down (and tax loopholes for offshore ventures permitted to shelter corporate income), the middle class tax burden and especially payments for social security as a percentage of income has gone up, government spending has gotten out of control, AND the US government now owes more money to foreign governments than probably any time during its history as a formal republic. That is the quick cliff notes version, even though I forget to mention that Clinton did actually make somewhat of an attempt to address the Social Security issue by raising your FICA payments, or the payroll deduction tax which is of course is broken out separately in your paycheck (and not formally calculated as part of your so-called tax rate bracket). But, let us move on to what the net overall affect has been up to this point. . The Center on
Budget and Policy Priorities Says the Following:
.Corporate tax revenues have fallen to historically low levels as a share of total federal revenues and of the economy. Despite the weakening of corporate tax revenues, and despite the fact that the Congressional Budget Office and other organizations now project very large federal budget deficits over the coming decade and beyond, Congress appears poised to shower costly new tax breaks on corporations. . Corporate tax revenues are at historically low levels and are projected to remain low for the coming decade. Preliminary CBO estimates show that in 2003, corporate income tax revenues were smaller, both as a share of the Gross Domestic Product and as a share of all federal tax receipts, than in any year since the 1930s except for 1983. Total corporate tax revenues fell by more than one-third between 2000 and 2003. A study by the Institute on Taxation and Economic Policy of 250 large corporations, which together pay about 30 percent of all corporate income taxes, found that one in six paid no corporate income tax whatsoever in at least one of the three years examined (1996-1998). . The corporate tax rate has declined in recent decades. During the 1990s, non-financial corporations as a group paid an average of 25.3 percent of their profits in federal corporate income taxes, according to new Congressional Research Service estimates. By contrast, they paid more than 49 percent in the 1950s, 38 percent in the 1960s, and 33 percent in the 1970s. This decline reflects reductions in the statutory tax rate as well as corporations' expanded use of deductions and other tax benefits. . . The following chart shows graphically that the US Corporations today pay the second lowest level of tax contributions (as a percentage of GDP) since 1946: . . . Mr. Brian M. Riedl
of the Heritage Foundation says the following:
.The total amount of federal spending--$2,156,536,000,000--is too large to fully comprehend (in $1 bills, it would stack halfway to the moon, weigh 10 times as much as the Sears Tower, and blanket the state of New Jersey). A more relatable statistic is federal spending per household, which allows families to measure the costs and benefits of government in their own lives. Throughout the 1990s - real federal spending remained slightly under $18,000 per household. From 1998 through 2003, federal spending jumped by $2,500 to reach $20,300 per household--marking the first time since World War II that federal spending has topped $20,000 per household. . For that amount of government, Americans paid $16,780 per household in federal taxes in 2003--a staggering tax burden indeed, but only the beginning. Federal revenues are still $3,520 per household less than federal spending. That difference represents the per-household cost of the $374 billion budget deficit. Since all federal spending must eventually be paid for in taxes, the $3,520 per household represents higher future taxes that must be collected to fund the full $20,300 per household that Washington spent in 2003. . The reality that all spending must eventually be paid for in taxes cannot be overemphasized. Despite its current popularity, the "big-government conservative" model of coupling tax relief with rapid spending increases is not sustainable in the long run. If Washington continues to spend $2,500 per household more than it did in the 1990s, then taxes must eventually rise by $2,500 per household per year. Budget deficits can delay, but not ultimately avoid, the tax collector. Permanently higher levels of spending require permanently higher taxes. . . . We are fans of lower taxes, as I am sure you are as well. However, one cannot cut taxes without cutting spending as well. The political solution has been to borrow the extra money needed to make up the difference or the shortfall - a recipe for disaster in our opinion. At the same time though, a way to extend the crisis into the future and claim the love of the multitudes of citizenry by taking credit for cutting taxes. In other words, you as a politician cut taxes, the people are happy and re-elect you, but what really are the long-term costs involved if spending is not cut as well? . As of October 2005, the US Government Debt is almost US$8 Trillion Dollars, and has been rising steadily each year since 1980. If that is divided among every man, woman and child in the United States right now, it comes out to MORE than US$20,000 per person (including infants still in diapers). However, this is only part of the story as a huge and looming bill is coming due in terms of all the other US government liabilities approaching in the very near future (things the US Government has promised to pay for, such as social security for the baby boomers, which is not calculated in the US$8 Trillion Dollars already borrowed). . IN OCTOBER 2004 -
USA TODAY REPORTS THE FOLLOWING:
