Saturday, November 24, 2012
New American Socialism
By Porter Stansberry
No one knows what to call it…
That's part of the problem. It's difficult to criticize something that doesn't yet have a proper name.
You can't just call our economic system "socialism." It's not. There's a profit motive and private ownership of nearly all assets. Socialism has neither of these. Besides, far too many people have become far too rich in our system to simply label it "socialism."
If you have ever traveled to an actual socialist country – with a power grid that never works, little public sanitation, petty graft at every turn, and endemic, horrifying poverty – you realize our system and real socialism aren't the same at all.
Our system isn't truly capitalism either, though. The State intervenes in almost every industry, often in a big and expensive way. With government at all levels making up more than 40% of GDP, it's fair to say we live in a State-dominated society.
And we share other, disturbing similarities with typical socialist states. Not all of them are economic. The most frightening similarity between the U.S. and classic totalitarian socialist states is the mutual investment in and appreciation of violent coercion. The U.S. has a huge standing army – by far the most powerful in the world. It fights aggressive foreign wars.
And it fights violent domestic wars: U.S. prisons are bulging with a large percentage of the population. But the overwhelming majority of U.S. prisoners have never committed a violent crime.
One hallmark of a totalitarian, socialist government is a large penal system. At its peak, prior to World War II, the Soviet Union's "gulag" system incarcerated roughly 800 out of every 100,000 residents. Today, the U.S. incarcerates roughly 743 people out of every 100,000 residents – a total of 2.3 million inmates.
Including people currently on parole, more than 7 million people are in the American criminal justice system – one out of 31 adults. Roughly 70% of federal prisoners are violent offenders. The number of drug-related prisoners has increased 12-fold since 1980. The U.S. has the world's largest prison population. Incarceration rates run seven times higher than in similar countries, like Canada, Australia, and the European Union nations.
Most of my readers probably aren't familiar with this violent side of America's culture. It's the poor who suffer the most from these aspects of American life. It is their children who are sent to foreign wars. It is their children who get sent to prison.
Likewise, as with all socialist experiments, it is the poor who suffer the worst economic outcomes, too. It is their cash savings that get wiped out by inflation. It is their jobs that disappear when regulations reduce capital investment or government debt crowds out private capital in the markets.
If the poor knew the first thing about economics, they wouldn't keep voting for socialist politicians and their programs. Alas, they don't even know the basics.
The poor in America, like the poor everywhere, still believe you can rob Peter to pay Paul. They still believe their "leaders" are trying to serve their best interests. It is a sad hoax. What has really happened is clear: Bamboozling the poor has become a way of life for American politicians. And the poor's willingness – even eagerness – to embrace the resulting economic slavery is the linchpin of our system.
But it's not only the poor who have become addicted to the system. Businessmen like Warren Buffett embrace it, too – despite its limitations and taxes. Buffett calls it the "American System." He says it's the greatest system for creating wealth the world has ever seen.
We're not so sure.
Yes, it certainly makes it easy for big businessmen like Buffett to become wealthy. But those same benefits don't accrue to the society at large. For example… even though the value of America's production has soared over the last 40 years and asset prices have risen considerably, our debts have grown even more.
When you adjust for debt and inflation, you discover America hasn't gotten richer at all. Yes, we have become more affluent. And yes, some individuals have gotten vastly richer. But taken as a whole, when you add back the debts we've racked up, the country hasn't gotten richer at all. Since the end of the gold standard in 1971, real after-tax wages, per capita, stagnated. On average, we haven't gotten any richer at all in 40 years…
What happened over the last 40 years?
Why did so many people rush so eagerly into debt? Why did they borrow more and more to buy the same things at ever-higher prices – again, and again, and again? And why do people in America continue to work, day after day, for jobs that offer no opportunity and declining real wages? Most important, how did a few people end up getting so rich from this merry-go-round economic system that never takes us anywhere?
To answer this question, we need only answer one core question: Who benefits?
Whose wealth and power increases with inflation? Whose stature in society grows alongside the government? Who profits from increased spending on wars, prisons, and social programs that are doomed to fail? And most of all… who profits from an explosion in debt?
A certain class of people has the power to not only protect itself from these policies but to profit as well. These people have used the last 40 years to produce massive amounts of paper wealth. And they are now desperately trying to convert those paper accounts into real wealth, which explains the exploding price of farmland and precious metals.
This explosion of wealth at the top of the "food chain" is the main feature of what I call New American Socialism. It's a system fueled by paper money, the constant expansion of debt, and a kind of corruption that's hard to police because it occurswithin the boundaries of the law.
