The true cause of the economic tsunami

Unfortunately that which has actually caused our present economic crisis is not even being given lip service by anyone. It is hoped that which is contained herein will help fill that void for the reader..

As every family knows, when it spends more than it earns it can only make up the difference by borrowing or increasing income. It is the same for the government except they also have the power to essentially print money. Let's look at how government appears to get away with running continuing deficits while any of us who did the same thing would eventually be forced into bankruptcy. When the government spends more money than it receives, the Treasury Department has the power to borrow the difference by offering bonds for sale at market interest rates. Ready buyers of these bonds are those foreign countries who sell more of their products and services to U.S. entities then is purchased from them. The dollar difference (trade deficit) must eventually return to the U.S. and is predominantly used to buy this debt.

When the amount of funds required to satisfy the deficit exceed the amount of trade deficit dollars available to buy our bonds, the Federal Reserve Bank (FED) buys the bonds. The FED presently owns around 40% of the national debt and this means the government essentially owns this portion of its own debt. They buy these bonds by crediting the attendant purchase amount to the bank accounts of the dealers that sell them. Since banks are required to only maintain 10% of their deposits in reserve they can lend 10 times that amount. This 10 to 1 leverage is then further increased when money is moved by transactions to other banks.

Why should this be of concern? Because this created money is just like any other commodity and its purchasing power decreases when the amount of it available increases . When there is more supply than demand of a commodity the value of that commodity decreases.. Hence, the devaluation of the dollar and resultant eventual inflation.

Our present economic condition has been brewing for many years. Its beginning can be traced back to what ensued after it was agreed by 29 nations at the Bretton Woods Conference in 1944 that the U.S. would guarantee to sell gold at $35 an ounce effectively pegging the value of world currencies to the U.S. dollar. Subsequent continued deficit spending that exacerbated in the 1960's coupled with an increasing trade deficit resulted in marked devaluation of the dollar relative to gold. This led to the issuance of what were called “special drawing rights (sdr's)”, that were in essence iou's, to offset the difference between the market price of gold and $35 an oz.

In 1971 the continuing increased national debt and ensuing pressure from speculators and central banks forced President Nixon to abandon the gold standard. Thus the dollar became a fiat currency whose value was to float in relation to other world currencies. Without the restraint of the gold standard, deficit spending accelerated and rose from under $500 Billion in 1971 to $9 Trillion in 2008. During this period the FED continued to manipulate the money supply resulting in an inordinate increase in the price of homes followed by a marked decrease in these prices circa 1985 to 1998.. What then followed brought us to our present economic predicament described as follows..

In order to allow banks to obtain additional funding Fannie Mae and Freddie Mac (GSE'S) were created many years ago by our government. By being able to sell loans through Fannie Mae, Freddie Mac and others, retaining fees for servicing and a small profit margin, banks could again use these derived funds to make more loans. Once loans are sold the lender no longer bears the risk of foreclosure when borrowers default. The result has been to progressively relax loan standards to allow marginal buyers to qualify.

We see this specifically when the Fed placed an excessive amount of money into the economy to address the recession that started just prior to the GWB presidency and extended to ease the economic blow of 9/11. This inordinate amount of money deposited into our banking system had to be loaned out since that is how banks make money. The ability to easily sell the loans removed the liability of foreclosure and the result was the accelerated development of creative loans to meet the demand.

The increased demand caused home prices to increase markedly attracting speculators. The increased need for buyers of these loans was met by Wall Street's investment bankers. They created bonds that were backed by a bundled package of a variety of mortgage types and initially priced by a complicated mathematical formula. Called Mortgage Backed Securities (MBS) they became considered as highly desirable investment vehicles and were sold worldwide.

Meanwhile, attempting to counteract what was occurring the Fed started to reduce the money supply. This increased the Federal Funds Rate multiple times but was unable to curb the excesses that had been created and the housing price bubble finally burst. The collapse of housing prices also resulted in the collapse of the market for MBS. Their value could no longer be adequately determined by the market or by the original pricing mechanism due to this complexity of this security.

In correspondence I had with economist Milton Friedman over a ten year period in the 1990's he stated that the Fed board should be eliminated and the responsibility of controlling the money supply should be left to a computer. The PC would be programmed to keep the money supply increasing only in proportion to the increase in population (about 3-5% per year). He also sent me graphs from his computer to show that it took two years for GDP to react to a change in the money supply. Thus the Fed's power to control the money supply should not be used to counteract fiscal policy. He believed that deficits should be addressed by either cuts in spending or increases in taxes. However, he preferred cuts in spending.

