Government vs. Prosperity

As the once-united Europe comes unglued at the seams …

As the once-powerful Federal Reserve runs out of cures for a sick economy …

And as our once-proud Treasury marches blindly toward a fiscal cliff …

I have conducted a wide search — beyond economic theory or financial numbers — for a deeper understanding of what ails America and its allies.

I have crisscrossed the globe four times this year.

I have personally spoken with hundreds of average citizens in BRIC countries — Brazil, Russia, India, and China … in the PIIGS countries — Portugal, Italy, Ireland, Greece and Spain … in former miracle-growth countries like Japan … in Africa and Oceania … and of course, in the U.S.

Nearly everywhere, I find a single, overarching emotion is paramount:

The fear that bungling governments are destroying — or about to destroy — what little is left of our peace and prosperity.

In Western Europe, as the entire continent sinks into a double-dip recession, the fear has spread from the PIIGS countries to France, England and even Germany.

In Japan, similar fears — long ridiculed by officials and ignored by the press — are once again bubbling to the surface.

And in the U.S., the fear of a fiscal cliff — less than five months away — has now pervaded corporate boardrooms, putting new investments on hold and prompting sharp cutbacks in hiring.

What is the common thread in this global fear and where does it come from?

For an answer, I have conducted an even wider search in the realm of ideas, and I have discovered a new book by a New York Times bestselling author who stands heads and shoulders above his contemporaries.

The book is Red and Blue and Broke All Over.

The author is Charles Goyette, an investment expert and political analyst who has earned raving praise from Congressman Ron Paul, Judge Andrew Napolitano, and Lew Rockwell — chairman of the prestigious Ludwig von Mises Institute.

Mr. Goyette has written more — and has a more fundamental understanding of — the true causes of the impending fiscal cliff than anyone I know.

So I recommend you take a short time off from the drumbeat of financial data to gain a better understanding of the forces behind it.

They are political forces that could doom your investments if you ignore them … or multiply your money if you harness them.

Below is our abridged version of Charles’ Introduction and Chapter One. For the entire story, be sure to read this blockbuster new book from cover to cover.

Government vs. Prosperity
Abridged from Introduction and Chapter One of
Red and Blue and Broke All Over, by Charles Goyette

Fly over populated centers along the U.S.-Mexico border.

On the North side, you will typically see broad, paved highways and neat rows of middle-class homes; on the south side, many dirt roads and mostly poorer homes.

What accounts for the difference?

Or look at this satellite image of the Korean peninsula at night. The brightly lit area is South Korea; the dark area, North Korea.

Both nations share the same people, language, cultural history and resources. And yet the South is dynamic and developed; the North, mired in poverty.

Why?

Or visit the cities and backwoods of Russia, the world’s largest nation, with nearly twice the land mass of the U.S. and boasting vast natural resources.

Compare what you see there to tiny Hong Kong, confined to a rocky, mountainous island with no natural resources to speak of — a country one twentieth the size of Russia, with three times better per-capita income … and 14 years more in average life expectancy.
Why the stark differences between these three sets of countries?

The answer: Freedom works!

Most of Mexico’s primary industries have long been owned or controlled by the central government.

North Korea is a police state, controlling not only the economy, but also the sciences, religion, education, the arts and even the daily thoughts of citizens.

And needless to say, under the Soviet Union, Russia’s economy was also centrally planned. For nearly the entire 20th century, the nation had virtually no free markets.

But these are not the only countries severely damaged by government controls.

According to a study conducted by the Heritage Foundation, free — or mostly free — countries enjoy incomes more than ten times the incomes in economies defined as controlled and repressed.

Even if you know about this generally, you will find the numbers shocking.

But what’s most shocking of all is that …

The United States Is Traveling
Down the Same Dangerous Road.

The Departments of the Treasury, Labor, and Agriculture, Commerce, Energy, Health and Human Services, SEC, FEMA, OSHA, EPA and other U.S. government agencies are maintaining their grips on the American economy and people … while expanding their intrusion into our lives with each passing day.

Meanwhile …

* The U.S. Supreme Court has ruled that police may kick down your front door without a warrant if they say they smell something in your home.

* The U.S. Ninth Circuit Court of Appeals has ruled that you do not have a reasonable expectation of privacy in your own driveway.

* The same court has ruled that federal agents can legally plant a secret GPS device on the bottom of your car and track your every movement without a warrant.

