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Sept. 23, 2008 - Freedomain Radio - Stefan Molyneux
28:45
1156 The Empire Strikes Out

An analysis of the current US economic crisis from Freedomain Radio - what is going on, and why.

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Hello everybody, it's Stefan Molyneux.
I hope you're doing well. This is a little presentation on the current U.S. financial crisis as of September 2008, entitled The Empire Strikes Out.
Debt, inflation, and the end of the state.
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So, what the hell is going on?
Why is the US government effectively nationalizing financial institutions?
Why is it sending a bill to the taxpayers for about a trillion dollars to bail out Wall Street?
Is the problem a lack of regulation or deregulation or something else entirely?
Is this related to the housing market?
Perhaps most importantly, what is going to happen now or next?
Well, the first thing to understand about the current financial crisis is what has happened to real wages over the past few decades.
Real wages have been stagnating or declining for the past few decades.
They rose every single decade from 1830 to 1970 and then declined in many areas 14% between 1970 and 1996.
Of course, real wages Is the actual purchasing power relative to goods and services, not the hyperinflation of fiat currency based on the overprinting of money, but the actual purchasing power has been stagnating or declining.
Here, if you have a fetish for graphs, this presentation is your porn.
We have 1947 to 1979, real family incomes, growth by quintile.
This is the five slices of the pie from the bottom 20% to the top 20% in terms of income.
You can see the bottom 20%, the bottom poorest 20% plus 116% a few decades, 74 to 79.
And there's none of them that are below 100% except for the top The top 5% went only plus 86, and the top quintile went plus 99.
Everyone else was 100% or greater increase in real wages.
Ah, but what happened at the end of the 70s?
Well, 1979 to 2001, real family income growth by quintile, and for top 5%, we can see that the...
Bottom, 20%, instead of growing by 116%, as they did in the earlier decades, only grew by 3%, and then plus 11%, plus 17%, plus 26%, plus 53%, but the top 5% grew 81%.
So here we can see that economic growth has slowed or stopped.
Effectively for the poorer people and has continued though not as high as it used to be for the top, right?
This is of course a massive predation and redistribution effort which can only be achieved by our friend the good old stately state.
So what is the cause?
Well, it's not brain surgery.
National debt from 1940 to the present.
The decline started in the sort of mid to late 70s, and that is when the debt began to explode, and that, of course, is fairly important.
Now, of course, the gross domestic product did also grow, but the proportion of the government grew much faster than the gross national product.
So, when you have this massive kind of government debt, which is, of course, a government debt is just an indirect form of taxation.
There are two major ones. The first is inflation, the second is debt.
The two are hugely related.
As you run into debt, you tend to have the habit of printing more money to pay off that debt, which, of course, drives up inflation, which increases your debt again.
So, it's been a huge game of whack-a-mole for the past couple of decades.
So the symptoms. Total outstanding U.S. currency per person.
It includes currency held overseas.
Again, we can see in the 70s we began to get this huge increase from a few hundred dollars up to the mid-2005 to $2,500.
This is a total outstanding U.S. currency per person.
It got a massive kind of inflation and foreign purchasing of debt.
Then, you can have a look at money stock, currency versus M1. You can look these things up if you want to get into the technical details.
But again, we can see late 80s, we began to see a pretty significant increase in the amount of overprinting of money.
Now, of course, the government controls the money supply, and the government sets the interest rates through the Fed.
It can try and control these two things.
It can print more money but hold the interest rate down, which drives a lot of problems and a lot of pressures, which are showing up in very oblique ways, as we can see in this current crisis.
Here's something interesting.
This is 2007. U.S. government obligations versus gross domestic products.
The government obligations... are I guess in the order of 60 and change trillion the GDP 12 the rest of the world's government debt is under 20 and the rest of the world's GDP is 40 so the rest of the world has twice the income relative to its debt the US has like a quarter of the income or less relative to its debt right so this is obviously not going to continue and we can see the effects of this in the current financial crisis So that's the macro level.
What happens at the personal level?
Well, let's look at the male median income year-round full-time workers.
This is in 2004 dollars.
This goes up to 2005.
And we can see that there's been a decline of 9.4% from 1977 to 2005.
And this, of course, is despite significant economic growth.
So this kind of problem with this government over printing and holding down the interest rates and so on is causing a lot of problems in the economy.
