Why Are Americans So Angy? - Part I

The Daily Reckoning PRESENTS: Could it be that war, vague yet persistent economic uncertainty, corruption, and the immigration problem all contribute to the anger we feel in America? Congressman Ron Paul of Texas covered these issues – and more in a recent speech before the U.S. House of Representatives. Read on…

WHY ARE AMERICANS SO ANGRY? – PART I

I have been involved in politics for over 30 years and have never seen the American people so angry. It’s not unusual to sense a modest amount of outrage, but it seems the anger today is unusually intense and quite possibly worse than ever. It’s not easily explained, but I have some thoughts on this matter.

Generally, anger and frustration among people are related to economic conditions; bread and butter issues. Yet today, according to government statistics, things are going well. We have low unemployment, low inflation, more homeowners than ever before, and abundant leisure with abundant luxuries. Even the poor have cell phones, televisions, and computers. Public school is free, and anyone can get free medical care at any emergency room in the country. Almost all taxes are paid by the top 50% of income earners. The lower 50% pay essentially no income taxes, yet general dissatisfaction and anger are commonplace. The old slogan “It’s the economy, stupid,” just doesn’t seem to explain things

Some say it’s the war, yet we’ve lived with war throughout the 20th century. The bigger they were the more we pulled together. And the current war, by comparison, has fewer American casualties than the rest. So it can’t just be the war itself.

People complain about corruption, but what’s new about government corruption? In the 19th century we had railroad scandals; in the 20th century we endured the Teapot Dome scandal, Watergate, Koreagate, and many others without too much anger and resentment. Yet today it seems anger is pervasive and worse than we’ve experienced in the past.

Could it be that war, vague yet persistent economic uncertainty, corruption, and the immigration problem all contribute to the anger we feel in America? Perhaps, but it’s almost as though people aren’t exactly sure why they are so uneasy. They only know that they’ve had it and aren’t going to put up with it anymore.

High gasoline prices make a lot of people angry, though there is little understanding of how deficits, inflation, and war in the Middle East all contribute to these higher prices.

Generally speaking, there are two controlling forces that determine the nature of government: the people’s concern for their economic self interests; and the philosophy of those who hold positions of power and influence in any particular government. Under Soviet Communism the workers believed their economic best interests were being served, while a few dedicated theoreticians placed themselves in positions of power. Likewise, the intellectual leaders of the American Revolution were few, but rallied the colonists to risk all to overthrow a tyrannical king.

Since there’s never a perfect understanding between these two forces, the people and the philosophical leaders, and because the motivations of the intellectual leaders vary greatly, any transition from one system of government to another is unpredictable. The communist takeover by Lenin was violent and costly; the demise of communism and the acceptance of a relatively open system in the former Soviet Union occurred in a miraculous manner. Both systems had intellectual underpinnings.

In the United States over the last century we have witnessed the coming and going of various intellectual influences by proponents of the free market, Keynesian welfarism, varieties of socialism, and supply-side economics. In foreign policy we’ve seen a transition from the founder’s vision of non-intervention in the affairs of others to internationalism, unilateral nation building, and policing the world. We now have in place a policy, driven by determined neo-conservatives, to promote American “goodness” and democracy throughout the world by military force – with particular emphasis on remaking the Middle East.

We all know that ideas do have consequences. Bad ideas, even when supported naively by the people, will have bad results. Could it be the people sense, in a profound way, that the policies of recent decades are unworkable – and thus they have instinctively lost confidence in their government leaders? This certainly happened in the final years of the Soviet system. Though not fully understood, this sense of frustration may well be the source of anger we hear expressed on a daily basis by so many.

No matter how noble the motivations of political leaders are, when they achieve positions of power the power itself inevitably becomes their driving force. Government officials too often yield to the temptations and corrupting influences of power.

But there are many others who are not bashful about using government power to do “good.” They truly believe they can make the economy fair through a redistributive tax and spending system; make the people moral by regulating personal behavior and choices; and remake the world in our image using armies. They argue that the use of force to achieve good is legitimate and proper for government – always speaking of the noble goals while ignoring the inevitable failures and evils caused by coercion.

Not only do they justify government force, they believe they have a moral obligation to do so.

