November 10, 2010

by Walter J. (John) Williams

Current Economic and Inflation Conditions in the United States

Economic Activity and Inflation. Before examining how the current circumstance can evolve from a severe recession, with a recent short and shallow bout with formal deflation, into a hyperinflationary great depression, it is worth defining the nature of the current economic and inflation conditions in the United States and likely near-term developments.

As discussed in the regular SGS Commentaries, the U.S. economy remains in a structural recession/ depression, where recession recognition as of December 2007 became official following the prior hyperinflation report. At the same time, due to extreme fluctuations in oil prices, where an oil-price collapse eliminated oil-induced inflation pressures building at the time of the prior report, consumer inflation experienced a brief and shallow dip into official (year-to-year) deflation, through the October 2009 CPI. The November CPI will resume positive annual inflation, partially due to a renewed upturn in oil prices.

The current downturn, as reported, already is the longest and the deepest business contraction since the first downleg of the Great Depression in the early 1930s. Such is reflected in payroll employment and GDP growth plotted in the following graphs. The payroll graph adjusts for the size of the recently announced pending benchmark revision to the series. The quarterly GDP numbers are published only back to 1947. If one counts the war production shutdown at the end of World War II as a normal business cycle, then the current downturn is the deepest since then, but still the longest since the early 1930s. The respective depths of the Great Depression and post-war production contractions are based on annual data available back to 1929.

While the official peak-to-trough contraction in the current downturn, per official real GDP is 3.8% (second-quarter 2009), most of the better economic series are showing contractions of greater than 10% (depression range), such as retail sales and industrial production, while others are showing contractions of greater than 25% (great depression range), such as new orders for durable goods and various statistics indicating the level of housing activity. Revisions to the GDP over several years eventually should show the current level of GDP activity to have been at depression level. The evolving depression quickly will move to great depression status, at such time as the hyperinflation hits, since that will be extremely disruptive to the conduct of normal commerce.

Net of gimmicked methodologies that have inflated GDP reporting over the decades, the U.S. economy has been in recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001, which actually began back in late-1999. The current downturn may evolve into a further multiple-dip circumstance. The Great Depression was a double-dip contraction.

The current economic downturn has been so protracted and severe that regular year-to-year comparisons and the seasonal adjustment process have forced new types of analyses and have led to major warping of regular economic reporting. Where a number of series, again, such as retail sales and industrial production, have leveled off at low-level plateaus of economic activity, year-ago comparisons have become less negative, but there has been no meaningful pick-up in economic activity.

Economic activity has sunk to such lows that regular measures of change that are followed closely by the financial markets — such as new claims for unemployment insurance — are not signaling economic recovery, as they turn less negative, only that activity is beginning to plateau at an unusually low level. With stimulus packages having had their initial impacts, with broad domestic liquidity (see money supply discussion) contracting at a pace that would promise an economic downturn in the best of times, and with consumers’ liquidity problems intensifying, the contraction in U.S. economic activity likely will accelerate anew in the early months of 2010.

Consumer Liquidity Structural Problems. The U.S. economy is in a deepening structural change that has resulted from U.S. trade, social and regulatory policies driving a goodly portion of the U.S. manufacturing and technology base offshore. As a result, a large number of related, high paying jobs have disappeared for U.S. workers. Accordingly, U.S. consumers have found increasingly that their household incomes fail to keep up with inflation. Without real growth in income, there cannot be sustained economic growth. Growth driven by debt expansion, as encouraged by the Fed in recent years, ultimately is not sustainable, as has become painfully obvious to many in the current systemic solvency crisis. Greater detail on these and related comments are found in the Consumer Liquidity Special Report.

As shown in the next graph, the U.S. trade deficit has narrowed in the current downturn, with lowered U.S. consumption and with a brief collapse in oil prices. There has been, however, no fundamental shift in circumstances to suggest a healthy move in U.S. economic activity towards a fundamentally improved trade balance or a shift towards reinvigorating the U.S. manufacturing base.

The deterioration in median household income has resulted in greater variance in income, as shown in the second graph, which has negative longer term economic implications. A person earning $100,000,000 per year is not going to buy that many more automobiles that someone earning $100,000 per year. The stronger the middle class is, generally the stronger will be the economy. Historically, extremes in income variance usually are followed by financial panics and economic depressions. Income variance today is higher than it was coming into 1929 and 1987, and it is nearly double that of any other “advanced” economy.

The next two graphs show official weakness in inflation-adjusted income. The top plot of the solid line shows real average weekly earnings, as reported and deflated by the Bureau of Labor Statistics (BLS) using the regular CPI-W. Real wages never have recovered their pre-1973 to 1975 recession peak. As wages dropped over the decades, the number of people in an average household that had to work, in order to make ends meet, increased.

The second graph reflects median household income over the years. The thicker line shows income deflated by the regular CPI-U, a measure somewhat broader than the CPI-W. Those inflation-adjusted numbers show that median household income, as of 2008, never recovered its pre-2001 recession peak and stood below its level of 1973. Deflated by the CPI-U-RS (current methods), discussed below, the pre-2001 recession peak also still has not been recovered.

In the last several decades, the BLS introduced a variety of new methodologies into the calculation of the CPI, with the effect of reducing the level of reported CPI inflation. The general approach has been to move the CPI away from its traditional measuring of the cost of living of maintaining a constant standard of living. The lower the rate of inflation used in deflating a number, the stronger is the resulting inflation-adjusted growth. The CPI-U-RS is the CPI with its history restated as if all the new methodologies had been in place from day one. The impact of the changes is evident in the two lines, with the thinner CPI-U-RS deflated line showing stronger relative growth. It would run higher than the top line if the years set equal were 1967 instead of 2008.

The broad point on income is that it is inadequate to sustain positive, inflation-adjusted economic activity. In the absence of income growth, debt expansion can act as a short-term prop for the economy, but that is not available at present. The system is in the throes of a solvency crisis, with banks reducing lending to consumers.

The broad point on the inflation measure is that by reverse-engineering the CPI-U-RS, current inflation reporting can be estimated as though it were free of the inflation-dampening methodologies. Such has been done with the SGS-Alternate Consumer Inflation Measure. In the plot of the real average weekly earnings, the dotted line reflects the series deflated by the SGS-Alternate CPI, and that shows the consumers’ liquidity squeeze to be more severe for those hoping to maintain a constant standard of living, than as indicated otherwise by official reporting.

Inflation. Inflationary pressures have started to surface from the Fed’s efforts at dollar debasement. A weakening U.S. dollar has placed upside pressure on dollar-denominated oil prices, which in turn have begun pushing annual inflation higher. This is not inflation generated by strong economic demand, but rather inflation driven by Federal Reserve efforts to weaken the dollar.

Though still well shy of the peak levels seen in 2008, oil and gasoline prices have soared since their near-term lows at the end of last year. The relative collapse, in latter 2008, of gasoline and oil prices triggered a period of year-to-year decline — formal deflation — in the CPI-U. Now with relatively high prices going against falling prices in year-ago comparisons, annual CPI inflation will turn positive, once more, as of November. As reported by the BLS, annual CPI-U inflation for October 2009 was not statistically distinguishable from zero; the SGS-Alternate Consumer Inflation Measure was about 7.1%.

For all of 2009, CPI-U average annual inflation should be less than a 0.5% contraction (deflation), with the SGS-Alternate at something shy of 7%. As measured December 2009 over December 2008, official annual CPI-U inflation should be close to 2% with the SGS-Alternate around 9%. A strengthening pick-up in official annual CPI inflation should be evident in early 2010.

The recent annual declines in CPI inflation were the biggest since 1949 to 1950. CPI reporting methods used in then, however, would have generated current inflation rates that did not drop below 5%, at worst, in the current cycle. The brief and shallow formal deflation that now is at an end — based on official CPI-U reporting — appears to have been about half the depth and half the length of the negative inflation bout in the 1949 to 1950 circumstance.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact, not otherwise published by the BLS.

Political Considerations. What lies ahead for the economy and inflation will have significant impact on the U.S. political process, as recent economic woes did on the 2008 election. Historically, the concerns of the electorate have been dominated by pocketbook issues. Prior to gimmicked methodologies making the reporting of disposable personal income largely meaningless, that measure was an excellent predictor of presidential elections.

In every presidential race since 1908, in which consistent, real (inflation-adjusted) annual disposable income growth was above 3.3%, the incumbent party holding the White House won every time. When income growth was below 3.3%, the incumbent party lost every time. Again, with redefinitions to the national income accounts in the last two decades, a consistent measure of disposable income as reported by the government has disappeared. Yet, even with official reporting, 2008 annual growth in real disposable income was 0.5%, well below the traditional 3.3% limit. As was suggested would be the case in the prior report, such contributed to the Republicans losing the White House in 2008. Where I always endeavor to keep my political persuasions separate from my analyses, for purposes of full disclosure, my background is as a conservative Republican with a libertarian bent.