As income declines, how do people make up the difference?
I mean, a lot of what is going on in the economy these days, as I'll talk about later, is people just trying to make up the difference of what is being stolen from the Minnesota and virtually invisible manner through inflation and through debt.
So, from 1950 to 2005, working married women with children under the age of six Increased six times from 11% to 61%.
So as male income has declined, the female income has had to rise to make up the gap.
And this, of course, is women going into the workforce.
Nothing wrong with women in the workforce.
Fantastic. But from my experience chatting with a fairly large number of women who have young children, they actually don't really want to go and have a full-time job and deal with the hassles of daycare and pick up and drop off and crying children and so on.
And as one woman put it, shmegma, which is baby spit up, on the work blouse.
Not that much fun.
What else have people done to make up for the loss of real wages?
Well, there's been a 114% savings plunge to negative from the mid to late 80s.
So, of course, as your real income begins to decline, you simply stop saving.
I mean, obviously, that's something that happens.
If you're starving for bread, you don't put some bread in the larder for later.
You eat what you've got now. So, the personal savings rate has catastrophically declined, and this, of course, can be really looked at, a massive transfer of wealth from people's personal bank accounts to those who control the government.
So, there's another effect that people have simply stopped saving, which makes them anxious, it makes them easier to control because they don't have any backup, it makes them easier to dominate, even in private industry and so on.
The household debt rate, you can see from 1967, it was less than 50%, about 40-45%.
I'm assuming this includes mortgages.
And now we have over 120% household debt ratio relative to income.
Again, a completely unsustainable situation.
But this is what people do.
People just don't change and say, well, we're not going to save.
We're going to start going into debt.
They're simply trying to stay afloat.
And grabbing whatever they can as their real incomes decline.
So there's the personal effects.
The net effect or the general effect.
Well, increases in the money supply, as we talked about, relative to real wealth, to real capital and goods, always causes inflation.
Unless, quote, wealth is imported too.
So basically what happens is the US government, to make up for this problem, it's caused by overprinting and artificially low interest rates, they simply borrow money from foreigners, which is then used to purchase foreign goods.
So they will borrow or sell securities.
And debt and treasury notes and so on to, say, the Chinese.
And then that money is used to subsidize or to help purchase foreign goods.
They keep the trade routes open.
And so what happens is it temporarily depresses inflationary pressures.
So when the price of everything is going up, if you import a bunch of cheap stuff from overseas, it helps keep the prices low.
Of course, this is at the expense of the American worker to some degree.
So that, of course, is a big problem.
Of course, there's lots of loans that go back from the US government and subsidies sometimes to foreign producers as well.
But what they're trying to do, since they're stealing American people's money and making it worth less, what they try to do is import more cheap goods to make up for that.
So, this lowers the effects of the wage decline to some degree.
So, for instance, here, foreign holdings of federal government, T-bill and T-bond debt, you can see here from 1986, where it was less than 15%, it's gone to over 45% in 2007.
This is what is so funny about voting, in that one vote from who you are relative to the pressures that are brought to bear on the U.S. government by its foreign Foreign debtor nations, your vote fades to insignificance.
What the US government is going to do is basically whatever its bondholders, which is huge, require it to do.
Trade deficits, 1980 to 2005.
This is pretty telling, you can see here.
Sorry, if you're listening, you might want to look at the video.
That from 1980 to 2005, there's a massive collapse in trade deficit.
What this means, of course, is that people are just importing a lot more than they're exporting.
This, of course, is just subsidized.
I mean, they just import and they're selling debt in order to buy goods from foreign countries.
Again, not good for domestic production, to say the least.
So, what's going on as a whole?
Let's try and package this up in a conceptual package that hopefully will make some kind of sense.
So what is the main purpose of monetary policy?
Well, the main purpose of monetary policy is to rob citizens through inflation and debt.
And hide that theft, or at least hide the effects of that theft in the short run.
I mean, somebody who steals your diamonds will replace them, if he is very cunning, with cubic zircona, so that you don't notice, at least for some time, and by the time you notice, he's long gone.
And of course, that is, or it's long sold, can't be recovered, he's got the money, he's gone to Puerto Rico or wherever.
So, the purpose of monetary policy is to rob citizens through inflationary pressures and hide that theft.
