The unintended consequences of the New Deal are slowly but surely being brought out into the open. Hoover’s Dam demonstrates how government policies can destroy the environment (in this case overusing the Colorado River), create unnatural and unsustainable economic development, and inevitably be brought to a point of collapse. This article was written by Douglas French.

Economics professor Bernard Malamud not once but twice invited the crowd in Las Vegas to visit nearby Hoover Dam to see for themselves an example of the productive assets that were created by Franklin Delano Roosevelt’s (FDR) New Deal. Professor Malamud was recruited to plead the Keynesian side of the argument in an “FDR’s Depression Policies: Good Deal or Raw Deal?” debate with the Foundation for Economic Education’s (FEE) Lawrence Reed during FreedomFest.

I finished my masters degree from UNLV under the tutelage of Murray Rothbard but I started my coursework with a class or two from professor Malamud, who, while being as Keynesian as they come, is at least sympathetic to the Austrian view when it comes to explaining speculative bubbles. He certainly took on Mr. Reed with good humor in front of an unfriendly, anti-FDR audience.

Malamud’s thesis is that no matter what your ideology, New Deal economics worked! The economy was in the midst of a terrifying deflation spiral. Treasury Secretary Andrew Mellon was saying things like “Liquidate labor, liquidate stocks, liquidate farmers.” The money supply was dropping, strangled by a rigid gold standard. The private sector was not eager to invest, so an alphabet soup of federal programs — like the CCC, CWA, WPA, FDIC, SEC, FSLIC — had to fill the void, putting people back to work, stimulating aggregate demand and providing for FDR’s four freedoms: freedom of speech, freedom of belief, freedom from want, and freedom from fear. At the same time, FDR’s “playing with the price of gold” as Malamud put it, loosened up the money markets.

Recovery (or reinflation) started as soon as 1933 and was only sidetracked in 1937, when the stimulus was pulled back. The “mistake of 1937″ was made, according to the UNLV professor, when FDR’s administration went back to listening to Andrew Mellon and instituted the austerity programs FDR had promised during his initial campaign.

When his turn came for rebuttal, Reed joked that he “felt like a mosquito at a nudist camp; I know what I need to do, but I don’t know where to begin.” After his free-market case was made and the Keynesian case was destroyed, Reed quipped, “The economy recovered when FDR didn’t.”

Keynesians erect a pretty low bar when judging the productivity of government stimulus projects, but the results of the concrete monster known as Hoover Dam have been devastating. Hoover described the dam as “the greatest engineering work of its character attempted by the hand of man.” The massive structure cost $49 million (or $736 million in inflation-adjusted dollars) and measures over 726 feet in height and more than 1,200 feet in length. It took five years and 4,360,000 cubic yards of concrete to build, and was finished two years ahead of schedule. About 16,000 people worked on constructing the dam, with over 100 losing their lives in the process.

Just as the Keynesian policies of the New Deal tried to cheat the laws of economics, government’s damming of the Colorado River attempted to cheat Mother Nature by bringing water to the desert southwest — water that just isn’t and never was there. The great western explorer John Wesley Powell was booed out of the room when he told the irrigation congress, “Gentlemen, you are piling up a heritage of conflict and litigation over water rights, for there is not sufficient water to supply the land.”

But 75 years ago, when the dam was nearly completed, FDR proclaimed during his dedication speech that millions of present and future residents of the southwest could count on “a just, safe, and permanent system of water rights.” The turbulent Colorado River that vacillated between droughts and floods would be tamed and become “a great national possession” and be counted on for irrigation to support a human migration seeking mild winters and new opportunities.

“The nation took him at his word,” writes Michael Hiltzik, author of Colossus: Hoover Dam and the Making of the American Century. “Since that dedication year, the population of the seven states of the basin has swelled by about 45 million. Much of this growth has been fueled by the dam and its precious bounties of water and electrical power.”

As Hiltzik points out, the dam’s water promise gunned the growth of southern California cities and attracted farmers to the west to grow water-intensive crops like cotton despite the lack of normal rainfall required to support this kind of agriculture.

Just as government stimulus programs and artificially low interest rates that promise to spur growth and make up for the lack of private investment never work, Hoover’s promise that his dam would, as Hiltzik writes, “provide all the water their states could conceivably need to fulfill their dreams of irrigation, industrial development and urban growth” is literally drying up. The water level at Lake Mead is down 120 feet from its high-water mark, revealing a white “bathtub ring.”

Now that millions have migrated to the southwest and private industry has invested millions of dollars, Hoover and FDR’s promises have confined those living and doing business in the west “in the straitjacket of an ever-intensifying water shortage,” notes Hiltzik. And while Interior Secretary Gale Norton claimed to have stilled the “conflict on the river” back in 2003 with the signing of two-dozen agreements transferring water rights between various Indian tribes, cities, and governments, the battle for water will rage on. The supply will never catch up with the demand.

