What lack of confidence in our Government... I thought we are entering an era of change?!

I sincerely hope you are wrong, although you eloquently and most simply described THE problem...

I am hoping interest rates will rise, IN TIME, but trading is not based on hopes.

Thanks as usual for your opinions!

I think that money spent on public education is a large part of the problem. Obviously not quality -- high school graduates are lucky if they can read and write. What students are being taught is to be PC and that the government can solve all problems.

More money = higher salaries, benefits, and retirements for teachers. The makes an eventual solution to economic problems even less likely.

Eliminating public education would be a good start on a solution.

its hard to argue that anything the government does is effective. my statement is heavily couched as the least of all evils. i was thinking more of making sure kids who deserve to go to college have the money for it. also, they might as well go to college for four years rather than be unemployed.

Mr Practical - thanks for the insight, and unfortunately I'm of the mind that things are going to get a lot worse as well. My question is, how does this slow destruction of our currency tie in with the short-term danger of deflation? As we've seen recently the dollar has strengthened bringing about asset deflation, and it's been warned on here (as well as other places) that the deflation is going to be a major theme for 2009. Can we assume that this is going to be something along the lines of deflation followed by hyper-inflation as the money helicopter tries desperately to re-inflate the currency? I've been hesitant to pick up tangible assets (gold/silver) due to the risk of deflation, but if what you're projecting is a whole-sale return of inflation (as defined by the declining purchasing power of the USD), should we be investing in hard assets (gold, silver, 7.62mm bullets, etc)?

I have utmost respect for you. One question. Couple weeks ago you said you thought gold would fall into the 600's and be a good buy as deflation continues this year. In this article it seems to me you are talking about the imminent destruction of our currency. Obviously these two cannot coexist.

Can I just request a clarification - am I mixing up your expected time frame? Or has your opinion changed due to a new data point (which I certainly respect).

In reality, the government is being told by its population to "do something to fix this." Most people don't wish to take the time and expend the energy to become informed and aware of the problems facing us.

It's so much easier to point to our leaders and say "Do Something."

We here at Minyanville forget that we are not average citizens but are in fact just the opposite. We take the time to read and learn and then form opinions.

The vast majority simply form opinions, usually without learning anything except what they heard on the idiot box. If it takes more than 30 seconds, the eyes glaze over and the mind wanders.

Things will not get better until we, the people, insist that we no longer want more of the same. I like to say that we the people must lead and eventually our leaders will follow.

Your article is theoreticaly correct and what you state should eventually be woven into long term Gov/banking policy. Having said that I will state your view is WRONG today. No one is happyabout the Gov spending and even Obama has acknowledged this. BUT their are people out there right now without jobs and need to feed their families. The stimulus can create jobs and I will argue this country's infrastructure, health care and energy policy does need a stimulous. If say stimulus is used to make all government buildings use 30% less energy. Is that not a good long term financial plan? If the stimulous is used to cut health care expenses such as electronic record keeping. Is that not a good long term plan? If stimulous is used to encourage companies to invest in green tech creating green collar jobs. Is that not good for the country's long term energy policy? If you raise rates and encourage peopl to save RIGHT NOW! What the heck do you think is going to happen NOW? I can't save if I am unemployed can I? Now if economy gets moving again I totally concur their needs to be a balance of saving and spending which is why we are where we ar at right now. But it's too late to be making this argument now. People need to feed and clothe TODAY the kids you speak of for the future. The tricky part will be once economy does turn around. Implementing your ideas...

Why is it that so many feel that we can't have the worst of both worlds at the same time, deflation of certain assets as well as inflation? It's called stagflation.

I always thought inflation was an increase in the money supply without the same increase in the economy or GDP. Rising prices is just a symptom of inflation.

I'm old enough to remember this happening in the 70's. Some asset prices were dropping or at best holding steady. Other prices were going through the roof.

I'm so tied of this "deflation is the boggy man" drum beat coming from the (financial) mass media.

I understood your intent. Unfortunately the track record for public education is clear. Teachers unions are powerful and their interest is the teachers, not the students.

Realistically nothing is likely to be reversed, trend-wise, until things get much worse... and even then the govt will likely use the situation to grab even more power.

I believe Mr P said that IF gold falls to $600, because of the deflation, it would be a bargain... but has also cautioned, in the past, that timing is tricky.

While I agree that interest rates need to rise and that the bailouts and stimulus packages are fundamentally short-sighted and foolish I don't think you go far enough with your analysis.

The place to start in thinking about this problem is the huge national debt but the very next place is the huge, continuing, annual balance of trade deficit. Everyone acknowledges that this is unsustainable but I can't for the life of me see how its being addressed by any of the government stimulus proposals.

We as a nation, in this global economy, have to figure out how to produce goods and services, in sufficient quantities and at a competitive price, that will allow us to pay down the debt instead of standing by while it perpetually increases.

This new, end of history, paradigm where other countries produce and we consume (on credit) is ridiculous!

This of course means that wages in foreign countries must rise and that wages in the United States must decrease...dramatically!

Try to find a politicain with the courage to tell the public that the American Way of Life is not sustainable though. The very Way of Life that our soldiers have killed and died for. The standard of living that caused us to make a mockery of our supposed principles of human rights, freedom and democracy by propping up dictatorships around the world.

We are far too arrogant and self-satisfied to listen even if this mythical leader were to appear.

No, this will not end pretty.

We are mice who know they have to bell the cat.

