Socialism versus Capitalism

There has been a lot of bashing of Capitalism after the collapse in 2008.  Many people blame Capitalism for our current economic problems.

Some notable critics include Nouriel Roubini in this article, where he states:

“Karl Marx got it right, at some point capitalism can destroy itself...We thought markets worked. They’re not working.”

Other critics include Michael Moore when he produced the movie "Capitalism:  A Love Story".  He blames Capitalism for the cause of the financial collapse and recession.

Their criticisms are debatable.

Michael Moore

Michael Moore's film, "Fahrenheit 9/11" was spot on and excellent.  "Capitalism:  A Love Story" was an excellent movie as well.   It was very entertaining and thought provoking.  It makes the audience laugh, cry, angry and frustrated.

Moore advocated Socialism over Capitalism.

However, as his movie points out, the problems are corruption and white collar crime, not Capitalism.  Moore's film censured:

1. corruption
2. white collar crime
3. injustice
4. bailout of banks
5. control of government by corporations and ex-Wall Street executives
6. monopolies (he quoted Roosevelt and Adam Smith censuring monopolies)

Yes, 1, 2 and 3 are rampant.  However, these happen in Socialist and Communist societies as well.  Capitalism does not advocate any of these.  In fact, Capitalism cannot work if these are rampant.

4, 5 and 6 are more related to Socialism, not Capitalism.  Moore's film is actually critical of Socialism, not Capitalism.

Socialist governments believe in intervening and helping businesses survive, such as bail outs.  Capitalism does not believe in bail outs.  It believes that if the business is incompetent, it should die.  The more involvement from the government, the more socialist that country is, until you have the extreme which is communism.

Therefore, the more intertwining of government with corporations, the more socialist it is.  True Capitalism and Free Markets believe in separation of businesses from government.  When Wall Street manipulates Washington with bribery, this might be corruption, but it is not Capitalism.  Corruption exists in every country.  The leaders of many socialist countries are corrupt and far more wealthy than their subjects.  Look at Kim Jong Il, Lenin, Mao and Castro.

Moore's film was right to censure monopolies.  Monopolies eliminate competition, and competition is fundamental to capitalism.  However, socialist countries, especially extremely socialist countries which are communist countries, have a high proclivity to reduce or eliminate competition and have many more monopolies than capitalist countries.

However, Moore supports unions.  The purpose of unions is to eliminate competition by forming virtual monopolies (read more).  Therefore, it is hypocritical for Moore to censure monopolies and support unions.

If competition is being eliminated, then this means that Wall Street is becoming less capitalist and more socialist.  This is a problem and the problem is that we have too much socialism.

Moore advocated Democracy over Capitalism.  This is not an either/or.  If you have more Capitalism, it does not mean that you have less Democracy.  Democracy is a Political system, not an Economic system.  Capitalism is an Economic system, not a Political system.  You can have Democracy with Capitalist, Socialist or Communist economic systems.  Examples include the U.S., Canada and Europe, which have become socialistic.

You can have a Dictatorship or Authoritarian political system with Capitalist, Socialist or Communist economic systems.  China used to have an Authoritarian political system with Communist economic system.  It now has an Authoritarian political system with an extreme Capitalistic economic system.  Many people still think that China is communistic.  It is not.  It is more Capitalistic than the U.S. and thanks to Capitalism, the Chinese middle class has become far wealthier (read more).

Furthermore, Democracy is a cause of our debt problems (read more).

Moore advocates socialism and cites Europe (and Japan) as role models.  These countries have fake wealth.  Socialism usually involves increased spending, borrowing, deficits, debts and size of government.  Japan's debt (as a % of GDP) is the highest in the world.  Many European countries have higher debts than the U.S.  They have massive, unsustainable debt levels.  They steal from their children and grandchildren through government debts to fund their standard of living.  The U.S. debt is out of control and still growing.  The U.S. has become poorer and will become even poorer because it has become more Socialistic and less Capitalistic.  Unfortunately, the U.S. will become even poorer because of corruption and crime as well.