A wide variety of possibilities would follow or coincide politically with a hyperinflationary great depression, but the political status quo likely would not continue. Times would be financially painful enough to encourage the development of a third party that could move the Republicans or Democrats to third-party status in the 2012 presidential and congressional elections. Present economic conditions are bleak enough to impair re-election prospects severely for incumbents in the 2010 mid-term election.

Untenable Positions for the Federal Government and the Federal Reserve. The effect of the structural income problems on the economy has been that most consumers have been unable to sustain adequate income growth beyond the rate of inflation, unable to maintain their standard of living. The only way that personal consumption — the dominant component of GDP — can grow in such a circumstance is for the consumer to take on new debt or to liquidate savings. Both those factors are short-lived and have reached unsustainable extremes. Debt expansion and savings liquidation both were encouraged by the investment bubbles created by Alan Greenspan; he knew that economic growth could not be had otherwise. Part of what is happening today is payback for those policies.

This circumstance places both the federal government and the Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli would work. From the standpoint of the federal government, traditional fiscal stimulus in the form of tax cuts or increased federal spending have reached their practical limits, with the actual annual budget deficit running out of control at roughly $9.0 trillion per year. Yet, that likely will not keep political Washington from pushing its deficit spending until the markets rebel. After all, there is an election in 2010. It is that market rebellion, however, that will set the hyperinflation stage.

From the Fed’s standpoint, it can neither stimulate the economy nor contain inflation. Lowering rates has run its course and done little to stimulate the structurally-impaired economy, and raising rates may become necessary in defense of the dollar. Similarly, raising rates will do little to contain a non-demand driven inflation, such as seen developing in the current circumstance so heavily affected by oil prices. Continued efforts to debase the dollar should be successful, but not in stimulating economic activity, only in triggering an accelerating pace of inflation.

With the economy in depression, hyperinflation kicking in quickly should pull the economy into a great depression, since uncontained inflation is likely to bring normal commercial activity to a halt.

Part III will be published tomorrow.

I extend by deep thanks to the various readers who have raised questions and provided ideas and material. As always, please feel free to offer your comments or raise your questions by e-mail to johnwilliams@shadowstats.com.

Copyright 2010 Shadowstats.com

Let’s Attack Iran!

November 9, 2010

by Fred Reed

(Editor’s note: Fred gets top billing over Hyperinflation, ’cause God knows we need a laugh. Check tomorrow’s post for Part II of the series.)

Oh good. I see that Senator Lindsey Graham wants to attack Iran. The US, he says, should “sink their navy, destroy their air force and deliver a decisive blow to the Revolutionary Guard.”

Senator Graham has the brains of a tapeworm, making him eminently qualified for the Senate. Tapeworms, I note, do not have brains. It is characteristic of warlike innocents, to include the Pentagon, to believe that if you destroy navies and air forces, you win wars. This worked well in Vietnam, you will recall, and as soon as we destroy the Taliban’s navy, Afghanistan will be a cakewalk.

Now, I understand that practicality and realism are alien concepts in American politics, to be approached with trepidation, but maybe, just once, we should think before sticking our private parts into a wood-chipper. Just once. I do not propose consistent rationality, forethought, or intelligent behavior. I profoundly respect my country’s traditions.

However, folk wisdom from West Virginia: Before you say, “I can whip any man in the bar!” it is well to scout the bar.

Note that the United States cannot defeat Iran militarily, short of using nuclear weapons. It is easy to start a war. Finishing one is harder. I could punch out Mike Tyson. Things thereafter might not go as well as hoped.

Some will find the thought of American martial incapacity outrageous. Can’t beat Iran? Buncha towel monkeys? Among grrr-bowwow-woof patriots, there exists a heady delusion of American potency, that the US has “the greatest military power the world has ever seen.” Ah. And when did it last win a war? In Afghanistan, for ten years the gloriousest military ever known, the expensivist, and whoosh-bangiest, hasn’t managed to defeat a bunch of pissed-off illiterates with AKs and RPGs.

At this point Lindsey of Persia will doubtless allude to the wonders of air power, of “precision-guided weapons,” of smart bombs that presumably read Kant on the way down. Those pitiable Iranians would have no hope of stopping our mighty bombers. True.

Implicit in this Thomistic fantasy (Clancy, I mean, not Aquinas) is that Iran wouldn’t, couldn’t, wouldn’t dare fight back without a navy, etc. Lindsey had better be very sure that Iran couldn’t block the Strait of Hormuz in retaliation. Enough of the world’s petroleum comes from the Gulf that the price would rise drastically if the Straits were blocked. Some economies would simply stop.

How many supertankers going up in flames would be tolerated before operators of tankers refused to risk it?

Iran recently began serial production of the Nasr 1, an anti-ship cruise missile. Tankers are thin-skinned and highly flammable. The Nasr 1 can be fired from the back of a truck. Trucks by their nature are mobile. They are easy to hide.

Fly Mach II Go Boom

The Air Force, to include Naval Air, may be confident that it can destroy all of Iran’s missiles. The Air Force always believes that air power can do anything and everything—make coffee, win at marbles, everything. After all, don’t its airplanes say “Vrooom!” and “Swoosh!”? Don’t cockpits have lots of portentous buttons and spiffy little screens? Unfortunately the Air Force is regularly wrong.

In fact the entire military is regularly wrong about the ease and duration of its adventures. For example, it had no idea that Viet Nam would turn into an endless war ending in defeat (if that makes sense). Iraq notoriously was going to be a walk in the park. That the war on Afghanistan would last ten years with a distinct possibility of defeat…this never occurred to the soldiers.

It is barely conceivable that the Five-Sided Wind Box could do what Field Marshal Graham thinks it could do. The unexpected is always a possibility. But, the stakes being what they would be in Hormuz, hoo-boy….

Another possibility is that Israel will attack Iran, as it has threatened. I would like to think that even Bibi Nut-and-Yahoo has better sense but, it the US can produce gibbering wingnuts, why not Israel? The practical effects of an Israeli attack would be indistinguishable from those of an American attack: America would have to solve the problem. Which it probably couldn’t. Israel can bomb Iran’s nuclear codpieces, but it can’t defeat Iran. And if the Strait were blocked after an Israeli attack, the entire globe would holler, “Israel did it!” which would be true.

The distance from “Israel did it” to “The Jews did it,” though logically great, is emotionally short. People think in collective terms. Remember that after some Saudis dropped the Towers, the alleged war on terror morphed almost instantly into intense hostility for Moslems. It doesn’t make sense, but what has that got to do with anything?

I know a lot of Jews, who are all over the place politically and intellectually. They have in common a complete lack of resemblance to the scheming, hand-rubbing, heh-heh-heh Jews of Neo-nazi imagination. Few sacrifice Christian children (a temptation strongest, I can attest, among Christian parents). But…people think collectively.

Congress doesn’t support Israel because it likes Israel, but from political expediency. If the wind blows the other way, so will Congress. Gasoline at twelve dollars is a lot of wind in a commuting country.

Things worsen for America, yet we really don’t know where the country is going or how it will react. The last domestic catastrophe was the Great Depression, when America was a very different place. How bad can things get, economically, politically, internationally? How does a pampered population incapable of planting a garden respond to genuinely hard times? “It can’t happen here,” one hears. What can’t? I suspect that all sorts of things could happen, given sufficiently hard times.

The United States is today an edgy, unhappy country, sliding toward poverty, increasingly dictatorial, inchoately angry, hostile to blacks, the French, Mexicans, Moslems and, creepingly, the Chinese. (Jews, perhaps to their surprise, don’t make the enemies list.) Americans don’t do cosmopolitan. The federal pressure for diversity exists because otherwise no one would associate with anyone else. The Persian Gulf is one of few places that plausibly might wreck the industrial world. There would have to be someone to blame. And Israel can’t survive without American support.

Maybe I’m crazy. But if I were an Israeli, I’d find a nice café on Diesengoff and enjoy a double cappuccino, watch the girls, and keep my bombs in my pocket. Let somebody else take the fall.

Copyright 2010 Fred Reed.