Personally I simply do not see how it can be done.

Of course, if the "cat" is not "belled" a variety of unpleasant results are inevitable. Other unpleasant results become likely.

The writer Robert A. Heinlein wrote a number of essays about vitally needed changes. Foremost was the need to limit the suffrage to those with the will and imagination to be concerned about the future. He hoped this would make possible adding a bit of political "enlightenment" to "self interest".

Heinlein, as he grew older, saw a soon arriving future where the USA had fragmented into smaller countries. He held the most hope for an (as Machiavelli used the term) "aristocratic" (as opposed to "oligarchic") model which Heinlein called a "well run tyranny".

A more serious and insightful author of stories set in the future was Heinlein's near contemporary Cyril M. Kornbluth. Kornbluth was more interested in the weaker aspects of human nature than was Heinlein (Kornbluth had worked in the advertising industry) and built his stories around human groupthink, herd behavior, and disastrous self delusion. (For obvious reasons Kornbluth's popularity never equaled Heinlein's. Self knowledge is a bitter dish.)

The Ancients, including Plato and Aristotle, having watched thousands of political entities, states, come and go, believed Democracy inevitably was followed by Tyranny. We are watching this happen today.

The masses vote as herds for politicians who understand them. A tipping point occurs and the situation becomes irretrievable. As an optimist I hope that this "tipping point" has not already occurred but as I realist I think it has.

That is a truly idiotic idea (getting rid of public education).

No major industrial nation has found a way to do without publicly funded education.

No nation has achieved first class economic status without P.F.E.

Every nation aspiring to transition to first class economic status spends significant money on P.F.E.

The current system has problems but they will not be solved by blaming the teacher's unions. I would say for every problem induced by the unions there are two induced by the Club for Growth types and one hundred induced by don't-give-a-curse parents.

The government instituted Social Security to reduce poverty among seniors, and poverty among seniors has fallen dramatically.

The government started the Tennessee Valley Authority to provide power to rural areas, and those rural areas now have power.

The government decided to go the Moon, and we made it in less than a decade.

Don't get me started about the guys who landed on Omaha Beach on a miserable overcast day in 1944. They, collectively, turned out to be extraordinarily effective.

You may argue that private enterprise would have done those things more efficiently. The obvious response is that private enterprise did not do those things at all, because the profit motive did not exist. Capitalism is a useful tool but it is not a panacea. Government is very often far, far, far more effective than the alternative.

Having read both Heinlein and Kornbluth, I would consider both to be seriously limited in their knowledge of the human species. As SF writers (albeit superior ones), they tended to value technological solutions over all else. Neither could have conceived of a hero in the vein of, e.g., Falstaff or Samwise Gamgee. They are not useful guides to serious political analysis.

"who deserve to go to college have the money for it."

That is part of the problem, about 1/2 of the kids in college shouldn't be there, so we really don't need more money for that.

"This of course means that wages in foreign countries must rise and that wages in the United States must decrease...dramatically! "

Or in other words, the value of the dollar has to decrease dramatically.

First, hello Dean. I respectfully disagree with your stance in praise of government's efficacity. As usual.

That said, you'd think I should be in agreement with Mr. P's thesis, that government is currently in over-reach mode - and I am. However, when I see a call for cuts in spending and taxes of 95%... I have to offer a respectful demurral - that's too much, by a factor of 3 to 5 times.

It is, after all, possible to take a good idea too far. Call me a Reform Libertarian.

-30-

The government started Social Security because it said that people were not smart enough to save for their own retirement. It made SS mandatory, collected money, and then spent it as fast as it was received (Madoff is a piker by comparison, but then he couldn't make it legal or mandatory). If Social Security survives it will be at the expense of impoverished future generations. As opposed to private debt, public debt is an enheritance by the unwilling.

If the TVA had not been created either folks would have moved someplace that was inhabitable or they would have created a marketplace for private endeavor (gee, it worked everywhere else - why not Tennessee?).

In private industry if something isn't profitable it is called waste or inefficiency. In the public sector it is called pork.... and somebody else pays for the waste and inefficiency.

Greatness on a national level is not achieved through inefficiency and waste. Economy 101.

The half that shouldn't be there are the ones that shouldn't have even gratuated from high school. Passing grades are given to anybody who doesn't officially drop out.

Well I didn't have money for college either (I ran out of cash after the 1st semester) so I joined the Air Force and went back later when my company paid for some of the costs that the GI Bill didn't. Another company later paid all the costs for my MBA at Pepperdine. Hard work and assistance from employers who value education are a good alternative to government spending.

In my case, low interest rates are a huge bonus and allow me to pay more principal then ever on my loans. I live in Canada, and I went with a variable rate mortgage (over the long term variable is ALWAYS cheaper as I will soon illustrate), my student loans are also variable rate (not by choice, our government did something smart here), and I'm now paying 2.65% (prime - .85) for my mortgage, and unbelievably low rates for my student loans. My monthly mortgage payment has never been cheaper so I'm taking that excess money to pay down my other debts.

The point being is my mindset - I am a saver (wasn't always, so I'm in a bit of a hole now). And therein lies the problem with the economy - easy access to super cheap credit due to too much economic liberty (read: financial deregulation). It's just too easy to get into debt, people have the “keep up with the Joneses” mindset which needs to change. Government deregulation of credit markets and artificially low rates are definitely to blame for this. If you give someone enough rope, they will hang themselves.