Once we concede government has this “legitimate” function and can be manipulated by a majority vote, the various special interests move in quickly. They gain control to direct government largesse for their own benefit. Too often it is corporate interests who learn how to manipulate every contract, regulation and tax policy. Likewise, promoters of the “progressive” agenda, always hostile to property rights, compete for government power through safety, health, and environmental initiatives. Both groups resort to using government power – and abuse this power – in an effort to serve their narrow interests. In the meantime, constitutional limits on power and its mandate to protect liberty are totally forgotten.

Since the use of power to achieve political ends is accepted, pervasive, and ever expanding, popular support for various programs is achieved by creating fear. Sometimes the fear is concocted out of thin air, but usually it’s created by wildly exaggerating a problem or incident that does not warrant the proposed government “solution.” Often government caused the problem in the first place. The irony, of course, is that government action rarely solves any problem, but rather worsens existing problems or creates altogether new ones.

Fear is generated to garner popular support for the proposed government action, even when some liberty has to be sacrificed. This leads to a society that is systemically driven toward fear – fear that gives the monstrous government more and more authority and control over our lives and property.

Fear is constantly generated by politicians to rally the support of the people.

Environmentalists go back and forth, from warning about a coming ice age to arguing the grave dangers of global warming.

It is said that without an economic safety net – for everyone, from cradle to grave – people would starve and many would become homeless.

It is said that without government health care, the poor would not receive treatment. Medical care would be available only to the rich.

Without government insuring pensions, all private pensions would be threatened.

Without federal assistance, there would be no funds for public education, and the quality of our public schools would diminish – ignoring recent history to the contrary.

It is argued that without government surveillance of every American, even without search warrants, security cannot be achieved. The sacrifice of some liberty is required for security of our citizens, they claim.

We are constantly told that the next terrorist attack could come at any moment. Rather than questioning why we might be attacked, this atmosphere of fear instead prompts giving up liberty and privacy. 9/11 has been conveniently used to generate the fear necessary to expand both our foreign intervention and domestic surveillance.

Fear of nuclear power is used to assure shortages and highly expensive energy.

In all instances where fear is generated and used to expand government control, it’s safe to say the problems behind the fears were not caused by the free market economy, or too much privacy, or excessive liberty.

It’s easy to generate fear, fear that too often becomes excessive, unrealistic, and difficult to curb. This is important: It leads to even more demands for government action than the perpetrators of the fear actually anticipated.

Once people look to government to alleviate their fears and make them safe, expectations exceed reality. FEMA originally had a small role, but its current mission is to centrally manage every natural disaster that befalls us. This mission was exposed as a fraud during last year’s hurricanes; incompetence and corruption are now FEMA’s legacy. This generates anger among those who have to pay the bills, and among those who didn’t receive the handouts promised to them quickly enough.

Generating exaggerated fear to justify and promote attacks on private property is commonplace. It serves to inflame resentment between the producers in society and the so-called victims, whose demands grow exponentially.

The economic impossibility of this system guarantees that the harder government tries to satisfy the unlimited demands, the worse the problems become. We won’t be able to pay the bills forever, and eventually our ability to borrow and print new money must end. This dependency on government will guarantee anger when the money runs out. Today we’re still able to borrow and inflate, but budgets are getting tighter and people sense serious problems lurking in the future. This fear is legitimate. No easy solution to our fiscal problems is readily apparent, and this ignites anger and apprehension.

Disenchantment is directed at the politicians and their false promises, made in order to secure reelection and exert power that so many of them enjoy.

It is, however, in foreign affairs that governments have most abused fear to generate support for an agenda that under normal circumstances would have been rejected. For decades our administrations have targeted one supposed “Hitler” after another to gain support for military action against a particular country. Today we have three choices termed the axis of evil: Iran, Iraq or North Korea.

We recently witnessed how unfounded fear was generated concerning Saddam Hussein’s weapons of mass destruction to justify our first ever pre-emptive war. It is now universally known the fear was based on falsehoods. And yet the war goes on; the death and destruction continue.

This is not a new phenomenon. General Douglas MacArthur understood the political use of fear when he made this famous statement:

“Always there has been some terrible evil at home or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it.”

