Sunday, May 13, 2012

May Day in Paris

By Scott Silva

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 uncertainty?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec   Subscribe at our web site  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

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