November 8, 2010

by Walter J. (John) Williams

Commentary Number 263

December 2, 2009

Economy and Financial System Face Eventual Great Collapse

Government and Fed Actions Have Narrowed Timing for Hyperinflationary Great Depression to Next Five Years

High Risk of Ultimate Dollar Crisis Unfolding in Year Ahead

(Editor’s Note: I’ve split this report into three parts. This was given less than one month before the 2010 New Year and the possible breaking of the hyperinflation crisis in 2010. Some have transpired, some loom on the horizon.)


A Great Collapse. The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment. The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar. The results of those efforts are being seen in tentative selling pressures against the U.S. currency and in the rallying price of gold.

Crises Brewed by Federal Government and Federal Reserve Malfeasance. The crises have been generated out of and are centered on the United States financial system, triggered by the collapse of debt excesses actively encouraged by the Greenspan Federal Reserve. Recognizing that the U.S. economy was sagging under the weight of structural changes created by government trade, regulatory and social policies — policies that limited real consumer income growth — Mr. Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion.

The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products, which included instruments of mis-packaged lending risks, designed for consumption by global entities that openly did not understand the nature of the risks being taken. Complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses.

As with consumers, the federal government could not make ends meet while appeasing that portion of the electorate that could be kept docile by ever-expanding government programs and increasing government spending. The solution was ever-expanding federal debt and deficits.

Purportedly, it was Arthur Burns, Fed Chairman under Richard Nixon, who first offered the advice that helped to guide Alan Greenspan and a number of Administrations. The gist of the wisdom imparted was that if you ran into problems, you could ignore the budget deficit and the dollar. Ignoring them did not matter, because doing so would not cost you any votes.

Back in 2005, I raised the issue of a then-inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan. I was told simply that “It’s too far into the future to worry about.”

Indeed, pushing the big problems into the future appears to have been the working strategy for both the Fed and recent Administrations. Yet, the U.S. dollar and the budget deficit do matter, and the future is at hand. The day of ultimate financial reckoning has arrived, and it is playing out.

Saving the System at Any Cost. The Federal Reserve and the U.S. Treasury moved early in the current solvency crisis to prevent a collapse of the banking system, at any cost. It was the collapse of the banking system and loss of depositor assets in the early-1930s that intensified the Great Depression and its attendant deflation. A somewhat parallel risk was envisioned in 2008 as the system passed over the brink. The decision was made to avoid a deflationary great depression.

Effective financial impairments and at least partial nationalizations or orchestrated bailouts/takeovers resulted for institutions such as Bear Stearns, Citigroup, Washington Mutual, AIG, General Motors, Chrysler, Fannie Mae and Freddie Mac, along with a number of further troubled financial institutions. The Fed moved to provide whatever systemic liquidity would be needed, while the federal government moved to finance corporate bailouts and to introduce significant stimulus spending.

Curiously, though, the Fed and the Treasury let Lehman Brothers fail outright, which triggered a foreseeable run on the system and markedly intensified the systemic solvency crisis in September 2008. Whether someone was trying to play political games, with the public and Congress increasingly raising questions of moral hazard issues, or whether the U.S. financial wizards missed what would happen or simply moved to bring the crisis to a head, remains to be seen.

In the midst of the crises, the Obama Administration has introduced major new government programs, ranging from carbon tax plans to a national health care and insurance program. Irrespective of any stated goals of not increasing the federal deficit further, these programs will have severely negative impact on the federal deficit, either from massive net expenses, or from losses in tax revenues in a weaker economy. The various initiatives generally will act as major depressants on business activity. The U.S. Treasury has delayed publishing the U.S. Government’s 2009 GAAP-based financial statements for two months, until February 2010. With my estimate of a GAAP-based 2009 annual deficit of roughly $9 trillion, there may some method in pushing off unhappy accounting until after the health-care package is resolved.

While the system will be saved at any cost, and the government will spend whatever it can spend until the financial markets rebel, the ultimate cost here will be in inflation and the increasing debasement of the purchasing power of the U.S. Dollar.

Hyperinflation Nears. Before the systemic solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. The U.S. economy also already had entered a severe structural downturn, which helped to trigger the systemic solvency crisis.

The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government’s solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. Accordingly, risks are particularly high of the hyperinflation crisis breaking within the next year.

Numerous foreign governments have offered unusually blunt criticism of U.S. fiscal and Federal Reserve policies in the last year. Both private and official demand for U.S. Treasuries increasingly is unenthusiastic. Looming with uncertain timing is a panicked dollar dumping and dumping of dollar-denominated paper assets. Such is the most likely event to trigger the onset of hyperinflation in the year ahead.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat dollars (not backed by gold or silver) will come the eventual destruction of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult, painful and unhappy times for many in the United States. The functioning and adaptation of the U.S. economy and financial markets to a hyperinflation likely would be particularly disruptive. Trouble could range from turmoil in the food distribution chain to electronic cash and credit systems unable to handle rapidly changing circumstances. The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression.

While the economic difficulties would have global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system. For those living in the United States, long-range strategies should look to assure safety and survival, which from a financial standpoint means preserving wealth and assets. Also directly impacted, of course, are those holding or dependent upon U.S. dollars or dollar-denominated assets, and those living in “dollarized” countries.

The balance of this special report is broken into the following sections:

* Defining the Components of a Hyperinflationary Great Depression
* Two Examples of Hyperinflation
* Current Economic and Inflation Conditions in the United States
* Historical U.S. Inflation: Why Hyperinflation Instead of Deflation
* U.S. Government Cannot Cover Existing Obligations
* Hyperinflationary Great Depression
* Closing Comments

Defining the Components of a Hyperinflationary Great Depression

Deflation, Inflation and Hyperinflation. Inflation broadly is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently, in Zimbabwe where the pace of hyperinflation may have been the most extreme ever seen.

The historical culprit generally has been the use of fiat currencies — currencies with no hard-asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

Ralph T. Foster (hereinafter cited as Foster) in Fiat Paper Money, The History and Evolution of Our Currency details the history of fiat paper currencies from 11th century Szechwan, China, to date, and the consistent collapse of those currencies, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.

Here are the definitions:

Deflation: A decrease in the prices of goods and services, usually tied to a contraction of money in circulation. Formal deflation is measured in terms of year-to-year change.

Inflation: An increase in the prices of goods and services, usually tied to an increase of money in circulation.

Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency.

As discussed in the section on “Historical U.S. Inflation,” the domestic economy has been through periods of both major inflation and deflation, usually tied to wars and their aftermaths. Such, however, preceded the U.S. going off the domestic gold standard in 1933 and abandoning international convertibility in 1971. The era of the modern fiat dollar generally has been one of persistent and slowly debilitating inflation.

Recession, Depression and Great Depression. A couple of decades back, I tried to tie down the definitional differences between a recession, depression and a great depression with the Bureau of Economic Analysis (BEA), the National Bureau of Economic Research (NBER) and a number of private economists. I found that there was no consensus on the matter, where popular usage of the term “depression” had taken on the meaning of a severe recession, so I set some definitions that the various parties (neither formally nor officially) thought were within reason.

If you look at the plot of the level of economic activity during a downturn, you will see something that looks like a bowl, with activity recessing on the downside and recovering on the upside. The term used to describe this bowl-shaped circumstance before World War II was “depression,” while the downside portion of the cycle was called “recession,” and the upside was called “recovery.” Before World War II, all downturns simply were referred to as depressions. In the wake of the Great Depression of the 1930s, however, a euphemism was sought for future economic contractions so as to avoid evoking memories of that earlier, financially painful time.

Accordingly, a post-World War II downturn was called “recession.” Officially, the worst post-World War II recession was from November 1973 through March 1975, with a peak-to-trough contraction of 5%. Such followed the Vietnam War, Nixon’s floating of the U.S. dollar and the Oil Embargo. The double-dip recession in the early-1980s may have seen a combined contraction of roughly 6%. I contend that the current double-dip recession that began in late-2000 already has surpassed the 1980s double-dip as to depth. Here are the definitions:

Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor such as a truckers’ strike. The NBER, which is the official arbiter of when the United States economy is in recession, attempts to refine its timing calls, on a monthly basis, through the use of economic series such as payroll employment and industrial production, and it no longer relies on the two quarters of contracting GDP rule.

Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%.

Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%.

On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II — as officially reported — have been recessions. Using a the somewhat narrower “great depression” definition of a contraction in excess of 20% (instead of 25%), the depression of 1837 to 1843 would be considered “great,” as would be the war-time production shut-down in 1945, at least technically.

Two Examples of Hyperinflation

Weimar Republic. Ralph Foster closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor whose university affiliations included, among others, Harvard and University of California Berkeley. From firsthand experience, Kessler described the Weimar Republic hyperinflation:

“It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.”

