The background: On Inauguration Day 2009, 2 million people converged on Washington, D.C.

“Two million people don’t gather in one place unless things are really good, or really bad,” we observed that day. There is a fine line between the two.

Almost three years later, on Oct. 11, 2011, we stepped in the proverbial crotte when we suggested in the 5 Min. Forecast that the disappointment of “the crowd” that had gathered on the National Mall that day had manifested itself in two ways: the Tea Party on the political right and Occupy Wall Street on the political left, suggesting there are “uncomfortable parallels” between the two movements.

“Absolutely not!” cried a representative sample from the Tea Party. “The Wall Street protesters are the virus. The Tea Party is the antidote. The stark and direct contrast between the two groups could not be more noticeable. We have one group demanding everything for nothing (Wall Street protesters). The other group is demanding the government stop taking, regulating and restricting everything.”

“Maybe you should spend more time finding libertarian values within the movement,” countered another voice, “which I strongly believe is our last hope. Occupy Wall Street (OWS) is bringing the widespread outrage against crony capitalism and bought government into the headlines. Don’t assist in the mainstream media’s attempts to marginalize them.”

The debate broke out a week to the day after I had attended a meeting titled Conference on a Stable Dollar: Why We Need It and How to Achieve It, hosted by the Heritage Foundation in Washington, D.C. One notable attendee I had the good fortune of meeting at the conference was a gentleman by the name of Ralph Benko. Mr. Benko, a Forbes contributor, has been in his capacity as fellow at the Lehrman Institute arguing for a new, improved gold standard for three decades.

“No contortions are needed,” Mr. Benko wrote the day after the conference, suggesting one idea unifies the popular protests, “to cross the bridge between the ‘profiteer-hating’ #OWS and the sober reformers gathered in monetary conclave by the Heritage Foundation. The official website of Occupy Wall Street contains an entire forum dedicated to the gold standard. While by no means unanimous, a theme emerges that elegantly is summarized by one of the activists there: ‘Gold and silver. Been honest money since the dawn of time. The only money that has ever worked….’”

Indeed, in the preface to The Case For Gold, the minority report from the presidential 1982 Gold Commission, Ron Paul provides for common ground between the Tea Party and those who would Occupy Wall Street. “Whenever governments are granted the power to purchase their own debt,” Dr. Paul writes, “they never fail to do so, eventually, destroying the value of the currency. Political money always fails because free people eventually reject it.

“For short periods, individual countries can tell their citizens to use paper, but only at the sacrifice of personal and economic liberty.”

The Case for Gold, Dr. Paul’s “Lost Gold Bible,” was written to demonstrate “as clearly as possible the choice available to us: political (paper) money or commodity (real) money… Making the wrong choice will jeopardize our political freedom and destroy the possibility of restoring a truly productive economy.” Never have those words wrung as true as they do today… whether you’re a curmudgeonly Tea Party conservative or a dirty Occupy “hippie.”

Ironically, the kerfuffle between the two groups arose while we were convening for our Agora Financial Reserve Safety & Survival Summit in Baltimore’s Inner Harbor. We screened our new documentary, Risk! for the audience assembled there. Risk! follows a unique set of entrepreneurs as they wend their way through an increasingly regulated economy fraught with litigation and other onerous hurtles to success. As such, we’ve been ruminating on the role of the entrepreneur as the engine of the economy and sole creator of jobs for well on two years now.

The entrepreneur is the antithesis to the politician and benefits most from economic freedom. The society as a whole prospers as a consequence. (You’ll have to view the film and decide on your own if we got the premise right!)

“We have a melting place of ideas,” Gary Shapiro, CEO of the Consumer Electronics Association, says in an interview we conducted for Risk!

We have the desire, the know-how and the goods. But frankly, we often find ourselves fighting our own government.

What’s changing American society is that we used to be people who did things by ourselves. We were brave. We went out there and we fought for the next generation. We gave more to our government than we expected back. Now it’s shifted. Now there’s a large portion of society, about half of Americans, getting checks from the government. It’s entitlement.

You’re entitled to all these things, and if you don’t succeed, it’s not your fault, it’s the companies’ fault, and you’ll sue them or the government owes you this.

