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The Collapse of the Modern Social Welfare State

Friday, 31 August 2012 09:41 Written by  Matthew Conlan

The problem is simple to identify: a politician’s primary purpose in life is not to represent his constituents or pass laws or social engineer (though he does these things to various degrees), but rather, it is to get re-elected and augment his power.  Barring the occasional exception which does not disprove the rule, this is a universal truth even in our formerly Constitutional-revering Republic.  When viewed through this lens, the long and gradual process perverting the American system of Government and property rights becomes clear.

If a politician’s primary purpose is re-election, his primary concern is pleasing (or at least not irritating) his constituents enough to garner sufficient votes for victory. Barring voter fraud and rigged elections (no longer so easily dismissed in the land of voting dead people, illegal immigrants and erudite poodles), politicians must carefully weigh the conflicting demands of what are essentially his two key voting blocks: (1) those who work and pay taxes and (2) those who demand and receive Government handouts and benefits. Traditionally, the way to satisfy the latter is through raising the taxes of the former, thereby risking the loss of one to satisfy the other.  While politicians have raised taxes on the so-called haves through social guilt and divided that group by various classifications of wealth (working class vs. high income earners, blue collar vs. white collar, etc), alienation of the tax payer continues unabated if he does not have a sense of value coming from increased confiscation of his assets by the State. This is the great challenge presented to any politician who requires re-election to stay in office.

Fortunately for our antagonists, when Government spending, debt, and budgets cross the inflection point of sustainability, they have always resorted to the time honored trick that circumvents the discipline imposed by honest monetary systems backed by gold and/or silver: currency debasement. This is the stealth tax that punishes the saver and rewards the debtor. This is how politicians survive. If on the one hand the tax payer has reached his patience with the politician and the other hand the recipient of Government largesse continues to demand more, additional benefits can be granted through the printing press without losing the votes of the former. The trick is this: not to print too much money so that the loss of purchasing power becomes obvious to the saver and the tax payer. 

Generally, an increase in the money supply (read: inflation) of 1-3% a year can be sustained for a number of years without upsetting the delicate balance of the voting public between tax payers and entitlement recipients. Unfortunately, like any complex biological system, a Government’s number one imperative is to grow, and like any complex biological system, this occurs exponentially until a crash occurs. This unspoken 1-3% covenant is always broken in every fiat (not backed by gold or something of value) currency system and an accelerated rate of money creation occurs. On a long enough time-line (say, since the founding of the Federal Reserve Bank in 1913), this trend becomes painfully apparent even to a Princeton-doctored Economist. 

Before joining the Dark Side and becoming the Maestro as the Fed Chairman from 1987-2006, Alan Greenspan was a disciple of Ayn Rand and believed in sound money backed by gold. In a famous essay titled “Gold and Economic Freedom”, he noted:

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense— perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.”

Greenspan later concluded:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”

To most of my fellow readers, the above seems obvious: Money printing or inflation reduces the value of currency - nothing new here. However, what I rarely hear asked is: what happens when faith in a currency collapses and its respective country, economy, or Government is forced to return to a sound monetary system backed by something of value? How can a Nation return to the former model of antagonizing the tax payers and earners to provide entitlement benefits to those who feed off the System after a total repudiation of fiat money? Deficit spending works to a point but there would be no tolerance for that solution after going through the pain of a currency collapse. The percentage of Federal, State, Local, and Western International budgets that are spent on entitlements are so large, that we could only hope to pay a small percentage of these benefits under a sound monetary system or Gold Standard. 

In my last article, On Trust, I explored how faith or trust in a currency system can evaporate without warning. Those conditions are in place now and when it happens, the only sound way that has historically proven effective in returning faith to money and all it entails (a sound functioning economy via a non barter system) is through backing with something of value. A new fiat solution would fail almost immediately (though I would not put it past politicians and the powers that be to try this first before returning to sound money).

In the brilliant tome This Time is Different: Eight Centuries of Financial Folly, Carmen Reinhardt and Kenneth Rogoff have meticulously researched and examined an impressive database of international monetary systems and financial collapses worldwide over the past 750+ years. As hard as it may be for the average American to grasp, every monetary system eventually collapses and is replaced. The average lifespan of a fiat system during these past eight centuries is about 27 years. At 41 years of age, our current system, which began when President Nixon stopped the foreign exchange of US Dollars for Gold on August 15, 1971, is long in the tooth. This impending and inevitable changing of the monetary guard will mark the end of the modern social welfare state as we know it.

For long term savings, my actionable advice is the acquisition of physical precious metals - gold and silver. I’ll discuss this further in an upcoming column, but consider a couple of basic points to keep in mind for now: If you do not hold it in your possession, it might not be real. Gold ETFs and stocks are not the equivalent of physical specie (gold or silver) held in your possession. To hold one’s long term savings in paper currency is to continue to have your property confiscated by Government and bankers. Don’t play their game. Take your ball and go home. Like any responsible Prepper, you would merely be taking your wealth off the grid like all other important aspects of your survival.

Disclaimer: As I am not a professional wealth advisor, everyone should perform his own due diligence and research before making any investments.

Last modified on Tuesday, 04 September 2012 16:35
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