Accountability

My former co-worker, as well as a good friend of mine, and I were discussing the various causes of present day financial crisis. Naturally, the Real Estate Bubble of 2006 came up along with the subsequent crash of 2008. After a long spirited exchange of supposed scapegoats like oil speculation and Ponzi scheming financial firms, I went on to talk about government intervention and policy failure.

My argument centered on the deregulation of the banking industry and the loosening of the lending standards. The repeal of the Glass-Steagall Act in 1999 opened the door for Banks to become giant conglomerates that could perform savings, loan, insurance, investment, as well as other types of business under one roof. The Glass-Steagall Act was passed originally in 1933 in order to stem the abusive corporate tactics that led to the market crash of 1929 and the subsequent Great Depression. This act prohibited banking institutions from engaging in other businesses - in essence, they could no longer take on unacceptable risk with people's savings. This was one of the first steps taken by the United States to get out of the Great Depression.

The loosening lending standards began to escalate in the past decade due, in part, to the demand of the Democratic party that everyone in America deserves a chance to own a home. The other part was the realized profitability by the newly "unchained" banking institutions. So when the banking institutions saw the Democrats' demands, their eyes lit up with dollar signs. They helped the Democrats' lobby for the Federally sponsored mortgage programs, and the rest is history. Soon, the massive lending led to soaring profits which led to even looser standards and more profits. By 2006, the peak of loosening lending standards led to the sub-prime mortgage era - where people with atrocious credit rating could get a mortgage at a substantially inflated interest rate. Everyone was raking in the money and nobody was paying attention that the money earned can never be realistically realized...

Let me explain that - you wouldn't lend money to a broke man without a job, because you would never see that money again. However, with banking institutions now having government protection and willing insurance branches to protect in the event of default, the banks lost all sense of responsible lending.

My good friend argued in turn: "You can't blame the banks and politicians. Surely the people who took the loans they knew they could never repay deserve the blame."

My response to that was: "You have people who are responsible and irresponsible. The bottom line is the people in charge must put measures in place that decrease, if not eliminate, these kinds of noncollectable loans. When the savings of ordinary people and the health of economy is at stake, you have to have responsible and accountable people take the right action at the top."

My friend replied: "I refuse to blame the banks for the fools who borrowed irresponsibly and contributed to the financial crisis. The blame is in the borrower."

My response: "The borrower does have a certain degree of responsibility to themselves. However looking at the bigger picture - if you're in charge, do you really want the health of the nation resting in the hands of the people you consider to be irresponsible fools?"

There is a Russian phrase that roughly translates to - "the fish rots from the head down". In this context, it means that the irresponsibility present in the society of a nation is a direct reflection of the leadership of that nation. On the other hand in a well run society, the leadership are more intelligent having the integrity and accountability to the people. The leadership must be responsible to the rest of the people, who may not be as intelligent, but are willing to work and contribute to society as a whole.

Accountability by the leadership ensures accountability by the rest of our society, with appropriate indisputable retribution in the event anyone fails to conform in this regard. The society is only as corrupt and irresponsible as the government and the government is nothing more than the representation of the people's ambitions.

So the question is - are you ambitious enough to force a change of who represents us as a nation?

Gold Unleashed!

I have received a lot of email regarding my November 27th post on Real Money. Specifically, the correspondence was divided into two camps. One was arguing that the price of gold is strongly inflated due to the falling value of the United States Dollar. The other was vehemently professing that the soaring demand from countries like China and India played a major factor.

Both factions are correct, to an extent. The nature of gold, as stated previously,  is that it has intrinsic value that no treasury in the world can devalue. As such, it is highly desirable at the moment by countries and individuals who don't value paper currency on the same level.

With the treasury printing presses in the US and Europe set ready to greatly devalue the dollar and the euro, the one asset governments cannot devalue is thrust into limelight. Relative of these currencies, gold will retain its value.

However without buying or selling of the gold itself, its price would remain the same regardless of where the dollar goes. It is the actual volume of gold purchases that drives up the price (demand).