I think the following allowed debt instruments are absurd and should be banned:

- car loans longer than 5 years at any interest rate (if you can't afford the payment over 5 years, then you can't afford the car)
- interest only mortgages (danger Will Rogers, danger)
- ARMs (how did anyone get involved in this scam?)
- mortgages longer than 25 years (again, if you can't afford the payment over 25 years, then you can't afford the house)
- 0 down for mortgages (if you can't even cough up a 5% – 10% down payment, then you can't afford the house)
- credit for big ticket electronics (once more now, if you don't have the cash for that $2500 big screen TV, then you can't afford it, save up and buy it in a few months, or don't buy it at all)

I do have to agree that although low rates are really allowing me to bite into my debt, higher rates would promote saving and kill off cheap credit, which would facilitate the real solution: debt reduction by business, the consumer and government. And of course, stricter fiscal policy regarding lending practices as mentioned above.

I find it amusing that you see Falstaff as a "hero". Shakespeare was musing about human nature darkly indeed with his fat old poltroon.

With vastly less talent and skill than The Bard I was musing over human nature myself. Nothing to do with "political analysis", at least intentionally.

As far as Machiavelli and the Ancients go, my point of view is that astonishing wisdom survives from earlier times. I think Tolkien would agree.

As for Sam Gamgee, my own "Lord of the Rings" are heavily laden with blue pencil marginallia and underlinings. I find the story of the war of the rings the wisest "musing" on human nature written in English in the Twentieth Century.

As for "technological innovations" used in stories set in the future, I look at them as simple plot devices not to be taken seriously.

deflation is very powerful just for the fact that it should be given the debt levels. if government got out of the way it would cycle through much more quickly. but they wont. so it will be long and drawn out. hyperinflation only the govt knows if they will go that far.

no its a matter of timing. i cant crystallize that. deflation carries all prices lower. gold will be hedge in hyperinflation if govt chooses to totally destroy currency. i have written on this in past.

that's called revolution and you may be right.

does the tail wag the dog? we had our chances. when you go to war do you put your children on the front lines or do you protect them as our progeny? i am afraid my friend it has gotten to that point.

you are correct, there is both rising prices and falling prices and we all get involved in labels. falling prices are actually good for the masses if they have no debt (why i advised debt reduction long ago).

agree but would add this...productivity isn't decreed or does it begin at the national level. it begins grass roots, company by company, person by person. that is entrepreneurship. the government is not involved in that process.

Time Enough for Love...one of my favorites.

i stand corrected....i meant federal government.

"the government is not involved in that process."

Well, after spending the last couple of decades watching our manufacturing base being shipped overseas and our balance of trade escalate accordingly the government better dang well get involved in the process!

This country has been sold out from under us while we were all passed out in a consumption based stupor. It is well past time that we woke up and the government should either lead, follow or be put the heck out of the way!

I guess all in due time. Our current 'leadership' is too busy telling us what we want to hear and most of us are too busy looking for scapegoats...

or trying to get ready for the coming feeding frenzy at the giant banquet of borrowed money the government is preparing for us.

I don't believe in inevitability regarding the human condition, but perhaps it's moot given our leaders actions the past few years... so what comes after tyranny?

Seems to be a common thread that things need to get worse before real change can happen and for change to occur it has to be bottom up not dictated down. This is something I talk endlessly to my kids about, change happens not because of some consensus disseminated by those in the know, but by individuals making choices that they personaly believe are correct based upon a fundamental belief or moral reason. It is the cumulative effect of these choices that collectively brings about change. So to me the root cause of change, or lack thereof, is our own choices. So if you really think things need to get worse before they get better, what you are really saying is that too many people don't yet understand what is happening and they are making bad choices or their choices are being manipulated. Shouldn't we be trying to get them the information necessary to make better choices.

If someone asked me what is the one thing you are most sure of - it would be that governments allocate resources inefficiently. So why do we let them do it? It doesn't attract cougars at cocktail hour but it's my choice, and one I try to pass on.

WRT Social Security, my point was that poverty was reduced. The program was therefore effective. Cost-effective is another question.

WRT TVA, I think you are woefully ignorant of history.

WRT to the perfect allocation of resources by private enterprise - I have worked for private enterprises my entire life, and you must be joking. To cite just one example: the free market at one point valued the stock of AOL so highly that they merged as equals with Time Warner. The mind boggles....

Capital is very often misallocated grossly without the meddling hand of government in sight. Waste and inefficiency are tolerated in private enterprise for all sorts of reasons. It may be worse on average in government but that is not the same as 100% superiority.

And, I notice you didn't touch the one about the boys in the 29th Infantry on D-Day. If you had I've have directed you to Niccolò Machiavelli regarding the inferiority of mercenaries. Anyone who's served can tell you stories of the sometimes incredible stupidity of the military. But in the aggregate, they achieve ends that no private organization does.

Lazarus Long was one of Heinlein's better efforts at writing the Wise Old Man character (i.e., his idealized version of himself). A lot of fun....

The government influences the decisions of the entrepreneurs in many ways. Taxes, infrastructure, education of the citizens, regulations - all play a part.

A human being can starve to death in a week or two. This crisis will last much longer than that.

Rather than starve (or watch their children starve) people will resort to violence. That is very bad for the economy short and long term.

Waiting for the economic cycle to play out without consideration of these factors is national suicide. We are much better off throwing money at the problem than we are dealing with starving rioters.

