Show Me The Money

Almost a month ago I was given a book by its author. His name is Tom Greco and his book is "The End of Money and the Future of Civilization." I thought I'd read the book casually, skim most of it and then say something nice to the author. The bottom line is that I just finished the book yesterday. I became fascinated by it, read it carefully, savored every page and came away from the experience far more enthusiastic about the book than I am for our modern financial system.

Unlike most books about money it doesn't serve as an alternative to a sleeping potion. Unlike most books about money that identify the problems with our monetary system, "The End of Money..." not only defines the problems but also identifies the solution to the current crisis.

The book is readable, entertaining, enlightening and understandable to anyone, not just monetary students.

Tom Greco strips away the mysteries that blind most of us to the functioning of debt money and fractional reserve banking. He explains how money is created by monetizing debt and the resultant twin imperatives for ever more debt and unsustainable growth to feed the insatiable demands of compound interest.

But then the book gets really interesting when Greco shows that there are various alternatives to the current debt based monetary system that address its defects and offer incredible promise of enabling a healthy, prosperous and sustainable future for all. And, these alternative systems aren't something that Greco dreamed up or that have never been tested. Rather he describes and demonstrates several examples from around the world that have survived, in some cases for decades. Greco also provides a candid description of the problems alternative monetary systems must confront, including many that are self inflicted by the organizers and users of the systems.

Thomas Greco is no dreamer. He is a realist and the work he has completed offers a clear and honest evaluation of the current situation, the dangers that ultimately could threaten civilization and the hope for a reasonable future. In short Greco is not just willing to say "The Emperor has no clothes." He also showed me the money, warts and all.

If you really want to understand money, the problems with money and solutions to enable civilization to prosper, read "The End of Money and the Future of Civilization."

You need to know this information, understand it and act upon it.

Thinking Outside the Box

Yesterday's blog focused on the daunting economic problems America faces. What are the solutions?

Current thinking seems to be to cure the problems by forcing liquidity into the financial sectors of the economy. So far results aren't promising.

Current thinking doesn't appear to differ significantly from the thinking that created the problem bubbles in the first place. This of course brings to mind two famous observations by Albert Einstein. The first is on problem solving, "We can't solve problems by using the same kind of thinking we used when we created them." And, the second is perhaps even more on target for the strategies being employed by our fearless economic leaders. It is a definition of insanity: "Doing the same thing over and over again and expecting different results."

These observations by a man many consider to be one of the most brilliant people to ever live suggest that the solution has yet to be found and that the current approach is likely to fail. More importantly, Einstein's approach to problem solving and definition of insanity indicate that any solution with a prayer of success must come from outside the box and defy conventional wisdom.

If outside the box, unconventional solutions were to be attempted what might those solutions look like? The following are The Rainmaker's suggestions for how America might deal with various issues threatening this country and the world in areas beginning today with a discussion of the current economic/monetary crisis. In days to come issues such as health care (Medicare), elder care (Social Security), energy, ecology, immigration, crime and terrorism will become the focus.

The first outside the box solution is to return to the founder's intentions as defined in Article I Section 8 of the United States Constitution regarding creating a national currency.

Our money is typically something about which we aren't conscious. Like air or water, it isn't considered unless we don't have any. Then, it becomes a matter of life and death. Few of us can even define money. What is it really?

Money is best understood by its two primary functions.

First, it is a medium of exchange. This means that it facilitates transactions without our having to resort to barter. Second, traditionally, it is a store of value. This means that you can hold money and be confident that tomorrow or next year, it will by substantially the same goods and services as it will by today.

America's money still services the first function admirably, functioning as the world's reserve currency. However, as a store of value our money is an abject failure. Between 1913 when the Federal Reserve Bank was created and 2004 the purchasing power of a dollar dropped about 96%. The net effect of that decline in our money's capacity to act as a store of value is that a 2004 dollar would buy about 20% less than a nickel would buy in 1913.

Why is American money failing in its role as a store of value?

Although there are several reasons that explain the failure of U.S. currency to be a store of value, this discussion will initially focus on the role of interest and usury. Subsequently, the role of fractional reserve banking will be considered.

Interest is typically a charge levied on borrowers to compensate lenders for the risk of non repayment of loans. Usury is usually defined as loaning money at exorbitant or illegal rates of interest.

Prior to the creation of the Federal Reserve Bank in 1913, money was issued by government and various banks. Subsequently money has evolved to the point that it is issued by the Federal Reserve Bank as a loan to the U.S. Government. When you look at a dollar bill you will note that it says "Federal Reserve Note." A note is a promise to pay or a loan document. Thus virtually every dollar in circulation today is proceeds of a loan from the Federal Reserve Bank to the U.S. government or by banks that are members of the Federal Reserve system as loans to customers through fractional reserve banking. And, the Federal Reserve collects an interest charge on that currency circulating as a medium of exchange.

Yet, there is no reason to borrow the medium of exchange. There is no risk of loss. Nevertheless this interest charge distorts the American monetary system because although the money is issued by the Federal Reserve to facilitate transactions, the Federal Reserve doesn't issue the money to pay the interest charge. This adds what amounts to a hidden tax on every dollar in your pocket, your bank accounts, your retirement accounts. That isn't necessary to cover risk of loss. This is in effect usury on a massive scale.

As Americans struggle to pay this usurious hidden tax every decision, every transaction is distorted. It usually isn't much of a distortion but even a 1/10th of 1% change of course results in a major deviation slowly over time. Charging interest on the medium of exchange is a huge and unfair burden on all Americans.

The second value in the erosion of the purchasing power of America's money is the effect of fractional reserve banking. Every American dollar is borrowed into existence. First the Federal Reserve loans money to the U.S. government and it loans money to its member banks. These funds are spent in the case of the government. Government employees and contractors deposit those funds in their bank accounts. The balances in those accounts are then spent over time.

Those bank balances become part of the bank reserve and, since it is clear that on any given day depositors won't draw down their account balance, the bank can put that money to work by loaning against it to other customers. The cycle repeats. Banks are required to maintain a reserve, ranging from 3% to 10% of the gross deposits. So, if a bank receives a $100 deposit it can loan another customer $90 or more. When that loan is deposited into the customer's account the bank can loan an additional $81 and so on. Thus, if you do the math, a bank can extend about $1,000 in loans on a $100 deposit assuming a 10% reserve ration.