The hyperinflation in Germany’s Weimar Republic is along the lines of what likely will unfold in the United States. The following two graphs plot the same numbers, but on different scales. The data are the monthly averages of the number of paper German marks that equaled one dollar (gold-backed) in 1922 and 1923, with that number acting as something of a surrogate for the pace of inflation.

The first plot is a simple arithmetic plot, but the earlier detail is masked by the extreme numbers of the last several months, suggestive of an extraordinarily rapid and large rise in the pace of inflation. The second plot is on a logarithmic scale, where each successive power of ten represents the next tick mark on the vertical scale.

While the hyperinflation did hit rapidly, annual inflation in January 1922 already was more than 200%, up from as low as 6% in April 1921. The existing currency was abandoned at the end of 1923.

Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary History of the United States that the early stages of the Weimar Republic hyperinflation was accompanied by a huge influx of foreign capital, much as had happened during the U.S. Civil War. The speculative influx of capital into the U.S. at the time of the Civil War inflation helped to stabilize the system, as the foreign capital influx into the U.S. in recent years has helped to provide relative stability and strength to the equity and credit markets. Following the Civil War, however, the underlying U.S. economy had significant untapped potential and was able to generate strong, real economic activity that covered the war’s spending excesses.

Post-World War I Germany was a different matter, where the country was financially and economically depleted as a penalty for losing the war. Here, after initial benefit, the influx of foreign capital helped to destabilize the system. “As the mark depreciated, foreigners at first were persuaded that it would subsequently appreciate and so bought a large volume of mark assets …” Such boosted the foreign exchange value of the German mark and the value of German assets. “As the German inflation went on, expectations were reversed, the inflow of capital was replaced by an outflow, and the mark depreciated more rapidly … (Friedman p. 76).”

Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors — particularly France — as well as to face loss of territory. From Foster (Chapter 11):

“By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments.

“During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.”

The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires.

The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation than it was to the U.S. Civil War experience. In certain aspects, the current U.S. situation is even worse than the Weimar situation. It certainly is worse than the Civil war circumstance.

Unlike the untapped economic potential of the United States 145 years ago, today’s U.S. economy is languishing in the structural problems of the loss of its manufacturing base and a shift of domestic wealth offshore; it is mired in an economic contraction that is immune to traditional economic stimuli. As the U.S. government has attempted in recent decades to assuage electorate discontent with ever more expensive social programs; as the Federal Reserve has moved to encourage debt expansion as a remedy for lack of real, inflation-adjusted, income growth; the eventual bankruptcy of the U.S. dollar was locked in. The problem here was taken on and created willingly by U.S. government officials — embraced by both major political parties — not imposed by a victorious and vengeful enemy of war.

In the early 1920s, foreign investors in Germany were not propping up the world’s reserve currency in an effort to prevent a global financial collapse, and they did not know in advance that they were doomed to take a large hit on their German investments. In today’s environment, both central banks and major private investors know that the U.S. dollar will be a losing proposition. They either expect and/or hope that they can get out of the dollar in time to avoid losses, or, in the case of the central banks, that they can forestall the ultimate global economic crisis. Such expectations and hopes have dimmed markedly in the last two years, as the untenable U.S. fiscal condition has gained more public and global recognition.

Zimbabwe. Hyperinflation in Zimbabwe, the former Rhodesia, was a quadrillion times worse than it was in Weimar Germany. Zimbabwe went through a number of years of high inflation, with an accelerating hyperinflation from 2006 to 2009, when the currency was abandoned. Through three devaluations, excess zeros repeatedly were lopped off notes as high as 100 trillion Zimbabwe dollars.

The cumulative devaluation of the Zimbabwe dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have be needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy.

In early-2009, the governor of the Zimbabwe Reserve Bank indicated he felt his actions in printing money were vindicated by the recent actions of the U.S. Federal Reserve. If the U.S. went through a hyperinflation like that of Zimbabwe’s, total U.S. federal debt and obligations (roughly $75 trillion with unfunded liabilities) could be paid off for much less than a current penny.

This image of a sign in a restroom facility at a South African border station with Zimbabwe speaks for itself.

What helped to enable the evolution of the Zimbabwe monetary excesses over the years, while still having something of a functioning economy, was the back-up of a well functioning black market in U.S. dollars. The United States has no such backup system, however, with implications for a more rapid and disruptive hyperinflation than seen in Zimbabwe, when it hits. This will be discussed later.

Part II will be published tomorrow.

I extend by deep thanks to the various readers who have raised questions and provided ideas and material. As always, please feel free to offer your comments or raise your questions by e-mail to johnwilliams@shadowstats.com.

Copyright 2010 Shadowstats.com

Fed’s Quantitative Easing to Starve Middle Class Americans

November 7, 2010

Courtesy The National Inflation Association

The Federal Reserve today announced that they will be implementing $600 billion in additional quantitative easing by the end of June 2011. The Federal Reserve will maintain its current policy of reinvesting principal payments from its security holdings and will expand its balance sheet by an additional $75 billion per month. The total announced balance sheet expansion was $100 billion higher than the public consensus of $500 billion. The Federal Reserve will continue to hold interest rates at record low levels of 0% to 0.25%, where they have been for nearly two years.

Quantitative easing is nothing more than the Federal Reserve printing money and creating inflation. This quantitative easing steals from the purchasing power of the incomes and savings of all Americans. While Americans are distracted by the mainstream media with daily debates by the Democrats and Republicans about taxes, U.S. taxes have almost no where near the effect on the lives of middle class Americans as does the Federal Reserve’s monetary policy and quantitative easing. Instead of millions of Americans attending “tea party” events in Washington with Glenn Beck and Sarah Palin, they should be marching outside of the Federal Reserve building in New York chanting “End the Fed”.

As highlighted in NIA’s new documentary ‘End of Liberty’, which just surpassed 170,000 views in three days, prices of nearly all agricultural commodities have been spiraling out of control in recent months just in anticipation of today’s quantitative easing announcement. In the past 60 days alone, cotton prices are up 54%, corn prices are up 29%, soybean prices are up 22%, orange juice prices are up 17%, and sugar prices are up 51%. Meanwhile, the Dow Jones has only gained 9%.

The Federal Reserve is doing everything in its power to push stock market prices up so that the government can take credit for an “economic recovery”, but as NIA has been warning for years, inflation gravitates most towards the goods that Americans need most in order to live and survive. There is nothing that Americans need more than food. The agricultural commodity price increases of the past two months will begin to make their way into all supermarkets nationwide during the next few months. Americans who have been struggling just to make their mortgage payments, will now be forced to stop paying their mortgage in order to buy food. Instead of hoping to get the latest Apple gadget for Christmas this holiday season, American children better be grateful if their parents are able just to put food on the table.

After the financial crisis of late-2008/early-2009 when the Federal Reserve implemented its first round of quantitative easing, the Dow Jones rallied by 74% from its low of 6,469.95 in March of 2009 to a high of 11,257.93 in April of 2010. By the Dow Jones rallying, the U.S. government was able to take credit for creating an “economic recovery”, despite the fact that unemployment remained near multi-decade highs. NIA released a documentary on May 13th called ‘Meltup’, in which we said, “The truth is, our economy is not recovering, prices are rising only due to inflation.” NIA proclaimed in ‘Meltup’, “If stocks were to see a nominal decline one last time, we will likely see Bernanke shoot up his largest ever dose of quantitative easing.”

On July 19th, with the Dow Jones having declined by 11% from its April high down to 10,073.68, everybody in the mainstream media was talking about the threat of deflation. NIA released an article on July 19th entitled, “Double-Dip Recession Does Not Mean Deflation” in which we said, “NIA believes the Federal Reserve is quietly getting ready to implement ‘The Mother of All Quantitative Easing’.” NIA went on to say, “NIA fears that come this October, Bernanke is likely to shoot up his largest ever dose of quantitative easing.”

Today, NIA’s prediction for the most part came true. The Federal Reserve announced massive quantitative easing ($600 billion) and our timing was almost perfect (we missed October by a few days). This isn’t quite what we consider to be the “The Mother of All Quantitative Easing”, but don’t worry, the Fed will announce additional quantitative easing soon if the slightest hint of deflation reappears.

Current U.S. price inflation based on the consumer price index (CPI) is 1.5% and the Federal Reserve wants to see this number increase to 2%. The truth is, the U.S. Bureau of Labor Statistics (BLS) uses geometric weighting and hedonics to artificially manipulate this number lower than the real rate of inflation in order to keep American’s social security payment increases as low as possible so that politicians in Washington have more of your money to spend. Based on the way the U.S. government previously calculated price inflation before the BLS’s latest tactics to manipulate the CPI as low as possible, NIA believes current year-over-year price inflation is at least 5%.