Falstaff is intended as a deeply flawed hero. Gluttonous, cowardly, dishonest, and all that; read or watch him in a play, and then tell me you don't like the . Recall the story that Elizabeth I liked the "globe of sinful continents" so well that she commissioned Shakespeare to write another play centered on him, resulting in MWoW.

Which is exactly my point; the authors you cited lack the necessary understanding of human nature to create a hero who is not a good libertarian individualist. Unlike Sir John and the noble Sam.

Poverty reduced until future generations bear the consequences... Madoff hoped to be dead when his scheme came to an abrupt end, but somebodys' kids won't be that lucky. Whether Ponzi, Madoff, or the government the bills must be paid by someone or defaulted. Ponzi and Madoff suckered volunteers. The govt doesn't need volunteers.

The whole point about efficiency and waste is that until the government gets involved those who can't compete sucessfully are eliminated from the marketplace by bankruptcy, acquisition, or new management. When the government fails it takes the successful and unsuccessful alike down the tubes

And the point you deny is that there is inefficiency and waste everywhere, not just in government. Further, the government can (and sometimes does) do things that are cost-effective, but offer a lower return on investment than is available elsewhere. Such as the TVA. If your goal is simply to maximize wealth without any care as to distribution this is bad. If you think helping poor people out even if it requires some less-than-perfectly-optimal use of capital, it isn't so bad. And, as repeated examples throughout history prove, the free market does not efficiently allocate capital. In the short term this is obvious; consider numerous bubbles. Free market enthusiasts believe that in the long term the inefficient allocations are exposed but "no man steps into the same river twice". A huge series of inefficient short term allocations does not miraculously turn into a perfectly optimal solution in the long term. Simulated annealing or genetic algorithms will approximate an ideal solution by a series of random changes to the state of a system - but only if that system is not being changed by outside factors. If it is, then the algorithm is pretty much guaranteed to *not* converge to a good solution.

i just need 1 more trillion man. I promise... look man, just 1 more trillion and I'll clean up. I, look, I promise man... Look, man, we'll spend it on stuff YOU want, man. Yeah... you'll be spendin' it man.. You want another aircraft-carrier?, yeah - that sounds good doesn't it? And, more freeways, yeah man - with thinker concrete for bigger trucks.. Yeah, man, it sounds good, man... You and me, we gotta have it - together.

Apparently you didn't read as far as my second sentence.

Have read and watched Falstaff. He is a man who has thrown away his own honor. One sees men and women of that sort all the time. An example from recent news is Bernie Madoff. A contrasting example of a person of the other sort was Thierry Magon de la Villehuchet. One is uninteresting and vile while the other tragic and human.

The Falstaff character has real possibilities. There is a deep view of human nature expressible. Always ignored, of course, as far as I know. An actor with real insight into Josef Stalin would have the tools for the job.

Tolkien's Gollum is that same sort of man carried to a greater extreme, and a fine character he is. Jackson's movies did all of Tolkien's characters dreadfully badly except for Gollum. Goes to show how show biz people think, what they are, and what they know about.

Anyway, no, I don't like Falstaff, and find him totally unsympathetic. Contrast, say, the more sympathetic Lady MacBeth, who is in the end is not willing to abandon all moral compass, with Falstaff, who has long since decided to have none. Again, one is tragic and the other is of no account.

The Dora segment in "Time Enough For Love" is one of my Heinlein favorites, lyrical, elegiac, and coherent. Well written as Heinlein goes (have read all of Heinlein and always with enjoyment).

Now that I am 62 years old I see the age required to write it. Not at all a young man's story!

The Lazarus Long of "Time Enough For Love" is a quintessential "outsider looking in", deracinated ("pulled up by the roots"), and therefore easy to identify with for others of the same sort, like me, and perhaps you. The easy "rootedness" of Kip Russel in "Have Spacesuit - Will Travel" is forever beyond one's reach.

Perhaps it is merely getting older.

Always read your Minyanville pieces with full attention. Thanks for your kind efforts.

Mr. Practical,

Dead on.

Unfortunately, you are right.

Politicians can't follow the right course of action, they follow the popular course of action, mainly because their sense of self is built upon their popularity versus public service.

I would save if my wage would allow it. I would save more if my taxes and health insurance premiums weren't so huge.

As it is, at median income in a median price house (almost exactly) I can barely make ends meet and I am CHEAP (frugal, thrifty?).

I had a smal treatise written but Flash wasn't happy.

Ach!

Regardless, the middle class has been sold down the river. This won't end well and I'm not going to be volunteering to fill sandbags for the likes of Madoff or Frank or Paulson.

Ah Falstaff, ah Shakespeare!

Falstaff was a good foil to those around him who revelled in his faults but whom he also illuminated their own faults.

In other words, he was the everyman that could be (everyperson?).

Both a hero and a fool.

I'm half way through my second reading of the complete works Shakespeare, and it amazes me, astounds me, at how people haven't changed one bit, regardless of technology and industrial revolutions.

From 1946's The Trade Cycle and Credit Expansion- The Economic Consequences of Cheap Money:

Commodity credit is the transfer of savings from the hands of the original saver into those of the entrepreneurs who plan to use these funds in production. The original saver has saved money by not consuming what he could have consumed by spending it for consumption. He transfers purchasing power to the debtor and thus enables the latter to buy these nonconsumed commodities for use in further production. Thus the amount of commodity credit is strictly limited by the amount of saving, i.e., abstention from consumption. <b>Additional credit can only be granted to the extent that additional savings have been accumulated.</b> The whole process does not affect the purchasing power of the monetary unit.