All this creates economic activity driven by fractional reserve. However, the goods available for purchase, being limited by physical reality, don't keep pace with this exponential growth of the money supply. Hence the purchasing power of a dollar falls.

The system is ultimately unsustainable.

So, here is an outside the box suggestion to deal with the current monetary crisis. It is time to go back to the future so to speak and implement the Andrew Jackson solution to the impossibility of a National Bank collecting an interest change on the medium of exchange while expanding the money supply by issuing exponentially expanding FIAT currency in to a fractional reserve banking system.

The Federal Reserve Act of 1913 should be repealed. The money used as a medium of exchange should be issued by the United States Treasury interest free. In a perfect world this money would be backed by precious metals such as gold and silver. Imagine the United States of America issuing honest, real money.

If the United States were to go all the way, the government would allow other forms of currency to compete with the dollar, giving people the opportunity to shop for the strongest, most stable and most honest currency.

Actually, the financial performance of the United States economy after Jackson revoked the charter of the Bank of the United States and before the creation of the Federal Reserve was significantly superior to the economic and fiscal performance in the past 96 years since the creation of the Federal Reserve when measured in terms of relative growth and stable purchasing power of American currency.

Next up is the coming health care crisis.

"For whatsoever a man soweth, that shall he also reap."

The ancient Biblical wisdom quoted above accurately portrays what the world can expect over the next few years.

Incurring long term debt to finance consumption, speculating on successive stock, then real estate bubbles and dependence on unsustainable health and old age entitlements all carry costs. There really is no such thing as a free lunch.

The United States has been on a binge of funny money, entitlements, easy credit and unsustainable consumption for almost 100 years. Now its time to pay the piper. How bad will it be?

When the stock market crashed in the early 30s, it required 14 years after the bottom to recoup the lost value. That is probably a reasonable estimate of the time required for America to recover from this financial hangover, once we reach the bottom.

When will that depth be reached? Hopefully in 2009, but possibly not until 2010 when Medicare goes "cash flow negative." Possibly not until 2017 when Social Security follows suit.

The only certainty is that however long it took to dig this hole, it will probably take that long to climb out.

The risk is that in the attempt to stop the current bleeding a new bubble is being created, a currency bubble. The Federal government together with the Federal Reserve are inflating the currency to incredible levels in the so far futile effort to sustain liquidity. If they go too far, pass some ill defined unknown tipping point, then it's possible that hyperinflation could result.

To appreciate what that might mean read a little history about Germany during the third decade of the 20th Century. The crises eventually led to the end of the fledgling German Republic, which was replaced by the Third Reich.

In other words, our current situation is bad but it could easily get worse.

Wealth, Virtual Wealth and Debt

Frederick Soddy, winner of the Nobel Prize in 1921, wrote "Wealth, Virtual Wealth and Debt" in 1926, which anticipated the market crash of 1929. Given the current state of the economy perhaps it is time to revisit Soddy.

Soddy points out the the real world is subject to the laws of physics while the economic world is subject only to the laws of mathematics. Thus there is a limit to what humanity can physically produce and consume, which Soddy defines as wealth. But Soddy sees no theoretical limit to the amount of debt that humanity can incur. Virtual wealth is what we call money, a representation of wealth that can be traded as a medium of exchange or held as a store of value.

Why, asked Soddy should a medium of exchange and store of value representing real wealth be treated as a debt incurring an interest charge?

Yet debt based monetary systems, such as the Dollar, Euro, Yen and almost all other national currencies, compound debt through interest charges without regard to real wealth, creating obligations that can never be repaid. Every dollar in our pocket, checking account, savings account and retirement account incurs an interest charge collected by the Federal Reserve, a privately owned bank. Yet, we didn't borrow those dollars, we earned them. Why are we paying interest on those dollars?

When it is no longer possible to carry the debt (pay the interest and repay the principal) the debtor is in default and his or her property is seized by the debt holder (financial institutions, banks and ultimately the owners of the Federal Reserve). Thus there is a tendency in our ecnomy to concentrate wealth in fewer hands over time.

Soddy understood the inherent impossibility of a debt based monetary system to be sustainable. Such a system borrows money into existence without regard to real wealth, incurs an interest charge to use currency as a medium of exchange and multiplies debt without regard to the physical world's ability to carry or service the debt (pay the interest and repay the original principal)accumulated by a fractional reserve banking system.

"Wealth, Virtual Wealth and Debt" is still in print and worth reading for anyone wondering what is really going on in today's economy.

Words of Wisdom

The following observations are true although the author is unknown to the Rainmaker. Please read, consider and share them as you see fit.

First, it is impossible to legislate the poor into financial freedom by legislating the wealthy out of financial freedom or even into poverty.

Second, what one person receives without working for, another person must work for without receiving.

Third, the government cannot give anybody anything that the government does not first take from somebody else.

Fourth, when half the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody is going to get what they work for, that is about the end of any nation.

Fifth, it is simply impossible to multiply wealth by dividing it.

Finally, it is simply impossible to legislate morality.

The Rainmaker thanks Peter Poranski for inspiring this post.

Sir Francis Bacon Part Two

A few days ago The Rainmaker published a discussion of a very short but interesting set of propositions by Sir Francis BAcon, politician, statesman, poet, author, philosopher and enthusiastic promoter of the scientific revolution. That post was inspired by our correspondendent Diana. As promised in that post our reactions will be provided to both Bacon's "Stumbling-Blocks to Truth," and Diana's points to ponder. Diana's material is highlighted in Bold, the original text of The Rainmaker's original post will appear in italics and today's text will look just like this.

As a thinking society, what can we learn about ourselves from assessing Sir Roger Bacon's 'Stumbling-Blocks to Truth?'