After the ten-year drought, another $700 million is now being spent to install an additional intake pipeline into the diminishing Lake Mead. Almost 90 percent of the drinking water for Las Vegas comes from the lake. The new intake pipeline, officially known as Intake No. 3, “will reach deeper into the reservoir to protect the valley’s water supply should the lake shrink low enough to shut down one of the two shallower straws,” reports the Las Vegas Review-Journal.

However, the cost of this project is likely to rise, because the tunnel being excavated for the pipeline unexpectedly filled with water earlier this month. But this cost overrun shouldn’t trouble Keynesians, because the additional taxpayer money just provides more stimulus, right?

Those in government never learn. They can’t print prosperity, and more water won’t magically appear if they dam a river. While the man on the street believes government infallible, politicians and bureaucrats cannot calculate the economic profits and losses of government interventions. Ludwig von Mises made the point that government interventions inevitably lead to unintended consequences, leading government to constantly intervene further. So governments will fight over scarce water, and private use is increasingly being restricted by local ordinances.

The New Deal dam project that professor Malamud is so proud of provided a few thousand jobs 80 years ago, but has spurred migration, farming, and development that is likely unsustainable and may ultimately be the biggest malinvestment in history.

http://www.campaignforliberty.com/article.php?view=1024

Ah, the pleasures of being politically connected. No matter how much of an unproductive leech you may be to society, there’s always the chance of making quick millions through the taxpayers and masterfully run bureaucracies. This is absolutely sickening and demonstrates the corruption and disregard for sensibility that occurs as government expands its size and power over the people.

Former Clinton and Obama budget adviser Franklin Raines owns a key carbon-emissions patent he developed as CEO of the government-sponsored mortgage giant Fannie Mae, positioning him and his partners to make millions of dollars if it is used in any carbon-capping scheme implemented by the Obama administration.

Raines and his associates led Fannie Mae and Congress to believe Fannie Mae owned the patent, despite public records to the contrary, a WND investigation has found.

Raines and his partners carried out their plan by quietly filing for and receiving a second nearly identical carbon-emissions patent that superseded the first patent, according to government records. The second patent was never assigned to Fannie Mae or any other party.

As WND reported, an Enron-like accounting scandal enabled Raines to earn $90 million in his five years as Fannie Mae CEO, from 1999 to 2004.

Raines and his associates applied for the first patent, U.S. Patent No. 6904336, entitled “System and Method for Residential Emissions Trading,” Nov. 8, 2002, while Raines was Fannie Mae CEO. The first patent was issued June 7, 2005.

http://www.wnd.com/index.php?fa=PAGE.view&pageId=168077

Awesome article from Sheldon Richman. Government never admits its role when problems arise, but politicians frequently act to blame the marketplace whenever they get the chance.  “Look how dangerous it is if we aren’t managing society. People will miserably fail and make terrible decisions if we leave them to make their own choices.”

You’ve got to hand it to the people who really dislike free markets. They see them everywhere (under every bed?) and especially wherever any serious problem arises. That no free market exists within a thousand miles makes no difference whatsoever.

Take the oil spill in the Gulf. Market opponents are having a field day. They say this finally demonstrates the need for government to run things. Private firms can’t be trusted.

But it looks more like government can’t be trusted. The central government is, in law and in fact, the owner of the part in the Gulf where BP drilled for oil. (I didn’t say it was the legitimate owner.) The owner leased its property to a private company, BP, with a bad safety record (though a good one for sucking up to the environmentalist establishment and bureaucrats) and issued permits for the drilling operation. It then failed to keep a sharp eye on what BP and subcontractors Transocean and Halliburton were doing to its property. That might have something to do with the fact that government regulators don’t have the sort of relationship to “their” property that real private owners do, and they can always be counted on to get friendly with those they regulate. The Minerals Management Service in the Interior Department has a special conflict of interest: It makes money off the drilling it permits and regulates. Thus it could benefit from decisions that are bad for the public.

So what failed here, the market or the State? The call isn’t even close. The free market was nowhere near the scene. It has an airtight alibi. It didn’t exist.

Now with some effort you might get a die-hard anti-market person to concede this. So we move to the next step. What should replace the current hybrid (government-corporate) system? I see only two choices: full government management or full market management. Full government management wouldn’t appear terribly promising, considering that the current problems are traceable back to government management already. How would things change substantially if, instead of contracting out the drilling to a nominally private company, the government instead hired the personnel itself and paid them directly from the U.S. Treasury? Who cares if the rig says “BP, ” “Transocean,” or “U.S. Government” on it? The same fallible people would be in the same position to make the same fateful mistakes. Not much would have changed.

