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Socialism Coming Back To Haunt U.S.

Socialism Coming Back To Haunt U.S.

America is more than a country; it is the ideal of liberty. In economic terms, liberty translates into the entrepreneurial spirit of hard work, risk taking and self-reliance. And this spirit has made America rich beyond compare.

Unfortunately, over the past four decades, much has been undone. Under the guise of a new, “social??? justice, political leaders have turned our native ethics upside down. Profit-taking is now seen as gouging; success is greed; businessmen are predators. This creeping socialist transformation of our culture has finally broken the back of the American economy.

The definitive fork in the road occurred in August 1971, when President Nixon ended the U.S. dollar’s link to gold. The move allowed the U.S. government to issue money without the restraint imposed by gold-backed currency. For most countries, this would have unleashed a wave of monetary inflation and, consequently, skyrocketing prices. But, since the dollar remained the world’s reserve currency, foreign central banks were compelled to subsidize U.S. expenditure, and our inflation was exported overseas.

With global funding secured, Congress offered increasingly generous entitlements to an increasingly dependent population. This has resulted in the decay of America’s productive sectors and a massive depletion of accumulated wealth. Now, socialist America subsists on the whims of the capitalist powers of the East. American consumption is dependent on loans from nations who just 40 years ago were economic afterthoughts.

Rather than dissipating their wealth through spending and borrowing, these economies have undertaken the difficult work of wealth creation. Though nominally Communist, China has become an intensely pragmatic state. While Americans have grown complacent about their liberty, China has quietly, but with determination, expanded economic liberty: courts are becoming more efficient, land reform has introduced private ownership, and obstacles to entrepreneurship are decreasing.

Many countries, such as China and Japan, which export massively to the United States, resist converting their U.S. dollar surpluses into domestic currencies. They fear that, in doing so, they will force up their own currency relative to the U.S. dollar, making their exports less competitive. Therefore, they invest the bulk of their surpluses in “secure??? U.S. Treasury bonds, satisfying America’s appetite for imports and entitlements.

But this logic is economically flawed. Through their actions, Asian governments are transferring their citizens’ wealth to the United States. When a Chinese business exports to the U.S., the dollars earned are exchanged in a Chinese bank for local currency. Those dollars are then recycled by the Chinese Central Bank to buy U.S. Treasuries. America then creates more dollars (inflation) so that it can redeem those outstanding Treasuries. This mechanism props up the dollar and holds down the RMB. As a result, the Chinese are poorer and America richer. Unfortunately, many Asian governments are still too collectivist to cease robbing their citizens. If they would do so tomorrow, America would feel the full effects of years of federal profligacy at once.

What happens when half a century of socialism catches up with the “shining city on a hill???? Start with America losing its Triple-A credit rating, then the dollar free-falling, then interest rates rising into double-digits as a last-ditch effort to restore faith, which may lead to civil unrest — and certainly widespread misery.

Already the credibility of the U.S. dollar is being questioned by producer states. Any loss of its privileged “reserve??? status would result in rapid diversification out of the U.S. dollar and U.S. Treasuries. In short order, the inflation gingerly spread around the world by the U.S. government would come back home to roost.

The outlook for the U.S. economy appears increasingly bleak. The final window for self-imposed reform has been forsaken, as both Democrats and Republicans have chosen to magnify the mistakes of the past. Huge investment losses experienced by investors worldwide may have forever tarnished the luster of U.S. stocks. Meanwhile, the threat of inflation and bank failure has discouraged domestic savings. Americans looking to preserve their wealth are turning to precious metals, commodities, and foreign shares denominated in the currencies of surplus countries.

Even in its most successful incarnations, socialism is a drag on a successful market economy. The U.S. has been able to have socialist entitlements within a relatively free-market only because the costs were borne by foreigners. But as the global economy strains under increasing weight, look for those funders to begin tending their own gardens.

This U.S. economy is now a runaway train, and anyone who has the courage to look out the window will likely want off. Short of the imposition of U.S. exchange controls (as during the last depression), American investment funds will flow toward countries that fuel their economies with America’s depleted resource: liberty.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s latest book “The Little Book of Bull Moves in Bear Markets”.

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