Like the European and totalitarian socialism of the last 100 years, New American Socialism harnesses the power of the State to grow and maintain production. Like in traditional socialism, the poor pay the costs of New American Socialism. But unlike socialist systems of the past, this new American version has one critical improvement…
In the New American Socialism, the power of the system produces private profits. In this way, it provides a huge incentive to entrepreneurs and politicians to work together on behalf of the system. This is what keeps the system going. This is what keeps it from collapsing upon itself. And this, unfortunately, is why the imbalances in the world economy will continue to grow until the entire global monetary system itself implodes…
New American Socialism began with the policies of President Franklin Delano Roosevelt. In 1933, FDR seized all the privately held gold in the U.S. and began creating the massive government programs necessary to implement socialism. To give you some idea of how much the federal government grew during FDR's reign, remember federal spending made up 3% of GDP in 1930 – a level that had been fairly consistent for most of America's history. Almost immediately after his election, he tripled federal spending to more than 10% of GDP. And by the time he died in office, federal spending reached 44% of GDP – an all-time high.
As everyone should know by now, the promises of socialism aren't affordable. Robbing Peter to pay Paul is inefficient and kills Peter's incentives. The result is usually economic stagnation, depression, and eventually a crisis that frees people from the government's confiscatory repression. Because America was the only large economy standing after World War II, it took much longer than usual for the problems of socialism to appear in our economy. Also, the government scaled back many of FDR's policies during the post-war boom. In winning the war, we also won a generation of economic spoils.
All this changed in the 1960s. Lyndon Johnson had delusions of government-led grandeur. His ideas of a "Great Society" and "Model Cities," along with an expensive foreign war (Vietnam), were a recipe for massive new debts and an increasing role for government in all aspects of American life.
These policies led to an acute funding problem in 1971 because the debts of socialism couldn't be financed with gold-backed money. It was far too expensive. And so we began a new kind of socialism… the New American Socialism.
What happened in 1971? The size of America's government deficits forced us to abandon gold. After World War II, the U.S. dollar became the world's reserve currency. In exchange for placing the dollar at the center of the world's economy, we made a solemn promise to always exchange the U.S. dollar for gold at $35 an ounce. Nixon broke that promise, calling our creditors "global speculators" and telling them to go pound sand.
This move away from gold severed the fundamental tie between our economy and our money. Without the link to gold, bank reserves could be created by fiat. And they were. This led to a huge expansion of our money supply and our debts.
The power to use this debt and to control the creation of new money is the most powerful factor in our economy. The government can now create unlimited amounts of credit to control the U.S. economy. This bestows favored status on certain companies – notably banks. This lies at the core of our economy's structure. It is how fiat money privatizes the benefits of New American Socialism.
Most Americans simply don't understand how our historic tie to gold made it impossible for the banking system to grow beyond clear boundaries. Gold limited the amount of currency in circulation, which, in turn, restricted how much money banks could lend. Under the gold standard, the maximum total debt-to-GDP ratio was limited to around 150%. But as soon as we broke the tie to gold, our total debt-to-GDP ratio began to grow. It's now close to 400%.
Without the tie to gold, the amount of economic mischief our government could engineer became practically limitless. No social goal was too absurd… no war too expensive… and no government insurance scheme too patently self-serving not to finance.
Today, New American Socialism has spread like a cancer throughout our country, afflicting industry after industry. Like a cancer, once it infects an industry, it metastasizes from company to company in that sector. Suddenly, businesses cannot function without massive government aid. These corporate wards of the State weigh down the rest of our economy… making us weaker and less competitive and dragging us further into debt.
Keep in mind, this New American Socialism I'm talking about isn't called socialism at all. It goes by many names. It's been called "compassionate conservatism." It's been called "joint public-private enterprise." It's been called "government insurance."
I've been studying it for many years – finding it in one company after another. I've actually preferred having it in many of the stocks I've recommended over the years because it tends to be good for investors. That's the most insidious thing about New American Socialism: It's a form of socialism that leaves the profit motive in place.
That's why the New American Socialism has grown decade after decade. That's why it continues to be heavily promoted by almost every mainstream media outlet and both political parties. It leads to a kind of corruption I believe will be impossible to stop without a full-scale economic collapse…
Socialism always destroys the poor because it robs them of social mobility and makes it impossible for them to protect themselves from the predations of the powerful. Historically, its damage has been limited because eventually socialism so disrupts an economy that even the rich and the powerful suffer. That's what's so dangerous about this New American Socialism. It doesn't subject the rich to any depravation at all. It does just the opposite. The New American Socialism retains the profit motive for the rich and the well connected. In this new model, only the poor suffer. The rich are always protected.
It's capitalism for the rich, without any risks… and socialism for the poor, without any rights.