We should be ever vigilant when we hear the fear mongers preparing us for the next military conflict our young men and women will be expected to fight. We’re being told of the great danger posed by Almadinejad in Iran and Kim Jung Il in North Korea. Even Russia and China bashing is in vogue again. And we’re still not able to trade with or travel to Cuba. A constant enemy is required to expand the state. More and more news stories blame Iran for the bad results in Iraq. Does this mean Iran is next on the hit list?

The world is much too dangerous, we’re told, and therefore we must be prepared to fight at a moment’s notice, regardless of the cost. If the public could not be manipulated by politicians’ efforts to instill needless fear, fewer wars would be fought and far fewer lives would be lost.

Regards,

Congressman Ron Paul
for The Daily Reckoning
July 12, 2006

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535” on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

“So you think you can tell
Heaven from Hell
Blues skies from pain…?”

– Syd Barrett, RIP

Facts are nothing without theories. We were reminded of this as we perused the financial pages this morning. The reporters must have been reading each other’s stuff. Practically everywhere, “disappointing earnings” were blamed for weak stock prices yesterday. How did they know?

Well, of course they didn’t. But they had their theories…as we do. Without them, you can’t tell Heaven from Hell…or blue skies from pain. So we get theories, most of which are so imbecilic we don’t know which one to laugh at first. That is why our mission here at The Daily Reckoning is so easy. We can cover our eyes confidently, point and chortle; there is bound to be a jackass in front of us. But last week, our chuckles stopped – for a moment – when Warren Buffett and Bill Gates got together to spend their own money. It took our breath away. More about that tomorrow.

Here in the pages of The Daily Reckoning we have also been elaborating a theory of our own, trying to follow a very thin thread through a labyrinth of facts and figures. Our theory is that the American economy – and perhaps all of Western, English-speaking civilization – is forming a huge top:

The U.S. Empire is wasting itself in hugely expensive and probably counterproductive wars. The bill for the Iraq and Afghanistan wars will reach $500 billion next year, every penny of which was borrowed, and three-quarters of which was borrowed from outside the empire. An empire that relies upon “barbarians” to maintain its military campaigns is an empire in decline. A society that spends more than it earns is also in decline, even if it hasn’t woken up to the idea.

The world’s financial system – based on the U.S. dollar – is approaching the beginning of its end. It was always a system based on “faith,” a misplaced faith. Trillions of dollars worth of currency, credits, and derivative have been introduced into the world economy. This wave of liquidity was injected, intentionally, to stave off a correction of the market in 2001-2002. American financial officials, desperately afraid of following Japan into a deflationary slump, have released a tidal wave of money and credit on a scale hitherto unseen in world economic history. Tax cuts, spending increases, and below-CPI lending – combined with Japan’s own Niagara of liquidity – has had the world awash in money.

This inflation has boosted asset prices, but it has also boosted debt to a level where the whole world economy has become dangerously leveraged. It is impossible to go from extreme leverage to even more extreme leverage forever. Eventually, and with no need for any particular blunder on anyone’s part, it must un-leverage itself. That is where it will hurt and that’s what lies ahead.

America’s central bank will, of course, not sit back and let the pain take its course. No, politicians will rant. Investors will whine. The Fed will panic and attempt to inject even more “inflation.” But this time, the inflation will not go into tech stocks, nor housing. It will go into commodities…particularly gold, which will be seen as an antidote to America’s “funny” money. Foreign dollar holders – mostly central banks – will dump dollars in favor of more reliable assets. The dollar will not survive as the world’s only reserve currency.

Real interest rates in America will go up. Prices of financial assets – stocks, bonds, houses – will go down. Economic growth will at first slow, and later, probably go negative. Real earnings for most Americans will decline even more. Relative earnings, compared to people outside the empire, will slide precipitously, marking a trend that will probably last for the next half-century.

In the immediate future, “the global economy is beginning a transition to an environment of tighter monetary policies and reduced liquidity,” a London-based analyst explained to the Financial Times. “History tells us that in such a world it will be much more difficult to earn the kind of high returns on risky assets that investors have enjoyed in recent years, and that some degree of risk reduction and increased allocations to cash are appropriate.”