All The Rainmaker really knows about Roger Bacon is that he was a pretty amazing dude...The Rainmaker had never heard of these four stumbling-blocks to groking the truth. An Aside: "Grok" is a term from Robert Heinlein's "Stranger in a Strange Land," the first libertarian book The Rainmaker ever read (almost 40 years ago...ouch!) and the term "grok" means "to know completely." Obviously the definition of "grok" has been grossly simplified for brevity but any fundamentalist Heinlein fans will have to bear with this for now. It's still a great read after all these years.

Back on track: Here is what Peter's email for Diana said about Bacon's blocks in full: (The Rainmaker's comments are inserted into Diana's text in regular type.)

Four very significant stumbling-blocks (are) in the way of grasping the truth, which hinder every man however learned, and scarcely allow anyone to win a clear title to wisdom and truth. (Circa 1214-1294)

They are:

1) submission to faulty and unworthy authority

The Rainmaker agrees that Sir Robert nailed the problem pretty concisely yet compreshesively and suspects that Machiavelli would consider #1 above to be an Oxymoron.

2) long-standing continuance of custom

The Rainmaker suspects that Hobbs would disagree the #2 is always an obstacle. The Rainmaker can almost anticipate George Wills column to refute this proposition.

3) popular prejudice and regard to the opinion of the unlearned

4) concealment of ones own ignorance while exhibiting wisdom"

The Rainmaker strongly suspects that Sir Roger Bacon would be glad he didn't live in the era of Congressional hearings, spin doctors and cable news networks as those pertain to items #3 and #4.

The Rainmaker is no philosopher but sees nothing to disagree with in the four statements. All four are indeed stumbling-blocks in the way of grasping the truth.

The foregoing was obviously, at least to The Rainmaker Bacon's material. The following is from Diana by way of her spouse Peter P.

"We seek truth to analyze problems and to avoid making similar mistakes in the future yet in our politically charged world we find intellectual dihonesty and purposeful chaos.

We ask ourselves:

1) Are these stumbling-blocks to truth and wisdom being used against us?

Yes, and The Rainmaker believes they are being used with malice aforethought. Search for this website featuring the "Money as Debt" movie and invest 45 minutes, then let The Rainmaker know if you agree or disagree with this answer.

2) Who in government is telling us the truth?

Only those with their mouths shut who are not writing anything. Seriously The Rainmaker believes one can trust that government which is closest to home most and hold that government more accountable. The closer one gets to the center (a state capital or Washington) the less trustworthy and the less accountable the politician or bureaucrat.

3) Does the media use it's medium to keep us from obtaining the truth and wisdom?

The media is a medium of obfuscation, interest group propaganda, sensationalism and entertainment. The media will keep us from obtaining the truth only if we allow it to do that. In the Rainmaker's opinion we are each on our own hook when it comes to becoming informed and wise.

4) How are the candidates using deception to sway our thinking?

In every way they can conceive of in order to obtain their respective real objectives, which are almost universally applicable to any candidate for any office:
*To be elected;
*To grow (pick at least two) powerful, wealthy and famous at public expense;
*To maximize their personal perogative's and perks;
*To use their power to peddle influence in order to lavishly fund their reelection campaigns;
*To be reelected often at any cost, which usually means don't rock the boat and go along to get along;
*To conceal "their own ignorance," confusion, uncertainty and insecurities while exhibiting apparent "wisdom" that in reality is merely conventional wisdom;
*To maximise their own perceived power and privilege;
*To leave a "legacy" of honor purchased at the taxpayer's cost and the soldier's life, both spent as necessary to furthur the politicians self interest; and,
*To do the right thing for the country, its citizens and the world if it doesn't conflict with any of the preceeding objectives.

The Rainmaker believes that if asked, any politician will answer that his or her objective is the last one listed and further, that being masters of "Cognitive Dissonance" politicians and bureaucrats have usually convinced themselves that is in fact the case. However, it is the Rainmaker's opinion that the previous eight objectives are pretty much listed in the real world order of importance.

5) How did we get into this economic crise?

The Rainmaker believes the United State's monetary system is inherently dishonest. As the monetary system is the medium in which a society functions, when it is poluted it will eventually do to society what dirty water eventually does to a fish--kill it. There has never been a paper money, debt money system that has managed to survive 100 years. Ours is about 94 years old.

Therefore since the medium in which society functions is dishonest--no matter how well meaning and personally honest most people in a society might be and usually are in their day to day lives--the society itself is tainted. Periodic economic dislocations are probably inevitable in any society, but the dislocations experienced by a society function with dishonest money are more frequent, more severe and ultimately fatal. That is The Rainmaker's observation regarding Diana's final point.

The Rainmaker offers the following support of this observation. That support is in the form of three books.

The first is "Money and Debt" by Thomas Greco. It can be found at a website called "Reinventing Money" in the "library" on that site and can be downloaded for free (it's only a 65 pages). It comes in three parts (meaning separate pdf files).

The second is "Debt Virus" by Dr. Jacques Jaidaran M.D. and it can be found at most online booksellers. "Debt Virus" is excellent although longer and a more expensive option than "Money and Debt.

And if really ambitious, read "Wealth, Virtual Wealth and Debt," written by an English Nobel Prize winning physicist Frederick Soddy. It was written about 80 years ago and reads that way. But it is well worth the effort.

Just something to ponder...

Obviously The Rainmaker's hot button was pushed by Diana's material. Hopefully you will find some value in all of this. Even if it is only value equal to a dime, it is 30% more in terms of intrinsic worth than the paper and ink we call money. This is because a dime is actually worth more regardless of the denomination of the bill the paper and ink comprise. That's right the intrinsic value (the worth of each bill, be is $1.00 or $100.00) is about $0.07.

OZ on the Potomac

The monuments of Washington, DC are beautiful tonight, well lit reminders of what was once the last best hope of the planet. OZ is indeed visually impressive. Yet, OZ is rapidly becoming an empty facade where the streets are paved in worthless greenbacks. The wheels of America's government still turn smoothly, its entitlements, earmarks and various and sundry wars, humming like a fine tooled machine fueled by endless debt. And, the weather is delightful tonight, crisp, clear and cool. It's after midnight and we are safe for at least a few hours, Congress has adjourned for the evening and the Wizard sleeps.

However, the fate of the nation hangs in the balance. Financial markets are in turmoil. Tomorrow Congress will continue to debate the terms and conditions of the "Mother of all Bailouts."