Incentives Matter

That’s because what matters is incentives, not whether a worker is on the government payroll. Why assume that civil service employees know more or care more than people paid by corporations?

But, it will be said, the government workers will have a mandate to protect the environment and the public. Okay, let’s go with that. Let’s say the decision-makers are environmental hawks who really don’t like oil drilling anywhere. They’ll be tough: no drilling unless it’s 100 percent safe. Leaving aside the obvious problem with this standard, that policy would have costs. The risk of oil spills may drop to zero, but we might have to forgo certain important benefits in the process. Poor people, say, might have their prospects dimmed by more expensive energy.

Is the tradeoff worth it? How do we go about answering that question? Government is no help here. It can certainly impose a plan, but constructing a plan beneficial to the public would be like playing darts in the dark. What bureaucrats think is good for us may not actually be good for us, no matter how much they care. Mises and Hayek covered this in their writings on state socialism and economic calculation.

Things are sure looking bleak. Government assurances are worthless whether it contracts out for drilling or does it itself. That leaves only the free market. Can it be trusted?

First off, let’s remember that we live in the real world. There are no iron-clad guarantees. The best we can hope for is relative security. Option A can’t be perfect. All we can ask is that it is better than Options B, C, and D. But how do we decide? When people conclude that government management is the best alternative, knowingly or not they have rigged the game. They are comparing the messy real world in which free markets would operate to an impossible government-managed smooth-running utopia, where regulators have complete knowledge and total dedication to the public interest. This is the Nirvana Fallacy, and the problem with it is that utopia isn’t on the table.

What is on the table are two options: an arrangement where incentives align economic activity with the public interest and one where they don’t. Now which setup seems more promising? One where personnel risk no capital, face no prospects of bankruptcy, and procure their revenue by force (taxation) after flattering members of special-interest-serving congressmen? Or one where: capital had to be raised from wary investors in a competitive environment, insurance would be priced according to risk, products would have to be sold to buyers who are free to say no, and full and strict liability would haunt every decision, with bankruptcy always looming and no government bailout are even implied?

When you come down to it, the choice is really rather easy.

http://www.campaignforliberty.com/article.php?view=931

Raise a Flag for Liberty!

“Resolved, that the flag of the United States be thirteen stripes, alternate red and white; that the union be thirteen stars, white in a blue field representing a new constellation.”

-Marine Committee of the Second Continental Congress, June 14, 1777

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It’s 2010. Incumbents, career politicians, and DC insiders are on the chopping block. Americans are sick and tired of the two-headed, one-party system and are looking for something new. Now is an extraordinary time and opportunity in our country for the independent candidate. Jake Towne is such a candidate and he has a real chance of winning in November. However, if Jake is going to win this November he needs our help now!

Please join our effort to reach $50,000 in total funds raised for the Towne for Congress campaign (less than $17K to go!) by June 15th, 2010. Our donations will help buy television and radio ads across Pennsylvania’s 15th district and provide the much needed visibility and recognition for Jake Towne to win in November.

You can visit www.TowneForCongress.com and pledge to participate in the money bomb on June 15th or you can visit www.TowneForCongress.com and give now to take Jake closer to our goal.

Please take action to ensure a great independent and constitutionally principled candidate like Jake Towne wins a seat in congress this November 2nd. The definition of insanity is repeating the same actions and expecting different results. The time is NOW to end the failed Republocrat system and to blaze the trail for the fresh voices who will stand on ideas and principle rather than bickering partisan politics and the old school “go-along-to-get-along” power system.

Please visit www.TowneForCongress.com and pledge or make a contribution today!

Sincerely,

Trevor Lyman

Patriots!
Please send this letter to all your contacts in the Liberty and peace loving community.

Thank you,

Tom Dybowski aka legalizeliberty

In this post, DragonLZ asks a very important question:

What was so much better back in 2003 that justified the incredible bull market that lasted four and a half years, from March of 2003 until October of 2007?

A related question that DragonLZ could have asked is what was so great about Zimbabwe in 2007 that caused it to have the best performing stock market in the world?  But we’ll get back to that.

Little does dragonLZ know that he is at the start of journey that leads to Mises, Hayek, and the Austrian School of Economics, for it is that very question that only the Austrian School can answer.  As he pointed out, there isn’t a very good economic reason why the market kept going up and up.  We agree.  So what did happen?  Here is the Austrian School answer, known as the Austrian Business Cycle Theory (ABCT):

Excessively low interest rates exacerbate the boom and bust cycle

These low interest rates cause an increase in the available funds (business capital.)  From these funds, malinvestment occurs as companies take on projects that would not be justifiable under a system of free market interest rates.  (Rates higher than the prevailing rate.)  This expansion can occur because the Fed (or any central bank) holds rates too low for too long, or through unchecked fractional reserve banking.  If it persists long enough, economic activity can BOOM, but it is an illusion.  Many of the projects are unsustainable, excessively risky, and pull resources away from more efficient alternative uses.  In other words, economic activity gets distorted.  The result is a predictable crash.