No human being alive, especially Federal Reserve Chairman Ben Bernanke, is smart enough to perfectly manage the rate of price inflation by printing money. By expanding the balance sheet by $600 billion, NIA believes the real price inflation rate will rise above 10% in early 2011. Once Americans realize just how rapidly their dollars are being debased and losing their purchasing power, it could cause a rush out of the U.S. dollar and trigger hyperinflation as early as year 2012.

America no longer has a free market economy. For everybody on Wall Street to be so fixated on the words that come out of Bernanke’s mouth, it shows that the economic system we have is extremely fragile and vulnerable to collapse at any time. With prices of assets soaring in recent months just in anticipation of Bernanke’s quantitative easing announcement, it shows that the world’s financial system is already flooded with trillions of dollars in excess liquidity. Unless the U.S. government immediately implements dramatic spending cuts across the board, NIA believes the world is going to lose confidence in the U.S. dollar and it will be impossible for the U.S. to survive past the year 2015 without the U.S. dollar becoming worthless.

The fact that the Republicans took control of the House of Representatives last night is completely meaningless. If the U.S. government is to implement the spending cuts necessary in order to prevent hyperinflation, Americans will be faced with a second Great Depression, which NIA believes is a necessity and much better than the alternative. However, the Republicans will not risk being held responsible for the next Great Depression, because it will ensure Obama gets reelected in 2012. Therefore, NIA predicts that nothing is going to change with the Republicans taking over the House.

The only good news that came so far this week is that Rand Paul was elected to the U.S. Senate. NIA predicted in our top 10 predictions for 2010 that Rand Paul would win both the Republican nomination for U.S. Senate in the State of Kentucky and the U.S. Senate seat and we are very proud that Rand Paul was victorious. NIA considers Rand Paul to be the true leader of the Tea Party movement because he fully understands the hyperinflation that awaits as a result of the Federal Reserve’s actions.

NIA hopes to see Rand Paul filibuster any attempts by the U.S. Senate to raise the ceiling on our national debt. There is no reason to have a national debt ceiling if every time we reach it, Congress raises it. NIA prays that Rand Paul proposes a Balanced Budget Amendment in 2011, because this should be our government’s top priority if it wants to restore confidence in the U.S. dollar and prevent a complete societal collapse.

NIA would like to apologize for the minor technical problems in the last two minutes of NIA’s new 1 hour and 14 minute documentary ‘End of Liberty’, during the time in which NIA’s President Gerard Adams was speaking. This small audio problem was caused by YouTube and out of our control. To make up for this, NIA’s President will be featured in an exclusive NIA video later this month explaining in detail the hyperinflationary crisis that is ahead and how NIA members can prosper while the rest of America goes broke. As you know, NIA’s President made a 378% return on his investment in silver call options that he suggested to you in February. He believes there will be many more opportunities similar to this for NIA members to become wealthy in the years ahead as the rest of America goes broke.

The most important thing for you to do to help your family members and friends survive the upcoming hyperinflationary crisis is to help them become educated to the truth. Tell them to become members of NIA for free at http://inflation.us and ask them to read our articles and watch our documentaries. If they have any questions about the U.S. economy or inflation, they can browse through our comprehensive ‘NIAnswers’ database and if their question hasn’t already been answered by us, they can submit it to us to be added to the database. NIA will soon be announcing its most important new ‘NIAnswers’ of the past several months. Also, on December 7th, NIA will be releasing its latest update to its review of the major online sellers of gold and silver bullion.

Copyright 2010 The National Inflation Association

Can Liberty Be Advanced Through Violence?

November 6, 2010

by Butler Shaffer

We cannot solve our problems with the same thinking we used when we created them.

~ Albert Einstein

A Republican candidate running for Congress in Texas has set many minds and mouths atwitter with his suggestion that, should state tyranny ever become a problem in America that could not be resolved by political means, the use of violence, while “not the first option,” would be “on the table.” There is a deep-rooted frustration and anger among millions of Americans directed at the entirety of a political establishment that is forever employing lies, deceit, contradictory reasoning, violence, increased regulatory and taxation schemes, Federal Reserve monetary policies, wars, expanded police and surveillance powers, and other practices that advance corporate-state interests at the expense of ordinary people. Those upset with such behavior have tried resorting to the politically-acceptable means of bringing about change. They have gone to voting booths to support candidates who promise to “get the government off your backs,” or “no more taxes,” or to not engage in “nation-building.” With but a handful of exceptions, those elected turn around and violate such promises, leaving the disenchanted voters to seek out other political saviors at the next election.

The current “Tea-Party” movement began as yet another expression of popular disaffection with our politicized society. It was, however, quickly co-opted by the same right-wing franchise of the political establishment that participated – in bipartisan efforts with its left-wing branch – in the construction of the modern empire. Just as in the 1994 Republican Party’s congressional victories, persons of libertarian sentiments will discover that dressing a Tea-Party candidate in a three-cornered hat will not change his fundamental character as a pimp for the prevailing order.

When the futility of using institutionally-approved methods for making change become increasingly evident to people, it is not surprising that many might look to violence as the only effective solution. Students of social psychology often speak of the “frustration/aggression” hypothesis, wherein a repeated interference with goal-directed activity may result in a resort of violence. As Fred Berger expressed it, where:

“certain segments or groups within the population are systematically exposed to these weaknesses in the ability of the legal system to provide or protect security, those subjected to such treatment come to feel “left out” of the social process, come to regard themselves as the “victims” of the social and political scheme, rather than full participants in it. . . . Such conditions tend to foster counter-violence and retaliatory disorder. . . .”

In a world in which it has become evident to so many that the institutional order exists to promote the interests of the few at the expense of the more numerous, is it so remarkable that such an awareness would be responded to with anger and violence? To regard oneself as being endlessly at the mercy of increasingly malevolent forces that one is otherwise unable to control or resist, can produce a sense of hopelessness that may lead to violence directed against its perceived source.

How is one to respond to the systemic violence that is the lifeblood, the very essence, of the state? Society has always been a struggle between the “invisible hand” of a peaceful and productive order that arises, without direction, as the unintended consequence of people pursuing their own interests, and the “iron fist” of institutionally structured violence we have been conditioned to equate with “social order.” I have defined “government” as “an institution of theft, predation, rape, destruction, and mass murder, the absence of which, it is said, would lead to disorder.”

To understand political systems, and to learn how to protect oneself when dealing with them, one must cast aside all of the illusions and lies in which we have been trained to see them. They are defined, even by students of government, as agencies “enjoying a monopoly on the use of violence within a given territory.” There is nothing, nothing, that the state ever does that does not derive from a presumed authority to employ whatever amount of deadly force its officials deem necessary – or just convenient – to achieve its ends. Contrary to the mantle of “public servant” in which they like to cloak themselves, government employees – from the president on down to janitors – insist upon their power to compel obedience by force.

The mainstream media and high-ranking government officials have been feigning righteous indignation over the city officials in Bell, California, who paid themselves gargantuan salaries – one as high as $800,000 per year, and with retirement pay nearing $1,000,000 annually. What is most upsetting to such critics, however, is not the enormity of their racket, but that these local officials failed to conform themselves to established methods for the looting of taxpayers. Like the Claude Rains police chief in the movie, Casablanca, who informs Humphrey Bogart that he is “shocked to discover gambling” going on in his business – as he receives his gambling payoff from the croupier – the town government of Bell will receive a selective criticism of its behavior. Government defense contracts; hundreds of billions of dollars in “stimulus” gifts to favored business interests; the refusal of the Federal Reserve system – or of Congress – to reveal the beneficiaries of its monetary policies, these and other politically-correct forms of looting will pass without significant comment from right-thinking people. Nor, in contrast with the Bell racket, will much be made of the fact that a current candidate for governor in California has spent $141.5 million of her own money in an effort to get elected. Why? As one who understands that people act in order to be better off after acting than they would have been otherwise, what returns does this woman expect from her investment? Who is insisting upon an explanation from her?

I have long been of the view that parents have a moral obligation to keep their children from living under tyranny. As such, how do I go about the task of helping to make their world one in which they may enjoy the conditions of peace and liberty? My experience convinces me that participation in electoral politics is more than futile: it only adds energy to the system; it confirms the central premise of all political thinking, namely: important change can occur only within the halls of government. Besides the fact that the electoral process is unavoidably rigged in favor of the status quo, it also assures that, no matter who you vote for, the government always gets elected. Voting is designed to give people the false sense that they are in control of the machinery and the policies of the state. Emma Goldman got it right when she said that “if voting changed anything, they’d make it illegal.”