OZ, this mythical bastion of Capitalism and free markets, has become something akin to a National Socialist State. Consider on the one hand the "Storm Troopers" of the Department of Homeland Security using fear to justify tyranny who are a matched pair with thousands of SWAT teams intent on imprisioning more people in both absolute and per capita terms than any other nation on earth in a futile effort to win a "War on Drugs." America has become a police state. Meanwhile, on the other hand, companies deemed "too big to fail" are being taken over by a government and thus insulated from the consequences of their mistakes and their corruption. The "Land of the free and the home of the brave" has become a phantom or a figmant of imaginative spin doctors.

Nobody knows how the masters of our universal debt, America's creditors, will react. If the Asians, Indians, Arabs and Europeans don't approve of the terms of the "Mother of all Bailouts," they could sell their multi trillion dollar currency stash and call their multi trillion dollars in government notes; dumping their assets like so much sand into the fine tuned gearbox of America's debt based Empire and dismantling the "shining city on the hill." Of course the resulting disorder might consume them as well. That consideration might yet preserve the status quo for a time. Where will it all end? Who can know?

Meanwhile those who contend to become the new Wizard stalk the countryside. What to they think? Not much. What do they really say? Even less. They would rather talk about something else; almost anything else. The current financial melt down is beyond their comprehension. One calls for "Change," yet represents the status quo of a generation of failed policies. The other is comitted to the maintainence of Empire and continuation of the never ending war, while confessing he doesn't understand economics. The focus of the race has devolved to identity politics revolving around the race of the Presidential nominee of one party and the sex of the Vice Presidential nominee of the other party. America's media, political elites and the vast majority of American voters really have no clue as to what really matters.

It is said that when Rome burned Nero played the fiddle. One doubts that any of the national candidates who would be the new Wizard have enough musical talent to emulate him. Yet make no mistake, OZ is engulfed in financial flames lit four score and fifteen years by the passage of the Federal Reserve Act in 1913; creating a fiat currency inspired insanity. The consequences of those decisions can't be avoided much longer.

The moral of this story is: Buy precious metals.

The Sovereign Individual

Most of us never really think about it but our system of government rests on a base level assumption that the individual citizens of this or any state are sovereign.

Sovereign, what does that word mean? According to Merriam-Webster's dictionary it means: "one possessing or held to possess Sovereignty," or more specifically, "one that exercises authority with a limited sphere," or finally, "an acknowledged leader."

In the case of the United States of America the Preamble of the Constitution acknowledges the supreme power or authority of the people who come together to create the government. The Preamble says in full:

"We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America."

In addition to that implicit acknowledgement of the supremacy of the individual as the source of authority to sustain the legitimacy of the state, there is two other very important amendments to the Constitution appearing in what has come to be known as the "Bill of Rights:"

Amendment Nine reads in full:

"The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people."

Amendment Ten reads in full:

"The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people."

Taken together those three brief passages acknowledge the supremacy of the people as the ultimate source of power and authority delegated to the government.

Over the past couple of hundred years the pendulum has swung pretty far away from the assumptions implicit in those statements. Now the state has come to assume more and more power, the people are currently (even after the dreaded Bush tax cuts) paying about 300% of what serfs paid the Lords when power was delegated to ruling families via the "Divine Right of Kings" under which system the people were mere vassals of the state. Today the vast majority of people meekly submit to various indignities: Random searches, SWAT team raids, drunk driving traffic check points, presumed guilty till proven innocent audits by taxing authorities, significant limitations on free speech (especially on college campuses--making a mockery of the term "academic freedom"), random drug testing and even partial disrobing in order to board an airplane.

The question is how much farther can the pendulum swing before it begins to reverse course?

The evolution of technology mentioned in The Rainmaker's most recent post might be indicative of a shift in power and a return of power (sovereignty) to the people.

This shift was predicted back in 1997 by James Dale Davidson and Lord William Rees-Mogg in their book "The Sovereign Individual," which The Rainmaker has read and heartily recommends. Davidson and Rees-Mogg aren't sure that the concept of the nation state is viable. They point out that governments spouting patriotism tend to manipulate citizens into supporting social policies, monetary policies, wars and ever more intrusive government creating a swarm of unintended consequences that eventually can destroy the state's viability. When the book was written in 1995/1996 and even when the book was published this theory seemed like a stretch.

But times change and at about the same time the book hit the shelves a guy named Zimmerman released an encryption program for computer files and communications called PGP ("Pretty Good Protection"), which may prove to be the death knell of the modern nation state. Actually the more likely result is a more level playing field between the state and its citizens.

PGP together with online currencies can empower a Sovereign Individual to take real steps to assure his or her privacy, financial independence, physical safety and political liberty. Thus the equilibrium that was disturbed in the United States during the 100 years between the creation of the first national bank and the eventual imposition of the Federal Reserve System/United States Income Tax inducing the pendulum to swing towards ever greater state power at the expense of individual liberty might be checked and the pendulum could be starting to reverse its course towards greater individual Sovereignty.

The outcome is unclear. Stay tuned.

Technology and the State

According to Martin Van Creveld in "The Rise and Decline of the State," techology plays a crucial role at each end of the spectrum. Beginning in 1300 AD and continuing until 1975 the state was enhanced by technology; however, beginning in 1975 and continuing until the present the trend has been for technology to be more problematic to the state.

Advances in such diverse technological areas as printing, weapons, medical treatment, sanitation, farming, communications, media and transportation all served to enhance the state for most of the past several hundred years.

