Another reader named Jeff said,
“I wish this article would be on the front page of every newspaper and magazine and on every News channel.” (So do we, Jeff!)
Countless other responses expressed similar sentiment. How do we get the word out... how do we get Congress to pay attention... and in the meantime, what can we do?
The good news is, at least one person in Washington is paying attention (and actually has a firm grasp on what’s going on). Congressman Ron Paul recently gave a four minute speech titled “Current Conditions or Just a Bad Dream.”
You can watch it here via YouTube. The opener pulls no punches:
Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It's surreal; it's just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.
We find it hard to argue with the man.
It would be presumptuous to suggest Congressman Paul is doing “God’s Work” – that’s a Goldman Sachs thing – but at least he is out there telling it like it is.
The Invisible Burden
Moving on... Milton Friedman once observed that “the burden of government is not measured by how much it taxes, but by how much it spends.” This is true as a general rule, yet all the more true when a government’s spending decisions are shrouded in secrecy.
When you really think about it – and as we have pointed out before – there is no definitive reason why a government has to directly tax its citizens. Instead, the government could simply print up fresh currency at will to pay all its bills.
This hidden form of wealth confiscation (printing up currency) is just as much a hit to one’s wallet – assuming there is paper in it – as the direct taxes one is forced to pay. (It’s just harder to detect, that’s all.)
And when Congress borrows more than the country can afford, squandering the cash on foolish or unproductive pursuits, this activity has the same long-run effect as ginning up worthless scrip... because the ultimate resolution to an unsustainable fiat-currency debt burden, however far off in future, is always printing that burden away.
So why bother with direct taxes in the first place? One big reason, your humble editor submits, is to divert the public’s eyes from the quiet shenanigans taking place. If we assume the government is funded by visible taxation, we will forget about (or otherwise ignore) the pernicious invisible stuff. All in all, we are subtly encouraged to pay attention to what we see – i.e. the IRS bill – and blithely ignore what we don’t see.
A Force-Backed Claim on Assets
My colleague Michael Sankowski, the razor-sharp editor of Taipan Publishing Group’s Currency Profits Trader, makes another keen observation in regard to taxes. He points out how the government’s ability to tax creates currency demand in and of itself:
There is a built-in demand for specific currencies. Taxes.
Yep, as much as I minimize my tax bill and hate paying taxes, I still pay them. I have to. I have to acquire U.S. dollars. I have to get lots of good ole’ Ben Franklins into my checking account, and then write a fat check to the U.S. Treasury. And so do you and everyone else you will see today. We are all are paying taxes in USD to the government.
Taxes can only be paid in the fiat currency. You cannot pay a tax bill in gold, silver, real estate, stocks or a foreign currency. No, the only thing the U.S. Treasury accepts to pay taxes is U.S. dollars.
While maintaining agreement with Mike, your editor suggests taking the argument one step further. Consider that it is not just a government’s power to tax that gives a currency its value... but the fact that a base of productive wealth exists which government can tax in the first place!
The logic chain goes something like this:
- Via the power to tax, sovereign governments maintain a force-backed claim on assets.
- The “force-backed” part comes from the fact that, if you don’t pay your taxes, big brother can shut down your business, confiscate your property, and throw you in jail.
- Therefore, fiat currencies are ultimately backed by the productive power and wealth-producing capacity of the sovereign economy on the whole.
Of Assets and Liabilities
Not to get too abstract on you, but in this manner we can now see how fiat currency is a bit like shares of company stock. Except in this case, we are not talking about companies but countries (sovereign nations run by sovereign governments).
What is a share of stock worth? On its own, nothing. It’s a flimsy piece of paper... or even less than that, a pattern of electron smudges in a computer database somewhere. Stock shares have value to the extent they represent a claim on the company’s underlying assets and future productive capacity – be it an oil major, a software company, a financial services firm or what have you.
Similarly, fiat currency is “worthless” on its own but, via the government’s force-backed claim on assets (i.e. the power to tax something worth taxing), that paper scrip actually represents
the present and future productive capacity of the country it hails from.
Now that you’ve gotten your head around the idea of fiat currency being like shares of stock, let’s take the logic chain a step further:
Countries are like companies in that, just as a share of stock is backed by the company’s assets and prospects, the worth of fiat currency is backed by a country’s assets and prospects.
Just as bad company managers can destroy a share price by dumping too many shares on the market, bad country managers (i.e. politicians) can do the same thing by dumping too much currency on the market.
Just as stock price is a function of supply and demand (shares outstanding versus desire to hold or accumulate those shares), the currency equation is the same.
Just as you have to consider assets and liabilities to figure out what a company is really worth – and thus where its share price should be – the same logic applies to countries too.
Now we have a better handle on why the dollar (and the euro and the yen too!) will likely be toast in the long run.
To stick with the analogy, “USA Inc.” is still a great company in many respects. America has brains and innovation and favorable demographics all going for it... not unlike a software company known for its brilliant R&D team and dynamic entrepreneurial culture.
But USA Inc. is also burdened with the management suite from hell – gross incompetence, criminal neglect, kickbacks and cronyism everywhere you turn. While things look decent on the future earnings side for USA Inc. – and some would debate even that, given the serious erosion of our manufacturing base – we are racking up a veritable mountain of long-term liabilities (sovereign debt) as Washington eats through trillions like boll weevils in a cotton field.
The only way for USA Inc. to ultimately wriggle out from under the crushing liability side of its balance sheet, then, will be to issue lots more shares, i.e. print up lots more currency. Expect major “shareholder dilution” ahead.
Tying It All Together
The title of this piece promised a greenback alternative “better than gold.” We’re getting there... it was just necessary to clarify the country/company analogy first.
Now that you can see how a country is sort of like a public company – and fiat currency like shares of stock – an important question comes up.
If countries are like companies, which ones should we buy?
You’ll have that answer in full in our next issue.
How to Protect Your Hard-Earned Money…
And Even Grow It During These Turbulent Times
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Justice Litle is Editorial Director for Taipan Publishing Group and Taipan Daily – a free investing and trading e-letter – as well as the editor of Justice Litle’s Macro Trader.
If his name sounds familiar, it’s because Justice is regarded as one of the top trading experts in the world. While pursuing a Ph.D. at Oxford University in England, Justice began his financial adventure that includes researching and investing in trading and commodities.
Because of his trading expertise, Justice has been quoted in The Wall Street Journal... written multiple articles for Futures magazine... given regular market commentary to the likes of Reuters and Dow Jones, and contributed to the book Trend Following. In fact, under his guidance, Outstanding Investments, a world-class natural resource newsletter, delivered a top-rated performance two years in a row.
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