* Thousands of American travelers are being virtually strip-searched daily by scanners that produce detailed images of your body through their clothing.

* The federal government dictates which pain medications and cold remedies you can use … whether you have too much cash … the mileage your car must get … which type of shower head, toilet and light bulbs you are allowed to buy … and much more.

And we’re already beginning to pay the price:

Santa Rosa, Colorado Springs, Rockford Illinois, Atlanta and dozens of other cash-strapped cities across the nation are turning off street lights at night to save money.

In many areas, the cost of maintaining paved streets has become so prohibitive, the pavement has been ground up and returned to gravel … or roads have been left to erode.

The U.S. government mails over 88 million checks a month. Nearly 46 million Americans are on food stamps and 50 million on Medicaid.

And it’s no coincidence that activities most firmly under government control are also those that have suffered the worst declines: The U.S. postal service. Public education. And many more.

The few bright spots: Industries in which technological advances are so rapid, Washington can’t quite catch up with them to interfere as much as it would like to.

A Bipartisan Threat

Both Democrats and Republicans have sponsored the tremendous growth of government.

And both have voted for the massive government spending of recent years.

But if the “heroics” of government spending — trillions in bailouts, rescue plans, stimulus spending, subsidies, and debt monetization — had resulted in real production, it would be a different story:

The economy would be robust, unemployment would be low, and Americans would be wealthier.

Instead, the money has been used destructively. Good money has been taken from people who made sound economic decisions and given to investment bankers who made reckless decisions.

Productive people have been taxed to buy worthless paper from billionaires who should have known better than to buy it for themselves.

We’ve seen cash for clunkers, cash for caulkers, cash for appliances, cash for unions, cash for government buildings, and even cash for the wives of fabulously wealthy Wall Street tycoons.

Result …

It has been generations since Americans’ faith in the economy has been this badly rattled.

The American dream, based on home ownership, the certainty that things will continually improve, the assurance of a comfortable retirement, and the assumption that our children will have a better life than we had, is being shaken by deep-seated concerns that our prosperity may be taking a giant step backward.

This is not so difficult. We can easily identify the dynamic growth of prosperity throughout history.

In fact, the story of mankind has been one of ever more freedom accompanied by growing — indeed, by an explosion of — human prosperity.

Unfortunately, however, just about all we can see in Washington is …

Politics as Usual

Our freedom has been double-teamed by Republicans and Democrats alike; it has been sucker-punched by the red gloves of one and has taken a hit on the blind side by the blue gloves of the other.

Both parties are to blame for the fading of the American dream. Einstein’s oft-cited observation that no problem can be fixed from the same consciousness that created it applies to the deflating promise of America.

So the restoration of the American dream will not occur as long as the political discussion remains constrained by the old voices of the Republicans and Democrats who marched us into our present economic morass.

A recent ABC News/Washington Post poll found a mere twenty-six percent of Americans are optimistic about “our system of government and how well it works.” That’s a record low.

Among the disenfranchised are people who have seen their jobs disappear, their savings exhausted, and their homes foreclosed.

They are people whose hopes for retirement have gone dry; whose expectations for their children’s future have withered.

Some are angry that their own responsibility is being rewarded with the bill for bailing out the irresponsible.

Others are distraught that their faith in the empty assurances by government — such as Social Security and Medicare — now threatens to prove their undoing.

Some feel remorse for the past; others fear the future.

What has happened to our prosperity? What has become of the American dream?

There can be no doubt that the scale of government debt means a lower standard of living for the American people.

But that is only part of the story. As foreboding as the debt may be, the obstacles to renewed opportunity and well-being go beyond what the numbers reveal.

Under the cloak of the Republican and Democrat orthodoxy that approved the debt as it compounded, other ideas were smuggled into America’s economic life.

They were ideas that seek to subordinate the individual — generally by economic and authoritarian measures — to the will of the state.

These ideas and practices were especially prominent in the mortgage meltdown and its ongoing aftermath — when Republican and Democratic majorities alike insisted on socializing the losses of private banks and corporations, while guaranteeing their profits were theirs to keep.

The country is financially insolvent because the Washington parties, red and blue alike, are philosophically bankrupt. Their shared statist philosophy needs to be exposed before it does us any more harm.

Prosperity

Prosperity is something much greater than wealth. Prosperity refers to the wellsprings of human ingenuity and enterprise from which long-term wealth and human improvement bubble forth.