Yet in the past 38 years technoligical progress in many areas has appeared to damage the state's viability:

• Transportation: The development of the shipping container, piggyback rail cars, and jumbo jets capable of hauling large amounts of freight dramatically enhanced trade. As trade increased the interdependence of states upon each other, lowered individual state's freedom of independent action as well as each states economic independence. Increased efficiency in the shipment of data is equally challenging. For example, in the era of global currency trading that approaches $4 trillion each day, it is now difficult if not impossible for any state or group of states to actually control the value of any state's money.
• Media: The ability of the nightly news to deliver graphic images of the costs of war in real time or to show either the brutality of local police or the crackdown on disidents in totalitarian (or for that matter "democratic" societies) as well as the media's ability to deliver images of the "good life" all combined to be inherently subservisive to the power of the state. The advent of decentralized media delivered via the Internet has challenged the major media outlets and in many cases reduced their news coverage ability to the point that they are becoming little more than celebrity news services.
• The Internet: Originally the Internet was built as a means of networked communication assuring a state's liklihood of surviving modern war and weapons systems. More and more, especially with the development and implementation of encryption tools, the Internet has become the preferred means of linking political dissidents, coordinating asymetrical warfare (terrorism) and facilitating tax evadors/political drop outs. This evolution has become perhaps the most significant challange to the power of the state in centuries.
• Weapons: The proliferation of weapons of mass destruction, coupled with demonstrated state inability to reliably account for much less control the proliferation, theft and use of those weapons of mass distruciton is a real threat to the state. If the state cannot maintain is monopoly on violence to protect its citizens, what good is it?
• Entitlements: The use of entitlements based on bad economic models to buy loyalty or at least silence dissent is becoming a significant problem to industrialized western democracies who are faced with the inability to keep the promises they have made. In France successive governments have been paralyzed by general strikes and violence in the streets when they have attempted to rationalize benefits by bringing them to sustainable levels. This is likely to spread until eventually the state is unable to survive economically. Already citizens of the European Union who live in Germany are refusing to accept Euros they can see (by reading the currency) are created in less frugal member states such as France and Italy.
• Immigration: States are demonstrating an inability to control and secure their borders throughout the world. Poor people, oppressed minorities and political dissidents as well as skilled workers and tax fugitives are voting with their feet. Cultural conflicts undermining the cohesiveness of states are becoming more prevelant, whether between native born and muslim immigrants in Western Europe or illegal immigrants and the native born in the United States.
• Medical Science: Advances in medical science are significantly lowering infant mortality, increasing life expectancy and lowering birth rates. The demographic consequences of these trends are already a major threat to the viability of states such as Italy and Japan. However it's not just industrial societies that are experiencing lower birth rates. Virtually every state is experiencing this phenomena, even fundamentalist theocracies in the Islamic world and traditionally Roman Catholic societies in Mexico, Central and South America are seeing significant declines in the birth rate. Thanks to the "One Child" policy, the demographics in the People's Republic of China are making it a state with one of the most quickly aging populations populations on the planet. The implications of this are not widely understood yet but the result will likely be increased political instability around the world.

It is impossible to predict with any certainty where these trends will take civilization and whether the state is doomed or will be able to adapt. Next, The Rainmaker will consider one potential scenario, the rise of "The Sovereign Individual."

The Decline of the State

"The state, which since the middle of the 17th Century has been the most important and most characteristic of all modern institutions, is in decline. From Western Europe to Africa, many existing states are either combining into larger communities or falling apart. Many of their functions are being taken over by a variety of organizations which, whatever their precise nature, are not states." This was written by Martin van Creveld, a Professor in the Department of History at the Hebrew University, Jerusalem in his book "The Rise and Decline of the State," published by the Cambridge University Press in 1999.

Who could have imagined as they sat in Number 10 Downing Street at the end of the 19th Century that within 100 years the British Empire on which the Sun never sat, would be reduced to Great Britain and Northern Ireland or that there would be serious talk in Wales and Scotland of secession.

Who could have imagined as they stood atop the Kremlin watching the annual May Day parade in 1980 that in a little over a decade the USSR would be no more and the Berlin Wall would be dismantled by the people of a united Germany?

Czechoslovakia and Yugoslavia are no more. Belgium is in the midst of dividing itself. Ethnic groups such as the Basques and Kurds are eager to part ways with Spain and Turkey. Russia is busily dismantling Georgia, birth place of Joseph Stalin.

How many Americans are aware of the current movements in Vermont and Hawaii to secede from the United States?

To our south Mexico has been fighting for a decade or more to hang onto Chiapas, while Sonora and other northern areas find more and more in common with Arizona, New Mexico, California and Texas. In western Canada and the northwestern United States there is a growing affinity.

In "The Untied States of America," Juan Enriquez visualizes alternative realities in which the United States could grow to as many as sixty states or shrink dramatically from the current fifty within a generation. His speculation is twenty years after a similar analysis by Joel Garreau gave us "The Nine Nations of North America."

And, in his book "The Black Swan" Nissim Nicholas Taleb describes the disintegration of his country, Lebanon.

What is behind this uncertainty regarding state stability? According to the analysis by van Creveld, the state rose to dominance as it became able to achieve a monopoly on violence and the supply of money while becoming a nanny to its citizens.

The primary function of the state in van Creveld's formulation was to wage War on other states. War requires the ability to raise money, tax, organize and mobilize. War also provides an emotional bond and unifying force to bind the state. War necessitates the state. As Randolph Bourne famous essay points out in its title: "War is the Health of the State." Another meditation on this premise is "The Report from Iron Mountain" most probably written by Leonard Lewin and published in 1967.

In the context of creating an emotional bond and a unifying force to bind the citizen to the state, the Olympics are a distant second to War if for no other reason than that the stakes are so much more sane.

Once the expense of War gets to a certain point it becomes advantageous for the state to take control of the medium of exchange and store of value, the money. This enables the state to disguise the true cost of warfare as well as the true cost of the state by the convenient device of debasing the money. Eventually the costs became so high that money became decoupled from any objective measure of value. The ability of a state's money to continue as a medium of exchange is really a function of the willingness of the populace to accept the paper. Put another way, modern state money is really a confidence game.

Simultaneously, in order to demonstrate a value proposition sufficient to justify the state--while keeping the natives satisfied, stifling dissent and creating loyalty--Bismarck came up with the idea of the welfare state. His original system of Social Security, subsequently copied around the world, used the false mathemetics of the proverbial Ponzoi scheme to create the illusion of real and sustainable financial benefits for the individual citizen of the state.

A brilliant analysis of the rise and operation of the American welfare state is, "Dependant on DC" by Charlotte Twight. The Rainmaker suggests you explore Twight's book in depth if you doubt any of the assertions made here about the welfare state.