Capitalism is like a Hockey game.  Both systems motivate the players to work hard and innovate because those who are the best will be handsomely rewarded with money and recognition.  With sufficient rules and rule enforcement, which both need and advocate, both will produce amazing results.  However, without rules and rule enforcement, the players will not hesitate to be violent and injure each other to win.

Wall Street has insufficient rules and rule enforcement.  They are tripping and punching their opponents to get ahead and the rules have either been removed or not enforced.  We think Wall Street is rife with crime, fraud and corruption (read more:  Wall Street).

Moore criticized Wall Street for lobbying and spending money on Washington to ease regulations.  Moore was right to criticize this.  As mentioned, this is corruption, not Capitalism.  An analogy is if a hockey player gives money to the referee to be easy with the rules and penalties.  Capitalism does not advocate this.  When this happens, Capitalism breaks down and the country becomes poorer.

Corporatism

Critics complain that companies have become too big and powerful.  Hence, they control the politicians.  This is a valid criticism.  In fact, we agree that this is an issue (read more about lobbyists in Democracy is a Myth).  However, this is not advocated by true Capitalism.  This is corruption and the politics need to be changed.

Contrary to popular belief, capitalism does not necessarily advocate or equate to "big business".  When companies become too big, they reduce competition.  If they use their money to influence politicians, they might be able to thwart competition even more.  As an example, if they become so big that they end up with an oligopoly, there is very little competition.  Let us take the hypothetical extreme where a company becomes so big that it is the only company in its industry.  This means that the company has become a monopoly, with no competitors.

When companies approach this stage, we have less Capitalism, not more.  Competition is fundamental to capitalism.  A monopoly is the anti-thesis to Capitalism.  If companies are too big, we need to split them up like the way the government split up AT&T a few decades ago.

Greedy Capitalists

Critics complain that capitalists are greedy.  They are correct.  Capitalists are greedy.  However, do not be disillusioned into thinking that the majority of the population are not greedy.  The most important issue to voters is money.  Due to voters' greed, voters have stolen trillions from children, far more than any Wall Street crook can hope to steal.  Everybody wants more money.  The main difference between the capitalists and the socialists is that the capitalists found a way to make lots of it.  If they have too much and the majority have too little, then it is the government's fault.  It is the government's job to distribute wealth, not the capitalist's.

If rich people are unfairly lobbying or manipulating politicians to keep income rates unfairly low, then this is a problem of excessive corruption and the political system needs to be changed, not the economic system.

Economy

Here is an executive summary of what happened to the U.S. economy:

1. Cause of Great Recession:  Collapse of Banks
2. Cause of Bank Collapse:  Collapse of Housing Bubble
3. Cause of Housing Bubble:  Massive Socialist Manipulation

The main cause of the Great Recession is the collapse of the housing bubble, fake economy and banks.  The main cause of the bankruptcies and meltdown of the banks is the declining value of their assets (mortgages) and defaults on those mortgages.  Their assets plunged in value when house prices collapsed and homeowners stopped paying their mortgages.  House prices collapsed when the housing bubble collapsed.  The causes of the housing bubble were:

• According to this article, the Community Reinvestment Act (CRA), a socialist policy, created the meltdown.  The CRA required banks to extend loans to high-risk, low-income borrowers.  These borrowers bought homes that they couldn't afford and therefore they eventually defaulted.  There is debate about whether the CRA contributed to the meltdown.  However, many of those who refute the CRA as a cause, are employees of the government.  (Read more)
• Interest rates kept too low by the Federal Reserve in the early 2000's.  In fact, real interest rates were negative (interest rate was lower than inflation).
• Washington's socialist policy, since two decades ago, to help every American realize the American Dream of home ownership.  From this policy, Washington created Fannie Mae and Freddie Mac and gave them $1 trillion to give out as mortgages, especially to low-income, higher-risk borrowers.  This enabled crooked Wall Street and Mortgage Brokers to take advantage of the situation by creating CDOs (Collateralized Debt Obligations).  On top of that, Washington implemented many programs to get Americans to buy homes.  Read "Housing, the Most Manipulated Market in the World".  The housing market is so manipulated by the government that one can argue that it is similar to Communist Russia's "central planning" of the economy.  Nobody can argue that housing was not a huge socialist program.