Do you think the Fed’s rates don’t have an impact on economic activity?  Then why do they bother manipulating them?  Ask Krugman.

From this most recent boom/bust to the dot.com boom/bust all the way back to the late 1920′s boom/bust…. and guess what…. the panic of 1819, the inflationary boom/bust of John Law’s Mississippi System and the Tulip Bubble before them…

Every single one has the same characteristics.  Easy money at the beginning, resources drawn into sectors that wouldn’t normally justify it, unsustainable development due to scarcity, and it all comes crashing down as entrepreneurs miscalculate risk.  The lyrics from the famous Hayek-Keynes Rap Video explain it better than I can:

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

And that’s how the Austrian School knew that we were headed for trouble.  The Fed had merely reinflated with cheap credit, which Austran scholars knew was unsustainable.  Another bust was sure to follow, worse than the bust which preceded it.

So the story continues, and this is why we urge caution once again.

However, it is foolish to view the Austrian School as anti-stock market.  Nothing could be further from the truth as the following quote shows:

One time, during Mises’s seminar at New York University, I asked him whether, considering the broad spectrum of economies from a purely free market economy to pure totalitarianism, he could single out one criterion according to which he could say that an economy was essentially “socialist” or whether it was a market economy. Somewhat to my surprise, he replied readily: “Yes, the key is whether the economy has a stock market.” That is, if the economy has a full-scale market in titles to land and capital goods. In short: Is the allocation of capital basically determined by government or by private owners? – Murray Rothbard

Now look at this Austrian School examination of the Fed and the stock market in May 2009.  Pretty consistent with what I have been saying all along. This rally is built on cheap money.

This is very dangerous.  Consider that the best performing stock market in the world in 2007 was Zimbabwe.  I’m surprised dragonLZ didn’t ask us why that was justified.  You can see now that it was for the same reason.

While I don’t want to disparage other bloggers that may have libertarian leanings and an affinity for sound money, without an Austrian School perspective on the boom/bust cycle they may sound like PermaBears to the untrained ear.  But just like me, they want economic growth. We all however would just prefer it to be sustainable.

Neither 2003-2007, as dragonLZ pointed out, nor 2009 was sustainable.

“A farm includes the passion of the farmer’s heart, the interest of the farm’s customers, the biological activity in the soil, the pleasantness of the air about the farm — it’s everything touching, emanating from, and supplying that piece of landscape. A farm is virtually a living organism.” — Joel Salatin

The deepest experience and impression of nature only arises on an individual level. There are many different stages of awakening awareness in nature, the most basic being the food we eat on a daily basis. Consider the packaged, wrapped, dehydrated, heavily processed food people commonly purchase. From the very beginning, people eating a majority of food of this sort are likely to be detached from nature, not to mention unhealthy. Modern industrial farms have concentrated themselves into a centralized business model relying on packing animals into small cages, spraying fields and crops with chemical pesticides, all of which is propped up through bureaucratic regulations that destroy local farms. My belief is that the nature experience, on a most basic and individual level, begins with local farms. People will have a much greater respect and understanding of nature when they regularly eat and observe whole, natural foods that come from a local source.

“Part of our responsibility as stewards of the earth is to respect the design of creation… That’s something you can devote your life for.” — Joel Salatin

Operating the Polyface Farm on 550 acres of land in the Shenandoah Valley, Joel Salatin is defying just about everyone when it comes to producing organic food. Salatin describes himself as a “Christian-libertarian-environmentalist-capitalist farmer,” and has focused his career on sustainable, environmentally-friendly, animal-friendly organic farming. One of the many unique aspects of Salatin’s approach is that he only sells food to individuals, restaurants, and other outlets within a four-hour-drive radius of his farm, in an effort to encourage people to purchase their food from local farms in their area.

“We think there is strength in decentralization and spreading out rather than in being concentrated and centralized.” — Joel Salatin

Salatin’s “secret” is feeding livestock a rich and diverse mixture of grass, which is supported with no pesticides or chemicals whatsoever. The cattle freely roam among the fields, restrained only by a portable electrified fence that can be easily moved in less than an hour with one or two people. The farm’s chickens are housed in portable coops that are transported with tractors. Salatin maintains a rotation of sorts by first letting cattle graze a portion of the field, and then letting the chickens roam that same area the following day. This simple process provides an easily maintained and renewable source of daily fresh grass for the cattle, gives the animals freedom to move around without much restraint, and it leads to incredibly tasty meat and eggs.