However, in the last half of the 20th Century the underpinnings of the state became more stressed.

• Beginning in 1945 the advent and use of nuclear weapons made the prosecution of the state's primary function--War--a more difficult, expensive and risky proposition. Use of these ultimate weapons was effectively denied to Superpower states such as the United States and the USSR, each of which suffered unexpected military reverses in Viet Nam and Afghanistan, but neither deployed nuclear weapons.
• Beginning in the 1970s the inherent unsustainabilty of the welfare state became apparent. For a time most states attempted the expedient of raising the taxes on workers to sustain the vaunted "Social Safety Net," but eventually with payroll taxes approaching 40% in Western Europe the carrying capacities of modern state economies maxed out, resulting in economic stagnation. The people became ever more aware that the welfare state was at best an empty promise and at worse a fraud designed to exploit citizens.
• Beginning n the 1980s the decoupling of state monetary systems from real value led to a series of inflationary spikes, speculative bubbles and collapses continuing into the 21st Century demonstrating to more and more people that currencies of nation states are often worth even less than the paper they are printed on and are really mechanisms to impose hidden taxes on citizens while hiding the true cost of government.

Finally, in the early 21st Century the planet's remaining Superpower became involved in a War with a shadowy group of terrorists that were able to resist the massive power deployed against them, evading defeat, capture and punishment for longer than the Axis powers were able to survive after Pear Harbor. In an effort to mobilize and motivate its citizens the government of the United States embarked on a concerted program of increasing state power, eroding civil liberties and symbolic measures such as forcing travelers to remove clothing and surrender toiletries in order to instill fear and justify loyalty.

The Rainmaker believes that as we move deeper into the 21st Century the relevance and power of the state will continue to wane. States in one form or another will probably continue to exist for the foreseeable future, but they will be a shadow of their former selves sooner rather than later.

The Yellow Brick Road Part Three

While the price of crude oil has risen in terms of these national currencies, it remains relatively stable in terms of gold. Crude oil is not becoming intrinsically more expensive, rather, the purchasing power of these national currencies continues to diminish. In fact the price of crude oil has remained essentially unchanged for decades when measured in terms of gold. Measurements of other commodities against national currencies and other precious metals will resemble this chart.

When measured against gold, most western currencies saddled the the high cost of maintaining a social welfare safety net for their populations are losing purchasing power due to government's deficit spending. In the United States that trend is exacerbated by excessive military spending relative to other countries. If Asian currencies were charted the result would demonstrate a less extreme loss of purchasing power due to cheap labor, higher savings rates and relatively lower expenditures for military and social welfare segments of their economies.

When measured against other western currencies the U. S. dollar is losing its purchasing power at a faster rate. The Rainmaker believes that much of the discrepancy in relative purchasing power between the dollar, pound and euro is largely due to two factors. First is the incredibly bad PR associated with the current American Administration. Second is the fiscal policy of the United States that is incurring record deficits to simultaneously fund two wars, entitlements and the financial sector bail out of the week.

What's next?

Candidly, it's probably going to get worse before it gets better. It will take time to replenish all the money collected and misspent by a succession of administrations out of the Social Security and Medicare Trust Funds. These surpluses have been squandered over more than a generation. That bipartisan breach of fiduciary duty by our elected leadership can't be fixed over night. Given that not one of the major candidates for President throughout 2007 and so far in 2008 has been willing to admit there is a current problem is not cause for optimism. These problems will probably take as long to fix as they took to create. And, the repair work won't even begin until our elected leaders are willing to admit that there is a problem.

How can we protect ourselves, our families and our livlihoods?

The advice is deceptively simple. Work hard, reduce risk, get out of debt, save and put part of your estate into precious metals. Work with your financial advisor to design a personal strategy that maximizes revenue, reduces risk exposure, increases savings and diversifies a portion (how big a portion you should discuss with your financial advisor) of your estate into extractive industries as well as gold, silver and platinum. Follow the yellow brick road.

The Yellow Brick Road Part Two

Had the gold standard not been abandoned in 1971, nobody today would be talking about the rising price of crude oil or gas at the pump. Why? Simply because the price of crude oil would not be rising. The chart above relates to the price of crude oil compared in dollars versus gold. Charts for virtually any commodity, for example coal, corn or beef would relate similarly to any precious metal such as platinum or silver.

What has gone hay wire with America? Why do we feel we have run off the road into a ditch? Is it really all about fall out from the aftermath of Septemeber 11, 2001 and the wars that followed? Or could there be a deeper problem?

Perhaps there is another explanation that doesn't involve just the events since September 2001 but goes deeper into the basic structure of the American and world economies and how modern nation states structure their currencies. What does it all mean?

To understand what it means one must be clear about the question, or really to understand what is "it?"

The meaning isn't so difficult to decipher if one approaches the problem from the proper perspective. Is the intrinsic value of oil or an overnight stay in London that much higher than it was a decade or a year ago? In a word, NO! Or, is the intrinsic value of the dollar that much lower? In a word YES! So, what is the explanation?

This is what The Rainmaker believes "it" means.

Let's begin with what the journalists would call "deep background," which comes in two parts.

First, for more than four generations America's elected leaders, business leaders, our friends and neighbors as well as (perhaps especially) our bankers from the Federal Reserve on down to the community bank next door have busily squandered America's inheiratance. This represents a moral crises involving our leaders and ourselves. The cure starts at home with each of us living within our means, saving, accepting that there really isn't any such thing as a free lunch and building a better future one day at a time by making the right decision in the present. Then America's leadership must focus on the real problems and leave the side shows of lifestyle choice, culture wars and celebrity politics behind forevermore. Until these changes are made the decline begun back in 1913 with the passage of the Federal Reserve Act and the Federal Income Tax, will continue.