Yes, revolution is exactly what I'm talking about and it's coming. People are waking up to the fact that our leaders don't have their best interest in mind when they make decisions.

It will take some more pain for the real impact to sink in. And the USA government/leaders know this is coming. Otherwise, why would NorthCom (US Army Nothern Command, newly created after 9/11 because the entire world, including USA soil, is now a battlefield) station over 20,000 active duty troops on US soil in the coming year with one of the expressed purposes being to quel social unrest that might come from the recession/depression.

Anyone notice that pistol, rifle and bullet sales are through the roof? As well as emergency food supplies such as MRE's? And there are long lines to purchase gold and silver by the general public?

The government has noticed. And they are preparing.

Shouldn't everyone? Is this subject too crazy to think about? Just look at what has gone down in the world over the past 6 months and tell me anything can still be considered crazy.

Madoff hoped to be dead?

That appears to me to be an argument that Social Security will eventually bankrupt us all because it's a Ponzi scheme. That's a good point against SS but doesn't prove everything the government does is bad. Everyone knows that at some point SS will be changed, and the point of recognition (to borrow from Prof. Depew) is a lot nearer for Medicare.

Like it or not, expect a national health plan similar to the European / Canadian / Japanese examples within a decade. That will effectively 'solve' the Medicare crisis by changing the rules of the game (and, perhaps, also save Ford and General Motors).

For SS, I expect that at some point we'll raise the age at which benefits begin to 75 or 80 and the problem will again be solved.

One reason arms are selling so well is that the NRA told all its members that Obama was going to take their guns, so people are buying before the laws change.

To quote an even older author, "There is nothing new under the sun". Somehow I think The Preacher of Ecclesiastes would recognize Sir John as a type of man he knew and understood.

The NRA is one small reason for the huge increase in gun sales. I have a friend who owns a very sucessful gun shop in Virginia and I asked him about the so called NRA alert.

He estimated that maybe 40% of his very large increase (100% yoy, 2 years running) has come from the NRA alert and that only began a month before the election. In fact, his gun sales started to take off early in 2007, way before Obama, and have accelerated since then.

The fact is that many people are waking up. We here at Minyanville must remind ourselves that we don't represent the average person on the street. We are much better infomred and much more proactive. This is why I regularly talk to non financial people to get a feel of what's really going on out there.

While there isn't panic yet, there is a growing awareness by the average person that something is very wrong.

I've never owned a gun but have been tempted recently. Put me down as part of your survey; I don't know exactly what it is I fear but I fear something.

A Question; What constitutes savings? Money in the bank, money invested in stocks, real estate, 401k's, businesses, etc. Obviously the asset side of our collective balance sheet is way down recently and may continue to go down, but how do you know what is savings and what was simply asset growth and can the still huge wealth in this country offset the debt and does it count for anything?

Thanks,
Joe R

Like it or not? Not.

I lived in Europe quite a few years ago and got a look at national health care.

My wife has life-threatening asthma and I called 911 during an attack... they took her to the nearest hospital and put tubes in her arms for a couple of hours. When I visited her the next morning she was in a room with 5 other patients. The following morning she told me to get her a private room as she hadn't sleep since being admitted -- coughing moaning, etc.

When she was admitted I told the hospital that I had private medical insurance and that I would be paying cash, then be re-imbursed later. I went to the office and asked for a private or semi-private room but was told that the hospital didn't have any -- so I asked how long the wait would be. They said there were no such room in the hospital.

I told the staff that I would have my wife moved to another hospital as soon as I could find one with a vacant private room. They said "Wait a minute" and disappeared into a back office. Five minutes later they trooped out and said "Follow me".

I followed the hospital staff down the hall until they came to a nurses' station. Suddenly they were pusing the nurses and all of their equipment out into the hall and wheeling my wife's bed in! Viola - instant private room!!

That isn't even the scary part. On the thrid morning when I went to visit my wife she made me promise not to let them operate on her. I told her they don't operate on asthma patients. She said no, every time she had gone to say goodbye to somebody who was scheduled to be discharged the next day the following morning they were being wheeled into surgery. The scheme was transparent - an empty bed was loss of revenue, so somebody had to have surgery and occupy the bed.

That was years ago -- I'll bet it has gotten worse since then. Fortunately I was a cash customer - and I had choices. The govt eliminates choices and competition. It comes down to comply or go to jail.

The point isn't that the private market doesn't misallocate capital from time to time. It does. The point is that, absent intervention by the government, the private market punishes those individuals or entities who misallocate their capital.

There is no such check on government misallocation of capital. Theoretically, I suppose, the check is that "we the people" can vote the bums out. In practice, government, irrespective of political parties, has the power to borrow unlimited amounts (so long as our creditor nations are willing to lend) and compel payment of taxes (by force if necessary), and government can then allocate that capital in any way it deems fit. Which tends to be in an inefficient and wasteful manner.

You wrote:

"Falstaff was a good foil to those around him who reveled in his faults but whom he also illuminated their own faults. "

Indeed. Shakespeare built a character of mythic nature with no apparent internal self to "act the foil", as you point out. Individual human nature is most often revealed through opinions held of individuals with some mythic dimension.