Today, we have a mind-set among a large portion of our population of entitlement, which is very, very different than our parents’ generation and their parents’ generation, where you come here with nothing, it’s a gift to be a citizen here and it’s such an opportunity.

The American dream is not a guarantee that you are going to succeed. It’s just a guarantee of equal opportunity to try to succeed. It’s not a guarantee of equal results.

The popular uprisings of both the “right” and the “left” — as onerous and misleading as those political wedge terms can be — would benefit from a return to a system of honest money in which, to quote Dr. Paul again, “the people are in charge, not the politicians and the bankers.”

“No reason why the Tea Party can’t unite with Wall Street protesters,” writes a third voice from the fracas in The 5, “and really sock it to those nervous suckers who occupy the Hill.

“2012 is already shaping up to be an especially dramatic year.”

Amen. Bring it on.

Regards,

Addison Wiggin

Politics, Paper Money, and the United States Entrepreneurial Culture was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The fact stands to reason. During our most recent fiscal upheaval in the United States, one out of every two economists with a job drew his or her paycheck from a government institution.

Your economist, your elected official and your friendly neighborhood bureaucrat, your policy wonk, and even your favorite mainstream journalist believes that you — the individual — couldn’t possibly know what you are doing with your own money.

They think you’re too stupid to make the right decision when faced with choices in the marketplace. If you agree with them, then I’d respectfully advise you to stop reading right now. You’ll only take offense at what Mr. Schlichter has to say.

If, on the other hand, you believe that you’re capable of making a decision on your own…if you believe you can safely buy the goods and services you need when you need (or want) them, then you’ll take to and welcome Detlev Schlichter right away.

“The market economy is not a superior organism that has its own goals,” Detlev writes. The economy does not exist to “generate positive GDP” for the good of a nation. Nor are we servants subject to the whim of the formerly omnipotent “Masters of the Universe” who run trading desks on Wall Street.

We use money — our money — to make transactions. That’s it. All else that follows in this book begins from that simple starting point.

Once you ignore the conventional method of viewing the economy…of measuring growth and counting the unemployed…a funny thing happens. “Failure” and “bankruptcy” become natural events even in a smoothly sailing economy. Viewed in proper context, “failure” is not something to be prevented. It’s a vital tool on the way to success. We all make mistakes from time to time. There’s no one to blame. But there’s a heck of a lot to be learned…

Blasphemy, for some. A godsend, for others. I’ll assume that for the time being, you’re in the latter group.

In this book, Detlev doesn’t hold back any punches in exposing the flawed concept that is paper currency. I admire his rigor and clarity as he straddles this unpleasant territory with ease. He doesn’t name names. He doesn’t bog us down with details. He doesn’t enlist GDP charts from across the globe. He leaves the devilish details to other books boasting “financial crisis” in their title.

He’s not likely to land an HBO contract for the effort, so I suggest you get started with Chapter 1.

If you’re of the right mind-set, it will be a pleasant experience, I assure you. Detlev’s crisp algebraic prose recalls one of the best systematic financial writers to tackle banking: Murray Rothbard, whose The Mystery of Banking offers a succinct account of what began ailing the economy in the 20th century.

Unlike Rothbard, Detlev is a practitioner, not an academic.

You have to admire a man from the City who worked 19 years in high-yield income, pursuing the oft-maligned Austrian economics as a hobby at night.

Sometime in 2007, the hobby became his vocation. But his first real wakeup call came in 1998, post-ruble collapse and the LTCM failure. The events themselves weren’t the problem, Detlev began to see. How government-supported firms reacted is; they got bailed out and sought to manipulate interest rates.

A decade on…and “bailouts” have become the norm. Bankers expect them. And place their bets accordingly. The implied “safety net” has become the Achilles’ heel of the entire system.

Today, even as economists, the media and policymakers search for causes of the financial collapse in 2008 (and dream up new regulations to “prevent it from ever happening again”), those same imbalances and misperceptions are building to yet another climax.

In this fine work Detlev bursts through the notion that “everybody” benefits from stimulus. And he sets out to dethrone the economic god of the 20th century: monetary policy.