.A USA TODAY analysis found that the nation's hidden debt -- Americans' obligation today as taxpayers -- is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt. This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt. The $53 trillion is what federal, state and local governments need immediately -- stashed away, earning interest, beyond the $3 trillion in taxes collected last year -- to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed. As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill, Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month. Greenspan and economists from both political parties warn that the nation's economy is at risk from these fast-approaching costs. If action isn't taken soon -- when baby boomers are still working and contributing payroll taxes-- the consequences may be catastrophic, some economists say. . The worst-case scenario is a sudden crisis -- perhaps a major terrorist attack or a shutoff of oil from the Middle East -- that triggers a loss of confidence by investors in the U.S. economy. Foreign investors refuse to lend more money to the government to finance its deficits; drastic tax increases and benefit cuts occur suddenly; the dollar's value plummets, which raises the cost of imported goods; and a severe recession or depression results from falling incomes. . . Current President George W. Bush himself said the following on February 9, 2005: . Some in our country think that Social Security is a trust fund--in other words, there's a pile of money being accumulated. That's just simply not true. The money--payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system--what goes in comes out. And so, starting in 2018, what's going in--what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem. . OTHER INFORMATION OFFERS UP THE FOLLOWING: . Take a look at the following US Government Pie chart for 2006 available from the link directly below. Do you really know where you money is spent? Forty-five (45) percent is now spent on Medicare, Medicaid and Social Security, twelve (12) percent is spent just to pay the current interest on the national debt, and fifteen (15) percent is spend on the military. If almost half of the US government income is spent on social welfare programs, and IF it is true that about US$1.5 Trillion Dollars MORE will be needed EVERY YEAR when the vast majority of baby boomers start taking checks - AND if the government NOW is already spending more than twenty (20) percent of what they take in - what are they going to do? Where is the money coming from? How will they resolve the problem and if not now, then when? . . The following information also confirms the three largest government expenses are the Department of Defense, Health and Human Services (Medicare and Medicaid) plus interest on the national debt, which is what the previous information tells us. In actual numbers, the US government is spending US$336 Billion Dollars per year on interest payments on the national debt alone. To put this into focus in terms of other annual government spending - NASA gets US$15 Billion per year, Education get US$61 Billion and the US Department of Transportation gets US$56 Billion. So, a larger amount of citizens tax money goes to pay the current interest on the national debt alone, and this figure is much more than government expenditures for education and transportation combined. . In addition the following offers a very clear and simple explanation of government deficits, and what is going on: . Suppose you want to spend more money this month than your income. This situation is called a budget deficit. So you borrow. The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you don't have enough money to cover your spending (another deficit), you must borrow some more, and you'll still have to pay the interest on the loan. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. This situation is known as bankruptcy. . Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress's appropriations. The total borrowed is nearly $8,000,000,000,000 and growing. Even when government officials claim to have a surplus, they still spend more than they get in. We pay interest on that huge debt. . . . IN SUMMARY AND
ANALYSIS:
.The socialists got it wrong, you cannot regulate morals, work ethic or motivate people via central planning. In short, socialism does not work, as it does NOT encourage people to work harder, be innovative and creative, nor does it allow for upward social mobility in society either (which is a very strong incentive for people to save, invest and so on). In addition, socialism calls for a planned economy whereby the government is in charge of absolutely everything - and we know how that always pans out. Worst of all, socialism discourages people to think for themselves, take care of themselves, and truly be free in the process. Instead, if every citizen knows or believes the government will always take care of them - then why bother taking care of yourself or even being worried about it? Why bother saving and investing your own money for retirement when the government will give you a pension in old age? Why bother saving money and taking care of your own personal finances, when you know the government will always bail you out? Why bother taking care of yourself when someone else, such as a bureaucrat thousands of miles away will do it for you - or will they? Are government bureaucrats really that good and competent when it comes to taking care of you? . Free market capitalism does work, but the critics will tell you (correctly so) that it creates inequality in a society. Which is to say, the entire idea behind free market capitalism is that you let the free markets do their thing and you let people have the freedom to invest or do whatever they want (for better or worse). Some will win, and some will loose. So, it is correct to say that a truly free market system certainly does punish some people who will suffer the consequences of bad choices or ideas, or inefficiency as well (if someone else makes a better product and also cheaper). The people that make wise choices with their personal finances and investments will be rewarded. It is that simple. If you work hard, use common sense, save and invest wisely - chances are the free market capitalist system will be good to you (but there are of course no guarantees). If you run up the credit cards, do other foolish things with your money and otherwise run your economic personal life like a run away freight train - the free market will let you fall flat on your face - no doubt about it. Free markets require personal responsibility, and in fact encourage it out of necessity. . However, if we look back at history and historical economic divisions in a free market society (Ancient Rome was a free market), there is always a pyramid effect in terms of percentage of very wealthy, percentage of what are called middle-class and of course percentage of the poor. Why is it that throughout history, this is the case? It can be hard to say what the exact reasons are and just about every political or economic philosophy has already