The ancient Romans made important contributions to the implementation and refinement of property rights.

They established trading colonies as far away as the east coast of the Indian subcontinent before the time of Christ.

They developed civil engineering skills that enabled them to build roads, aqueducts, and other marvels that supported populations that could barely have been conceived elsewhere in antiquity.

They created long-term prosperity for themselves. The later plunderers of Rome got wealth, emptying the treasury of the empire, but they did not get prosperity.

Similarly despite billions in cash that has flowed into the Persian Gulf oil states for generations, that money has not been turned into long-term prosperity for its peoples, as the seething discontent that spawned 2011’s Arab Spring revolutions in the Middle East has shown.

The Saudi royal family, the Al Sabahs of Kuwait, and Libya’s Kaddafis have had their palaces with gold bathroom fixtures, but the capital is spent abroad in places where opportunities abound. When the wells of the desert kingdoms run dry, so, too, will the wealth.

Freedom and Wealth

To say that freedom creates prosperity is convenient shorthand.

To be more precise, freedom provides a conducive environment in which prosperity, the dynamic of wealth creation, can function.

What is this dynamic? Where does wealth come from? We ourselves are its creators. It is the nature of man to provide himself food and shelter, to improve his circumstances, to discover, to invent, to refine, and to expand.

When free to do so, he creates wealth, creates it again, and creates it anew.

The presence of petroleum was a nuisance to Pennsylvania farmers until in 1849 someone discovered how to refine kerosene. John D. Rockefeller’s fortune was begun in refining kerosene, although before long a man named Thomas Edison had invented a way to light homes that was superior, and Rockefeller’s business had to adjust.

The distribution of alternating current discovered by Nikola Tesla was commercially superior to the direct current Edison built his company on and Edison Electric was forced to adapt to the new improvement.

Wealth is created by the greatest resource of all: human beings. It is people who continually discover lesser resources and put them to use in new ways.

Look about at all the wealth people have created. Buildings and homes, schools and churches, stores and places of entertainment; leisure and literacy and libraries; heating and cooling systems; bright lives of bright lights, bright colors, and stunning clothing; marvels of electronics, digital magic, and the miracle of global communications; new medical techniques, devices, and medicines; high-speed travel and stores stocked full of food, much of it fresh from around the world.

A return to the path of prosperity does not lie in legislative prescriptions, new programs or new plans for what the state must do.

Our prosperity will not be restored by some new tax-cut proposal or new spending initiative; no laws will do it; no charming candidate.

Our problem transcends any mechanical solutions or reform package. We are beyond the ability to fix our problems with process tinkering.

As congressman Ron Paul has noted, “It’s not a budgetary problem. The budget is a symptom of this disease. Americans have to inquire into the nature of government itself.”

The State’s Impunity

The state has no money that it has not first taken from someone.

And this era of rising gas prices should help concentrate attention on the point: As you reach into your front pocket to fill your gas tank at prices that would have been thought obscene just a few years ago, the Department of Energy is taking $30 billion a year from your back pocket.

What does it do with your billions? Does it explore the remote and dangerous corners of the earth and discover any oil? Does it take enormous risks in hazardous oceans and arctic conditions and suffer substantial losses to locate energy? Recover it, refine it, and transport it to your neighborhood? Just how much gas does it put in your tank for its $30 billion?

Not a drop.

Just as the government pumps no gas, it builds no house and it grows no corn.

And when it does appear to grow corn, for example, in the provision of food subsidies, it only does so by taking seeds from a man who then cannot grow his own.

Because even what it appears to create is only accomplished with the labor of someone else who would have used his labor for his own preferences or from money taken by people who are now precluded from acquiring what they prefer.

The state could have provided an environment of freedom so that prosperity could flourish, as intended. It could have stood against coercion, on watch for force and fraud. Instead, it has become a fearsome cause of coercion, and an agent of force and fraud itself.

Without instruction by the state, the American people know perfectly well how to create wealth. They do it by doing what they’ve always done.

They do it by going to work every day, by saving when they can, by taking pride in their work, by buying and selling, by coming up with new ideas around their kitchen tables, by developing good habits such as thrift and punctuality, by looking for better jobs, by looking for better products, by selling better products and by honoring the fundamental principles of right and wrong.

The gifts of the free economy add up, multiply, and compound.