He believed that taxpayers would more likely spend money in an economically beneficial way than government and, by that virtue, was more likely to increase our national income {GDP). The benefit of a growing GDP is higher tax revenue that can be used not only to pay for government services but also our national debt. The interest alone on our massive national debt caused by deficit spending is huge.

If the money supply was limited in growth as Dr. Friedman suggests then the legislative and executive branches of government would be forced to either curb spending or raise taxes to balance the budget. This would mean that these elected officials would have to answer to the voters and would be more likely to be more fiscally responsible.

There is no question that deficit spending has led to our present economic predicament. Increasing the money supply to offset deficit spending must eventually cause hyper inflation. In the past we have seen prices on goods rise due to this. Six dollars in 2009 is equal to one 1950 dollar. Thus devalued dollars are used to pay off debt. The extraordinary increase in deficit spending will at some point in time accordingly devaluate the dollar resulting in dire effects on the economy and will especially negatively affect the growing senior community who live on fixed incomes.

Unfortunately until this is recognized and steps are taken to no longer use the Fed to bail out actions taken by the legislative and executive branches of government, our country will continue to face continuing and worsening cycles of economic boom and bust leading to periodic financial tsunamis'.

Are You Liberal or Conservative

The answer to this question, as used in political connotation, requires an understanding of the respective terms. This process involves the semantics of their use in discourse.

It stands to reason that a mutual understanding of the words and terms when utilized in discussions is required for communication between the parties involved to convey true meaning to the discourse. This is especially true when the words and terms are expressed in ideological and political platforms and through the media to the public at large. Unfortunately the dictionary usually only deals in defining words and is insufficient in providing the required semantical definition necessary for one to clearly obtain true meaning in their actual application.

To further confuse the issue, we find in conversation the interchange of the words liberal with being "to the left" and conservative as being "to the right". This apparently arose from the use of the terms in the parliaments of foreign countries; the parts of the parliamentary chambers located to the right and left of the presiding officers accordingly representing conservative and liberal elements respectively. Adding additional complication we find, at times, connotations used tying "to the far right" as tending towards fascism and "to the far left" towards socialism or even communism.

Unfortunately, these terms are flagrantly interchanged by activists, politicians and those in the media. This results in the public receiving frequent misrepresentation of the facts. Our interest here is to the mis-information being conveyed to the American people that accordingly distorts their ability to clearly understand the meaning of the rhetoric to which they are exposed.

Looking to the past, it is no wonder that confusion exists regarding the understanding of what the terms liberal and conservative really mean. It is only in the last century that the term liberal has become associated with socialism. This collectivist ideology involves the redistribution of income and wealth with an accordingly greater control by the central government over the interactions of economic enterprise. Prior to this evolutionary change, being liberal had the reverse meaning of being in strong support of individual freedom with an attendant limited role of government in one’s life.

The term liberalism was coined in Europe somewhere in the late 17th or early 18th century to represent a political philosophy that emphasized limited government with individual freedom and civil liberties. It promoted representative government and property rights along with freedom of religion. In economic matters it favored non-interference from government since the forces of the marketplace would provide the best results for the nation’s people. Thus, at its prime liberalism represented limited government with a separation of powers among the legislative, executive, and judicial branches and economic free enterprise. Sounds like present day conservatism doesn’t it?

The term conservatism was coined to represent beliefs that arose to counter liberalism . Essentially, it supported the existing distribution of power, wealth and attendant social status. These beliefs included emphasizing faith and tradition ahead of freedom of thought and speech, as well as, supporting the total interest of society over those of its individual members. Sounds to a degree like present day liberalism doesn’t it?

Unlike Europe, America in the process of enacting a Constitution had developed political beliefs that included economic individualism and the limitation of government power. This was incorporated into the Constitution. This did not follow the beliefs underlying European conservatism but was in fact closer to European liberalism. The American beliefs accepted the concepts of a free market and the personal acquisition of property by individuals. Individual freedoms and property rights were representative of attendant moral, religious, political, and civil
rights. As the provisions of the Constitution decreed, the federal government was limited to acting in those areas wherein the states themselves did not have that ability, in inter-state matters and in foreign relations. Great importance was placed on separation of powers, judicial review, and states' rights as opposed to federal power. This then became the foundation of American conservatism.