been tried out. Socialists will tell you that the free market guarantees those at the top stay at the top and those at the bottom stay at the bottom (which is why they argue that government needs to even things out). On the other hand, the free market does allow for social mobility, which the socialist system does not. There are many cases of poor people or shall we say, non-wealthy people that come up with an idea and create a new business venture that allows them to become wealthy. So, there is social mobility and opportunity for movement in a free market. Some will argue that in the free market not everyone has equal access to such opportunities either due to lack of education or access to capital. Of course, as well, there are both wealthy and middle-class people that have the opportunity to make some poor investments or do some foolish things with their money that causes them to loose it (possibly moving them down in the ranks as well). This is what the detractors of the free market are of course concerned about (the people that move downward). This is a very interesting philosophical argument between these two schools of thought. The liberals and socialist believe you as a private citizen cannot think or behave responsible for yourself, and there government must do so for you. The conservatives and libertarians think you should be allowed to do whatever you want without the government on your back, and let the chips fall where they may. In this regard, capitalism is unforgiving in that it will punish and root out inefficiency, poor planning and foolish habits in terms of your personal finances. So, if you fail to save and invest money for your own retirement - you for sure will be broke in old age. It would seem then that the socialist solution is to salvage all the people that are behaving foolishly, thus in effect, rewarding inefficiency and non-positive behavior. Free market capitalism by nature, on the other hand, encourages sound personal financial principals and teaches citizens to take care of themselves. Which is better? It is really true that you need a bureaucrat to save your money for you, and generally speaking take care of you - Or are you more than capable of taking care of yourself? This is the blunt question to answer in order to decide if you favor socialism or the free market approach. . However it is very interesting to note that most Americans consider their own country to be the wealthiest and most prosperous nation on earth (actually Luxembourg is the wealthiest on a per capita basis, but that is another story for another day). It is also very interesting that in 1967 former US President Johnson declared a co-called war on poverty. Now some forty years later, more or less the same percentage of the American population, remain in poverty. According to some very recent (June 2005) statistics for the US, anywhere from 28 to 36 Million Americans earn between Zero and US$13,000 per year in income (depending upon whose numbers you think are valid). Another 30 Million earn between US$13,000 and US$25,000. The short translation is about 12 percent of the American population is poor (maybe more, all depending upon the figures that you use). Another 10 percent or so defined as the working poor, another percentage defined as lower middle class, and so on. In other words, an income distribution chart that pretty much mimics statistics for other capitalistic free market societies throughout history (once again, a study in the economic differences in ancient roman society may surprise you in the similarities of what seems to be a sort of natural wealth distribution). . Some countries with a capitalistic system do of course have larger amounts of so-called poor people. President Vincente Fox of Mexico has made the comment that probably up to 40 percent of Mexicans are classified as poor, as in contrast to 15 percent or 25 percent (pick a number depending upon the statistics) of American society as being poor. However, the point is, 60 percent of Mexicans then are supposedly middle class, or at least something other than poor (or much wealthier of course in terms of the top rung). This also means Mexico, and countries with similar statistics have no-where to go but up, in terms of the possibility of the future economic mobility of the population. This is also important because this is where the economic growth has and will come from. As more and more of these multitudes of people slowly move into the middle-class, the pent up demand for consumer goods in these nations will be enormous (and US corporations know this, as opposed to the very low single digit, almost stagnant growth in the US). This also in part was the undeclared driving force behind NAFTA, CAFTA, etc. . The thing in terms of the US though is the idea of the welfare state thrown into the mix. What happened to the war on poverty? Is it true that socialism cures all ills, or is it true you cannot fight natural outcomes in terms of disparity of wealth? Can we really have both a true capitalistic free market and socialism together at the same time, or will one always cancel the other out? . The Keynesian School of Economics says the government is supposed to help (save) the losers in the free market or the downtrodden, and often enough at the expense of the winners (or through higher taxation of the winners in order to support the losers). Is this fair? Well, it probably all depends on which side of the fence you are on. If you are a person that has NOT gone into debt, that has saved or invested your money, you will be very angry at the idea of a government taking away your money in order to hand it over to someone else that did not do what you have done. If you are the person that spent every penny that you made, incurred tremendous personal debt and put the well being of yourself (and your family) in jeopardy as a result, you will clamor for whatever government handout you can get. Will you not? . . THE CURRENT SCHIZOPHRENIA OF WESTERN
DEMOCRACIES