The advice seems solid to us.

Most directly and immediately affected by reduced liquidity should be those investments that have most depended on it. The Bank of England warns today that the epicenter of damage could be in the heart of London’s financial center: the City. The big trading houses and banking groups have made fortunes from the credit bubble. When it pops, their profits, and maybe their capital too, could be wiped out.

“The severe crystallization of credit, market and liquidity risk could plainly represent a serious shock to the U.K. financial system,” says the Bank of England. A serious shock to the U.S. financial system, too.

What to do? Sell Goldman. Buy gold.

More news from our team at The Rude Awakening:

————–

Eric Fry, reporting from New York…

“For those of us who trust in the long-term energy bull market, every bout of weakness creates the opportunity to increase or adjust our investments in energy stocks.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

And more ideas, thoughts, and whatever else pops into our minds:

*** “British banks have recently been so profitable that the U.K treasury actually commissioned an inquiry into this extraordinary profitability,” The Global Profit Hunter’s Sala Kannan reports. ” England’s HSBC Bank (HBC) for example, had a net profit margin of 31.85%. Compare that to J.P Morgan’s 15.53% net profit margin. Barclays Bank (BCS) and Lloyds Bank (LYG) of England are also extremely profitable with margins of 22.16% and 26.02%, respectively.

“According to the study by Don Cruickshank, ‘Excess profits arise when prices are consistently above costs across the output of an economic market. These excess profits translate directly into excess profitability, measured as the rate of return on the capital employed in the production of those products and services. Thus an indicator of persistently high prices relative to costs is persistently earning a rate of profit which is higher than the cost of capital employed.’

“These banks have large economic moats to keep competition at bay – a feature that Warren Buffett always looks for in his investments. And when it comes to keeping the competition away, size again affects British banks.

“The U.K. being a physically small country, all four of its banks have branches nearly everywhere in the country. This makes it easier for them increase a customer’s cost of switching banks.

“In reality, there is nothing to be suspicious about bank profitability. If run well, it is simply a great business to be in. Especially in England. With high switching costs for customers, steady profitability and an extraordinary economic moat, banks can provide fabulous investor return in the long run.”

*** We boarded the train for London this morning with a clutch of newspapers under our arm. The Times, Telegraph, La Liberation, El Pais, the Financial Times, the Herald Tribune. Looking through the papers, we find that the world is still a wicked and dangerous place. Based on the headlines, the war on terror is a losing proposition; the terrorists are at least holding their own.

But with no financial stories in today’s papers to inspire us with their absurdity, we turn to bigger news:

First, we note sadly that Syd Barrett, the inspiring genius of Pink Floyd, has died. The poor man’s musical career did not last long; we’ve ordered pizza that took longer. But he hit some fine notes that will be remembered by fans. Henry sings his “Wish you were here” song over and over; it’s one of his favorites. But by the 1970s, Barrett had gone over the edge. Heaven and Hell came together in his brain, perhaps joined by LSD. He stood on stage and played a single note…or missed the performance all together. The band replaced him and continued to send him his royalties. Syd moved into his mother’s basement and lived there the next 30 years…muttering to himself. On Friday, he died. Rest in peace.

The other big story is in the sports page and comes in the form of a question: What did the Italian player, Marco Materazzi, say to France’s Zinedine Zidane to lead him to head-butt the man and get thrown out of the game, which probably cost France the World Cup?

The World Cup is big news in Europe. Even after losing the critical match, the French team came back to Paris as heroes. A grand welcome was staged for them in front of the Crillon Hotel, near our office. All day, the traffic inched down the street, horns blaring. Finally, in mid-afternoon, the police cleared the way so a car carrying some of the players could pass. It, too, soon got stuck in the general gridlock, whereupon fans mobbed the car in order to congratulate the soccer players. Exactly what they were congratulating the losing team for was never explained to us. Finally, the police regrouped, chased away the fans and got the car moving again.

“What could the Italian have said?” we wondered to ourselves in our office. “They don’t even speak the same language.”

“Yes, I insulted him,” Materazzi admitted. “But I said nothing about his mother. To me, a mother is sacred.