The corruption and fraud on Wall Street and at multiple levels of American society, exacerbated the housing bubble.  (Read:  How U.S. defrauded billions from the world)

The fake economy was created by excessive household debts, spurred on by low interest rates and government manipulation.  Now that households are de-leveraging by reducing their debts, the economy is shrinking.  Since we still have huge debts, the economy is still fake and we are still not at a "real", sustainable level, where we enjoy what we earn and deserve (living within our means).

Therefore, the root cause of the Great Recession is socialism, not free-market capitalism.

Debt Crisis

Furthermore, due to the high public and private debt levels, the economy will continue to be anemic or even go into another recession.  As explained in this USA Inc. report, the main causes of the U.S. debt problem are the entitlement programs, which include Social Security (old age pension), Medicare (free healthcare for the elderly) and Medicaid (free healthcare for the poor).  They account for 57% of total federal government expenses, up from 25% 40 years ago and are growing the fastest.  These are socialist programs.  Similarly, the cause of the high debts in other Western countries are due to socialist programs as well.  For Canada and most European countries, the percentage of the federal budget spent on socialist programs is higher than 57%.

The amount that the U.S. federal government spends, averaged 3% of GDP from 1790 until 1930.  Since 1930 until 2010, this has ballooned to 24% of GDP.  The government does not create wealth.  It takes wealth from people who create it and distributes it to others.  Therefore, the larger the government, the less people there are creating wealth.  In the U.S., only three out of four people are creating wealth.  This is socialism.  The extreme is communism where the government controls nearly 100% of the GDP.

Contrary to popular belief, the U.S., Europe, Canada and Australia are socialist, not capitalist countries.

Many people cite Scandinavia as a success story for socialism.  Firstly and contrary to popular belief, there are only three countries in Scandinavia:  Norway, Sweden and Denmark.  Secondly, Norway is rich, not because of socialism or capitalism.  Norway won the lottery by sitting on oil.  Like Saudi Arabia, Norway does not need to work for the next 100 years.  This money spills over to Sweden and Denmark, where the three countries are closely linked by trade, language and blood.  Thirdly, Sweden (with only 9.5 million people) has $1 trillion and Denmark (with only 5.6 million people) has $626 billion of gross external debt (source).  Their public debt is reasonable relative to other countries, but they still have public debts nevertheless.  Any country that has debt means that it borrowed from the future to spend on its social programs and to support today's fake economy.

Every country in history that has tried socialism, has succeeded in bringing prosperity to a portion of their citizens in the short run (which can be many years).  Without fail, every one of these countries have become poorer in the long run.  This track record is unbroken in earth's history.

Extreme Socialism

Communism, which is an extreme form of socialism, drove Russia and China into poverty. China was so poor in the 1950's that millions of Chinese starved to death.

Because of capitalism, China has increased their wealth many, many folds.  People talk about their poor, rural peasants.  Yes, they are poor compared to the millionaires created every hour in China.  (Millionaires were unheard of a few decades ago.)  However, because of capitalism, these peasants are now many, many times richer than they were 50 years ago.  Nobody is starving.  They have ample, cheap food to eat.  They are now eating red meat.  They are now buying cell phones and decent clothes and eventually will buy computers.  Therefore, you can say that the peasants are rich, relative to the Chinese population under extreme socialism.

Economic System

There are thousands of different types of systems in this world.  Each system shapes and motivates behaviour in different ways.  If you want your sales rep to sell more, you increase his/her commission.  If you do not want people to park on the street, you hand out parking tickets.  The capitalist system motivates people to take risks and start businesses, by rewarding them with riches if they succeed.  The socialist system retards that motivation.  The main creators of wealth for any country in the world, are entrepreneurs.