Not only is the present monetary system less than optimal, it’s also unsustainable. To put it in the words of the technically literate: GIGO — garbage in, garbage out. The current monetary system can lead only to volatile and unsustainable economics. Forget all the macroeconomic theories and statistical validations for this or that political motive.

In a chapter in my own Demise of the Dollar, I had an eye-opening, if entertaining, experience documenting what I ultimately entitled the “Short Unhappy Episodes in Monetary History.” The first “modern” experiment with paper money occurred in ninth-century China. After several hundred years, the Chinese gave up on “flying money” because it proved to be subject to political whims and gave rise to disastrous inflation in consumer prices.

And yet even with numerous examples at our fingertips — France in 1717-1720 under John Law’s scheme, in which paper money lost 90% of its value; Abe Lincoln’s financing of the Civil War sparking inflation, which turned Americans off paper money until 1913; Peron’s Argentinian coup in 1943, which ushered in paper and destroyed gold reserves; and, of course, Weimar-era hyperinflation — we have engaged in another experiment with paper money, this time on an epic scale.

The litany of crises we’ve endured from LTCM through the mortgage meltdown share DNA. Other books seeking to understand the precarious situation we find ourselves in miss the single root: our ongoing currency crisis. Digging deep, Detlev explains why we’re more in danger today than ever before. This fact alone should place this book at the top of the pile at your bedside you’ve been “meaning to read.”

Detlev’s work could be the resource for a new generation of young economists.

As the next crises unfold, we’ll need a hearty breed ready to pick apart the myths and turn toward clear, basic tenets of what keeps money working for us — not politicians and central bankers.

Regards,

Addison Wiggin

Detlev Schlichter and Paper Money Collapse was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“Progress” is no sure thing. Beyond the cycles of greed and fear, confidence and desperation, are other episodes that surpass human desires and capacity. Following the collapse of the Roman Empire in AD 476, people in Europe did not wish to become poorer. They underwent no genetic change that made them less intelligent or less suited to material comfort or less adept at technological progress. Yet, technological innovation and material progress went into a slump for nearly 1,000 years. According to historians, the order that had allowed trade and prosperity gave way to disorder and poverty. Who wanted such a change? Why would people permit it? Seeing their standard of living threatened, why did they not do something to counteract it? Surely government officials could simply have come up with new policies that would set things right again?

Likewise, in 1914, although lessons had supposedly been learned from the wars of the nineteenth century, the world once again found itself on a road to disaster, with the outbreak of World War I. From a military point of view, the war had effectively been “won” by France at the first Battle of the Marne in September 1914. France had defeated the German army and forced it back to a line situated not too far from where it had begun. Like many of the other battles fought, the battle of the Marne, with an estimated 512,733 killed, only served to underline the futility of a war. Little was gained at the cost of enormous human sacrifices.

Yet, what came to be known as “The Great War” continued for another four years. By 1916, it had become such a folly of senseless slaughter that the French were on the edge of mutiny. Troops on both sides, seeing no point to the continued bloodshed, often agreed on informal cease — fires. Senior officers repeatedly had to intervene to make sure their soldiers continued to kill each other. Hopelessly bogged down in trench warfare where neither side had a decisive advantage or even a reasonable war aim, sensible men might have decided that enough was enough. Even now, few people can come up with a good explanation for why the nations involved went to war, what they hoped to gain from it, and why they did not stop fighting after it became clear that the war was a losing proposition. It was the costliest war in human history, with an additional 31 million men dead, missing, or wounded.

Moreover, it was no real war in a conventional sense, as neither side had anything to gain, and indeed did not gain anything.

Prior to the French Revolution and industrialization, wars were much more limited. Armies would take the field for short periods of time — usually in the summer, when roads were passable and before the harvests. They would do their mischief and then go home. There were few popular wars. Instead, conflicts were between groups of people whose lands and lives were immediately threatene — by an invasion of barbarians from the East, for example. More often, they were localized rivalries — one monarch against another, duking it out with a relatively small number of paid mercenaries. In 1066, William the Conqueror (formerly known as William the Bastard) took all of England with a force of only about 5,000 men.

