By Scott Silva
Editor, The Gold Speculator
5-8-12
It’s May Day again in Paris. Over the weekend, French voters elected
Socialist Party leader François Hollande who promises to repeal all austerity
measures in favor of a robust Keynesian spending program. This development is a
setback for EU fiscal stability, and will likely undermine Franco-German
cooperation and may spell the end of the Eurozone. What effect will the new socialist
regime in France have on us here in the United States? Is socialism the answer
to our economic problems? What affect will socialist Europe have on my
portfolio?
May 1st is celebrated traditionally in most socialist, Marxist
and communist countries as Labor Day and
International Workers' Solidarity Day.
It is commonly marked by organized street demonstrations, parades and marches
by working people and their labor unions throughout most of the world. In the
heyday of the Soviet Union, May Day in Red Square included a parade of the
latest military equipment, a feast for cold war intelligence analysts and NATO
war planners. Nowadays, May 1st
is a national holiday in more than 80 countries. It is also celebrated
unofficially in many other countries.
The United States has attempted to counter the left-wing May Day
tradition. In 1921, following the Russian Revolution of 1917, the Veterans of
Foreign Wars and other conservative groups promoted May 1st as Americanization Day. In 1949, the
holiday was renamed Loyalty Day. In
1958, Congress declared May 1st Loyalty
Day a national holiday. Popular recognition of labor-centered May Day has
largely died out in the US. No longer do labor union-led crowds gather as
thousands did in Times Square every May 1st during the Great Depression. Last week, fewer than 100 Occupy Wall Street
protesters showed up at Bryant Park in midtown Manhattan as part of the planned
nationwide Occupy General Strike.
It’s no wonder that May Day and its modern day Occupy movement has failed
to take hold in the United States. Collectivism has failed everywhere it has
been tried. Communism failed in the Soviet Union. It failed in Cuba. It failed
in South and Central America. It failed in communist China and North Korea. And
the welfare state is failing today in Greece, Spain, and France.
Collectivism may show early signs of success. But economic prosperity in
the collective state is fleeting and deceptive.
Sooner or later the fundamental flaws of central planning reveal
themselves. Price control, production control and “fairness” give way to
corruption, graft and shortages. The central planners create the illusion of
success built on a body of lies. The hint of prosperity for all provided by a
benevolent government hand gives intervention its pernicious, seductive appeal.
In the long run, collectivism in all its forms has always proven to be the path
to tyranny and misery.
As Margaret Thatcher observed “"The problem with socialism is that
eventually you run out of other people's money [to spend]." Apparently,
citizens of France and Greece have yet to learn this lesson. In elections over
the weekend, voter backlash to strict austerity regimes in the debt-ridden
Eurozone countries toppled conservative French president Nicolas Sarkozy in
favor of anti-austerity Socialist Party candidate François Hollande, and
fascist anti-austerity factions defeated the centrist coalition Greek
government which had negotiated the EU/IMF bailout based on massive budget
cuts. The radical reversal presents a new existential threat to Eurozone and to
the Euro as a currency.
Socialism does not work because it is inconsistent with fundamental
principles of human behavior. The failure of socialism in countries around the
world can be traced to one critical defect: it is a system that ignores
incentives. The welfare state seeks to replace incentives with “entitlements”.
The government that delivers “free” goods and services expects to gain voter
loyalty and remain in power. We can see the flood tide of welfare state
entitlements swirling in to swamp federal budgets and submerge the nation into
unprecedented debt. Any thinking person knows that 100% debt/GDP is
unsustainable. The demise of Eurozone economies under the weight of crushing
national debt and an aging, dependent population should provides a clear,
real-time example.
But Washington central planners are blind to the failure of the European
welfare state. The current Washington regime clings to the notion that the
Federal government has the solution to every problem. Government intervention
is the answer to any ailment. The snake oil comes in many flavors: “Free”
healthcare for all; Social Security
retirement benefits for all and forever; affordable mortgages through federally
mandated load modifications; low cost, subsidized college loans for all, with
no repayment after 10 years!” And on and on.
It doesn’t matter that budget cannot support current federal spending. And
it matters not that we must borrow 40 cents of every Dollar the federal
government spends. Will foreigners buy US debt when the US debt reaches 120% of
GDP? Or 150%? Will anyone buy US debt
when entitlements consume 100% of federal revenue?
Well, to be fair, socialism would work if central planners could
anticipate demand and control production and distribution perfectly. We need
only look at the Chevy Volt to conclude that government has great difficulty in
judging demand for even one product, never mind the millions of products and
services that make up the US economy. The genius of capitalism is that it accounts
for demand, price, production and distribution of every product and service
through the “hidden hand” of the free market and the incentives that accrue on
through private property.
Free markets operate most efficiently when government intervention is minimal,
or as Thoreau wrote in 1849 in his Civil
Disobedience, “That government is governs best which governs least”.
In
a capitalist economy, incentives are of the utmost importance. Market prices,
the profit-and-loss system of accounting, and private property rights provide
an efficient, interrelated system of incentives to guide and direct economic
behavior. Capitalism is based on the theory that incentives matter. Capitalism
works because it is aligned with the principles of human behavior. Adam Smith recognized
the driving force of economics to be self interest. Individuals act in their
own self interest, and respond to incentives of the marketplace. Capitalism is
the best hope for the individual liberty and prosperity.
How
can we tell that the current path towards the all-encompassing welfare state is
failing? We can ask ourselves a simple question: “Are we better off today than we were four
years ago?”
There answers are clear and stark. Real wages are lower than they were
four years ago. Prices are higher than they were four years ago. Gasoline prices have more than doubled.
Bread, eggs and coffee prices are higher. Mortgage rates are down, but 22.8% of
all US mortgages are underwater. Unemployment remains at Great Depression
levels- 14.2% including those unemployed, underemployed or no longer looking
for work. Taxes are high and will be higher yet if the Bush tax cuts expire at
the end of the year and new taxes kick in to support national socialized
medicine. Education costs continue to rise by 7% or more each year.
May Day in Paris (and Greece) marks a return to socialist and fascist
economic policy. Similarly, current White House economic policy is based on
principles put forth by John Maynard Keynes and Karl Marx, namely, the font of
prosperity is government redistribution of wealth and government intervention
is virtuous.
So what can investors expect from the socialist revival in France and
return to fascism in Greece? We are seeing the dynamic play out in the markets
today. Stocks are selling off for the second day in a row. The Euro is trading
down below the $1.30 mark, and funds are flowing into US Treasurys. The
stronger Dollar is pushing commodity prices down; oil is trading below $100/bbl
and gold is testing the $1600/oz support level.
Gold bugs see strong support at the $1600/0z level, the price that
typically brings in the bargain hunters. The reason for this is longer term
prospects for gold are bullish. New government spending sprees in the Eurozone
will further debase fiat currencies which is bullish for sound money. The US
economy continues to struggle; White House economic policy and US monetary
policy have failed to stimulate robust economic recovery. Additional poor
economic data will tempt the Federal Reserve to enter into a third phase of Keynesian
Quantitative Easing later this year, which will weaken the Dollar and push gold
prices up.
Responsible citizens and prudent investors protect
themselves and their wealth against the ambitions of over-reaching government
authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely
market analysis on gold and silver and portfolio recommendations contained in The
Gold Speculator investment newsletter, which is based on the principles
of free markets, private property, sound money and Austrian School economics.
The question for you to consider is how are you going to
protect yourself from the vagaries of the fiat money and economic
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