“I appreciate the fact that you obviously love life and the living.” — Polyface Farm customer

“You, as a food buyer, have the distinct privilege of proactively participating in shaping the world your children will inherit.” — Joel Salatin

This is a breath of fresh air compared to the industrial meat facilities today. In these facilities cattle are heavily restrained, the farmers hardly interact with the animals, and a huge portion of the cattle is fed corn (which is often grown with questionable techniques using pesticides and GMOs). Salatin has a tremendous respect of and connection with his animals; a connection that cannot come through the detached and horrific slaughtering processes in industrial meat facilities today. Clearly there is an importance in the environment animals are raised in and its impact on the taste and vibration of the food. Salatin sees and treats animals as free creatures, not soulless drones waiting to be eaten.

“I am a caretaker of creation. I don’t own it, and what I’m supposed to do is leave it in better shape for the next generation than I found it.” — Joel Salatin

The greatest gift Joel Salatin is giving to the world, however, is not his food. He is showing people that there is an alternative. What kind of impact would Salatin have if he simply held signs and protested to a corporate or government building? What effect would he have if he simply lobbied government to mandate his farming beliefs? Probably none at all, and no one would remember him for it. Salatin is taking action. He is not waiting around for someone else to implement his vision; he is taking initiative and proving that low-tech, sustainable, organic, animal and environmentally-friendly farming is not a lost cause. He is a living example that it is actually a tremendous success.

“I see myself today as Sitting Bull trying to bring a voice of Easternism, holism, community-based thinking to a very Western culture. If we fail to appreciate the soul that Easternism gives us, then what we have is a disconnected, Greco-Roman, Western, egocentric, compartmentalized, reductionist, fragmented, linear thought process that counts on cleverness. Now, how’s that for a mouthful?” — Joel Salatin

Joel Salatin’s relentless pursuit of self-sufficiency has given us a remarkable example of how to happily and prosperously live in tune with the environment. All the buildings on his farm are constructed with lumber from the forest resting on his land. His animals are fed natural grass. The land is irrigated by its own ponds. He prospers through a local customer base who jump at the opportunity to support such a venture. Salatin’s achievements are laying the groundwork for the future of localism: respecting and appreciating the beauty and freedom of nature, working sustainably with animals on a very personal level, supporting both inner happiness and the local community, all through operating a profitable business. With individual initiative and creativity, nothing is impossible. Such is the story of Joel Salatin.

“How much evil throughout history could have been avoided had people exercised their moral acuity with convictional courage and said to the powers that be, ‘No, I will not. This is wrong, and I don’t care if you fire me, shoot me, pass me over for promotion, or call my mother, I will not participate in this unsavory activity.’ Wouldn’t world history be rewritten if just a few people had actually acted like individual free agents rather than mindless lemmings?” — Joel Salatin

“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our People, and eat out their substance.” – Declaration of Independence, 1776

The below pictures were from a presentation given at yesterday’s “Towne” Hall on May 24.  I’ve added a few comments with documentation links.  The quote above from the Declaration easily applies to the 22.5 million bureaucrats, America’s second largest job sector, who make nearly twice the average wage of the private sector.

While America is not Greece – or Iceland – there are glaring similarities.

While the Republocrats are not King George… they are far worse.

For Liberty and the Constitution,

Jake Towne

USDA link here.  Note the strong rise in number of SNAP food stamp recipients during the past year.  One would expect to see this number dropping or even flat-lining – along with employment rising – if a recovery were underway.

BLS link here.  Note that while the “newspaper” unemployment rate is still 10%, the U-6 figure – which more accurately describes total unemployment is 17% – a depression statistic.  I’ve described the common sense solutions to end rampant unemployment almost overnight in the campaign’s Jobs plank.

Since the BLS drops off workers from its U-6 figure, the real unemployment rate is most likely slightly greater than 17%.  Shadowstats estimates the rate at about 22%.

The current national debt – which is closely tied to the USTreasury market is now over $13 trillion.  Current government plans include massive deficit spending through 2013, and the government’s optimistic projections of a return to “normalcy” even then should be severely doubted.  Source of budget data.  However, due to the cash-based accounting method government uses, this hides the undeniable fact that the real national debt is much larger when GAAP (Generally Acceptable Accounting Principles) are used to identify future taxation sources and future debts such as Social Security and Medicare (see below).

The above is taken from the Treasury Department’s latest report from April 2010 where government’s inlays – social security and retirement taxes, income taxes (both personal and corporate), and excise taxes can be seen.  The average monthly level is about $170 billion per month.