.Most people that are crazy do not know that they are crazy - that in part is why they are crazy, and we can say it would seem to be the same with governments also. They often have multiple personalities or hear conflicting voices - one that says turn left, and another that says turn right. This is the current political and economic problem with the United States at the moment, both in terms of government and the general population at large. In fact, this in general is probably going to be the case with most democratic welfare states going forward. How so, you want to ask? . Well, we know that many countries decided to take the mantle of free market theories discussed by Frederich Von Hayak, Milton Friedman, Ludwig Von Mises and others starting more or less in 1980. Ronald Reagan in the US was the first to really get on the microphone and expound the ideals of less taxes, less government, less regulation and so on. Same thing was the case with Margaret Thatcher. For the most part, this argument of free markets, free trade and lower taxes has been the political theme for some time now. Even supposed liberals have taken up the calling to some extent. The problem is they have not practiced what they preached. . Everyone is always in favor of lower taxes and more money in your pocket, me included. However, if you as a government, company or individual have lower income - guess what? You need to spend less too. You cannot reduce your income and expect to spend the same amount as you had before - because the truth is you no longer have it. You must cut costs or expenses. These things go hand in hand. Otherwise, if you continue to spend the same amount, or even worse if you increase spending - you for sure will go broke. How can you manage to spend more than you make? Quite simple, you borrow it. But then you have another problem, which is how to pay back all the money you have borrowed. None of the options are really pleasant or beneficial, including the printing of even more money to pay such debts. This is common sense and anyone with common sense will understand it. . The problem is, the politicians seem to have no common sense, or if they do, they ignore it because they have another problem, namely politics. Which is to explain, a whole lot of folks out there that were promised a free lunch, and that were also promised the government would take care of them. Because these persons were brought up to believe or think that the government would provide, they did not do the many things they should have done. Such as: stay out of debt, save money, and become responsible for their financial welfare. In fact, this is really the biggest crime of socialism - teaching the citizens to become irresponsible, lazy and foolish with their own finances. That is a fact, and if you want even more proof of it, go and visit a former communist country to see how well some people there are making the switch. However, the citizens of a former communist country can at least be excused to some extent - but the people living in a democratic free market capitalist society their entire lives? How foolish can someone be to believe that lead is really gold (metaphorically speaking), that paper with nice engravings on it is worth something (and that printing even more of it will miraculously create even more wealth), and that any government can really borrow or spend their way out of trouble? How foolish can someone be to believe that the banks offering all those free credit cards with 5 digit credit limits and no money down mortgages are a good thing for their own long-term finances? What most Americans should have done is to have taken Nancy Reagan's advice - just say no. She was talking about drugs, but easy credit and bank debt is pretty much the same vice for many people. It has also been the same problem for the politicians - albeit they have been spending your money instead of their own. . In any event, here is the paradox or problem. What to do, what to do? Well, while it can often be difficult to predict the future exactly, generally speaking we can be fairly sure of some possible outcomes. Which is to say, human nature is pretty much predictable. We as human beings have been on this planet for a very long time, and while HOW we live and the electronic gadgets we use might have changed - we have NOT changed. Also, even though some people will try and convince you that one plus one equals seven, the laws of economics and physics are fairly concrete. So then, logically thinking this problem out, we have come up with the following possible outcomes, ideas and comments we think will apply in the future: . Unless any governments STOPS spending more money then they take in, and do it right now, they will eventually go broke. Spending (and borrowing) even more money that is taken in will only aggravate the problem much sooner and for the worse. Plus, the longer you wait and the more you become indebted, the less manageable the problem becomes. . The US government currently spends 12 percent of YOUR tax money on debt service (making interest payments on the debt). If they continue to borrow money, then what will it this amount result to in the next year, and the year after that? The IMF and WORLD BANK scolds other countries that have gotten into financial trouble and always insists as a condition for a bail-out that the foreign government expenses are cut drastically. Why is it that the US government refuses to apply its own advice? . The real answer is to cut spending, increase taxes or do both. Do you think it is more likely that the politicians will cut spending or somehow increase taxes? The argument that a new national sales tax will eliminate the IRS and do way with the income tax is a folly. Even though US income tax rates are currently at some of the lowest levels they have ever been historically over the past 70 years (although most Americans do not believe it, and the reason they do not believe it is because they see themselves struggling financially and do not know who or what to blame other than tax rates), income tax increases are a hot potato politically. If anything, a new national sales tax will probably be put into place as a revenue source instead of increasing income taxes. If there are any increases in term of money taken out of salary paychecks, it will be an increase in FICA (social security payments), and more on that later. . NUMBER TWO: The price of oil is going up, you can count on it (they are running out and when demand remains high for a commodity and less supply is available - the price goes up). This will almost guarantee higher prices for consumers' worldwide as the price of oil affects almost everything we buy or consume. Where as only a very short time ago, the fear was deflation (and inflation was chosen as the