Now, ever since the stagflation of the 1970s, which was the first blow against Keynesianism and a strong support for Austrian economic policies like Mises and Hayek and so on, monetary policy has become more sophisticated.
Stagflation was when you had both economic stagnation and inflation, which according to Keynesianism is impossible.
And it robs the government of the supposed magic Keynesian ability to deal with stagnation through printing of money, because when you have stagnation and inflation, you can't print more money, otherwise it would drive the inflation up.
So monetary policies become more sophisticated.
The inflationary effects of overprinting fiat currency are now well understood, not just by the U.S. government, by all of its debtors as well, and countermeasures are in effect.
Now, with an increasingly globalized economy, the importing of, quote, wealth through foreign loans is possible, right?
So this is something that is quite important to understand.
So this allows the symptoms of wage decline to be temporarily drugged or reduced through the importation of cheap foreign goods.
And again, there's nothing wrong with free trade.
There's nothing wrong with cheap foreign goods.
It's just that when it is subsidized and enacted through massive government selling of securities, then it's artificial, right?
That's really, really bad.
So, the pressure to drive down prices.
So, when you look at economic policies as a whole since the 1970s, you can best understand them as counter-inflationary strategies designed to mask Real wage stagnation and decline.
Everybody knows that it's harder to get ahead and we feel like we're stalled or we're falling back or we're just, you know, we're running to stand still, so to speak.
And this reality has been masked through a number of things.
Obviously through debt, through the provision of government services, through the predation on future generations.
So when your real wages decline, if the government borrows money and provides services, then it masks that decline.
So a lot of it is going on to just help people to feel like they're actually making money or even standing still, when in most cases they're actually falling back.
So, for instance, as housing prices increased, the government loosened regulatory restrictions and provided loan guarantees to higher risk borrowers to draw more people into the housing market.
Of course, that's good for the government, which makes money on housing purchases.
But again, it's just a way of masking the problems that are occurring with the decline in real wages.
So make housing more accessible to people, even those who can't afford it, masks the fact that they can't, in fact, afford it.
Where if they really understood that, they would demand real change.
Of course, the government artificially lowers and manipulates interest rates all the time.
And of course, when there's a greater demand for capital, for capital loans, then obviously, like any demand, drives up the price.
So when more people want to borrow money, the price of that money goes up, just like any other good.
When the price of money goes up, which is interest rates, Then fewer people can afford to take out loans and it limits the risk within the system.
However, when the government both stimulates demand by printing lots of money and artificially lowers the interest rates, then that fuse, so to speak, is bypassed.
And the signals that the market should be receiving in terms of higher interest rates because of greater demand, those signals are destroyed through government control of interest rates and currency.
And therefore people can just get loans who shouldn't be getting those loans.
So of course that's a big problem.
So, to offset the problem, the government provided more insurance for risky loans.
Because when the government breaks the price mechanism of interest rates, then people don't know who to lend to, and they just tend to become very conservative, or they look for other markers or indicators.
But, of course, the government wanted to keep the economy going and to give people the impression that their wages weren't declining.
So all it did was it said to insurance companies and to mortgage companies and to banks, it said, hey, you know, we'll underwrite these risky loans and give you either implicit or explicit bailout promises.
So what happens is bad loans begin to permeate the economic system.
Loans which should not be provided because of a drop in real wages, because of shaky credit history, because of uncertain job prospects, and of course because the decline in wages is only going to continue.
So even if somebody can afford the mortgage now, they might not be able to in a year or two.
So you get a huge amount of bad loans.
Well, these bad loans were bundled up and sold in financial markets around the world as, you know, ironclad securities.
And people aren't stupid.
They knew that these were risky loans, but they bought them because they were guaranteed either implicitly or explicitly by the United States government.
And, of course, the precedent of the S&L, the savings and loan bailout in the 80s, had been set.
So people were convinced, and not wrongly, that the US government would act to bail out.
It's about as secure as you can get is coerced money from the taxpayer, right?
So when these loans began to collapse, These bad mortgages, bad loans, began to collapse.
Foreign bondholders pressured their own governments for bailouts.
Of course, these governments, which hold a huge amount of U.S. national debt, threatened to call in their U.S. debts or stop lending money to the U.S. government.