Second, the American dream has captured the imagination of people around the world. Chinese, Indians ane Brazilians--as well as the rest of the world--all want what we've got. Their economies are cranking up to deliver the goods. However, those countries, not to mention the Japanese, Koreans, Taiwanese and Chileans have a built in advantage in the sense their economies don't have to finance the American military industrial complex, supporting troops garrisoned in more than 100 countries around the world and spending more on the military than all the other countries in the world combined. Nor do those countries sustain a social welfare safety net for their workers. These aspiring Chinese, Indians and Brazilians--and all the rest--are driving demand for commodities, especially oil, creating shortages and posing a serious threat to the relative value of the dollar. In short, goods and services are going to continue to cost more in dollars and dollars are going to continue to be worth less and less against other currencies until and unless we get our act together.

The Rainmaker does not believe that this is a problem unique to the dollar. Why? Read on!

Well to really grasp this one must understand that while the dollar's slide is an American phenomena it is also the symptom of a more serious global problem. Why? Well the dollar, like most national currencies is backed not by real wealth but by debt created by national banks secured only by the full faith and credit of the nation. The Federal Reserve, a privately owned institution, loans currency into existence and the United States (actually the tax payers) guarantees those loans will be repaid. Taxes levied on the income of individuals and corproations pay the debt service. The dollar isn't backed by precious metals. The dollar is backed by our capacity to pay taxes.

One can make the argument that the dollar is not nearly as weak as it currently seems (June 2007) and the current valuation, especially against the Euro is really a function of the incredibly bad PR associated with the current Administration. In fact the fundamentals of the Euro are in many ways worse than the fundamental foundations underpining the dollar. European countries have much more significant entitlement problems, less productive work forces, lower savings rates and higher taxes than Americans. This should eventually enable the dollar to rebound against European currencies and make London hotel rooms a little more affordable.

However these arguments don't hold against the Asian competition.

So, what is the real story? The bottom line is that most all national currencies are ultimately secured by the ability of the national government to collect taxes sufficient to carry the debt due the national bank issuing the currency. How can one judge the severity of our currenty problem? The answer is to look at commodity pricing and currency valuation compared to gold.

Please return to the chart at the top of this piece and look at it again with this analysis in mind.

Is this a problem unique to the United States? Or does it involve other national currencies as well? We'll explore that topic in Part Three of The Yellow Brick Road.

The Yellow Brick Road Part One

After the tornado deposited her in the wonderland of "OZ," Dorothy looked at her faithful dog and said, "Toto, we arent' in Kansas anymore!" When gold recently broke through the $900 per ounce barrier, flirted with $1,000 per ounce and then retreated back to the high $800 per ounce range, its price performance seemed to correlate positively with the dollar hitting new lows against the Euro. It's a strange new world made even more confusing by the advent of $4 a gallon gas at the pump. Americans everywhere seem to feel the same confusion as Dorothy as she realized she was in a strange new land.

This may be a strange ecnomic landscape and nothing we counted on seems safe anymore, but what does it really mean to us as we live our daily lives?

During the last half of the twentieth century, we Americans grew up believing in the inevitability of our day to day reality. What was before would always be. The dollar was the "go to" currency of choice in a world of change and uncertainty. America only fought just wars. American "know how" would always save the day.

However, during the first decade of the twenty first century Americans look around and nothing seems quite so safe any more. The September 2001 attacks were a shock. The failure to find "Weapons of Mass Destruction" in Iraq after the intelligence community assured the President the presence of WMDs was was a "Slam Dunk" and their discovery inevitable, was disheartening. The subsequent failure to "win the peace" in Iraq after such an easy and triumphant invasion was hard to believe.

The seeming financial fall out of the cost of the wars, such as the credit meltdown hammering the banks and mortgage companies, the stock market stagflation, sticker shock at the gas pump and the economic malaise all seem surreal. The fact that the dollar seems to be weaker against other currencies, notably the Euro, and that a decent London hotel now costs $800 per night is simply unbelievable.

What does it all mean? What will happen next? How do we protect our families and ourselves and our business investments in the clinches, which are apparently the fall out of September 11th? This is now what most of us believe to be the relevant question.

But perhaps there is another explanation that doesnt't rely just on the events of September 2001 and has to do with funny stuff like currency management, going deeper into the basic structure of the American and world economies and how modern nations structure thier economies.

Next, the Rainmaker will explore those alternative explanations or our current unfortunate reality.

The Times They Are a-Changin'

When Bob Dylan wrote the words "The times they are a-changin'," he was of course writing about the cultural mega shifts of the sixties. But these words are more applicable today than most of us realize. However, the application has shifted from the forty+ year culture war to the economy.

Why?

Because the United States' economy is about to undergo huge changes due to three overlapping factors:

• Rising inflation;
• The long term continued decline of the dollar; and,
• Entitlement reform.

What do these changes mean? How will they effect each of us? What personal decisions provide the most protection, the lowest risk and the greatest opportunity?

In ancient time inflation usually involved monarchs shaving coins or dilution the precious metals from which those coins were cast. Nowadays, it's much easier because the United States has delegated management of its money to the Federal Reserve (FED), a privately owned bank. The FED can issue money at will with a few computer key strokes.

What does this mean?

It means that the purchasing power of a dollar today is about the same (actually a bit less) than the purchasing power of a nickel back in 1914. 1914 is about the time the U.S. monetary system was privatized and turned over the FED. The same can be said for the Euro, the Yen, British Pounds and other paper currencies around the world. Interestingly the purchasing power of gold in the past 94 years is virtually unchanged. According to the World Gold Council, no paper currency (FIAT currency) has existed longer than a human lifespan and the Federal Reserve Dollar is already a Methuselah at 94 years. I guess we're lucky life expectancy has been climbing.

Why would the FED allow this to happen?

Because the crushing pressure of debt service on the $40 trillion to $60 trillion in unfunded liabilities of Social Security, Medicare, Pensions, the "on budget" National debt, business debt, consumer debt and other costs such as the Iraq war makes it easier to repay that debt with cheaper inflated dollars. Our national policies and spendthrift politicians are debasing the dollar.

However, that's not the whole story. The dollar is also under inflationary pressure because of rising commodity costs. The people of China, India and Brazil all aspire to the "American lifestyle." Energy, metals, food and transportation are becoming scarcer and therefore more expensive.