cure to combat deflation) now we have inflation coming back as a problem once again. In part because of higher oil and other commodity costs, in part because the US Federal Reserve had artificially lowered interest rates during 2001-2004 to combat deflation. Interest rates will now go back up in the US in order to combat this inflationary pressure. It will also increase the costs to service the growing national debt as new higher interest rates are presented for renewed US Treasury Securities (another problem). . It has been proven time and time again though-out history that politicians always take the easy way out of printing more paper money. Better said, if they have an option of worrying about deflation (which is what happened during the so-called Great Depression) or inflation, they will feed or allow inflation. Why? They are scared to death of the possible social problems that would result from another economic deflation. They are also very concerned about a large number of upside down loans - the idea that many banks could end up taking over properties due to foreclosure and that the value of that real estate not high enough to sell off and cover the loan. In other words, the FEDERAL RESERVE will protect the banks at all costs, even though that may not be the best thing to do in terms of the rest of us. . NUMBER THREE: Social Security remains to be a very serious issue and it is not going away. In addition, no one has nor wants to confront the problem. Sure they talk about it, and then it gets brushed under the rug because a storm came through (an act of God, not a man made storm). The fact remains, it is a pay as you go system, which means for years the citizens have paid - and the money went. It was a system based on demographics and the demographics have changed (when it was started 70 years ago, roughly eight or ten people were paying in for each single person taking a check, now it is the case of roughly two or three to one and very soon one to one). The people that have paid into this system all these years want their check when they retire - and who can blame them? On the other hand, the money does not exist to keep this PONZI scheme going. There are not enough new people coming in to pay for all the people promised a check on the back end, which is what happens often enough in such a scheme. They claim the government will never let it fail. Probably not, they will just print more money (giving you back US$1,000 per month in the future that really will be worth US$500 in purchasing power) or they will increase payroll contributions from the people currently paying in or they will cut the amount you will receive in the future or they will extend the eligible age to get a check, or some convoluted combination of all these things. . There is a fear among many people that the government might be tempted to nationalize all the private pension accounts or retirement plans. In other words, a confiscation scheme involving privately saved money to shore up the government social security program. Other people are fearful that the government will refuse to allow those people with a private pension to take a check from the social security program, arguing that they do not need it (because they were in fact smart enough and disciplined to save money for retirement, thus penalizing this group of people as a result). Who knows, but certainly anything is theoretically possible. Using the Great Depression as one example of what the average citizen will tolerate in terms of government abuse, most people did not question a forced government confiscation of gold in 1933. The reason? Most of the people that thought it to be a wonderful idea were broke and had no gold. Socialist thinking is that the few must suffer for the benefit of the masses. Socialist thinking also says that if you were forward thinking enough to save your own money - too bad, we need it to pay for the people that were not. . THIS IS THE REAL CRISIS: The symptom will end up being economic, but the disease or problem is psychological or political. Which is to say, many governments NOW claim to be champions of the free market, now subscribe to libertarian school of thought and have even cut taxes or privatized previously nationalized industries in the process. HOWEVER, they are still operating under Keynesian (Socialist) ideals in terms of deficit spending, welfare state programs and so on. You cannot have it both ways. The politicians are going to have a very difficult time selling this new concept to the masses (completely and explaining the full impact all the way around), so we believe they will not even bother. Instead, they will continue to ignore the paradox and keep on doing the same thing - talking about globalization and free markets, while operating financially as disciples of John Maynard Keynes. Talk about confusing? When a government comes down with a case of schizophrenia, it is not a good sign. . NUMBER FOUR: It all depends upon who wins out in the execution of how to solve the problem. If the liberals or socialists win out - watch out. The middle-class will be in for a beating. This will be the group suffering the most. The wealthy? Well, they are wealthy. If you have 30 million dollars and the government takes half, you are still left with 15 million - no? Meaning, it is true maybe you cannot buy that home on the French Riviera that you wanted, but it is not like you do not or will not have a roof over your head or food on the table. The poor? Well, they will get the social welfare always (although not much at that in reality). We do not want these people rioting now do we? In addition, the argument will be that we have to help all the other formerly middle-class that are now poor or in dire straights - right? Never mind they signed up for every free credit card that landed in the mail box and never mind they never saved a dime or even tried to apply some discipline to their own spending habits. They are now in need, and someone has to help them. That someone will be you, through higher taxes, lower standard of living, whatever. Just as before, we are going to hear - We are all in this together. We? Who is this we being spoken of? We did not tell all these people to behave foolishly. We did not tell the government to rack up so much debt that they now have a problem. Why is it now we must solve the problem? I did not cause this, so why do I