In the twentieth century, by contrast, wars involved huge numbers of combatants. Even noncombatants were called on to play support roles. In World War II, American women were called out of the home to work in aircraft plants and take up jobs formerly done by men. Whole populations were mobilized and enlisted in the war efforts, which were far more costly in lives and money than any wars in history, despite the fact that these wars often seemed to serve no other domestic purpose than to lead the way to ruin.

Why did such wars occur in the last century and not before? We have two answers. The first is the standard one: Never before was savagery on such a scale possible. It took industrial economies, abetted by ever-innovative technology, to produce industrial — scale wars. The second: Never before was it possible for so many people to share so many bad ideas all at once. Thanks to progress in communications, men and women were drawn to group thinking like moths to a flame. Soon, they were talking all sorts of nonsense and making their own lives miserable with wars and upheavals that contributed nothing to their well-being, other than being a distraction from their personal problems.

The Internet was not such a revolution as the New Era dreamers had come to believe. The price of communications had been dropping for the past 200 years — from the telegraph, to telephone and radio, to television, to CB radio. These, coupled with cheap newsprint, increased the availability of information to nearly everyone, but they also made much bigger mobs possible, and bigger bubbles, too. Instead of reducing violence in international politics, cheaper communications increased it. At the beginning of the century, railroads, telegraph, and popular newspapers made possible the biggest, most costly war in all human history — with far more people involved than ever before. By the century’s end, the Internet and television made possible the biggest bubble ever — with much greater public participation than at any time in history.

Millennial Optimists

At the end of the nineteenth century, it had also seemed — as it did at the end of the 20th — that progress was inevitable. People expected progress in every aspect of life. The world’ s economies were booming. The industrial revolution was in full throttle and spreading its smoky aroma throughout the world. A person could already hop on a train in Paris and ride in luxury all the way to Moscow. A man in London could order his spiced tea from the Orient and his carpets from Istanbul. Was there any reason to believe that this bounty — products of new technology, free markets, and enlightened political stewardship — would not continue?

By the end of the nineteenth century, the overt use of torture had disappeared in the Western world and slavery had been completely abolished in civilized countries. It seemed — at the height of the Belle É poque — that manners, art, and personal security were improving. Moreover, as Europe had enjoyed nearly three decades without a major war, there was a widespread belief that war was a thing of the past, not of the future.

Yet, only a few years later, the world began walking backward, and the most costly and barbarous wars in history began. Between 1914 and 1919, France lost 20 percent of her young men of military age — and the century had scarcely begun! With hardly a pause for breath, from 1914 to 1945, people shot, tortured, murdered, blew up, poisoned, and starved each other on a scale the world had never seen.

The twentieth century turned out to be a period of what Brzezinski called “megadeath,” with an estimated 187 million victims. By 1945, all of the world’s major economies — save one, that of the United States — were in ruins. Japan, the Soviet Union, and Germany were little more than heaps of ash and twisted metal. France and Britain were mostly intact, but geared up for war, not for peacetime production. Worse, both were in the hands of socialists and syndicalists, which so inhibited their recovery that they were soon overtaken by their former enemies — Germany and Japan. Progress is never guaranteed, neither material nor moral.

The Rape of Nanking

Like it or not, the world is still ruled largely by the heart: It is full of sin and sorrow, sturm und drang, madness, and the kindness of strangers. It is a world whose history, as Voltaire observed, is “a collection of the crimes, follies and misfortunes” of mankind. On December 13, 1937, the Japanese Imperial Army made history. Previous records in depravity were broken when the devil worked overtime for a six-week period. When it was over, an estimated 377,000 people had been slaughtered.

The victims were not soldiers of the Reich or draftees of the Kremlin. They were men, women, and children of all ages and party affiliations. Democrats. Catholics. Confucians. Bricklayers… They shared one common mistake — they were in the wrong place at the wrong time. These people were not obliterated in an impersonal air raid, such as the 60,000 thought to have been killed at Dresden or the 200,000 killed at Nagasaki and Hiroshima. Nor were they killed methodically and systematically as the Nazis and Bolsheviks usually did with their victims. Instead, they were put to death one by one, or in small groups, after being tortured, degraded, and made to suffer as much as the killers’ imagination made possible.

