Market Economics Work – How We Solved Our Gas Crisis – Hey Mom Look No Government

By Anton Wahlman

American memories are apparently becoming shorter and shorter. Various
misguided references to the alleged causes and cures of The Great
Depression aside, people don’t remember that we once upon a time, less
than 100 years ago, didn’t have a Federal Income Tax, that drugs were
legal (and then alcohol prohibited), and that inflation and interest
rates were double-digits less than 30 full years ago.

Among the most recent things to be completely forgotten are the high
gas prices, peaking in July 2008 with nationwide averages over $4 per
gallon and people in California paying $5 on occasion. Politicians and
pundits blamed this on “speculators” and called for the government to
“do something.” Toyota (TM) Priuses were selling at MSRP or higher.

Less than six months thereafter, gas prices had fallen by over 50%,
and Toyota Priuses now come with $750 rebates to make them move. Never
before did gasoline prices fall so far, so fast. Not even close.

What was the government program that fixed this economic problem? The
answer is none at all. The government didn’t lift a finger to solve
this problem. It let the market do its magic, curing the issue with
its own natural self-healing mechanism first described in Adam Smith’s
The Wealth of Nations [1776]. Sure, there was a lot of huffing and
puffing about what people suggested the government should do, but in
the end the government did nothing. The problem just went away. No
government intervention solved the problem.

Think about it: The one recent problem which the government left to
the free market to solve, got solved in record-short time. Contrast
this to the ever-ballooning demands for the government to “do
something” about the financial and economic crisis. The demands from
almost all ends of the political spectra suggest that we drop all
economic common sense and instead spend money we don’t have.

Think about it again: We got into this mess by borrowing too much,
spending too much, and making too many loans. What’s being proposed?
Let’s spend even more, borrow much more, and make even more loans.
It’s like an alcoholic trying to cure a whiskey bottle’s hangover by
drinking a whole case worth of whiskey the next morning. If there ever
were a more self-evident disaster outcome guaranteed, I can’t think of
one.

The free market cured the high gas problem in less than six months
without the government lifting a finger or spending a dollar.
Likewise, the free market would cure the imprudent debt bubble by
allowing it to be pierced, seeing prices falling, wages falling and
allowing bankruptcies and foreclosures to clean up the imprudent
investments into orderly liquidation. Adjusting wages to demand, would
guarantee full employment as with any other market price.

In a free market, the current recession would probably be cured within
a year or two, and it would allow the government to cut expenses
instead of increasing them. Only by dramatically cutting the size of
our government, so that we can eliminate the deficit and start paying
back the debt, can we restore sanity to our financial and monetary
equation, which includes saving the value of the dollar.

As it stands, we are on a path that will put us in Germany’s World War
I surrender rail car and its 1918-20 aftermath. We will be left with a
debt burden so great that the only way out will be massive inflation,
as we essentially default on government bonds. Germany was left with a
huge war debt after World War I, but because the debt was not
denominated in British Pounds or French Francs, Germany simply
inflated itself out of its obligations, causing dramatic
mis-allocation of resources, societal chaos, the rise of Hitler and
the bloodiest war (World War II) in its wake.

In our case today, the debt-explosion path that we will apparently be
pursuing, will most likely also mean a massive inflation when we
eventually print the money to pay off the bond buyers (read: The
Chinese). China has one of the soundest economies in the world today,
with low or nonexistent public and private debt, and high growth, but
it has invested its surpluses largely in U.S. government bonds.
Whoops! All that the Chinese worked for during the last decade, will
go up in smoke. And in the wake of the Chinese losing their savings
invested in U.S. government debt – another war? We are clearly playing
with fire, taking on all this debt to finance unprecedented levels of
government spending.

Wall Street is Voting on the Candidates – In Need of a “Cold Shower”?

By Anton Wahlman

Proper schooling includes the study of the things in life that have withstood the test of time. This includes objects of art (Leonardo da Vinci), literature (Shakespeare) and politics (the Declaration of Independence, the Constitution). These are items in life who are classical because they are each fundamental in their own disciplines.

With the most interesting political campaign in a generation in full swing, it is worth reflecting on the extent to which what is being discussed in these political debates will go down in history 25, 50, 100 or more years down the road as “classical” – or important in the eyes of history.

Let me suggest that at this point in the political season, as interesting as the fights may be from a multiplicity-of-candidates perspective, the actual content of the issue disagreements isn’t fought in a particularly classic way. What do I mean by that?

First, let’s define what is the classic debate in politics. It is pretty simple, actually. Everything that is done in the world, every dollar that is spent, is either done so by someone who is in charge of himself (or the family/children), or by someone who has taken the resource or forced it to be directed in any other (involuntary) way. That’s the government, which taxes, spends and regulates. For this reason, the classical debate in politics is very simple: Should the government tax/spend and/or regulate something, or should it not? If the individual is in control of his property, it is capitalism, but if the government regulates it and/or taxes/spends it, the thing in question falls in the column of socialism.