From the same report, the level of government spending, which averages about $300 billion per month.  (Only the government can run that type of accounting, due to its money-printing!)  While Social Security and Medicare are a major expense, the level of “National Defense” spending appears deceptively low as it is just the DoD budget.  As I wrote about in “Guns or Health Care?” plenty of “Other Non-Defense” spending are in fact related to the military – Homeland Security, the nuclear arsenal under the Dept. of Energy, Veteran’s Affairs, the Treasury’s military retirement program, etc.

As seen in the official USTreasury report on page 178/254, the total unfunded liabilities for Medicare and Social Security is a jaw-dropping $107 trillion over the future of these programs.  While I predict the Democrats may bear the brunt of the blame for the collapse of Medicare, one must not forget that it was the Republican’s massive expansion of Part D’s prescription drug plan that worsened the fiscal situation.  One interesting possible interpretation of the recent health care takeover plan is it may simply be a stop-gap solution to temporarily increase taxes over the next few years.  (On Social Security, I will be delivering a presentation in more detail next Friday.)

The above is built from the Federal Reserve H.4.1 data here.  The red line is the total (reported) balance sheet of the FED, which has more than doubled since the time of the Banker Bailout.  While the original TARP bailout (not shown) accounted for much of the initial sharp increase, most of the debt has been replaced by $1.12 trillion of mortgage-backed securities from Freddie Mac and Fannie Mae (the purple line).   This graph shows the nationalization and propping of America’s entire residential housing industry. The yellow and green lines show the cumulative totals of USTreasury and USAgency debt held by the FED.  While the Federal Reserve has admitted it will take losses on the MBS debt, the question remains as to how much and when.

The purchasing power of the dollar has lost well over 94% since FDR took America off the classical gold standard in 1933 through monetary inflation.  The monetary inflation is caused by the FED.  They debase the dollar by creating more and more irredeemable paper dollars.  Graph provided by Bloomberg Financial, 2009.

The above chart shows the “real interest rate” from 1970 to 2009, formula below.  It is an approximation for the dollar’s purchasing power versus time.  While in 1980 it reached nearly +10% (savings rate of ~19% and inflation of ~10%), in 1990 this rate went negative and continued dropping.  The chart shows the capital and savings of America being ruthlessly destroyed by the FED and the government.  Source.

Real Rate of Interest = (Interest Rate earned by a bank savings account) minus (Inflation Rate)

The rising price of gold over the past decade demonstrates the destruction of the world’s paper currencies.  In the past several weeks, gold reached all-time record highs in dollars, yen, euros, Swiss francs, and British pounds.  As described in this article, the gold price is likely suppressed by governments in order to make their own currencies look good as I wrote about in “The Summers Gold Price Suppression Scheme.”  Gold trades over $20 billion USD per trading day – or over $20 trillion annually – a figure larger than the $15 trillion GDP figure used for the United States.

To cap off the situation with the dollar, the latest quarterly banking profile from the FDIC indicates the deposit insurance fund (DIF) is bankrupt.  While consumers at failed banks still receive “insured” funds, the losses are presumably filled in with dollars from the FED, as reported last here.  The current FDIC “watch list” rose to 775 banks, or almost 10% of all FDIC-insured banks in the US per p. 3/26.

The crux of the Over-the-Counter derivatives problem is its enormous size.  However the $600 trillion figure shown is the derivatives’ contracts notional value – a true market value cannot be assessed.  The primary issue with OTC derivatives is that they trade off of exchanges, so their contents are opaque to the rest of the marketplace.  Note that exchange-traded derivatives (EXD) are much smaller.

BIS data here.  Note the sharp drop following the 2008 financial crisis.  More details on derivatives can be learned in “What the Heck are Derivatives?” and “Bring Light to Dark Derivatives!”

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

Or so we were told.  That has probably never been true.  Now we are told that is how it once was, but a new role of government is emerging.  Yet this new role is the same role it has been for millenia.  How is that new?  It’s not.  It’s a scam.

57 years ago, this man knew what most Americans can’t figure out today.

The Republic Becomes the Empire by Garet Garrett

We have crossed the boundary that lies between Republic and Empire. If you ask when, the answer is that you cannot make a single stroke between day and night. The precise moment does not matter. There was no painted sign to say, “You now are entering Imperium.” Yet it was a very old road and the voice of history was saying: “Whether you know it or not, the act of crossing may be irreversible.” And now, not far ahead, is a sign that reads: “No U Turns.”