Entering into the 20th century Americans generally accepted these principles that were to carry the conservative label. However, there was a political movement evolving that could now be endowed with the new label of liberalism, American style, that had beliefs that government should be more involved in social issues and in controlling the free market. Since the economy had become more complex as it expanded , these elements began to support the idea that the government could best promote the interests of its citizens by regulating the economy and having government provide for the welfare of its citizenry. In addition they wanted government to correct economic deficiencies they believed to be caused by unregulated capitalism. They supported progressive taxation, antitrust laws, a minimum wage, social security, public education, safety and health regulations, consumer protection and environmental preservation laws. Some of them became socialists, although not necessarily openly supporting Marxism and communism.

These elements eventually found a way, albeit gradually, to change the course of government. The federal government, supported by three-quarters of the state legislatures, aided and abetted these elements in enacting the 16th Amendment to the Constitution in 1913 taxing the income of wage earners. Although at first it placed only a nominal tax on those with extraordinarily high incomes, with time it evolved into a broad based tax on virtually all income. The federal government was now able to usurp “states rights” enumerated under the Constitution, redirecting income taxes collected from residents of one state to the benefit of residents of other states and to federal programs that in the past may have been entrusted to the actions of individual states.

The American liberal received another big boost with passage of a package of social programs entitled “New Deal”. President Franklin D. Roosevelt introduced the New Deal in 1933 in an attempt to reverse the economic downturn and provide for those in society having been adversely affected economically by the great depression following the stock market crash in 1929. This New Deal legislation placed restraints on the free market activities, allowed government to intervene in the economy, heavily increased taxes and increased the size of government. However, it took the sale of materials to our future allies and then later for our own use at home, and the tightening
of the belts by those Americans supporting our troops, to bring the economy back to relatively normal.

During this period American conservatism developed adherents that did not approve of the New Deal and promoted the resurgence of a free-market economy. They continued in this pursuit and in the presidential election of 1964 conservative Republicans supported Barry Goldwater whose book “The Conscience of a Conservative” espoused the principles of conservatism. Although he lost the election conservative beliefs continued to be espoused and in 1980, Ronald Reagan a strong supporter of Goldwater, took over the conservative mantel, ran and won the Presidency. His call for patriotism, religious and moral values, as well as, strong opposition to high taxes,
government controls, and federal spending was the motivation for his support by the majority of Americans.

With this background perhaps we have the foundation to simplify the meaning of the terms, as they apply to an individual American, with which we are dealing in the light of today’s world. Let’s try for definitions that can be easily understood after delineating and reviewing what has been stated heretofore.

Conservatism - from the foregoing we find that this term conveys the following:

1. A free market and the personal acquisition of property by individuals
2. Individual freedoms and property rights are representative of attendant moral, religious, political, and civil rights.
3. In accordance with the Constitution, the federal government is limited to acting in those areas wherein the states themselves do not have that ability, in inter-state matters and in foreign relations.
4. There is great importance placed on separation of powers, judicial review, and states' rights as opposed to federal power.

Simplified Definition:

An ideal conservative believes in the importance of the individual person, the family structure and the responsibility of individuals within each family to do as much as they can for themselves before asking for assistance. When assistance is needed the progressive route taken is community, city, county, state and federal, in that order, with the federal government the avenue of last resort. A conservative believes in the least government possible.

Liberalism – from the foregoing we find that this term conveys the following:

1. Government should correct economic deficiencies caused by a free market economy
2. Government should provide social welfare
3. It is right for government to impose progressive income taxation
4. Government should impose a minimum wage
5. The social security system should remain a system where those working support those who are receiving social security payments
6. Government should support only public education forcibly paid for by taxpayers even though some object to some of the subject matter and the manner in which it is taught .
7. Government should impose stringent safety and health regulations.
8. Government should impose stringent consumer protection and environmental preservation laws.

Simplified definition:

An ideal liberal takes the completely opposite position to an ideal conservative vying for a socialistic form of government working from the top down wherein the freedom of the individual is compromised for the supposed good of the collective group.

Please note that these definitions do not include side issues such as abortion, gun control, immigration, campaign reform etc. Conservatives and liberals may have similar positions without compromising their principles.

In summation, the fundamental difference between a liberal and conservative is whether an individual is allowed the freedom, with attendant responsibility, to function in society – or – whether an individual’s interests are subservient to the collective interest of the members of society. One must either be one or the other because once the collective interest takes precedence an individual’s freedom is compromised, then it just becomes a matter of degree as to the extent. A liberal who compromises his principles may consider himself a moderate liberal but is still a liberal. It is impossible for a conservative to be a moderate conservative because any compromise involves usurping individual freedom and attendant personal responsibility and this would automatically make him/her a liberal.

Now, are you liberal or conservative?

Socio-Political Commentary

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