And, of course, to save itself, the U.S. throws, as it always does, as all governments do, it threw the taxpayers in the fire and said, you know, we'll screw the taxpayers and give you your money.
So, don't call in your loans and don't stop lending us money.
It's just another shakedown operation.
It's just a massive clan of Mafia gangs.
So, the endgame.
Now, this is going to trouble some people.
This, again, it's all my opinion, right?
So, this is useful if you find it useful kind of thing.
But people think there's this big sinister cabal that's going on.
I don't really believe that.
And this has precedence, right?
So in any late empire scenario, there comes a time when the financial predation of the general population will not outlast The current careers of the thieves, right?
So we've got this massive growth in predation upon the taxpayers.
At some point, it's not going to outlast the careers of the thieves, right?
So when you get into a big, chunky government power, you're like 55 or whatever.
You want to retire at 65.
So when it turns out that the current level of predation won't outlast your career, then people grab...
What they can as quickly as they can.
It's sort of like, you know, the Indiana Jones scenario.
He's going through the treasure cave and inspecting things slowly and taking things carefully.
But, of course, when the trap is triggered and the big stone door begins to close, then he's just going to grab whatever he can and try and make it out and grab his hat as he exits, right?
When the window of theft goes below the length of the careers of those who are currently stealing, it ends up being shortened enormously rapidly because there's this massive feeding frenzy.
There's just shark attack, blood in the water, grab whatever you can because the whole system's coming down.
So there's an ever-increasing predation of the public purse.
And all government policies become designed to pillage as much as possible from a failing system.
So this public predation, let's take an example, right?
So some people have called the invasion of Iraq the Rashomon War, based on a Japanese play where everybody has a different story about a theft in the woods, because of the multiplicity of motives.
Like, people just make up stuff, right?
Well, it wasn't about oil or democracy or bringing peace to the Middle East or avenging the Gulf War or because they didn't like guys with mustaches.
Anything like that had nothing to do with that.
All the people who said, oh, it's about controlling the oil, it's like, well, they haven't even taken any oil.
It's not about that. We simply look at what happens in war.
It was about stealing from the public.
The real targets of the war in Iraq are not the Iraqis.
They are, sadly, innocent bystanders, and it's not the American soldiers who are less than innocent bystanders, but the real target of the Iraq war is the public purse, because that's what always happens in war, is people make billions and billions and billions of dollars from war.
A government under the free market Republicans has grown 40% over the past seven years.
It's all about stealing from the public purse, not about the provision of services, not about giving drugs to the elderly.
It's just, you know, what bullshit do I have to tell you in order for you to not punch me when I steal your money, right?
This escalating but hidden predation was also the reason for the, quote, sudden collapse of the Soviet Union.
It was not seen in advance because this massive shark attack feeding frenzy that was going on underground was not visible until the whole structure collapsed.
The same thing is occurring to the United States.
So what happens now?
Well, look, first of all, I mean, you see people say, oh, write to your congressman and tell him to stop.
I mean, come on. This whole system just has to play out.
I mean, it's been almost 100 years since the income tax and the Fed was created, so...
This ain't going to go away.
This ain't going to stop. This truck is like barreling down a hill and there's nothing that can be done to stop it at the moment.
The logic of the violence of the system, the violence of state control of currency and state control of banking regulations and the violence of state control of interest rates, it's just going to have to play out.
Nothing that we can do. This cancer metastasized decades ago.
There's absolutely nothing that can be done to stop the progress of what is occurring now.
Current orgy of state predation will just inevitably escalate to bankruptcy.
It was about three years ago. I said it was five to fifteen years that we had, fifteen on the very outside, and it's a little quicker than that.
But, you know, it's also not going to happen tomorrow, right?
Bankruptcy is the only solution for the system.
There's no way to stop it at the moment.
Everybody's grabbing, everyone's panicking, and the problem of the commons, the blood-drenched problem of the commons, is going to have to work itself out to conclusion.
But, you know, this is not Germany in 1920.
Fascism will not result from the fiscal collapse of the existing state.
So, the government runs out of money.
What happens? So employees just change jobs.
Instead of working for the government, you go get a job in the private sector.
People don't die in a financial collapse.
Buildings do not fall down.
Factories do not explode.
California does not fall into the sea.
It is not a war.
It is not a famine.