have to pay for it and suffer? . On the other hand, if the conservatives or true libertarians get their way, they will let the chips fall where they may and the let everything work itself out over time. Of course, that pretty much was the idea when Herbert Hoover was President, and a few folks (the ones that lost all of their money due to their own foolish habits) were a bit perturbed. Along came Roosevelt and John Maynard Keynes to save the day (and income tax rates went up to about 70 percent just to put things into perspective). In any event, let us say this is the game plan adopted. Let us suppose the government says, sorry, we cannot afford it anymore - good luck, you are on your own. What will that do to the social fabric of society? Will people take a long hard look at them-selves and say, yes you are correct? Will they say, yeah I probably should not have run up all those credit cards and put my family into such debt? Will they say, yes it is true, I did not save any money and this is really my own fault? Probably not - It is easier to blame it on the government or someone else. It is also more palatable to make someone else pay for the problems - at least politically this is always an easier sell to the general masses. . In any event, some people have made the observation that the increased military presence performing police functions in the US is a prelude. Stated another way, some people do believe the government is trying to get the American public used to the idea of Para-Military units walking around in public with black uniforms and automatic rifles, so they are not too panicked when a crack down needs to be put into place. It has been noted these folks are not the 101st Army Airborne division with regular green army uniforms and such. The arm patches seem to indicate they are not local city or state police, so who are they really? Are they affiliated with some new government agency - Homeland Security or FEMA maybe? Supposedly FEMA is a group of nice helpful folks, like the Red Cross, that hand out boxes of canned food and bottled water. Who knows? Who cares? For the moment, they claim it is to combat all the foreign bad guys that have suddenly appeared. Maybe all of these possible assumptions are the wild-eyed fantasies of some conspiracy nut? I will take the journalistic high ground, just like FOX News and say, we report - you decide (or something like that). But again, anything is theoretically possible if you think it through - that really is the scary part about it. . EXPATRIATION IS
GLOBALIZATION ON A VERY PERSONAL LEVEL:
.They used to say go west young man. Now they say go global. They might be telling you to go somewhere else pretty soon, but I shall refrain from going off topic. In any event, what a word: Globalization. It even sort sounds like a noble word. Well, it is to some extent. The problem is they did not tell you both sides of the story. You see, globalization is really an idea that correlates to the free market theory of economics. Which is to say, in the free capitalistic market, there are winners - and there are losers. There are people, or countries that will make money, and there is going to be some negative fallout as well. What? They never told you that? What else have they not told you? . Well, the truth is that Ross Perot did tell you. Bush (the father, not the son) said all is good with globalization. Clinton said: Well there is some good things about globalization, and some negative, but more good than negative. Come again? Well, he forgot to highlight that in free markets, it is certainly true that when all things are equal, capital (and jobs) will flow to where it gets the best return. Remember, capitalism is about profit and efficiency. You cannot have it both ways. You cannot expect everyone to open their markets to you, or reduce their import tariffs for you and there not be any benefit going the other way. This is what it is all about. So, the truth of the matter is, politicians do not like to tell the entire story - just the positive highlighted parts they think the people want to hear. And by the way, this is not and of itself a criticism of globalization or the true market, but for sure many people are not aware of all aspects of it, and therefore not prepared. . An interesting book on the subject is: ONE WORLD READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM by William Greider . One review of the book says that: The world is in the midst of an industrial and economic revolution more far-reaching than the one that transformed Europe and North America in the 19th century. According to William Greider, this revolution is a juggernaut that neither multinational corporations nor governments can control. While huge amounts of wealth are being generated, there is a downside, too: social dislocation; economic uncertainty; and the oldest, rawest form of exploitation--that of the weak by the strong. . . Regardless, we do think that a truly libertarian free market is the way to go. In addition, globalization is part of that. We have made the argument before that the former Soviet Union, China and Vietnam has now turned their own economies to capitalism in order to save their respective nations from further ruin. We had asked the question before, what will the so-called capitalistic free market social welfare state democracies do to save themselves? The answer is given from the mouths of the leaders of these countries directly - Globalization. However, as we have already stated, they talk the talk, but not the walk. Liberals have jumped on the bandwagon claiming globalization is good for society in that a rising tide lifts all boats. Stated another way, the manner is which they have attempted to sell it to other liberal constituents is that it will help the worlds poor get out of poverty and increase their standard of living. This is the sales pitch, and there are some economic arguments to support this claim (in theory). The conservatives and the business community stay mum and go along with the liberal argument even though that is not their own agenda. Conservatives and business people are concerned about markets, commerce and profits - not social justice in and of itself as a goal. US corporations want access to these other growing markets because they know that is where the growth is. The US, economically speaking, is on the decline (whether someone wants to accept