Examples "characters with mythic dimensions" might include President Bush, Mr. Obama, the Clintons, Mr. Gingrich, Rush Limbaugh, Al Franken, Tina Fey, Sarah Palin, Paris Hilton, Ann Coulter, JFK, FDR, Herbert Hoover, Clyde Barrow. Frank Hamer, John and Joseph Redman, Joseph John Rochefort.... The list gets more esoteric and personal as I extend it.

I think you could possibly build a real character around Falstaff. Mifune was so convincing in "Yojimbo" because he understood his character's self loathing and misanthropy (amounting to bloodthirsty "just to watch them die" hatred) and sympathized with it. Someone with sufficient insight could do likewise with Falstaff.

For urban /suburban dwellers, the big fear is of the person who might get in your house while you are home, or be in there when you unexpectedly return home in the middle of a burglary, which then turns into a robbery if not worse. The rural homeowner fears the same but KNOWS well that the sheriff is not just 5 minutes away, and that he/she must deal with the problem on their own, hence most are armed in some manner. Gun rights/restrictions arguments also cross into hunter/never hunted areas, but this fight is primarily a distraction, the main issue being that of feeling safe in your own abode. From a very serious gun owner and one-time excellent marksman(can't see both ends of the sights with bi-focals), some proven good advice: do not buy any weapon you are not willing to become a competent user of, you must carefully weigh the inherent trade-off between quick access to your weapon in a fright and the strong possibility that an unintended person(teen or child) will come upon your weapon and find it an irresistible temptation, do not ever point a gun at a person your are not ready and willing to kill and therefore, assume the same of them. I have dreamed that I killed one of my own sons, waking up in a fright at sounds in the middle of the night, which upon my wakening was truly frightening. Be thoughtful about weapons in the home. Gun locks are an excellent 1/2 way measure. Be Safe.

"Savings" are "consumption foregone". Stocks, 401ks, real estate, etc. are not savings. They are speculative (based on how one "sees" the future) intended investments.

Savings occurs when one makes the choice of "not to buy".

"Investment" occurs not when savings are committed but when the return on (and, of course, "of") investment is realized. Without this return the "investment" has actually been consumption. One can see then that savings are either consumed or invested. One can also see that if savings have been zero then investment must have been zero also.

Further, "savings and investment" cannot properly be used to describe paper transactions except as the paperwork transaction results in a real increase of real production. An example would be a Nineteenth Century farmer raising corn with a wooden plow producing corn which the farmer then makes into whiskey which he sells for dollars. Instead of consuming the dollars he saves them until he has enough money to buy a steel plow which allows him to double his production of corn. Buying the plow has proven to be an investment.

Real investment results in an increase of real wealth. Since about 1992 (you can argue earlier, much earlier) we have seen a net decrease in real wealth. This implies a decrease in real investment, that is, investment that provides a real and not paper return, meaning that savings have increasingly gone into consumption.

The economic equation is now a three way. On one side you have economical productivity. In the middle is a pool of measurement. On the other side is consumption. The current outlook is based not on the menage a trois but on some sort of a two sided balance equation. The actual model shows something like this. When production is slow, subsidise it. When consumption is slow, Stimulate it. The way the Federal Reserve and the Treasury lost control of the situation is that they did not realise the pool in the middle was not only expanding currency, but also expanding credit. Credit was like issuing more currency. The current stimulous and bail outs are not working because all they are really doing is catching the money supply up to the actual spending which has already occurred, not contributing to current actual or future growth.

Plato and Aristotle talk about this extensively. They talk about "Democratical man" as being a distinct type that make up democracies becoming displaced by "Tyrannical man" as the democracies deteriorate into licentiousness. Plato was talking about an actual change in the character of the individuals making up the citizenry over time not about abstract political classification. Close reading of the pre-Third Reich materials and Russian materials from the 19th Century will show this change occurring clearly.

Think "In a Democracy, bleat with the sheep; in a Tyranny howl with the wolves."

As the Tyranny collapses (think the death of Stalin and Mao) "Aristocratical man", at least somewhat concerned with honor, duty, honesty, and self restraint (the aristocratic virtues) replace Tyrannical man. Think Khrushchev and Brezhnev. Aristocracy shifts to oligarchy through moral decay, naturally, and Democratical man returns, and so the cycle repeats itself. In Russia these changes are happening very quickly. The Democratical man phase, roughly starting with Yeltsin, is shifting rather rapidly to Tyrannical man. The Russians are under a lot of pressure. We live a carefree life by comparison.

Please accept my apology for an inadequate overview of a very complicated subject. I suggest Plato's "Republic", but caution that Plato had a very subtle and ferocious sense of humor when he aimed at an audience of fools. (This is most of the time. Plato thought everyone else stupid, even Socrates, whom he genuinely liked.) Be careful with Plato. He is amazingly funny but the joke is usually on you. Also, read the whole thing closely. It takes a bit to get into Plato's head as he was maybe as smart as he thought he was.

I do admit, I love the Ben Bernanke Action Figure.

Please pardon the unconventional wisdom. By NO means do I subscribe or recommend. I'm not looking to be ridiculed, but only provide additional food for thought (or fodder if you need more fiber).

But Why Not spend everything you have? You can't take it with you. Surely you can spend more wisely than your children or the government. Right?

If you spend everything you earn, you can be working much later in life. That's a great thing because we need your talents to be productive. Please don't golf 50 hours a week! You could throw your back out that way, Right? Riding lawn mowers are pretty comfortable these days--plus you don't have sit around for that crappy fivesome ahead of you.