Entrepreneurs create businesses and jobs.  They create wealth not only for themselves, but also for their customers, employees, shareholders, governments and therefore essentially for every other person in society.  Without computer entrepreneurs, such as Steve Jobs and Bill Gates, you would not be reading this article on your computer.  Without phone entrepreneurs, you would not be able to listen to music or chat with your friends from your classroom or office.  Without car entrepreneurs as Henry Ford, you would never enjoy the ride of a car.  Without clothing entrepreneurs, you would not be wearing the clothes that you are wearing.  Without restaurant entrepreneurs, you would not have enjoyed the hundreds of different cuisines.  Without entrepreneurs, you would not have most of the things that you have.

Yes, most of those entrepreneurs are rich, very rich.  They are the richest people in the world.  But without entrepreneurs, your economy would not be wealthy.  If your economy was not wealthy, you would not be wealthy, no matter what you do.  The reason our doctors make thirty times more than doctors in Cuba, is because our economy is so much wealthier, not because our doctors are thirty times smarter.  The reason our baseball players make 1,000 times more than baseball players in Cuba, is because our economy is so much wealthier, not because our baseball players are 1,000 times better.  The reason anybody, including barbers, accountants, bus drivers, lawyers and plumbers, makes the money he/she does, is due to the economy.  The reason welfare recipients get any money, is due to the economy.

Our economy is wealthy because of entrepreneurs.

A capitalist system encourages people to become entrepreneurs.  A socialist system reduces that encouragement.  A country cannot become wealthy and stay wealthy if there are no entrepreneurs.

Instead of spending more money to foster and nourish entrepreneurs, we spend the far majority of our money on socialist programs.  In fact, we spend so much more than we can afford that we have huge, unsustainable debts.

The longer we stay socialistic, the poorer we will become.  This is guaranteed.  You just have to look around the world and see what other countries' experiences have been with socialism versus capitalism.  However, we never seem to learn from history.

Every country that has become more corrupt, has become poorer in the long run.  This track record is also unbroken in earth's history.

Every country that has adopted Capitalism, has become wealthier.  This track record is also unbroken in earth's history.

Here is a short story to explain the difference between socialists and capitalists:

A group of socialists are standing on a street corner.  A group of capitalists are standing on the opposite street corner. 

A Rolls Royce drives through the intersection. 

The socialists say:  "Look at that bastard with the Rolls Royce!  Let's go take that Rolls Royce away from that driver and share that wealth amongst all of us!" 

The capitalists say:  "Look at that bastard with the Rolls Royce!  Let's go figure out a way to make enough money so that we can all buy Rolls Royces!"

If a country is filled with socialists, they would be trying to share everybody else's wealth.  Nobody would be creating wealth.  This is why socialists countries eventually become poor.

If a country is filled with capitalists, everybody would be creating wealth.  This is why capitalist countries eventually become rich.

Here is an excellent explanation of Socialism that has been circulating through e-mails (author unknown):

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class.  That class had insisted that Obama's socialism worked and that no one would be poor and no one would be rich, a great equalizer.  

The professor then said, "OK, we will have an experiment in this class on Obama's plan".  All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A...(substituting grades for dollars - something closer to home and more readily understood by all) 

After the first test, the grades were averaged and everyone got a B.  The students who studied hard were upset and the students who studied little were happy.  As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. 

The second test average was a D!  No one was happy.  When the 3rd test rolled around, the average was an F. 

As the tests proceeded the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else. 

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

Could not be any simpler than that.

These are possibly the 5 best sentences you'll ever read and all applicable to this experiment: 

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. When half of 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 else is going to get what they work for, that is the beginning of the end of any nation.

In a controlled environment, where all other factors are removed, a socialist country will continue to become poorer.  What governments around the world have been doing, to counter this, is to steal from children to create fake economies and fake wealth.  This can maintain a fake level of prosperity for a number of years.  Eventually, countries hit thresholds on how much they can steal from children and then they become poorer.  Europe serves as a good example of this.

Neither Extreme

We are not advocating extreme Capitalism either.  We believe that there should be some socialism if a country can afford it and does not steal from children to pay for it.  Unfortunately, most countries cannot afford it, or they are spending too much on social programs, as exemplified by their budget deficits.  Since most Western countries have substantial tax revenue, by running deficits and debts, this shows that their social programs have ballooned out of control and they are stealing from children to pay for them.  This shows that most Western countries have become very socialistic.  So extreme Capitalism is a far-away worry.

