"Forward, Into the Past"
By Bill Bonner
BALTIMORE, MARYLAND – "We have been stepping back… back… back… trying to take it all in. The Big Picture, that is. How come… after more than 2,000 years of learning to make progress… all of a sudden, progress seems to be slowing down… or actually going into reverse? And how come our democracy – the crown of political creation – seems incapable of meeting the challenge?
Last week, we were looking at the headlines from Argentina to see where we were headed. After all, what the gauchos don’t know about backing up is probably not worth knowing; they’ve been doing it for decades. In terms of GDP per capita, Argentina was once one of the richest countries in the world. Now, it is number 94, below Turkey and Mexico. The IMF says that even Cuba is richer.
And here’s the latest from the Buenos Aires Times: "Argentina’s government has confirmed a sweeping voluntary agreement with retailers and business leaders that will see the cost of more than 1,200 household products frozen in a massive pre-election price-control freeze." Get it? Prices, up 37% so far this year, according to the country’s statistics bureau, will be held down… until after the election in November.
Price Controls Don’t Work: We saw a similar headline in the U.S…. 48 years ago: The New York Times, from June 14, 1973: "NIXON FREEZES PRICES FOR UP TO 60 DAYS, THEN WILL ESTABLISH PHASE 4 CONTROLS; FARM PRICES, WAGES, RENTS UNAFFECTED."
Richard Nixon had imposed the fake dollar on America in 1971. By 1973, prices were rising at an 8% rate. What did Nixon do? He commanded them to stay put! Of course, it didn’t work; price controls never do. The controls were quickly abandoned and prices continued to rise… with annual consumer price inflation reaching 11% in 1979.
That same year [he was appointed in August 1979], Jimmy Carter appointed Paul Volcker to head the Federal Reserve. Volcker then almost single-handedly turned things around – but only by putting the Fed’s key lending rate up to 18% (now 0.25%) and bringing on the worst recession since the 1930s... Paul Volcker was America’s last honest Fed chief. And now, it’s too late. The elite have too much to lose.
Economic “Traffic Lights”: After so many centuries of trial, error, and adaptation… it is obvious that the best way government can help progress is simply to let it happen. People go where they want. Government just has to make sure the economic “traffic lights” are kept working properly. Honest money, property rights, free markets – it doesn’t take much.
And today, our universities turn out far more engineers, scientists, marketers, and managers than ever before. Our capital markets are awash in money; funding is easy to get, even for outlandish and implausible projects. And tech breakthroughs come so fast, we can’t keep up with them. You’d think the economy would be racing ahead, too… and people would be happier than ever.
And yet, things seem to be going wrong. GDP growth rates are falling. Output is slipping. Freedom is declining. Jackassery is on the rise. The public is getting ripped off by its own leaders. And anger is increasing, as our “consensual democracy” is becoming more democratic and less consensual.
How Democracy Works: What’s going wrong? Greek philosopher Aristotle said, “Democracy inevitably degenerates into despotism.” Juan Perón, an Argentine, proved he was right. Not by overturning democracy, but by perfecting it. Specifically, Perón showed that being able to fool all of the people some of the time… and some of the people all of the time…
That is, he showed how democracy really works. He proved that with some of the people all of the time (probably about a third)… and all of the people some of the time (especially during election season)… you didn’t have to worry that you could never quite humbug all the people all of the time. All you needed was a simple majority! And he found them in the sprawl of Buenos Aires… an urban mob ready for a leader. Bribe them… lie to them… cheat them… and they will re-elect you.
The Elite Benefit: Democracy is not so much a failure as a fraud. It works. But only for the people who control it. It pretends to allow “the people” to call the shots. But in fact, the elites are always in charge… and always use their power to enrich themselves. That is why they can’t “pull a Volcker.” Not this time.
Normally, the stock market is equal to about 60% of GDP. But Fed policies over the last 33 years drove up stocks to where they are now, worth more than two times GDP. That extra gain put about $30 trillion of undeserved wealth into the pockets of the elite (the upper 10% of the country). Returning to honest money and free market interest rates would wipe out that $30 trillion. Stocks would drop down to normal levels – about a third of today’s prices.
Interest rates would rise back to normal levels, too – with mortgages probably around 7% or 8%. So what do you think the elite will do? “Pull a Volcker,” giving up their $30 trillion to protect the economy? Or continue ripping off the public to protect their wealth?"
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