We became so wealthy in this country so quickly. Better to not idle so much wealth. We could build generations of customers [for the children!] if we spend it. (I recall Milton Friedman writing something about theft and zero-sum games, so keep that in mind.
$5 lunch at subway = Food + time = GOOD
$5 black at the Sands = $0 - time = BAD)

Be a spender.

But only if Uncle Sam says!

Great article, by the way, as usual.

I humbly suggest that while savings trumps debt/consumerism, it does not save modern societies either. When a country with abundant family farmers industrializes two things happen: 1) it can produce goods and services cheaper than established countries, and 2) the living standard of the farm families that move into the cities goes up. Unfortunately for the first country in this process, the next country in the process develops and undercuts the competiveness of the more developed country. No politician can sell a declining living standard so the government interferes in the economy in some way to try and maintain the living standard. We saw this first in Europe as it was undercut by the new America in the 1900s. Government intervention in the economy, even as far as the war economies of Hitler and Mussolini, tried to maintain the living standards. After WWII, the American economy could not compete with the low wages of Japan and so the US government intervened with deficit financing and low interest rates, and tried to use the US dollars' dominance to maintain the US living standard. And then we saw this still again, as Japan's living standard rose after World War II until it no longer could compete with the new economies of China and other Asian countries. The Japanese government tried massive stimulus and low interest rates but has not been able to maintain the Japanese living standard from its peak. While it is true that Japanese individuals save, this money, for the most part, can not be economically invested in Japan. Japanese goods are over-priced on world markets and its strong currency does not help. It's only short reprieve has been its participation in helping China to export to Europe and the US. Japanese people save instead of consuming, so there is not must help in domestic markets. The core Japanese economy is shrinking, and will continue to do so, until Japanese homeless are as common as American.

In short, there is no way to save the living standard of countries that have developed. Their living standards will fall as they can not compete with developing countries and the less-developed countries' cheaper costs for infrastructure, production and education. The process is not linear and has been hidden by the effects of the world wars which reduced chunks of modern societies to the pre-industrial age, and also hidden by the efforts of governments to mitigate the effects of falling competitiveness.

I like the Japanese culture and people, but I do not see a good result for them, in spite of their savings rate. The ultimate problem is the young new countries with their sharp teeth. Every effort to save ourselves has just added to the world's debt problems.

Thank you. Bill

Implementing a Europe/Canada style health care system would provide some relief for SS as a by-product when we trasition to being less agressive about providing life-extending treatments and organ transplants to those past a certain age.

Was the genesis of SS really in the detrination that people weren't smart enough to save going forward, or just the acknowledgement that up to that point they hadn't done so in sufficient numbers and quantity up to that point for whatever reason?

Also, keep in mind that this was following a bunch of fatal runs on banks in a pre-FDIC environment, so it's possible that many had saved more but had been wiped out when their bank went under.

Sufficient numbers? How about SS spending 100% of 100% of the contributors' money. Madoff pales by comparison. PT Barnum said you can fool some of the people all of the time, all of the people some of the time, but not all of the people all of the time.

The govt just needs to fool 51% of the people and then make it a law. Then the other 49% are doomed along with the duped 51%.

Would you rather choose your own method of savings or another country for retirement?

I wasn't adressing the structure of the SS system, just whether the justification for establishing it was the overall conclusion that people weren't smart enough to save on their own as opposed to recognition that at that time lots of people didn't have enough savings for whatever reason.

I agree that the structure of the system is indistingushable from any other ponzi scheme (aside from the state declaring this particular ponzi to be not just legal but mandatory for almost everyone other than the policy makers themselves), and am personally planning to not need any mopney out of the system in 30 years when I reach retirement age (part of why I read sites like this, in fact....). I don't quite get the relevance of one to the other, in this case though.

Mr. Practical, I have been fascinated by your simple statement, “Savings must match debt. Period.” It has bounced around in my head for several days. If true, then if we took all the non-sovereign debt on the planet and subtracted all the non-sovereign savings on the planet, we would get the amount of excess debt. This debt would have to be eventually liquidated by payments over time, rapid inflation, or bankruptcy of the debtor. In your opinion, how far are we along in this debt reduction process? And do you feel that the debt reduction can be postponed by government action?

Thank you. Bill

Mr Practical, your assertion that there is too much debt begs the question: Why is there too much debt?

I think it is time for the public to be aware of the nature of many of the financial derivatives that have been created for financial gain which promise returns greater than the cost of borrowing. It isn't possible to comprehend the degree to which people have bought in to this kind of illusion which is only now coming into view for everyone to see.

Take a Collateralized Debt Obligation (CDO) as an example:

It is difficult for most people to see that a CDO is just a very exotic use of financial jargon to institute what was known when I was in high school as a chain-letter.

Just look at these essential extracts of the terminology to get the point.

"A CDO investor takes a position in an entity that has defined risk and reward, not directly in the underlying assets."*
In simple terms a buyer of a CDO buys a position in a chain-letter that has no equity position in the underlying assets.

"An investment in a CDO is an investment in the cash flows of the assets, and the promises and mathematical models of this intermediary, rather than a direct investment in the underlying collateral."*
In ordinary language this means that the return on the money to get a position in the chain will come from the money paid by future down-line buyers of the chain-letter and not from any financial return of the underlying assets referred to in the CDO. The underlying assets are merely there to give the perception that there is a relationship of return on assets that doesn't actually exist. The operators of the chain will promise to pay a return equal to that of the underlying assets but this is conditional to the continuation of income from the down-line growth. In order to continue providing the returns to up-line investors (positions in the chain) continued growth is required, and as with all pyramid systems of economics the collapse is inevitable.