Read more:

Capitalism

Steve Jobs

Credit Bubble

Are high levels of credit good for the economy? Ask many people that and most of them will say yes.

The Basics

When credit (unearned capital) is added to the economy, new products and services appear and/or the prices of products and services go up because there are more dollars chasing each product or service. When credit is serviced, capital is diverted from the economy. If the diversion of capital exceeds new capital inflows, then prices go down and/or products and services disappear.

The Problem

During the last 26 years, governments and financial institutions poured gluttonous amounts of unearned capital into world economies. Year after year, world economies have seen higher levels of credit. Now they are addicted and require higher levels of credit year after year just to sustain economic levels.

What does this mean?

World economies have mortgaged too much of their future economic activity. That’s what credit does. It creates current economic activity at the expense of future economic activity.

Why did this occur?

There are numerous reasons but the prominent ones may be US trade deficits and financial deregulation. Since 1975, the US has recorded trade deficits every year. To understand the net effects of long term sustained trade deficits, imagine ‘If you always spent more than you made’. You would eventually run out of money.

In-order to mitigate outflows of capital and the loss of jobs in manufacturing, the US economy evolved to become more serviced based and credit dependant, especially during the last 30 years.

During the 80’s, the Reagan Administration’s initiative to stimulate the economy by deregulating S&L’s caused an explosive growth of credit services. The lack of supervision led to highly speculative investments and eventually the S&L industry had to be bailed out. Despite this, deregulation continued and was expanded. In the 90’s, The Glass-Steagall Act which protected bank depositors from the additional risks associated with security transactions was dismantled. Commercial banks could now own brokerage firms and provide investments services and aggressively sell highly leveraged financial products. Consequently, the explosive growth of these brokerage firms was fueled by liquidity and credit sourced through their corporate parents.

During the last decade, ultra low interest rates combined with indiscriminate lending funded by Mortgage Backed Securities further inflated the credit bubble. Even with the past 3 years deluge of home foreclosures and personal bankruptcies, the credit bubble barely deflated because of the recent bailouts and stimulus programs which pumped massive amounts of credit and liquidity into the economy.

Where is the credit bubble?

The credit bubble has spread to most developed nations and emerging markets throughout the world via under regulated markets. Private and Institutional investors bought US and foreign financial investments and services that hedge commodities, leverage assets and overvalued securities. Additionally, foreign monetary policies were influenced by the US Federal Reserve’s policies. All the perceived wealth and credit generated from these investments, services and policies spilled over into and inflated stock markets all over the world, thus inflating prices for products and services and real estate all over the world.

Conclusions

(click on image to enlarge)

The above chart indicates that in Canada and the US, with the exception of the last 2 years in the US, the ratio of household debt to disposable household income has been generally increasing year to year for the last 26 years. I suspect that data from the respective charts for many if not most G20 nations would also generally show increasing ratios of household debt to disposable household income during the last 26 years.

From this data one can easily conclude that credit is responsible for a significant percentage of the economic gains (GDP) attained by many if not most g20 nations during the last 26 years. This trend cannot continue indefinitely and the last 2 years economic crisis was probably the 1st of many. In addition, each economic crisis will eliminate some products and services that leverage products and services. Economies will become less serviced based and credit dependant.

The current prices for most financial assets including stocks, securities and real estate as well as many products and services are unsustainable. It’s hard to ascertain how far prices have overshot their sustainable levels because the charts only go back to 1960. But reviewing the US chart data from 1960 to1984 shows a up and down cycle with modest gains each cycle. By charting minimum and maximum trend lines from the US 1960 to1984 cycles and sustaining these cycles average rate of increase would indicate that the US ratio today should only be between 65% and 75%, not 117.2%. Furthermore, even a sustained 65% to 75% ratio of household debt to disposable household income could still be too high. If left to their own devices, economies would evolve and eventually find their sustainable levels.