this or not). New sales growth is going to come from these emerging markets, and they want in. Plus, they of course want a better deal in terms of relocating manufacturing and jobs to these lower cost labor markets as well, which they have been slowly doing for more than a decade now anyway. . The problem is that even though they talk about free markets and so on, the reality is, they are still struggling with how to unravel the Socialist and Keynesian ideas from the practical execution of daily government life. Politicians, being what they are, will cater to the masses and populist thinking. Which means they will try to coordinate both, but just like oil and water - these things do not mix well (and why many problems will fester going forward in our opinion). Our fear or concern is how they will reconcile these two distinctive philosophies and how the average citizen will be effected going forward. . How about some good news? Well, if corporations are allowed to seek out other jurisdictions for lower costs and a better deal - then who is to say you cannot do the same? For one, the politicians do say you cannot - but only if you are one of the middle-class they plan on milking going forward. Of course they do not say this outright, but rather through taxation policies, restriction on the movement of capital, etc. Corporations are permitted through various tax loopholes; legal write-offs and so on, to go elsewhere and even shelter corporate income from US taxation (even though US corporate income taxes are really at an all time low). Individual private citizens like yourself, however, seem to be another matter, at least as far as the politicians are concerned. But, you cannot stop progress. People will go where they want regardless - it cannot be stopped (even though there is no doubt the politicians may try). This is the unintended fallout of globalization that the politicians never imagined, which is to say the globalization also of one segment they thought they had captive - individual citizens. . Many middle class people from the US and Europe have already figured some of these things out for themselves. Which is to say, why not consider selling assets in a high tax or high cost of living jurisdiction and moving to a low tax, low cost of living jurisdiction? This is what free markets encourage, do they not? Why is it that large corporations have to be the only citizens taking advantage? Expatriation, or the idea of moving to another country really is just another form of globalization at work, albeit on a very personal level. The same applies to such topics as offshore banking and the like as well. This is the one very real and practical possible solution and choice you do have. Which is to say, you can get away or relocate to another country that DOES operate somewhat on truer means in terms of the free market, private property rights and other forms of true libertarian thinking - without the trappings of an old socialist or welfare state to contend with. Many of these countries did not have the explicit intent to coming to this conclusion, but arrived there just the same anyway - in part because they never developed the welfare state monster others have. They could never afford to do it in the past, and now that maybe they can on some small level - the US pulled the rug out and is going the other way. The US used to tell developing countries - Do what we have done, become like us in terms of social security and all the other social welfare programs we put into place. At the same time, putting a restriction on government spending in these nations when the IMF or some other US controlled institution went in. So, it is quite amusing in some respects that because of these events, many of these developed countries do not have a welfare state to dismantle nor the payment obligations affiliated with it. Many might have high levels of foreign debt, but certainly not all. In addition, if the western democracies continue with plans to forgive debt of many of these countries, then these developing countries will certainly be in good shape going forward. So, maybe the time is here to think about going to where the future growth will be, and not harp on the good old days where it once was. . IN TOO DEEP: WITHOUT PAINLESS OPTIONS
.We have come to the conclusion that the idea of native middle-class citizens wanting to leave the co-called wealthier home country has taken the politicians by stark surprise. Some liberal politicians are in a panic over the idea, looking for even more ways to tax and impede the flow of money out of the high tax welfare state (they could care less if you go, what they really are worried about is your taxable assets that become un-taxable and maybe untouchable once they drift off into the abyss known as offshore - or into another country). . Once again, it can be very difficult to say for sure what route will be taken, but none of the options, in our opinion, will be favorable to those in the middle rung of society. For example, if they cut social security payments to the new retirees (and if you do not have much of a private pension saved up) - you will have a problem. If they raise income or other kinds of social contribution taxes - then obviously not a positive situation either with even more money taken away from your paycheck. If they leave things the way they are and continue to borrow money like there is no tomorrow - another negative scenario for the upcoming generations. If they simply print more money to pay off all this debt and obligations - then we have a devaluation of the currency and inflation. They may try to further restrict the flow of capital out of the country, either outright or by taxing a transfer that is made outside of the country - not a pleasant idea either. If they back out of the social welfare paradigm altogether and let things settle out naturally without interference, for certain you will have social unrest and whole load of upset people in the society - and that is not a pleasant thing to look forward to either. Do you really want to have to hire a private security guard to accompany you to go food shopping? You may need to if the last scenario is the case. . There is indeed no easy way out or positive solution on the horizon that we can see. What do you think will be done? More importantly, what do you want to do today in order to safeguard your own family so you