2-22-10
 

Voting for Oblivion

My dear friend, welcome back. Let's kick off with two quotes of past and present to set the scene for this week's cheery little ode:

"The best argument against democracy is a five minute conversation with the average voter." - Winston Churchill.

"Within 12 years... the largest item in the federal budget will be interest payments on the national debt," - former U.S. Comptroller General David Walker.

How are the two quotes linked? Cause and effect, gentle reader, cause and effect...

Consider that second quote taken from a recent new story. Your hard-earned taxes will soon be spent on servicing interest on debt. How long can this be sustained? Not long without something giving way- raising taxes alone won't be enough (they are already ludicrously high).

Does it make your blood boil to see what those politicians have done? It does? Should we lynch the bastards?

Are they really to blame?? No. The man in the street is: the average voter.

The trouble with democracy, as Winston Churchill and many other intelligent people throughout history noted, is that all democracies contain the seeds of their own destruction. This is what George Washington meant when he quipped about the people being unlikely to maintain the republic he bequeathed them. Rome fell for the same reasons (once it ran out of enemies there was no 'boogeyman' to distract the masses either).

To elaborate on what Winston Churchill said, the problem with democracy is that majority rules, and the majority of people are relatively poor and therefore quickly realize that they can vote themselves rich (by voting to tax higher earners more). The average person has no interest in economics and doesn't understand the consequences of his vote; all he sees is the "Free Money" slogans waved around campaign trails.

In a democracy, if politicians wish to gain and hold power, they have to pander to these voters by telling them what they want to hear- "Free Money" - and have no understanding or interest in anything other than their own election and re-election. The intelligent few politicians who speak out, like Ron Paul, are summarily ostracized.

Fine. So rich people are taxed more, and the rich (mostly intelligent and productive) people understand the game being played and go along, unless taxes get too intolerable and they leave the country, thus really screwing things up. Or they could always buy the politicians off, which is what lobbying is all about (by the way, Obama promised to slash lobbying but there's been a record amount this past year).

With all these confiscated taxes from the wealthier minority of voters, the booty is dished out to the 'needy' that constitute the majority of voters. Everyone's happy for now.

But then, a contender for the presidency comes along and promises even MORE free money than the last guy. The standing president now has now choice but to compete. Spending goes up and up... until the limit is reached. What's the limit? Until 1971, it was the Gold Standard; when every dollar had to be backed by physical gold bullion.

Naturally, this got in the way of even greater "Free Money" campaigns and this had to be abolished. And so it was. Since then, in a paper money economy, governments can print their own money and buy as many votes as they want... until the limit is reached.

That's where we're at right now: the end game. And gold will be the last man standing.

Contrary to a lot of opinion, history has shown that gold actually isn't the best defense against rampant inflation; stocks are (if purchased at sensible values). What gold is really about is something far deeper and even more ominous...

Gold is the antithesis of government. Gold is truth from a monetary standpoint. Gold is one of the few things remaining in the world that is not a big fat lie.

As far back as the Roman emperors, governments have been and still are, concerned with 'bread and circus' pandering to the masses to stay in power. What the masses want of course, is free money. The deception they use to achieve this magical feat is to PRINT IT . The Roman emperors were the first legal counterfeiters.

Now thankfully, the whole world isn't completely brainless (though it's a close call) and sophisticated investors know what governments are really all about and they will buy more gold the more money printing governments do.

What the price of gold is telling us actually isn't inflation (from a rising price perspective), but rather government dishonesty increasing.

(Some may argue that technically inflation is defined as the supply of money therefore gold actually is linked to inflation but I'm talking about the rising prices of things scenario- the supply of money and rising prices don't have a direct link).

Because governments all over the world are trying to counterfeit their way out of a natural correction in the economy (they've made up the more palatable term: quantitative easing for this deception), ALL paper currencies are now suspect. Gold is set to rise in line with this.

The Federal Reserve has been very clear about the fact that they intend to stop the quantitative easing program at the end of March. What that means in practice is that they are going to stop buying mortgage securities. Those mortgage purchases helped keep mortgage rates low. But they also financed the US government fiscal deficit, albeit indirectly. Banks that sold the mortgage securities turned around and bought US government debt or put the cash right back at the Fed.

That buying of government will now stop therefore. So who will buy it?

As Bill Gross (the bond king) states:

"The fact is that investors, much like national citizens, need to be vigilant, and there has been a decided lack of vigilance in recent years from both camps in the U.S. While we may not have much of a vote between political parties, in the investment world we do have a choice of airlines and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check writing over the past 12 months. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of 'check-free' elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond. Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this 'juice' was being squeezed into financial markets. If so, then most 'carry' trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their 'sugar daddy.'"

There's simply no precedent for this in economic history. There's a great experiment going on with our lives and the lives of our children. You won't be told that such an experiment exists or even what the outcome is; you'll just be landed with the consequences.

What's the alternative to democracy? Here's another quote from Churchill: "It has been said that democracy is the worst form of government except all the others that have been tried."

So we're stuck with the current democracy until it finally unravels, hopefully not with a war or a dictatorship (a major distraction will soon be needed to deflect blame away from politicians). Or... maybe, just maybe, the voters could educate themselves and become responsible with their vote. And that's why you're here isn't it? If only the whole country was a subscriber. Do feel free to invite everyone you know...

Best Regards,

Mark Patricks
 

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