It is not a plague.
Capital and resources will go through a wrenching reallocation.
That much is certainly true. It's painful and it's difficult economically and so on.
But, as I said, no war, no famine, no plague.
Yeah, it's a difficult transition, but it holds great promise.
If we can help the general population to understand that violence, the organized institutionalized violence of the state will always cause these disasters, well, that's good for the cause of liberty and voluntarism, isn't it?
I mean, we never thought that the government was going to be painlessly erased, did we?
Well, of course not. But as long as we can get people to understand that it is coercion that causes these problems, not voluntarism.
I mean, the amazing thing is, just before we move on to the next slide, it's truly an amazing thing, that The same government that people deride and hold in contempt for the invasion of Iraq or its, you know, myriad incompetencies and brutalities for Abu Ghraib and so on, this is the same institution, the same institution that has, what, a 400 billion dollar debt and a multi-trillion dollar, sorry, 400 billion dollar deficit, multi-trillion dollar debt?
This is the same institution that we believe is the port of last resort.
For financially irresponsible, quote, irresponsible institutions, right?
I mean, this is like saying that we solve the problem of petty crime by creating a massive and well-funded mafia.
So the idea that these financial institutions, which are all just playing in the sandbox created by the state, that these financial institutions have been, quote, acting badly or being greedy, and therefore we should give them to the biggest predator of all, the most greedy, vile, and destructive institution the world has ever seen, um... The government.
It's completely ridiculous, of course.
But, look, civilization is not going to collapse.
Your food supply is not going to cease to exist.
The Nazis will not come to power.
The Soviet Union was much more poor, much more corrupt, had no history of democracy, had no internet, none of the communication abilities that are available now.
Society didn't stop. Yes, it was a tough transition, but...
They were coming out of 70 years of communism.
That's a very, very different situation than an advanced economy like the American economy.
Yeah, a lot of government employees are going to have to get real jobs.
It's going to be tough, but that's going to immediately cause the economy to turn around.
I mean, it's like having some deadbeat guy who eats up all your food and uses up all your internet bandwidth and pees on your rug suddenly going and getting a job and contributing to the income.
Of course, instead of paying for his damage, you will then be receiving a rent check I mean, that's going to turn your economy around.
Getting people out of the public sector into the private sector is going to be a huge boost to the economy.
And, of course, there will be the general emotional panic that always occurs during the collapse of a dominant and corrupt ideology.
That, obviously, we have to watch out for, but we can do a lot to help that.
The opportunities for communicating about freedom and voluntarism, the free market, the beauty and value of unimpeded voluntary economic trade, Look, people as a whole, society as a whole, are only going to begin to look for new answers when the old answers, the fake answers, the lies, absolutely collapse.
The opportunity for a new and rational philosophy to take the place of a corrupt and irrational ideology only arises when the disasters of irrationality, the disasters of coercion, of violence, of centralized monopolistic coercion, when those become clear, well, then people will look for a new answer.
In order to embark upon fundamental change, societies like people just almost always have to hit rock bottom.
We would love it if the alcoholic would voluntarily stop, but this is like three minutes before the credits of leaving Las Vegas.
He's not going to turn around and become a marathon runner.
Societies like people who are addicted to corrupt and evil things have to hit rock bottom.
We just have to be there to tell people what's actually going on.
The key is to be there with a better direction, to help people understand that it was fascism, state control of the economy, not freedom that failed.
It was violence that failed.
It was coercion that failed.
It was brutality that failed.
It was not freedom that failed, because otherwise people would be tempted to escalate the cause to solve the symptom.
Well, thank you so much for watching.
Free Domain Radio, a wide variety of materials available to help people understand what is really going on.
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There are also great materials available at Mises.org if you prefer, you know, the purely economic approach to these issues.
I think that's wonderful too.
So thank you so much for watching.
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Don't waste your life in fear.
Yes, there's going to be a change.
Yes, it's going to be difficult. But, you know, we have the longest life spans in history.
We have the most amazing technology in history.
We can have these kinds of conversations.
Don't waste your life in fear, particularly of that which you cannot control.
Just work to help people to understand.
That evil, that violence, that coercion, centralized, organized brutality will always result in these disasters so that we can begin to loosen the shackles around the necks of the people rather than attempt to free them by weighing them down even further.
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