Wednesday, July 6, 2011

Running Out of Other People's Money

"Socialist governments traditionally do make a financial mess. They always run out of other people's money." - Margaret Thatcher (1976).

The more you are given for free, the more you expect. It is human nature. If you work hard for what you have, you appreciate it more.

The notion that Government will supply all your needs has been with us since governments came into being. Politicians cannot help but promise things they cannot legitimately produce in order to stay in power. The people believe them, ask no questions, take the goodies and vote them back in.

But democracy has its limits. Here are a useful couple of quotes about the downward progression of democratic government.
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. 
Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage (sources unknown).
Most western countries may be in this spiral from democracy and freedom to bondage. A scary thought. But it is a pattern with historical precedent. Debt will cause bondage. To be in debt means that someone else owns your possessions and may even own 'you'. There is a tipping point where we suddenly lose freedom.

As Margaret Thatcher said, this will occur when we run out of other people's money. Moreover, we will run out of true value money if we keep printing it.

The US debt is now 46% of the total budget. A debt nearing $2 trillion. Studies have stated that when 41% is reached, hyperinflation has always occurred. It is only a matter of time now.

The more government intervention we have the more our financial problems seem to escalate. If 'to big to fails' had been allowed to fail, we may well be on the way to recovery after 5 years of pain. But government chose to print more debt to cover the bad debt. The debt in the system still needs to be flushed out. Now it is worse.

Yes, there were enormous flows of cash coming out of the banks in September 2008, something like $5 trillion in a few hours, but where would we be now if those TBTFs had been allowed to mark down their balance sheets to true value and start afresh. Learning from their mistakes. Banning credit default swaps for example?

Intervention is expected; 53% of Americans, the land of liberty and freedom, expect the government to provide help for those in mortgage difficulty. Another 16% said the government should be doing less overall. The figures aren't in for New Zealand, but they could be similar. The expectation of cradle to grave social welfare is alive here.

But the West is borrowing to pay for social welfare and other entitlements. There is no production now or in the future that will cover this debt. It is too large.

We have already run out of other people's money.

Gold in New Zealand dollars: $1830.69 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $42.76 per oz
Previous all time high: $48.58
per oz
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The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001
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