If you say there were no frightening omens, that is true. The political foundations did not quake; the graves of the Fathers did not fly open; the Constitution did not tear itself up. If you say people did not will it, that also is true. But if you say therefore it has not happened, then you have been so long bemused by words that your mind will not believe what the eye can see, even as in the jungle the terrified primitive, on meeting the lion, importunes magic by saying to himself, “He is not there.” That a republic may vanish is an elementary schoolbook fact.

The Roman Republic passed into the Roman Empire, and yet never could a Roman citizen have said, “That was yesterday.” Nor is the historian, with all the advantages of perspective, able to place that momentous event at any exact point on the dial of time. The Republic had a long unhappy twilight. It is agreed that the Empire began with Augustus Caesar. Several before him had played emperor and were destroyed.

The first who might have been called emperor in fact was Julius Caesar, who pretended not to want the crown and once publicly declined it. Whether he feared more the displeasure of the Roman populace or the daggers of the republicans is unknown. In his dreams he may have been seeing a bloodstained toga. His murder soon afterward was a desperate act of the dying republican tradition, and perfectly futile. His heir was Octavian, and it was a very bloody business, yet neither did Octavian call himself emperor.

On the contrary, he was most careful to observe the old legal forms. He restored the Senate. Later he made believe to restore the Republic, and caused coins to be struck in commemoration of that event. Having acquired by universal consent, as he afterward wrote, “complete dominion over everything, both by land and sea,” he made a long and artful speech to the Senate, and ended it by saying: “And now I give back the Republic into your keeping. The laws, the troops, the treasury, the provinces, are all restored to you. May you guard them worthily.”

The response of the Senate was to crown him with oak leaves, plant laurel trees at his gate and name him Augustus. After that he reigned for more than forty years and when he died the bones of the Republic were buried with him. “The personality of a monarch,” says Stobart,

“had been thrust almost surreptitiously into the frame of a republican constitution…. The establishment of the Empire was such a delicate and equivocal act that it has been open to various interpretations ever since. Probably in the clever mind of Augustus it was intended to be equivocal from the first.”

What Augustus Caesar did was to demonstrate a proposition found in Aristotle’s “Politics,” one that he must have known by heart, namely this:

“People do not easily change, but love their own ancient customs; and it is by small degrees only that one thing takes the place of another; so that the ancient laws will remain, while the power will be in the hands of those who have brought about a revolution in the state.”

Revolution within the form.

There is no comfort in history for those who put their faith in forms; who think there is safeguard in words inscribed on parchment, preserved in a glass case, reproduced in facsimile and hauled to and fro on a Freedom Train.

Let it be current history. How much does the younger half of this generation reflect upon the fact that in its own time a complete revolution has taken place in the relations between government and people? It may be doubted that one college student in a thousand could even state it clearly. The first article of our inherited tradition, implicit in American thought from the beginning until a few years ago, was this: Government is the responsibility of a self-governing people. That doctrine has been swept away; only the elders remember it.

Now, in the name of democracy, it is accepted as a political fact that people are the responsibility of government. The forms of republican government survive; the character of the state has changed. Formerly the people supported government and set limits to it and minded their own lives.

Now they pay for unlimited government, whether they want it or not, and the government minds their lives — looking to how they are fed and clothed and housed; how they provide for their old age; how the national income, which is the product of their own labor, shall be divided among them; how they shall buy and sell; how long and how hard and under what conditions they shall work, and how equity shall be maintained between the buyers of food who dwell in the cities and the producers of food who live on the soil. For the last named purpose it resorts to a system of subsidies, penalties and compulsions, and assumes with medieval wisdom to fix the just price.

This is the Welfare State. It rose suddenly within the form. It is legal because the Supreme Court says it is. The Supreme Court once said no and then changed its mind and said yes, because meanwhile the President who was the architect of the Welfare State had appointed to the Supreme Court bench men who believed in it.

The founders who wrote the Constitution could no more have imagined a Welfare State rising by sanction of its words than they could have imagined a monarchy; and yet the Constitution did not have to be changed. It had only to be reinterpreted in one clause — the clause that reads: “The Congress shall have power to lay and collect taxes, imposts and excises to pay its debts and provide for common defense and welfare of the United States.”

“We are under a Constitution,” said Chief Justice Hughes, “but the Constitution is what the judges say it is.”

The president names the members of the Supreme Court, with the advice and consent of the Senate. It follows that if the president and a majority of the Senate happen to want a Welfare State, or any other innovation, and if, happily for their design, death and old age create several vacancies on the bench so that they may pack the Court with like-minded men, the Constitution becomes, indeed, a rubberoid instrument.

The extent to which the original precepts and intentions of constitutional, representative, limited government, in the republican form, have been eroded away by argument and dialectic is a separate subject, long and ominous, and belongs to a treatise on political science.