Peter Tsirlis

Fake Economy

This is sustainable:

• When our economy is expanding, our government should be running a surplus to build up a reserve.
• When our economy shrinks (recession), our government can tap into the reserve, run a deficit and pay for stimulus, unemployment insurance, lower tax revenues, etc.

Instead, this is what we have been doing for approximately 45 years:

• When our economy is expanding, our government runs a deficit.
• When our economy shrinks (recession), our government runs an even bigger deficit.

Below is what the government's budgets should look like on charts.  The government  should be building up a reserve with surpluses during economic growth years, as shown in Year 2 and 3.  When the economy goes into a recession in Year 4, the government can tap into and spend the $30 in reserve from Year 3, to stimulate the economy, resulting in a $30 deficit in Year 4.  Once the economy starts growing again in Year 5, the government budget should go back into surplus and start accumulating a reserve again:


Instead, below is what the budgets look like for most Western, debt-based governments.  When they should be running surpluses during economic expansion, they run deficits.  During economic contractions (recessions), they run even bigger deficits.


The government never has a reserve.  It always has a debt, and has deficits for most years which keeps growing the debt.  Is this sustainable?  What happens when the government hits a limit on how much more they can borrow?  What happens when one of the main contributors of economic growth, such as government borrowing, is removed?  Most likely the economy will stop growing, or shrink.

Most of the deficits and debts are a result of ever-increasing spending on socialist programs. (Read Socialism vs. Capitalism)

In the future, the economy will have a tougher time growing.  It might very likely be sluggish and have frequent recessions.  This is what happens when you have a fake economy that has been fuelled and supported by debt for approximately 45 years.  When you run out of fuel (debt), it stops growing.

In addition to our economy being fuelled and supported by government deficits, it has also been fuelled and supported by U.S. trade deficits, which in turn were supported by growing consumer/private debt.

For the past several years:

• The Chinese economy grew because they were able to sell to the growing Western economies.
• The Western economies, especially the US (and Britain), grew because Americans were spending like crazy.  They did this by:
  
  • massive borrowing through sub-prime mortgages, ABCPs, second mortgages and credit card debts.   Americans were using their houses as ATMs by borrowing against them.
  • massive consumption through trade deficits.
  • stealing from their children (governments drove up debts even more).
• The Canadian economy (and housing market) grew because their biggest customer (USA) was growing (artificially).

Therefore, the worlds' economies probably would not have grown so much and for so long if the West didn't borrow so much (that they never could pay back).

Now, the politicians want to save the economy.  Save it from what?  Save it from reality?

The politicians want the economy to return to the artificial level.

How will the politicians save the economy?  They will spend money to "stimulate".  Where will they get this money?  They will steal even more from our children to stimulate OUR generation's economy.  Where is the money going to come from to stimulate the next generation's economy?

When an economy is in equilibrium, it produces as much as it consumes, regardless if the economy has 300 Million people or 1 person.  In equilibrium, it has zero trade deficit or surplus.  This is illustrated below:



Here is an example of an non-equilibrium economy that consumes more than it produces:



The above is analogous to a farmer who produces 10 bushels of wheat but consumes 20 bushels (in year 2).  To do this, he imports 10 bushels from another farmer, resulting in a trade deficit of 10 bushels.  The farmer's economy may appear to be growing, because Consumption is increasing and is included in the calculation of GDP.  In year 3, he still produces 10 bushels of wheat, but he consumes 30.  To do this, he imports 20 bushels from another farmer, resulting in a trade deficit of 20 bushels.  Again, the farmer's economy is growing because Consumption is still increasing.  However, is this sustainable?  When will he ever repay the other farmer for all of the imported bushels?  Is this economy real or fake? In year 4, he still produces 10 bushels of wheat, but he consumes 20.  Because he is consuming less than the previous year, his economy is considered to be in a Recession.  Because he still has a trade deficit, his foreign debt continues to grow.

What is the right course of action here?  Should the government step in?  If so, to do what?  Should the government stimulate the economy?  If so, how?  Should the government try to get the economy back into equilibrium?  If so, how?