The situation is unsustainable, eventually forcing whoever serves as President and in Congress to act. What can they do? There are only four alternatives: raise taxes, cut benefits, borrow more or inflate the currency in cooperation with the FED. At the rate the United States economy is deteriorating borrowing may not be an option much longer. Raising taxes is never a popular alternative. And cutting Medicare and/or Social Security benefits is rightfully called the "third rail" of American politics. It's not good for the proverbial political career to take expected benefits away from the electorate.

Regardless of how bad the situation may become, the questions remain about how best to deal with it personally. Obviously it is impossible to offer specific management or investment advice that means anything to you in this post. But in general three observations can be made and a couple of questions can be suggested for you to consider during your next meeting with your investment advisor.

The initial observation is: Although it's clear that something has got to give in the United States when it comes to entitlement reform, don't bet that reform will solve issues confronting successful people. Generally it's easier for politicians to adopt the "Robin Hood" approach and take from the deep pockets to give to the poor and middle class. If you work in a profession (law, medicine, architecture, investment banking), own your own business, or make more than $150,000 a year your pockets are perceived to be deep. You might plan accordingly to protect your assets, your income stream. Remember the old truism: "There is no limit to the good that do-goodees will do with other people's money.

The second observation is: Inflation in the United States is likely to become worse as time goes on. It is simply irresistible for politicians and bankers to avoid paying the price for their past sins as long as possible by using cheaper dollars to pay off old debt. Additionally, every time the FED encounters a financial crises its knee jerk reaction is to soften the blow by injection huge amounts of money into circulation to maintain liquidity. The broadsest measure of money is known as M3 and it's been growing at an annual rate of about 14%. That number is harder to pin down because in March of 2006 the FED decided to stop reporting M3. I suppose it became something of an embarrassment. In 2008 the FED has continued its practice of bailing out the economy by injecting vast amounts of cash for such worthy efforts as the Bear Stearns, Fanny Mae and Freddie Mac "bailouts." In a couple of years Medicare will begin to experience a huge cash flow crunch and one must wonder at whether even the FED can bail out that entitlement. Then in 2018 Social Security will experience its own cash crises.

The final observation is: The dollar is probably about to stabilize at least in the short term. The dollar will probably reach equilibrium at least relative to the Euro because the the Euro is beset by generally unrecognized structural problems such as unsustainable entitlement and tax policies that are actually worse than those facing the dollar. Asian countries artificially maintain cheap currencies relative to real dollar exchange values to facilitate exports to the United States. If those policies change due to the perceived credit risk of American debt and/or the increased ability of Indians, Brazilians and Chinese to consume their output, then all bets are off and the dollar could go into free fall.

Here are a couple of starter questions that you might want to consider asking when you next meet your investment advisor:

• First, with Medicare set to go cash flow negative in 2011 according to the Trustees Report issued last spring, does it make sense to pour a lot of capital into your business? Since medical care is such a huge part of our economy this applies across the board, but especially if you are in the medical professions?
• Second, with the upward pressure on commodities and downward pressure on the dollar does it make sense to increase the percentage of retirement portfolio invested in commodities, precious metals and companies that provide those, while seeking instruments in other currencies?

One final word of caution: However tempting it might be to give up the day job and invest in commodities, currency or anything else full time, it is strongly advised not to attempt this at home. Investment advisers who do this for a living may cost some management fees, but that is a small price to pay for avoiding undue and unknown risks in areas about which you have too little knowledge to even identify those risks.

Although the situation appears critical, a well prepared and fully informed investor can prosper even in the worst of times. It's time to do your homework, consult with your investment advisor and devise a prudent strategy to preserve your capital! "The times they are a-changin'!"

The Way Things Are

Not good, that’s the way things are. But, things are not so bad either. Things could be a lot worse. If you are reading this a mile wide asteroid probably has not struck us. Things could be a whole lot worse.

The grass still grows. The sky is blue. The wind blows. People fall in and out of love, or at least lust. There is food to eat and water to drink. Most of us are clothed and housed. The television can be ignored mostly. We have music and movies and books and sports and the Internet to entertain us. Our children are above average. Our spouses and significant others still speak to us for the most part.

Of course the politicians still lie. There is crime and too many people are locked up for things that only harm themselves. Taxes are high. The money isn’t worth the paper it’s printed on and can’t be trusted. People die. But, in the grand scheme of things how much does any of that really matter to most of us.

If any of it really matters to you, get a life. Enjoy a good meal, listen to some good music and chill out.

Why ask why? Go ahead and order a Bud and forget about it.

That’s right, ignore the politicians. Live your life here and now. Tell the truth and be truthful. Pay the taxes you can’t avoid. Put your paper money into real assets. Laugh a little, hopefully a lot. Chill out. Ignore the politicians.

It is time to launch the Second American Revolution.

This Revolution isn’t to be fought with guns and bombs. This is a nonviolent revolution. Well, it will be nonviolent on the part of the revolutionaries. There are no guarantees what the government will do or how it will react. The soldiers in this revolution are all of us who have had enough and are voting with our feet. Opt out. Or, put another way, “Tune in, Turn on and Drop out!”

Why not? Do we really care who the President sleeps with? Do we really want to participate in a system that stations troops in more than 140 countries around the world? Do we think it’s right for those troops to be teaching military and police in those countries to torture and maim and kill the people living in those countries? Do we think our government should really be creating a series of trade agreements to make it easier of multinational companies, especially the “fortunate five hundred” to become the ultimate welfare recipients as they are subsidized in their export of American jobs? Do we believe we really need over 1,200 SWAT teams in communities across the country from Maine to Maui? Do we really want the FBI and the Department of Homeland Security to be able to listen to every phone call and read every email message we send? Do we believe it’s the job of the national government to decide what we teach our children? Do we really have to be forced to save for our retirement? Do we require the national government to tell us what is or isn’t clean air or water? Do we really need the national government to run our lives? Are we really that stupid?

If you answered yes to any of those questions that’s fine. But you might not enjoy this blog.

Some will say, “Do we really need a national government at all?” Yeah, we probably do. That government should provide for the common defense, assure the availability of sound money (not just paper backed by debt instruments), protect civil liberties and maintain a judiciary to resolve disputes. But, “The Nanny State,” as we know it, is obsolete and didn’t work anyway.