My opposition to voting arises from the same sense as my opposition to other forms of violence. Implicit in efforts to persuade the state to act according to your preferences – whether through voting, lobbying, or threats of force – is the idea that, should you prevail, others will be compelled to abide by what you have chosen for them. Voting is anything but the peaceful alternative to violence: it is premised on the coercive machinery of the state being employed on your behalf should you prevail in amassing a greater number of people on your side than do others.

More direct forms of violence – as some suggest to be the ultimate solution to statism – is likewise inconsistent with a condition of liberty. Violence is an expression of reactive anger, born of unrequited frustration. Violence is the very essence of the state: can one expect mankind to free itself of political destructiveness by adopting its very essence?

We will not become free when the state goes away. Rather, the state will go away once we are free. “Freedom” is a very personal quality, wherein the individual enjoys a centered, integrated life, free of the conflicts and contradictions that make up our normally neurotic lives. We must learn to respect the inviolability of one another’s lives and other property interests if we are to enjoy this inner sense of being free. A need for liberty is what we have in common with one another, but we will only grasp this fact when each of us is free of the inner forces that keep us divided and in conflict.

We have conditioned our minds to think of ourselves in conflict-laden ways, be they nationalistic, religious, racial, gender, or other forms of separation. Our political masters have trained us to think of one another in “we/they,” “us” against “them” categories, divisions that are – like the scapegoats upon whom we play out our conflicts – changeable to suit the political needs of the moment. The fear of unseen “communists” that helped fuel the Cold War, has morphed into the concealed “terrorists,” with each serving the same purpose: to expand the power and plundering of the state. Only by our individual ending of such divisive thinking and discovering the inner sense of non-contradictory wholeness that respects the inviolability of our neighbors’ lives and interests, can we become free.

“Liberty,” on the other hand, is the condition in which free men and women can live together in society. Trying to twist or manipulate unfree people into social systems – even those grounded in a verbal support of liberty – will never foster liberty. This is why the Constitution was doomed from the start: there was too much conflict and contradiction in the minds of most people to allow for the assemblage of free men and women. It is also why, once we have discovered the inner meaning of freedom, constitutions – and the governments they create – will be wholly unnecessary for a condition of liberty. This is part of the meaning of F.A. Harper’s observation that “the man who knows what freedom means will find a way to be free.”

How can a person whose mind and conduct is grounded in a divisive thinking that considers violence as a means to wholeness, be regarded as “free”? Free of what? Is it not evident that resort to violence can never be a means to liberty; that such methods presume a fundamental separation of interests that would reduce society to the Hobbesian dystopia of “all against all”? If a group sought to dismantle the state by violent means, is it not clear that it could accomplish such ends only by amassing coercive powers superior to the state itself; that it would have to become a super-state? And if this group were to be successful, it would dare not dismantle its own machinery, lest another group sought to recreate the previous apparatus; it would have to remain diligent in policing the thinking and actions of others who might be inclined to favor a more structured society.

One can no more advance liberty through violence than he can regain sobriety by embracing an alternative brand of alcohol. The state is a system that enjoys a monopoly on the use of violence. It is no answer to this destructive menace to introduce a competitor who employs the same means and seeks the same ends, namely, to construct society on the principle of the power to compel obedience to authority.

Albert Einstein got to the essence of the problem when he declared that “force always attracts men of low morality.” I understand how being frustrated by others as we pursue interests we are entitled to pursue can generate intense feelings of anger. But it is not out of reactive rage or desperation that we can discover our individual freedom and the resultant liberty we can share with our neighbors. It is such divisiveness that keeps us enslaved to the state. We need to discover what we share with one another, namely, a respect for our individuality that can arise only from the integration of our rational and emotional energies into a focused intelligence. If mankind is to avoid the fate of being the first species to intentionally make itself extinct, we must transform our own minds, and abandon our ageless and contradictory efforts to force others to be free!

Butler Shaffer teaches at the Southwestern University School of Law. He is the author of the newly-released In Restraint of Trade: The Business Campaign Against Competition, 1918–1938 and of Calculated Chaos: Institutional Threats to Peace and Human Survival. His latest book is Boundaries of Order.

Copyright © 2010 by LewRockwell.com

Secession: The Cure For Electile Dysfunction

November 5, 2010

by Daniel Miller, Texas Nationalist Movement

The mid-term elections have come and gone. Can I get big Texas “hell yeah!”? We will now be free of campaign ads, endless podium pounding by the potentials on how they will be the ones to stand against (fill in the blank) and the countless promises to return to core values. As Texas Nationalists, though, we have been given a gift – the final straw.

The situation now is not much different than it was before election day. Although there is a new crop of representatives in Washington, DC, a few who have committed to returning the Federal Government to its Constitutional limits, the odds are stacked against them. They are faced with an Executive Branch that has no regard for the Constitution much less a return to its limits, a Senate still composed mainly of those who agree with the Executive Branch both in method and direction, a well-entrenched party pecking order that is already publicly working to corral them even as they speak out against their “extremism”, a judiciary that is willing to rubber stamp Federal abuse and endorse it as “constitutional” and decades of unconstitutional Federal programs and agencies that will not go quietly. While the map seems overwhelmingly red, the Tea Parties, Constitutionalists and Liberty groups just got “Scott Browned”.

This is all in the context of the continuing economic meltdown. The Federal Reserve just announced that it was, in essence, monetizing the debt by its printing of $600 billion new pieces of paper bearing the likeness of dead Presidents for the purpose of buying government bonds. Welcome to the beginning of extreme inflation. This is in addition to the new bailouts, stimulus packages, industry takeovers and increased interest rates that are already on the table. All of this is touted as “necessary” to keep us out of a depression. And it will be this that will put the new crops principles to the test. Will they do what they promised or will they compromise in the name of staving off an “economic emergency”?

The “lame duck” session of the Congress followed by the “Compromise Congress”, fueled by the growing economic disaster, will turn to the states that are still functional to draw resources to maintain the standard of living and the government entitlements of the rest. Much like a human body that is dying, the organs are shutting down and the body is placing more demands on those organs still functioning, eventually burning them out and dragging them into death.

Enter Rick Perry and the very red State Legislature. The Texas Republicans all campaigned on stopping the encroachment of the Federal Government into the lives of Texans, rolling back decades of Federal erosion of Texas sovereignty and protecting Texas from further attacks on our sovereignty. And they will get their chance. As the Federal Government experiences compromise, gridlock and additional debt and growth, they will eye Texas as a “cash cow” and will fight to assert their dominance over our affairs. They will be forced to either admit that all of that defiance against Washington was “pillow talk” or they will have to follow through with it. And that defiance must eventually manifest itself in one course of action – secession.

It is the only option available. Look at it honestly. What happens when you “throw the bums out” and nothing changes? What happens when you throw them out and it gets worse? What happens if they make only minimal progress in rolling back Federal power only to be swallowed by a tidal wave of additional encroachment?

From a Texas Nationalist perspective, look again at why we want out independence. Not for the sake of repetition, overkill or “beating a dead horse”. Look at it as the task list for Congress to keep us in the Union or as the reason that our Legislature must give us a secession referendum.


I have said all of this before. However, it is important to keep these at the forefront of any honest discussion about the success or failure of the United States Congress. If they fail to do these things, then they have failed and we must secede. A good “College try” won’t cut it. They must remedy these grievances in total or let us go. But as Texas Nationalists we know that they can’t and won’t. The system won’t allow it to be so.

This election, as I stated earlier, has provided us with the last straw. The people of Texas are watching all of these Federal politicians and when they fail, which they will, those who decided to give them “one last shot” will be ready to separate. They will be looking for a release and all of that pressure will turn to the Texas Legislature and the Governor. They will be held to account for all of their promises, speeches and rhetoric. If they don’t stand behind their own words and take this challenge to the Federal Government, then they will be held accountable. If they do stand their ground and take this fight to the Federal Government, then they will be bogged down in the Federal Courts which will shut them down. This will leave the final option on the table – Texas secession.

Remember these three things:

1) The United States cannot be fixed.

2) The Federal Government will only take away more freedom and leave in its place more debt and more bureaucracy.

3) The only solution is Texas independence.

The Texas Nationalist Movement will grow over these next several months. Our ranks will explode with new members for whom the last straw is broken. We will swell with those for whom the last straw was broken a long time ago. People will join with us who are ready for more freedom, less government, a strong Republic and Texas independence. All of us will carry this banner for everyone else who will benefit. We will wave it in the faces of the Legislator who have been elected with a mandate to carry us out of Egypt. And we will win.

Daniel Miller is President of the Texas Nationalist Movement.