Below is what might happen if the government lets the economy get back to equilibrium on its own by not interfering with the free market and capitalism:



In year 5, the amount produced might equal the amount consumed.

Below is what most elected officials want to do, because they want the economy to be growing on their watch:



They will stimulate and grow the deficit and debt.  This is what Bush did in 2001.  The economy was growing in an unsustainable way through debts.  Below is actual US trade data.  It shows that in 2001, the Trade Deficit was decreasing:



Government spending, such as a stimulus, is also included in the GDP.  Therefore, the government debt partly reflects the amount of stimulus spent on the economy.  Below is US federal government debt (2009 to 2012 are forecasted data).  It shows that in 2001, the debt (as a % of GDP) was decreasing:

(Source: Taxtips.ca)

According to Peter Schiff (who accurately predicted the housing bubble, housing collapse, financial collapse, Fannie Mae and Freddie Mac bankruptcies, and government bail outs), recessions are not the problems.  Recessions are the consequence of government actions that artificially inflate the economy.  Essentially, the government creates bubble economies and recessions are when the bubbles pop.  The cycle keeps repeating because governments keep creating bubble economies.

Instead of letting the economy come down to equilibrium in a needed recession in 2001, Bush did not want a recession on his watch.  To do this, he stimulated the economy by increasing deficit spending and increasing credit and debt to consumers through Monetary Policy (low interest rates), Fannie Mae, Freddie Mac and other mechanisms.  This enabled American consumers to consume even more (with borrowed money) domestic and imported products, which resumed the increasing trade and budget deficits.  Consequently, this grew the fake economy even more and created the housing bubble.

In the above "US Trade" chart, you can see that the Trade Deficit is decreasing in 2007.  Year 4 in the same chart below can be used to represent 2007 and 2008 as well as 2001.


Instead of letting the economy come down to equilibrium in a needed recession and to enable people to save (saving enables investments and production), governments want the economy to go back to the previous artificial and unsustainable levels.

In the long run, these trade deficits and budget deficits are unsustainable to not only the US, but every country that sells to the US as well.  If the US cannot sustain their Consumption and Import levels, this means they will eventually import less.  This means other countries cannot sustain their Export levels to the US.  This is why the economy may be fake for most countries around the world.

Even if the stimulus causes the economy to grow again, it will make the debt bubble even bigger.  The next time it pops, the pop will be even bigger.

These are the sources of wealth and economic growth for most countries:

1. Hard Work
2. Innovation
3. Natural Resources
4. Killing and Robbing (for a few countries)
5. Steal from children (through deficits and debts)

As mentioned, elected officials want to grow the economy.  The hard way to do this is to foster more Hard Work and Innovation.  Hard Work and Innovation increases production and exports.  However, an easier way is to borrow and spend (government deficits and debts, consumer debt, etc.).

Every politician is more motivated to grow the economy during his/her term in office than for the long run, as future terms are not his/her concern.  Therefore they usually choose the easier way.  Consequently, the debts tend to increase from one term to the next, as politicians pass mounting debt problems to future governments/administrations.

Consumers like borrowing and spending because they want immediate gratification.  Businesses like this because they want the revenue today instead of tomorrow.  Lenders love this because lending is one of the most lucrative industries in our economy.

Check out New York Times' article on debt.  Appended below are a few screenshots from the article.






Debts are a result of socialist programs.  When these debts accumulate, it means that we have fake wealth.

Most debt-based economies are fake and paid for by foreigners or by stealing money from children.  There is also inter-generational transfer through housing, which is the most manipulated market in the world.  When mortgages and home prices continue to rise, it means that each subsequent generation has to pay more and more for homes to the previous generation, which makes each future generation poorer.

Consumer debt has been going up mainly because of mortgages.  Mortgages have been going up because price of homes keep going up.  However, easier mortgages (lower down payments and longer terms) have fuelled the demand for homes, which in turn raises home prices.  This has proven to be case in the US up until 2007.  We need to reverse this trend.

To reverse the trend, we need to make it harder to get mortgages, such as increasing down payments and shortening the term.