The one fact now to be emphasized is that when the process of erosion has gone on until there is no saying what the supreme law of the land is at a given time, then the Constitution begins to be flouted by Executive will, with something like impunity. The instances may not be crucial at first and all the more dangerous for that reason. As one is condoned, another follows, and they become progressive.

To outsmart the Constitution and to circumvent its restraints became a popular exercise of the art of government in the Roosevelt regime. In defense of his attempt to pack the Supreme Court with social-minded judges after several of his New Deal laws had been declared unconstitutional, President Roosevelt wrote: “The reactionary members of the Court had apparently determined to remain on the bench for as long as life continued-for the sole purpose of blocking any program of reform.”

Among the millions who at the time applauded that statement of contempt there were very few, if there was indeed one, who would not have been frightened by a revelation of the logical sequel. They believed, as everyone else did, that there was one thing a President could never do. There was one sentence of the Constitution that could not fall, so long as the Republic lived.

The Constitution says: “The Congress shall have power to declare war.” That, therefore, was the one thing no president could do. By his own will he could not declare war. Only Congress could declare war, and Congress could be trusted never to do it but by will of the people — or so they believed. No man could make it for them. Even if you think that President Roosevelt got the country into World War II, that was not the same thing. For a declaration of war he went to Congress — after the Japanese had attacked Pearl Harbor. He may have wanted it, he may have planned it; and yet the Constitution forbade him to declare war and he dared not do it. Nine years later a much weaker president did.

President Truman, alone and without either the consent or knowledge of Congress, had declared war on the Korean aggressor, 7000 miles away, Congress condoned his usurpation of its exclusive constitutional power. More than that, his political supporters in Congress argued that in the modern case that sentence in the Constitution conferring upon Congress the sole power to declare war was obsolete.

Mark you, the words had not been erased; they still existed in form. Only they had become obsolete. And why obsolete? Because now war may begin suddenly, with bombs falling out of the sky, and we might perish while waiting for Congress to declare war.

The reasoning is puerile. The Korean war, which made the precedent, did not begin that way; secondly, Congress was in session at the time, so that the delay could not have been more than a few hours, provided Congress had been willing to declare war; and, thirdly, the president as commander-in-chief of the armed forces of the Republic may in a legal manner act defensively before a declaration of war has been made. It is bound to be made if the nation has been attacked.

Mr. Truman’s supporters argued that in the Korean instance his act was defensive and therefore within his powers as commander-in-chief. In that case, to make it constitutional, he was legally obliged to ask Congress for a declaration of war afterward. This he never did. For a week Congress relied upon the papers for news of the country’s entry into war; then the president called a few of its leaders to the White House and told them what he had done.

A year later Congress was still debating whether or not the country was at war, in a legal, constitutional sense. A few months later Mr. Truman sent American troops to Europe to join an international army, and did it not only without a law, without even consulting Congress, but challenged the power of Congress to stop him. Congress made all of the necessary sounds of anger and then poulticed its dignity with a resolution saying the president’s action was all right for that one time, since anyhow it had been taken, but that hereafter Congress would expect to be consulted.

At that time the Foreign Relations Committee of the Senate asked the State Department to set forth in writing what might be called the position of executive government. The State Department obligingly responded with a document entitled, “Powers of the President to Send Troops Outside of the United States — Prepared for the use of the joint committee made up of the Committee on Foreign Relations and the Committee on the Armed Forces of the Senate, February 28, 1951.”

This document, in the year circa 2950, will be a precious find for any historian who may be trying then to trace the departing footprints of the vanished American Republic. For the information of the United States Senate it said (Congressional Record, March 20, 1951, p. 2745):

“As this discussion of the respective powers of the President and Congress has made clear, constitutional doctrine has been largely moulded by practical necessities. Use of the Congressional power to declare war, for example, has fallen into abeyance because wars are no longer declared in advance.”

Caesar might have said it to the Roman Senate. If constitutional doctrine is moulded by necessity, what is a written Constitution for?

Thus an argument that seemed at first to rest upon puerile reasoning turned out to be deep and cunning. The immediate use of it was to defend the unconstitutional Korean precedent, namely, the resort to war as an act of the president’s own will. Yet it was not invented for that purpose alone. It stands as a forecast of executive intentions, a manifestation of the executive mind, mortal challenge to the parliamentary principle. The simple question is: Whose hand shall control the instrument of war? It is late to ask. It may be too late, for when the hand of the Republic begins to relax another hand is already putting itself forth.

Notes

Garet Garrett (1878–1954) was an American journalist and author who was noted for his critiques of the New Deal and US involvement in the Second World War. See his books in the Mises Store. See his article archives. Comment on the blog.

This article was originally published as “The Decline of the American Republic” in The Freeman, February 25, 1952.