Texas Nationalist Movement
3104 Nederland Avenue
Nederland, TX 77627

The Tuesday Elections Changed Nothing

November 4, 2010

Thank God, the idiocy that is the American election process is over. Americans have imitated lemmings once again and made their mind-numbed pilgrimage to the polls. The politicos and talking heads have been excitedly discussing the results. But, lest you take some comfort in Tuesday’s election results, let’s do a quick reality check.

The Republican wing of the Government Party gained enough seats on Tuesday to regain control of the US House of Representatives.

The Democrat wing of the Government Party retained enough seats on Tuesday to keep control of the US Senate.

There is still a Democrat in the White House.

The Republican Party took ten governorships away from the Democrats. This will have the greatest effect when Federal redistricting will occur as a result of the 2010 Census.

The Republicans in the House will not be able to advance any serious agenda involving: (not that the Republicans really want to do these)
• Social Security and Medicare, which are continuing to grow in size and scope.
• The repeal of the Obama Healthcare law.
• Balancing the Federal budget. No one truly knows what the Federal budget is, since there is so much spending that is not disclosed and is “off-budget.”
• Shrinking the size of the Federal government. They will not be able to de-fund entire departments or get rid of entire bureaucracies.
• Defense spending, which swallows a huge chunk of tax revenue annually.
• Two simultaneous foreign wars, costing American lives, battlefield casualties and soldier suicides.
• The Federal Reserve will continue to buy up US Treasuries, hold interest rates artificially low, keep doing “quantitative easing” and more stimulus money will be printed and shoved out onto the American people, causing hyperinflation.
• Audit of the Federal gold supply to determine if the national gold even exists.
• Any other idea or solution that would rescue America from certain collapse.

Dear readers, remember that this Republican Party issued The Pledge To America only weeks before this election. In it, they pledge to return the American Federal Government to its Constitutionally-restricted size and scope. But also understand that they do not have the ability to perform their pledge, since Democrats control the Senate and the White House.

The only positive thing that can come from Tuesday night’s elections, and the recapture of the House by Republicans…is gridlock. That is not an insignificant outcome. With a Democrat President and a Democrat Senate, nothing that Republicans try to do will succeed. I take that back. When Republicans compromise with Dems and Obama, and advance the goals and agenda of the Government Party, they will get support and cooperation from the Democrats.

So, the world continues to turn. The dollar will continue to weaken. The American government in Washington will continue to spend money and grow unabated. China will continue to hold more US Treasuries than any other world entity. China will continue to quietly gain control of world natural resources through peaceful commerce. The European Union will continue to unravel. The nations of the world will soon replace the American dollar with another currency…probably the Chinese Yuan…as the new world reserve currency. And the American experiment, now over 230 years old, will come to an ugly end.

Tuesday’s elections were a shiny object that momentarily diverted the attention of the America populace from football, Dancing with the Stars, and favorite TV shows. Meanwhile the destruction of the American economy and nation continues unabated. Most folks will now go back to their clueless lives and wave the flag some more.

Now, more than ever, secessionists must work feverishly to convince their neighbors of the inevitable collapse of America.

Secession is the hope for mankind. Who will be first?

DumpDC. Six Letters That Can Change History.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

What’s More Important: Liberty Or The Entity That Protects It?

November 3, 2010

By Chuck Baldwin

Let me ask readers a question. What’s more important: freedom and its undergirding principles, or the entity meant to protect it? A word of
caution: be careful how you answer that question, because the way you answer marks your understanding (or lack thereof) of both freedom and the purpose of government.

Thomas Jefferson–and the rest of America’s founders–believed that
freedom was the principal possession, because liberty is a divine–not
human–gift. Listen to Jefferson:

“We hold these truths to be self-evident, that all men are created
equal, that they are endowed by their Creator with certain unalienable
Rights, that among these are Life, Liberty, and the pursuit of
Happiness. That to secure these rights, Governments are instituted
among Men.” (Declaration of Independence)

Jefferson could not be clearer: America’s founders desired a land in
which men might live in liberty. By declaring independence from the
government of Great Britain (and instituting new government),
Jefferson, et al., did not intend to erect an idol (government) that
men would worship. They created a mechanism designed to protect that which they considered to be their most precious possession: liberty. In other words, the government they created by the Constitution of 1787 was not the object; freedom’s protection was the object.

Again, listen to Jefferson: “That to secure these rights, Governments
are instituted among Men.” In other words, government is not the end; it is the means. Government is not the goal; it is the vehicle used to
reach the goal. Nowhere did Jefferson (and the rest of America’s
founders) express the sentiment that government, itself, was the
objective. Listen to Jefferson once more:

“That whenever ANY FORM OF GOVERNMENT becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to
institute new Government, laying its foundation on such principles and
organizing its powers in such form, as to them shall seem most likely
to effect their Safety and Happiness.” (Declaration) (Emphasis added.)

Jefferson is clear: people have a right to alter or abolish ANY FORM
OF GOVERNMENT that becomes destructive to liberty. To America’s
founders, there was no such thing as a sacred cow when it came to
government. Government had but one purpose: “to secure these rights.”

When ANY FORM of government stops protecting sacred, God-given
liberties, it is the right and duty of people to do whatever they deem
appropriate to secure their liberties–even to abolishing the

To America’s founders, patriotism had everything to do with the love
of liberty, not the love of government!

Today’s brand of patriotism (at least as expressed by many) is
totally foreign to the fundamental principles of liberty upon which
America was built. I’m talking about the idea that government is an
end and aim in itself; the idea that government must be protected from
the people; the idea that bigger government equals better government;
the idea that criticism of the government makes one unpatriotic; the
idea that government is a panacea for all our ills; and the idea that
loyalty to the nation equals loyalty to the government. All of this is
a bunch of bull manure!

When government–ANY GOVERNMENT–stops protecting the liberties of
its citizens, and especially when it begins trampling those liberties,
it has become a “destructive” power, and needs to be altered or
abolished. Period.

Can any honest, objective citizen not readily recognize that the
current central government in Washington, D.C., long ago stopped
protecting the God-given rights of free men, and has become a usurper
of those rights? Is there the slightest doubt in the heart of any
lover of liberty that the biggest threat to our liberties is not to be
found in any foreign capital, but in that putrid province by the

Therefore, we must cast off this phony idea that we owe some kind of
devotion to the “system.” Away with the notion that vowing to protect
and prolong the “powers that be” makes us “good” Americans. The truth
is, there is very little in Washington, D.C., that is worthy of
protecting or prolonging. The “system” is a ravenous BEAST that is
gorging itself on our liberties!

Patriotism has nothing to do with supporting a President, or being
loyal to a political party, or anything of the sort.

Is it patriotic to support our country (which almost always means our
government), “right or wrong”? This is one of the most misquoted
clichés in American history, by the way. Big Government zealots (on
both the right and the left) use this phrase often to try to stifle
opposition by making people who would fight for smaller government
appear “unpatriotic.”

The cliché, “My country, right or wrong,” comes from a short address
delivered on the floor of the US Senate by Missouri Senator Carl
Schurz. Taking a strong anti-imperialist position and having his
patriotism questioned because of it (what’s new, right?), Schurz, on
February 29, 1872, said, “The senator from Wisconsin cannot frighten
me by exclaiming, ‘My country, right or wrong.’ In one sense I say so,
too. My country–and my country is the great American Republic. My
country, right or wrong; if right, to be kept right; and if wrong, to
be set right.” (Source: The Congressional Globe, vol. 45, p. 1287)

Schurz then later expanded on this short statement in a speech
delivered at the Anti-Imperialistic Conference in Chicago, Illinois,
on October 17, 1899. He said, “I confidently trust that the American
people will prove themselves . . . too wise not to detect the false
pride or the dangerous ambitions or the selfish schemes which so often
hide themselves under that deceptive cry of mock patriotism: ‘Our
country, right or wrong!’ They will not fail to recognize that our
dignity, our free institutions and the peace and welfare of this and
coming generations of Americans will be secure only as we cling to the
watchword of TRUE patriotism: ‘Our country–when right to be kept
right; when wrong to be put right.’” (Source: Speeches, Correspondence and Political Papers of Carl Schurz, vol. 6, 1913, p. 119) (Emphasis in original.)

Amen! In a free society, genuine patriotism demands that our country
be RIGHT, as our nation’s policies and practices reflect the values
and principles of its citizens. To feign some kind of robotic devotion
to a nation without regard to sacred principle or constitutional
fidelity is to become a mindless creature: at best, to be manipulated
by any and every Machiavellian that comes along, or, at worst, to be a
willing participant in tyranny.