In other words, to reduce the amount of debt that we hold, we need to reduce the size of our mortgages.  To do this, we need to reduce the price of homes.  To do this, we need to make mortgages harder and harder to get.  If we extrapolate this to the point of banning mortgages, it may benefit the majority in the long run.

Read more:

Housing, the most manipulated market in the world

Fake Wealth

Stealing from Children

Bubbles - Extreme Maker and Breaker of Wealth

Housing, the most manipulated market in the world

Debt - Fake Wealth

Most Europeans, Americans, Canadians and Australians did not realize that they have significant government debt, until after the financial crisis in 2008.  Their debts have gotten worse, but it was always significant even before 2008.

In fact, most people around the world, including voters in Western democratic countries, do not even know the difference between deficit and debt.

This debt means that, since the 1960's, people in many countries around the world have enjoyed government spending and borrowing, which will be paid for by future generations.   This is unjust and unethical.  We believe that this debt should be paid off as soon as possible especially by the generation that borrowed the money.

Since it was the previous generation that borrowed most of the money, one of the first cut-backs to help pay off the debt, should be cut-backs to Old Age Pension (Social Security).  If this is not done, there will be no Pension for future generations.

According to the Fraser Institute:

• Canada has a total debt of $2.4 trillion, including federal, provincial and municipal liabilities.  Federal government debt is $457 Billion.
• Approximately 50% of population are taxpayers and each taxpayer still owes $150,211.  This is impossible to pay off in one life-time.  Most couples who spend most of their disposable income on a $300,000 mortgage, would take over 25 years to pay it off.

Because it takes so long to pay off government debt, this means that this money was spent on the previous or current generation and will be paid off by your children or grandchildren.  What we have done is burden people in the future without their approval or knowledge.

If you believe that it is immoral, unethical or illegal to burden somebody without their approval or knowledge, then you would agree that government debts are immoral, unethical and should be illegal.

Ideally, it would be great if we could give/subsidize more to students, welfare recipients, public transportation users, etc., but it's not possible.  It's not even possible to continue spending the way we are.

The problem is that most people do not know or care about:

• how much our debt is
• the difference between debt and deficit
• debt per taxpayer
• math

In essence, by being politically-correct, socialist policies have done something very immoral, unethical and cruel (which should be illegal) and that is to burden taxpayers and future generations without their approval or knowledge.

Canadians are in a false illusion.  We think that Canada is so wealthy and can help every 3^rd world country.  But Canada is not wealthy.  In large part, we're a fake.  Canada, like most Western countries, have fake wealth.

The analogy is like this:   A man borrows $2 Million and buys a mansion and a Mercedes. Everybody thinks he is wealthy.  He even feels wealthy.  He feels like he can provide aid to all of his neighbours.  But he can't. In fact, he doesn't make enough money to ever pay back this $2 Million loan.  Therefore, it will passed on to his children to pay off, which is essentially stealing from children.

According to Statistics Canada, the average Canadian family unit's net worth was $249,300 in 1999.  However, this is skewed by the rich Canadians.  The median net worth was $109,200.  If a family unit has two taxpayers, then that family's share of the Canadian government debt is $300,000.  This means the family is worthless or bankrupt.   From a mathematical and financial viewpoint, Canada is broke.  A country that is broke cannot be a first world country.  The more we go into debt, the more we'll become a third world country.

One of the ways to stop global warming is to raise awareness of the bad things people are doing.  The Ontario government wants to raise awareness of environmentally friendly people by issuing green license plates to small cars.  We need to raise awareness of our debt problem, otherwise we will become a third world country.
(Updated October, 2008)

Wikipedia shows the IMF ranking of public debt by country.

According to this October 2011 report, Capital Economics in London calculated these aggregate debt to GDP ratios (total private and public debt of countries divided by GDP):

• Euro zone and the United Kingdom:  450%
• Japan:  470%
• Canada:  410%
• U.S.:  350%

Read more:

Fake Economy

Housing, the most manipulated market in the world

Stealing from Children

Bubbles - Extreme Maker and Breaker of Wealth

Housing, the most manipulated market in the world