Butchery. Barbarity. Bestiality. It is hard to describe what happened in words that do it justice.

When the Roman legions destroyed Carthage, they took the lives of about 150,000. Timur Lenk killed 100,000 prisoners at Delhi in 1398. He built towers of skulls in Syria in 1400. Yet no cameras recorded the spectacles. Meanwhile, the photos in Iris Chang’s book, The Rape of Nanking, provide evidence against those who believe in the inevitability of moral progress. The event in question occurred more than 100 years after the Rights of Man had been declared. And nearly two millennia after the birth of the Prince of Peace. The prohibition against murder was well-established in all major religions. Of course, the victims would have welcomed murder — it would have been a comfort, like a stop loss in a bear market.

Japan is one of the world’s most law — abiding and polite societies. But storms of evil blow up from time to time. No race or nation is beyond their reach.

Those who believe in the perfectibility of man have a lot of explaining to do.

Regards,
Bill Bonner and Addison Wiggin

August 14, 2009

Industrial Slaughter and War: The March of Progress was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Instead, history turns its attention uniquely to the events on English soil, where the small band of warriors debarked to go into battle. Theirs seemed to be a hopeless enterprise. How could such a small army hope to avoid annihilation, let alone conquer a whole nation? But that is history…a story of such remarkable campaigns, battles, revolutions, uprisings, popular movements—all presumably marching toward the progress of mankind, all, presumably, “good things.” For without them, where would we be? No one knows. What if the Normans had stayed home? What if they had tended their fields, sought better ways to increase crop yields, put up more beautiful buildings, and given another kiss to their wives and children? Would the world be a worse place? We cannot tell.

However, in markets as well as politics, history is not made by the tailor, the baker, or the capitalist going about his work. It is made by mobs of tailors, bakers, and capitalists embarked on some enterprise, which is far beyond what any of them can know or understand, and which is usually absurd and often fatal.

Events in the twentieth century had been kinder to the United States than to their European cousins. Americans had taken part in the major wars, but had suffered far fewer casualties than other combatants. France lost nearly 6 million men in World War I, the United States 116,516. In World War II, the United States had 405,399 casualties, but the Soviet Union had more than 21 million (civilian deaths included). No U.S. cities were leveled.

Nor were there any civilian casualties to speak of. And U.S. industries, instead of being destroyed like those of Germany and Japan, ended the wars in a stronger position than when they had begun them.

It was not, then, reason that had shaped Americans’ belief in progress…but experience. After such a long spell of apparent progress (interrupted only by a few quarters of negative economic growth in the Great Depression), Americans at the end of the twentieth century had begun to think that progress was the nature of things, and that the level of technological and organizational perfection they had achieved had brought on the blessings of progress at a faster rate than ever before. What’s more, many of them thought that the temporary lulls and brief periods of backsliding experienced by the country since the end of World War II had now been eliminated. Thinking Americans attributed this giant leap forward neither to the grace of God nor the beneficence of nature, but to their own genius.

By the time the oldest members of the postwar baby boom generation had reached maturity (late 1990s), progress had begun to look easy, logical, even inevitable. Americans believed themselves to be masters of the business cycle, of technology, of the planet.

Myths of Progress

In what might have been an equivalent of the four-minute mile, Iaroslav Tchij, on a collective farm in the Lvov region of the Soviet Union in 1959, reduced a hog to 100 kilos of meat in just 5.6 hours. This might seem like a leisurely pace, but it took an hour less than foran American to do the job.

The Communist era began after the invention of the telegraph and was still going strong after radio, telephone, and television had become ubiquitous. But as we will see, information provided no defense against exaggeration and myth. Mr. Tchij, for example, was not alone in believing he could increase productivity in such a remarkable way. In fact, one of the myths of Communism was the idea that productivity would increase without interruption and at spectacular rates. This was not based on any observation. It was derived from theory.