It's astounding to my mind that supposed trustworthy and knowledgeable experts of global institutions can be involved in such unethical activities that have been known for decades as unacceptable and illegal practices.

"It's astounding to my mind that supposed trustworthy and knowledgeable experts of global institutions can be involved in such unethical activities"

David, it is much easier to understand why these institutions engaged in this unethical activity if you first understand the depth and origins of the current financial crisis.

What most people seeemingly can't digest is that the sub prime mortgages and all the other pyramid schemes were a reaction to the problem...not the problem itself.

Once you assimilate that a country that borrows over 3 billion dollars every day, just to avoid collapse, cannot survive then it becomes clear that all of the rest of the confusing financial transactions are just the desperate contortions of an animal caught in a trap trying to break free. In the desperation to avoid confronting reality any hair-brained scheme can be made to seem plausible.

We are the alcoholic who wakes up in the morning with a hangover and to avoid the pain gets drunk again rather than confront his alcoholism.

As for the current 'stimulus' plans, ask yourself what is going to happen to the national debt if these plans work and the economy improves resulting in inevitable interest rate increases.

This is ALL just one giant Ponzi scheme and as you state..."the collapse is inevitable".

I think it is apropos to point out that I believe the sub-prime fiasco was the result of the need for an asset base to justify the chain-letter scheme. All that was needed was a sizable asset base for the CDOs with little regard for quality. The asset base is but a small factor in the plan, so the losses there were not considered significant.

Mr. Practical, I have been fascinated by your simple statement, “Savings must match debt. Period.” It has bounced around in my head for several days. If true, then if we took all the non-sovereign debt on the planet and subtracted all the non-sovereign savings on the planet, we would get the amount of excess debt. This debt would have to be eventually liquidated by payments over time, rapid inflation, or bankruptcy of the debtor. In your opinion, how far are we along in this debt reduction process? And do you feel that the debt reduction can be postponed by government action?

Thank you. Bill

P.S. I thought that I had succeeded in posting this yesterday, but it appears that I did not. However, if I accidently posted it twice, I'm sorry

Financing is not as simple as -- "Commodity credit is the transfer of savings from the hands of the original saver into those of the entrepreneurs who plan to use these funds in production. ..."

Money is not a naturally produced substance. It is the result of human agreement and comes into existence in many forms. Credit can be acquired without savings being present. Money is an agreement on values established in a social situation and there are many examples of how this can be done in both constructive and destructive way. The intrinsic values are relative to the values used by the parties in the agreement.

I'd like to add my voice to that of DEAN SIMMONS. There is much for government to do to enhance the effectiveness of financial benefits to society that private enterprise can never initiate.

I've spent much of the last 5 years in China, where you are likely to agree that government plays a big role in economics. The capital results are astounding and unprecedented. The government is constantly involved in such manner as to ensure that development continues.

It is presented as the benefits are shared enough to encourage virtually everyone to strive for the success of the nation and eventually the whole world. It's considered as a win, win process.

The effect is beyond the belief of anyone who hasn't seen it, but I'm sure that everyone is beginning to get a glimpse.

I'm not saying it's the right way but I do say it needs to be seen and understood and some benefit gained from the understanding.

?

I would recommend the following as such a way to understand America's relative condition in the world.

Get out and take a look around.

I think an appropriate time to visit China is in late March and April.

You can fly United from O'Hare International Airport to Shanghai return for $837.90. A small investment for the valuable insight you would gain. If you are willing to experience an economical lifestyle you can have a comfortable subsistence for less than $100 per day. With my experience it can be done for as little as $20 a day in Shanghai or Beijing. Less in other cities.

Well, I have lived a fair portion of my life overseas: Japan, Korea, Philippines (4 years); Europe (6 years); Middle East (4 years).

One of my best friends is from Shanghai - she escaped some years ago - and says that it is better there now as she can visit her family without fear of being detained..... but still chooses to live here for what most would consider obvious reasons.

I thought the issue was what a government can do better than the private sector.

I too have spent many years in various countries, 24 in total.

Rather than having a clear division between government and a private sector, I prefer a good working relationship between government and business.

As for China and America (or other western countries) I can no longer see that there is anything in China to escape from nor anything in America to escape to.

I now avoid America as much as possible and enjoy China instead. I must enter the United States for business purposes but it is no longer the pleasure it was in my younger days and there is nothing in China like the imposition of anti-terrorism that now is an every journey fact of life in North America.

When China has something worthy of terrorist attacks, it will be. They have blown up statues of Buddha, just not in China yet. Islam now goes after Jews, Christians, and Buddhists (3,000 were killed in Thailand last year but not sure of their religions).... eventually Shintoists and Soka Gakkai, I would imagine. Western cultures are prime targets because of liberalism, religion aside. If China becomes more liberal it will no longer be under their radar.

The primary role of govt is the protection of citizens from the use of force. Many people would like protection from the use of force by their own govts. China probably falls in that category.... unless we are speaking of Taiwan.

Sorry Ronald,

My enjoyable years of deep involvement in the daily life of China is too far from what you believe for us to share in meaningful communication.

Glad you like it there!

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