So to answer my readers - you are both right. The falling value of the dollar is providing the motivation for countries and individuals holding the dollar to convert it into another asset that is more stable - gold. These purchases drive the demand and, subsequently, the price up.

The recent Federal Reserve intention to provide more liquidity only means that our government is ready to do more of the same. They will continue printing tonnes of money, hoping to devalue their debt and your savings. This should provide sufficient and significant additiinal motivation for countries and individuals holding dollars to convert them to gold.

Caveat: The worsening situation in Europe may provide a temporary flight toward the US Dollar as a perceived safety asset. During this time you may see some institutions and individuals sell gold for dollars. As a result, the price of gold and precious metals may fall to an extent. However, in my mind the safety in the US Dollar is a false perception and this boom will not last long. Therefore, I will use this period of Dollar's strength (and precious metals' fall in price) to purchase gold and silver.

There are many ways in which you may own gold. Bullion, coins, stocks, ETFs - it is up to you. Just remember that there are no guarantees in life and weigh risk/reward carefully.

Apathy, Polyarchy, and Squeezing the Middle

Isn't it great living in the United States of America? I certainly think so, because otherwise I wouldn't be able to write my column here every week. But make no mistake about it - we are losing the very foundation of what makes America great with each passing day. The worst part about this phenomenon is that we, as citizens, should be held accountable.

We may very well soon lose the freedom of expression, given the way that mayor Michael Bloomberg acted against the protesters and the media covering them. We have lost all our rights to privacy, given the way the Legislative Branch of our country has taken away our ability to sound off without that conversation being screened for keywords the government deems inappropriate. And now we are losing the foundation of unjust imprisonment without cause, the Habeas Corpus, which our wonderful government believes should be suspended. If this proposition goes through, anyone may be imprisoned and held without just cause. Yes, we are one step away from becoming a police state - the United Socialist Republics of America. Given all of rights that are taken away from us, we are headed towards a society that ultimately will be transformed into a dictatorship.

So how did the government obtain the ability to rule with an iron fist? The answer is voter apathy. More specifically, the answer is a gradual degradation of personal freedom, elected official limitations and the significance of your vote - facilitated by voter apathy. All of this happened, while the voting public at large remained blissfully ignorant. Ever since the forefathers of our country drew up the Constitution, every elected official has been trying to "game the system" and circumvent the underlying principles by claiming they were bringing forth an "improvement". As a result, we now have elected incompetent career politicians, who can take a "secret vote" in Congress so that their constituents can't even hold them accountable for the miscarriage of justice!

The majority of Americans simply believe that their vote counts for nothing. This fact has become a very destructive factor in the process of electing public officials. Let's look at the reasons why - electoral colleges and the two party system.

Electoral colleges disregard the popular vote, where my one vote in New Jersey is equal to someone's vote in Wyoming. Instead, Electoral colleges weigh the complete popular vote of a state with an assigned nominal value that is given to that state's winning party. This "homogenized" nominal value is why majority of individuals don't even bother showing up to vote. For example - I live in a very Democrat-dominated state and chances are most national elections will have New Jersey's nominal votes go to a Democratic candidate. As a result, many non-Democrats never bother showing up voting due to the belief that their vote will not be enough to overtake the Democratic majority. On the other side, many Democrats also don't show up to vote, because they believe there are enough Democrats to make the majority a winner every time without their vote.

The two party system stigmatizes and squeezes the middle class, making the largest segment of the United States' population feel ambivalent towards voting. If it were up to me, there would be no political parties whatsoever. A political party is a drug for the ignorant - a way to vote for a broad ideology that provides no real solutions, just feel-good monikers and slogans which get their party candidates elected instead. Let's take a look at the facts - we currently have a two-party system, where the vast majority of elected officials are either Democrats (who appeal to the lower class, the have-nots) and the Republicans (who appeal to the wealthy and the corporate). Both parties are raping the United States of America through entitlements. The Democrats are trying to take tax dollars and spend it on education, unemployment, tax breaks and free healthcare for the lower classes. The Republicans are trying to provide tax preferential treatment to corporations and upper class, spending wildly on defense, repeal anti-trust laws, and sell out American jobs overseas. Both Democrats and Republicans demolish the national budget. But who pays for these entitlements (corporate and individual)? Why it's the middle class, of course! The wealthy and Corporate hardly ever pay the taxes they actually must according to the tax code, while the lower class can't pay what it doesn't have. That leaves the middle class to foot the bill for politicians' irresponsible, and mostly irrelevant, promises. This results in the weakening of the middle class and, ultimately, the economy which depends upon it.