But in our contemporary experience, the state has become ravenous in directing and commandeering our productivity. Innovation is stunted. Dependency spreads. Capital spots safer havens elsewhere.

Because political connections become a more effective means of getting things done than industriousness, public policy becomes capricious.

A free economy means people are free to trade. Throughout history trade has been a means of illuminating mankind, spreading algebra and alphabets, steering discoveries in navigation, geography, and time measurement, driving transportation improvements and road construction.

Trade pollinates human culture, nourishes our humanity and inseminates our intellectual life with new foods and medicine, new ideas and arts, new inventions’ technologies, and products.

Why then does the state serve as a frequent impediment to trade? Why is the trade language of the state dressed in bellicosity? It speaks of unfair trade and trade from which we need protection. If there are trade “hostilities,” then trade “confrontations” are triggered. It blocks trade, erects trade barriers, and seeks to overcome them or to “retaliate.”

By prohibiting exchanges that enrich us, the state makes us poorer. Where does the state derive the coercive power to stop free trade among free people? People cannot be both free and prohibited from buying and selling; coercion and liberty cannot occupy the same space at the same time.

But there is nothing the state does quite as incessantly as meddle in prices.

When state price meddlers fix prices artificially low, it distorts the equilibrium of supply and demand and creates scarcity. It may drive important producers out of business. When the state artificially raises prices, the resulting distortion is surpluses.

People who now must pay those higher prices do so at the expense of other goods and services in the economy that go un-purchased. Not only is some other need unmet, but every price received is also a price paid.

In artificial price-fixing, just as in the case of trade interference, the state is favoring one citizen (or party to a transaction) over another.

It is state lunacy that forces us to pay for huge agricultural price supports in the morning, making food more expensive, while in the afternoon we pay for food stamps to lower the cost of food for some.

Price supports for tobacco growing come out of the taxpayers’ left pocket; federal antismoking programs out of the right.

Seniors looking outside the country for affordable prescription drugs risked federal prosecution for it, even as the government enacted a prescription drug benefit plan to lower costs, a plan that now faces a liability of $19 trillion.

We go to war to protect oil supplies overseas even as we slap on import tariffs to keep cheap Brazilian ethanol from coming into the country.

In one year, government creates tax advantages that encourage the purchase of Hummers and huge SUVs; in another year, your income taxes go to pay people to junk their gas-guzzlers and buy smaller cars.

The state takes money from you to give to sugar producers, and then it takes more to nag you not to use so much sugar.

The Kafkaesque absurdity of funding these mutually conflicting activities is made worse because we are impoverished by the madness along the way.

If Americans wish to reclaim their prosperity they must embrace freedom.

That’s it. Just freedom. Because by now the extent of our economic calamity should be apparent to everyone.

And that means the state . . . must . . . JUST . . . STOP!

It must stop the big things it does that collapse our freedom. Things like price-fixing and the Patriot Act, endless wars of invasion or occupation.

It must stop favoring the influential and politically connected by interfering with trade.

It must stop the bailouts and stimulus programs of both the Republicans and Democrats. It must just stop.

It must stop the destruction of the monetary system by the Federal Reserve.

It must stop the endless spending of Keynesian economics, an academic pretext that has encouraged trillions in deficit spending and left America staggering down a desolate road of long-term indebtedness.

The advice of British mathematician John Maynard Keynes that unemployment and recessions can be cured by creating artificial demand in the economy — that government can kick-start the economy by spending money it doesn’t have or by driving down interest rates by printing money — has been the prevailing creed of Republicans and Democrats since the Great Depression.

Keynes’ advice failed to end the Great Depression, which didn’t end until state spending collapsed after the war.

It failed again in the stagflation of the 1970s when, according to the Keynesian theory, the impossible happened: the high inflation it recommended coincided with the sharp recession and rising unemployment it promised to fix.

And it continues to fail today, draining our prosperity and bleeding the purchasing power of the dollar, even as it has jacked up the visible portions of the national debt from $9 trillion when the recession began in December 2007 to today’s $16 trillion.

Because the madness of this Keynesian meddling can only make our crisis worse, it cannot be allowed to continue.

The state must stop.

That’s the formula for restoring the prosperity of the American people, for making the men and women and children of America and their families better off.

Good luck and God bless,

Martin

Note from the Editor: Stay tuned to Money and Markets for specific insights from Charles Goyette on how to turn the shock of America’s impending fiscal cliff into major profit opportunities.