As to loyalty to a President merely because he is President, Theodore
Roosevelt may have said it best:

“Patriotism means to stand by the country. It does not mean to stand
by the President or any other public official save exactly to the
degree in which he himself stands by the country. It is patriotic to
support him insofar as he efficiently serves the country. It is
unpatriotic not to oppose him to the exact extent that by inefficiency
or otherwise he fails in his duty to stand by the country. In either
event, it is unpatriotic not to tell the truth–whether about the
President or anyone else.”

Hence, freedom-loving Americans cannot afford to become infatuated
with Washington, D.C. We cannot allow these propagandists on network
television to distort the meaning of true patriotism in our hearts.

Patriotism means we love freedom. It means we understand that freedom is a gift of God. It means we understand that government has only one legitimate function: to protect freedom. It means that our love of liberty demands that we oppose, alter, or even abolish ANY FORM of government that becomes destructive to these ends. And it means that we will never allow government to steal liberty from our hearts.

As I asked at the beginning of this column, What’s more important:
freedom and its undergirding principles, or the entity meant to
protect it? The right answer is, freedom and its undergirding
principles. If you understand that, then you rightly understand that
the current government we find ourselves under is in desperate need of
replacement. And whatever, however, and whenever that replacement
reveals itself is not nearly as important as that liberty is

On the other hand, if you mistakenly believe that government (the
entity meant to protect liberty) is more important than liberty, you
are both tragically deceived and pathetically impotent to preserving
freedom. You may also have identified yourself as an enemy of freedom.

As for me and my house, we will stand with Jefferson’s Declaration of
Independence–in whatever form it may present itself in a modern world
bent on dismantling our liberties. In other words, I pledge no loyalty
to any government that seeks to destroy our freedom–including the
current one!

(c) 2010 Chuck Baldwin

Chuck Baldwin is a syndicated columnist, radio broadcaster, author, and pastor dedicated to preserving the historic principles upon which America was founded. He was the 2008 Presidential candidate for the Constitution Party. He and his wife, Connie, have been married for 37 years and have 3 children and 7 grandchildren.

Please visit Chuck’s web site at chuckbaldwinlive.com.

La Fuente on a Slow Afternoon

November 2, 2010

by Fred Reed

(Editor’s Note: Expatriation facilitates slow afternoons and articles like this one. You could do worse than packing up your gear and starting over in another country…and if you stay here in America, you will do worse.)

So I was sitting with Tom the Robot and Jonesy in La Fuente, an old and cavernous beer bar hard by the cathedral in Guadalajara, and swapping lies. Except they weren’t lies, because some people can’t lie to equal the truth. Otherwise I guess they would. Thing is, lying is a limited form. Life isn’t.

La Fuente is dark and inelegant. It covers about a roaring acre of locals hooting and hollering and you pay for beers as you get them.

The Robot was talking about social interaction. Like Jonesy, he has what writers call a checkered past, but chaotic is more like it—ground Marine in Nam, paramedic in New York, curious jobs in remote parts of Alaska. He once played a bottle-nosed dolphin in a movie, hovering two feet below the Gulf of Mexico in scuba gear and waggling a plastic dolphin’s head above the water.

The Robot is crazy. He is also a dangerous brawler and has anger-control problems. Actually, he doesn’t see a problem. He’s perfectly happy smacking the hell out of people who need it.

Anyway, social interaction. He comes out of a bar in Guad late one night, three sheets to the wind, and probably the blankets and pillow cases too, and these young bad-asses come up with a knife and request his wallet. When that happens, the smart thing is just to give it to them. So the Robot reaches for his wallet and nails the sumbitch with a drop-shouldered sucker-punch, hard, and the jerk goes down leaving teeth on the concrete, and the others decamp.

“Bloody chicklets,” said the Robot, referring to the teeth. “I was stupid. I coulda got killed.” He has anger-control problems. And his wallet.

He wasn’t bragging, just telling beer stories.

Jonesy is a retired bush pilot out of Alaska with a soft Southern accent like Karo syrup dripping on busted china and he’d talk about flying way up north with ice on the wings and in a fog in places that made nowhere look like somewhere. Maybe he was in a high-wing Cessna, but I forget.

“What happens if you can’t find a place to land?” asked the Robot, who knew the answer.

“Shucks, you can land anywhere,” said Jonesy. “Nothing to it. What you want to do is find a airfield before you do it.”

I guess you could drink beer with a tax accountant. But I wouldn’t want to try it.

The waiter came by on a resupply run with more Corona and I mentioned coming out of Angola on a story for Soldier of Fortune in a DC-3, flying ten feet over the trees to keep SAM-7s from getting a lockThis was this when Cuban soldiers, whom I rather like, were supporting the evil commmie government in Luanda. I didn’t care. The world is complex. I didn’t need to solve all its problems, or take sides.

Anyway, among a certain kind of riffraff and rabble, such as us, the DC-3 is a legend. It first flew about 1936, and still does, age seventy-five and re-engined, and it was the platform for Puff the Magic Dragon, a gunship popular in Asia. More popular with one side than the other, I guess. With Gatlings firing tracers it looked like it had ray guns.

But that’s neither here nor there. La Fuente was getting noisier as people came in for an after-work brew. There was nothing hositle aobut it, just good times and bad acoustics.

Mexico changes fast. You see women in lots of bars. You’ve heard a lot about machismo, but it’s on life-support, at least in the cities. Which is a good thing. In the US you can see some diesel-dike feminist with spiked hair like an alarmed porcupine and hollering about what she thinks is machismo because she caught some guy leering at her tits. Mexican machismo isn’t funny. It often involved broken jaws. Still does in the wilder parts.

You might think guys who know more about guns, engines, and questionable bars than about polishing doilies, or whatever you do with doilies, would be untouched by civilizing influences, and regard women as furniture or captive hookers. No, actually. I know lots of pilots, former door-gunners, cowboy divers, and generally very tough guys. They think women are nuts, but don’t speak badly of them, even in private. Except gringas. Jonesy will gaze at an ambient lovely and opine wistfully that she could suck-start a leaf-blower. But he would never say it to her. He’s just dreaming. He treats his wife with kindness and respect. But then, she’s Mexican.

The Robot looks like a skull with skin stretched over it. Hollowed out, he’d make a good lamp shade. He has don’t-fuck-with-me eyes that make you want to be his friend, or somewhere else. I’ve never figured it out. Some guys you look at and you know mayhem is readily available. It isn’t a scowl, threatening manner, over-hanging orbitals, or angry voice. But you know. You just know. “Cops eyes,” they have been called.

He talked about motorcycles he’d had, which was lots, and falling off them occasionally to no good effect on bad turns, and long lonely rides down to Florida on a Harley panhead to dive and hang out with people your mother wouldn’t like at all.

The better forms of human detritus tend to travel in similar social tunnels. The Robot and I both knew the Last Chance Saloon, a biker bar at the top of the the Florida Keys. My lunatic friend Stu and I had spent time there when we drove down to pass the turn of the millenium underwater, which we did at Davis Ledge, trying to drink, at forty feet, a bottle of rust-cutter champagne called Domme Bahd Stufe, or something similar. It didn’t work too well.

A couple of hours and considerable Corona later, I’d heard about getting dropped off in distant lakes in Alaska to fish by a float plane plane that wouldn’t come back for two weeks so you better be alive then. About the shark that swept in on an attack run in cloudy water and veered off when it realized that divers weren’t in its food chain. About the bomb squad in DC that sent robots to investigate what seemed to be a bomb, but turned out to be bull sperm in liquid nitrogen. About cold rain over an disintegrating M60 tank on the mud ranges of Fort Hood. About….

I don’t guess we saved the world or cured cancer. But I thought it was a pretty good way to spend a slow afternoon, way south of the border.

Fred, a keyboard mercenary with a disorganized past, has worked on staff for Army Times, The Washingtonian, Soldier of Fortune, Federal Computer Week, and The Washington Times. He has been published in Playboy, Soldier of Fortune, The Wall Street Journal, The Washington Post, Harper’s, National Review, Signal, Air&Space, and suchlike. He has worked as a police writer, technology editor, military specialist, and authority on mercenary soldiers. He is by all accounts as looney as a tune.

Copyright 2010 Fred Reed.

The End of Liberty

November 1, 2010

provided by the National Inflation Association

How the U.S. is headed for a complete societal collapse! The most important film of all time!

(Editor’s Note: WOW! This is a scary movie…just a day after it was released on the all-time scary holiday. But make no mistake…NIA has nailed this topic. They have been 100% spot on with their predictions sofar. You will ignore the warnings here at your own peril.)


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