The founding fathers of Communism, like Internet investors, believed that a new era had arrived. It was founded neither on observation nor on hope, but on what they thought were the laws of history. In his funeral oration for Marx, on March 17, 1883, held in Highgate Cemetery, Engels honored Marx as “the Darwin” of economic history. Just as Darwin had discovered the key laws that governed the evolution of natural history, Engels said, Marx had discovered those that governed economic and political history. These laws, such as the concept of “surplus value,” which supported Marx’s critique of capitalism, were not laws at all, just pretentious obiter dicta, as Paul Johnson described them. Yet they formed the basis for the many myths that inhabited the fantasy world of Communist society.

The myth of determinism, for example, meant that everything had already been worked out according to the principles Marx described. The myth of progress, whereby conditions improved year in year out, was a myth disproved by Communism itself. The myth of the Marxist New Era held that the entire world would be re-created, not by God or nature, but by man, following the scientific and rational concepts of historical determinism. Finally, there was the myth of the New Man. This new Marxist man, not having the same hard wiring as other men, would be an entirely new being. He would not need a profit motive, for example. Nor would he wish to accumulate wealth or worry about his own family, as all his material and service-based needs would be supplied by the collective.

As irrational as these notions were, they were nevertheless taken up and endorsed enthusiastically throughout the twentieth century by various despots and crackpots. Not only were they argued over endlessly in the cafés of Paris, but they provided the foundation of an entirely imaginary world.

Soviet policy makers for example (again, like Internet investors) saw no reason why they should be constrained by the growth rates observed in the past. Without private property and private business, they thought that there would no longer be a business cycle to worry about. Communist growth projections became the measure of reported (though imaginary) growth: The Soviet Union’s economy was thought to have multiplied itself 36 times between 1913 and 1959. The economy of the United States, by contrast, only increased by a factor of four. Soviet leaders predicted that the size of their economy would surpass that of the United States in a dozen years.

But even this rate was sluggish to the North Korean dictator, Kim Il Sung. If you could determine economic growth by decree, he reasoned in 1969, why be satisfied with 15 percent? In his text titled On Some Theoretical Problems of Socialist Economies , he declared that there was no reason for communist economies ever to slow down, and that growth rates of 30 percent to 40 percent per year could be maintained. Three decades later in his “socialist economy,” millions of people were starving.

Kim should have paid attention when his fellow delusionary, Ceaucescu of Romania, addressed the agricultural issue. Ceaucescu decided to put his country in “the forefront of world agriculture.” This he accomplished in the most straightforward and expedient fashion: He simply multiplied per acre production figures by four. Marxist myth held that collective farms would be vastly more productive than old – fashioned independent farms. Thus, Ceaucescu merely brought the myth to life, realizing it in the spirit it deserved — mythically.

Even the Communist leaders themselves were myths: Mr. Djugashvili, a rather untalented former seminarian and New Era aficionado, became “man of steel,” Josef Stalin. Meanwhile, Kim Il Sung turned himself into a virtual deity, a mythical god, who became an object of worship for his impoverished people.

The astounding thing was how ready people were to believe such myths. American economists calculated that the Soviet economy must be 50 percent or 60 percent the size of the U.S. economy, and gaining ground. For decades, the Soviet Union was listed as the world’s second biggest economic power. But it was not true. The Soviet Union and North Korea were not getting richer, but poorer. Their people were not becoming more productive, but less productive.

Regards,
Bill Bonner and Addison Wiggin

August 12, 2009

Making History and the Myth of Progress was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we’ve seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical U.S. worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a “ hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. 21 And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

A Bubble in Health Care

And to the retiring boomers’ other doubts and insecurities, we might add that U.S. health care costs are expected to rise by 7 percent of GDP over the next 40 years—a rate that is more than twice as fast as other developing nations. The “old old,”—those aged 80 and over—are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the U.S. government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the U.S. economy.” 23 Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017—two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. 25 Medicare would have to deposit $ 13.4 trillion—$ 1 trillion higher than last year’s estimate—into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties—indeed, because of the difficulties—it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, “ but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ’ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S & P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Regards,
Bill Bonner and Addison Wiggin

August 6, 2009

Excerpt from “The Hard Math of Demography” was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.