are protected no matter what? We think it obvious, if it comes to a choice between social unrest versus inflation, that inflation will win out. If it comes to a choice between letting the few suffer who do have private pensions or savings (and who may not have gotten themselves into trouble with excessive debt) versus letting the other group suffer the consequences of having been unwise with their own personal finances, you can bet what choice will be made there. If 1933 in America is a teacher of anything, it is this. . In any event, the next question is where to go or where could be better? Well, just take a look at countries that do not or will not have these kinds of problems. In some cases, it might be nations that did get into trouble before, such as Argentina or Thailand, that have already gone through the difficult process of adjustment. In Thailand we have the example of a former multi-millionaire real estate developer that is now selling sandwiches on the street. Yet, interestingly enough, he has said it was his own fault. I was too greedy and I wanted more and more success, he claims. I allowed myself to become duped into borrowing money to finance a huge real estate project that now sits vacant and uncompleted. Banks, just like drug dealers attempting to coax a new junkie, encouraged him to get into trouble. It is not their fault, but rather my own. Now I sell sandwiches, and my dream is to become the Thai equivalent of McDonalds in Thailand, says the former millionaire that has decided to keep going and not give up. Similarly in Argentina, economic difficulties have forced Argentines to learn some very important lessons as well. Barter had become one of the primary tax-free underground forms of economic activity in Argentina, and it works. It allows people to live and survive. Banks had tightened lending to such an extent that almost ALL real estate purchases were (and still are to some extent) done with cash, no mortgages. Today, in 2005, things are better economically both in Thailand and Argentina, but the people have not forgotten and are surely more conservative with their own finances as a result. They also do not put blind faith in politicians anymore either - and the people do now pay attention. I wonder how well Americans might handle such a situation in their own country if it came to pass? Will they behave as calmly and politely as the citizens of Thailand? Will they lash out against the government as was done in Argentina - or will they lash out at each other, maybe accepting the rhetoric from politicians that all is the fault of the Arabs, Oil or whatever else? . The above are just two examples, but there really is a long list of other countries that have not gotten themselves into problems, simply because they could not afford to - literally. Which is to say, often enough the case where real estate bubble scenarios and bloated welfare bureaucracies do not exist are those very same emerging markets that Americans were always taught to be terrible, poor and dangerous places. Nations, that by chance or circumstance are actually more Libertarian economically and socially. Places such as Chile, The Dominican Republic, Brazil, Cambodia, India, Bolivia, and many more. . In short, do you really understand the cold reality of political choices, economics, and how decisions other might make could affect you? If you do you not, then perhaps you should. If you were that politician, what would you do and if so, what are the possible results? Everything is cause and effect. You can do something politically or economically to try and solve one problem if you are a government leader, but also this creates a problem or situation for someone else. What is more likely to happen, knowing what you know? There is no getting around it. Life is a matter of choices. And like all choices, there are a number of possible outcomes, both positive and negative. The question remains: How will possible future remedies for the problems at hand affect you? Will they be in your favor, or will they be negative? If negative, what do you want to do about it? What can you do in order to protect your own future and that of your family? The situation is not hopeless, on the contrary in fact. You may not be able to control what politicians do (or do not) and you certainly may not be able to control what central banker do either, but you can control your own destiny. So, get cracking. Hopefully this article will get you motivated enough to think, to read and to act. . SOME QUOTES TO CONSIDER: . Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all wise. Indeed, it has been said that democracy is the worst form of Government except all those others that have been tried from time to time. - Winston Churchill . Our government... teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto him-self; it invites anarchy - Louis D. Brandeis . Majority rule only works if you're also considering individual rights. Because you cannot have five wolves and one sheep voting on what to have for supper - Larry Flynt . The government solution to a problem is usually as bad as the problem. - Milton Friedman . A government that is big enough to give you all you want is big enough to take it all away. - Barry M. Goldwater . That government is best which governs the least, because its people discipline them-selves. - Thomas Jefferson . Knowledge will forever govern ignorance; and a people who mean to be their own governors must arm themselves with the power which knowledge gives. - James Madison . Giving money and power to government is like giving whiskey and car keys to teenage boys. - P. J. O'Rourke . Washington is a place where politicians don't know which way is up and taxes don't know which way is down. - Robert Orben . Let the people think they govern and they will be governed. - William Penn . The best minds are not in government. If any were, business would steal them away. Ronald Reagan . One of the definitions of sanity is the ability to tell real from unreal. Soon we'll need a new definition. - Alvin Toffler . Life loves to be taken by the lapel and told: ''I'm with you kid. Let's go.'' Maya Angelou . Life is really simple, but we insist on making it complicated. - Confucius . By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest. - Confucius . . Some Similar Articles Related to This One:
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