Almost every viewpoint in politics can easily be analyzed in this manner – capitalism vs socialism. It used to be a big geopolitical struggle between the free world and The Soviet Union, but the geopolitical struggle has now been replaced by the desires of radical islam and of ever-growing government at home.

In this context, the current debate of taxes and spending is pretty pathetic. Let’s start with Obama and Clinton. They are both in favor of raising Federal income taxes to well over 40%, raising the capital gains taxes from 15% to well over 40%, and probably also raising the corporate income tax from 35% to that over-40% rate. In other words, doing their best to make sure that the value of all companies on the stock exchanges will see their values tumble dramatically. By reducing corporate profits, and the share of those profits that go to their owners, it is a most basic corporate finance iron law 101 that the values must decline. Hence, a major reason for the stock market decline over the last couple of months. If there is a chance Obama or Clinton may actually raise those taxes in 2009, better sell those shares now before they go down another 20%. This is pretty simple – and prudent – risk management by those who own shares.

The most baffling point about the proposed Clinton/Obama tax hikes is their concurrent reaction to the recent market downturn and fears of recession. Both candidates are in favor of immediate tax breaks to avert a recession!

Hmmm, the economy is going South because of the fear of 2009 tax hikes, so therefore the same people who are proposing those tax hikes now want immediate tax cuts! Why doesn’t anyone call these deeply self-contradictory candidates on this evident inconsistency? It should be the first question in every interview/debate.

Unfortunately, the current crop of Republicans are not doing too much better in these departments either. While they pay lip service to avoiding tax hikes, and in some cases propose some (mild) tax cuts – such as a cut in the Federal income tax rate from 39.6% to 30% – they are fairly silent on specifics with respect to overall government spending. This year, the Federal government spends approximately $3 trillion, or $10,000 for each of us 300 million Americans. That’s up dramatically from 1962, when the Federal budget was $100 billion, or some $500 for each of approximately 200 million Americans.

None of the leading Republican contenders – McCain, Romney, Giuliani or Huckabee – have the courage to spell out specifically what – if anything material – they would cut from this giant $3 trillion bureaucracy. None of them has proposed abolishing a single government department, as far as I know. None of them points this out in socialism vs capitalism terms. All of them have bought into the principle that big government is here to stay, only that it should grow at perhaps 2% per year instead of 7% or whatever.

What we are left with here is therefore the cowardly Mexican standoff between Republicans and Democrats: Clinton/Obama are unwilling to accurately describe their plans for taxing and spending as a step into a future of socialism, and McCain/Romney/Giuliani/Huckabee are unwilling to admit that they are unwilling to change the status quo by anything but a rounding error.

There is therefore nothing classical about this fight at all.

Rather, the current in-fighting in the two parties focus almost exclusively on personalities and resumes – not actual policies in the context of the eternal struggle between capitalism and socialism. Someone is for “hope” and “change”, whereas someone else is for “experience” and “judgment.” But is someone willing to take a stand for and against socialism and capitalism?

Not any of the leading candidates, that’s for sure. With some degrees of difference in general direction, they have all basically bought into the model of big government, and the debate is about fine-tuning its size. Granted, it is important for the future of the stock market, economic growth and prosperity whether taxes are at 8%, 28% or 48%, but it doesn’t address the issue of the very fat $3 trillion annual Federal budget.

There is only voice pointing out that the Emperors have no clothes in terms of the narrow scope of the debate: Ron Paul. He points out that almost all of our $3 trillion budget is unconstitutional and socialist. The original constitution spells out that the only legitimate functions of the Federal government are the maintenance of a judiciary and a defense against foreign enemies. If we had a constitutional government today, it would cost somewhere well below $1 trillion, or well below $3,333 for each of us 300 million Americans.

Example in point: The framers of the constitution had as a key objective to make sure that the government does not get its hands on the education of our children. “Public” (socialist) schools didn’t exist until all of the founders of our constitution had died, in 1848, coincidental with Karl Marx’s publication of Das Kapital. I’m not a conspiracy theorist, but I couldn’t help noticing…

Yet today, the Republican candidates for President (except for Ron Paul) don’t propose the abolition of “public” schools. Same thing for other big budget items such as social security, medicaid and medicare. All these things are, in fact, socialist programs and therefore not-so-coincidentally unconstitutional.

So there you have it – today’s political debates have been reduced from comparing the classical differences between socialism and capitalism, to emotional nonsense such as whether we need a President who is for “change” and claims to be able to “unite the country.” How do you “unite” the views of the person who will see a huge tax hike to pay for some government program with the bureaucrats and the alleged beneficiaries of such a program?

America needs a cold shower of hard and fundamental choice: Should we follow the constitution and dramatically deflate the size of the government budget and its millions of regulations, or should we march forward into full-fledged socialism? We know where Obama/Clinton stand, although they dare not say it. Unfortunately, we also know that McCain/Romney/Giuliani/Huckabee aren’t proposing much more than “holding the line.”

The stock market has been voting in recent months, and its verdict isn’t all that rosy, as it starts to discount the probability of a leap into more socialism in 2009 and beyond. In the meantime, the rest of us can also vote our conscience – Ron Paul.