Had the voting America actually gotten together and lobbied the government for the abolition of the Electoral colleges and political parties, we may actually have candidates worth voting for, instead of some talking figure that must abide by the party ideology.

The United States of America is a Polyarchy state. Since we are very young, we are taught that America is the land of Democracy. That is simply false, because in a true Democracy every vote is counted equally, regardless of which part of the country it comes from. Furthermore, in a true Democracy there are no elected officials, as the people decide by a popular vote on every issue. In a Polyarchy, you have the elite few making decisions for the public. Therefore, United States of America is a Polyarchy state, where the power is being withdrawn from the people with each passing day.  



Benjamin Franklin was once asked: "...shall we have a Monarchy or a Republic?"
To which he replied: "A Republic, if you can keep it."

...and we haven't been very good about keeping it.

"Real Money"

One thing that people often can't seem to accurately grasp, due to years and years of indoctrination, is the concept of what real money means. Nowhere is this lack of grasp more evident than the United States of America. The reasons for this syndrome is years, decades and over a century of dollar dominance.

The truth, which people seem to forget is that every dollar in your pocket is a government-issued currency, backed by the faith of that government. If the government can no longer substantiate the value of the dollar, the paper currency you carry in your pocket, and in all of your accounts, is just that - paper. Not even worth the paper it is printed on.

If the government cuts on its revenue collection, it will have less money in the budget. Government currently spends wildly on elected officials and provides a slew of entitlements (corporate and individual); which forces the Treasury and the Federal Reserve to engage in printing money to cover these expenses. Sounds great, doesn't it? Until you realize that every time money printing occurs, they amount of paper money you have is being devalued.

Over the course of the past three years, since 2008, the United States Treasury has tripled (3x) the amount of  United States dollars in existence. As a result, every dollar in your pocket should now (2011) be worth one third (33%) of what it did in 2008. So how come the prices in most cases didn't increase threefold?

The reason being is that our economy has actually contracted over the course of the past three years. We haven't experienced real economic growth in over three years. We have actually suffered deflation during this period in time. The Federal Reserve officially engaged in Quantitative Easing (printing money) in order to "kick-start" the economy, when in fact the chairman of the Federal Reserve was attempting to prevent a natural, albeit painful, free market correction - deflation.

In a period of deflation, prices and salaries fall resulting in the increase of the dollar's value. Therefore as the Federal Reserve was helping the Treasury print money, the prices and salaries didn't skyrocket threefold, because the economy was suffering a period of deflation.

People who understand this gradual devaluation of the dollar have already rushed to purchase hard assets, whose value isn't dependent on the faith of the United States government. We are talking about foreign property, precious metals (gold, silver), and other things whose value is stable and not dependent on the dollar.

Gold, Silver are "Real Money", because unlike the dollar, their value does not depend upon the United States government, nor any other authority. These precious metals carry value in themselves. In a way the value of Gold and Silver do not change - their pricing in terms of US Dollar changes due to the change of the value of the dollar.

The skyrocketing price of Gold and Silver is a reflection on people's (and governments') speculation on the lack of value of the US Dollar. More individuals are acquiring gold as a safety net against inflation. But it's not just individuals who are acquiring Gold and Silver. China, and the entire Asian region, is buying gold in bulk. Chinese, who own the vast majority of US debt, have a reason to be concerned about the plummeting value of the dollar.

Therefore, they're trading in dollars into "Real Money". What's right for you? Only you can make that decision.