What Happens When the US Defaults on Its Debt?

Cat recently asked:

Now I’m curious… what happens when a country defaults on its debts? Somebody else absorbs the loss, I presume, but then what? What happens to the country?

I agree that economics must be a collision of mathematics and psychology. There are too many human players in the economy for human psychology to be ignored.

This is one area where I would you think you could tell me a thing or two. Haven’t you been in touch with a survivor of Argentina’s debt default? 

Here’s what I see happening. The US Government has, by law, declared the US Dollar to be legal tender for all debts public and private. Where the US to default on its debt, this doesn’t actually change the legal tender status of the US Dollar. Theoretically, the dollar would still be worth something, but I’m sure that a debt default would bring down the entire currency. The reason being that the other nations of the world have been piling into US Dollar denominated debt in order to seek a safe haven during this crisis. US Treasuries are deemed the safest form of this debt for no other reason than the US owns a printing press and can just print all the money it needs to pay off its bonds. 

Were the US Government to default on its Treasury bonds, then the other nations of the world would no longer view the dollar as a safe haven and would instead take their remaining assets out of dollar denominated bonds and instead put them into some other safe-haven: perhaps bonds denominated in Euros or, perhaps, into gold. Who knows where they will put their assets, but an exodus out of the dollar is all but guaranteed. Given that there are trillions of dollars of US Dollar denominated debt that aren’t US Treasuries, you’d see the value of the dollar plunge as these bonds were sold off as investors began fleeing. That would make imports very expensive for Americans; everything from television sets to cars to the oil to run them would surge in value. 

In essence, a default on US Treasuries would spell the end of the value of the dollar. The US Government would probably just try again with a new currency, but suddenly we would no longer be able to expect the rest of the world to loan our government money. That would mean that the government would have to be present itself to investors as a good credit risk and the investors would need to be fairly compensated for the risk they would assume with higher interest rates. Gone would be the days where the Federal Reserve can lower interest rates just because it feels that US economy needs an extra jolt. Interest rates would now be determined by foreign investors. It would spell the end of America as a super power and, for the vast majority of Americans, be the end of acting like a wealthy nation. 

Of course, why would the US ever default on its Treasuries? After all, it owns a printing press. It could theoretically print up some trillion dollar bills and pay off all of its bonds tomorrow. Of course, the US monetary system doesn’t work like that. As I explained in an earlier blog, the US Government has been content to hand the keys to its printing press over to its central bank. So in reality, the Federal Reserve would “monetize” however many US Treasuries it needed to by creating the money to buy them. Either way, the result is the same; money was created out of nothing and given to the US Government. The only difference is that one would appear as a loan from the Federal Reserve whereas the other would be the government printing money outright. 

It won’t take investors long to figure out that there’s really no difference between those two realities. In fact, Japanese economist Akio Mikuni recently told the nation of Japan that they should just write off the value of their US Treasuries because there was no conceivable way that the Americans would ever make them good. So people are starting to wake up to what’s going on. More and more people will awaken to what’s going on the longer Obama and Bernanke continue their campaign of trillion dollar deficits at zero percent interest. As the printing presses run day and night to bail out everyone from Wall Street banks, to automotive companies, to US mortgage holders, people will realize where the money’s coming from.

We will witness the collapse of the US Dollar in our lifetime, and probably within the next decade. It will spell the end of American life as we know it. We will no longer be an empire dictating world events going on halfway around the world, but instead a broke nation hoping to present a good credit risk to foreign investors who might want to  build a factory here. If we’re smart, we will rebuild this nation the same way previous generations did: by making much, spending little, and trying to avoid getting involved in any wars. We will have completed F.A. Hayek’s Road to Serfdom, and we will have to begin the hard work of rebuilding what we once took for granted.

Out of the Mouths of Economists

I read a lot of different perspectives from different angles on the state of our economy. I expect opinions to vary in what I read. In fact, I need the different perspectives to help give me the complete picture, but sometimes what I read is so outlandish that I almost spit my drink out onto my monitor. Case in point is John Mauldin’s recent “Outside the Box” guest column written by Dr. Lacy Hunt and Van Hoisington. 

Rather than expect you to read it, I’ll summarize it for you:

  1. Tax cuts are a better way to stimulate the economy rather than one-off stimulus checks because people are more likely to spend an increase in permanent income rather than a temporary windfall. 
  2. The annual turnover rate of each dollar in circulation (termed velocity by economists) is going to slow down because of deflationary pressures despite Ben Bernanke’s best efforts. 
  3. In prior economic downturns, consumer prices have continued to fall for sometime. Because of this, long-term government bonds have proven to be excellent investments during these deflationary contractions. Since we’ve got a ways to go with ours, go load up on Treasury Bonds.

It was the last suggestion that made me lose my cookies. At first I thought I must have misread the concluding sentence of the column, but when I went back, there it was: “As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.” WHAT!

How on Earth could two people pen an article that starts off talking about how furiously Ben Bernanke is running the printing presses and conclude with ‘go long on bonds’? Aren’t these people educated? Oh wait, I think I see the problem. The article was written by “Dr. Lacy Hunt.” You see, any ignorant person can spout off some bit of economic nonsense, but it takes a PhD in Macroeconomics to really strike gold when it comes to nonsensical statements. As I wrote in my book, “What Do You Mean My Money’s Worthless?” Macroeconomics is a junk science devised by a hack named John Maynard Keynes. To say it’s littered with fallacious concepts is to not understand the nature of the problem; it’s not littered with fallacies, it’s based on them! Should macroeconomists get anything right it’s not because of their economic training, but in spite of it. 

The problem that this article makes is based on the fallacy that the an economy can be understood as a mathematical phenomenon rather than as a psychological one. Don’t get me wrong, I have nothing against mathematical descriptions of complex systems. I got my BS in Chemistry. I can tell you all about them. But the economy is not a buffer solution and Ben Bernanke is not a chemist trying to calculate the right about of acid to add to bring the pH of the solution back from being overly basic.
Economies are simply collections of people and resources. Economics then is a study of how individuals or societies make decisions regarding how to allocate their labor and resources, and how those decisions can be improved. To look at them as impersonally as a chemist monitors a pH electrode is to assume that you can not only understand what’s going on, but can be in control of it. Of course, that’s exactly the illusion that government bureaucrats love, which is why Macroeconomics exists at all.

This article supposes that we in the United States are undergoing an economic crisis similar to the Great Depression or 1872-1894 series of banking panics or Japan’s Lost Decade. Long term government bonds did well in those times, so they should do well now. What seems completely lost on the authors is that, in two of those crises, the currency in question was backed by gold. In all three of these crises, the countries in question were running a trade surplus and were nations made of savers. That is nothing like the crises we are in right now. We are a nation of debtors and we are finding ourselves simply unable to take on any more debt. Into this breech steps our fearless central banker to create all the money anyone would want to spend; arm in arm with the central banker, is our government that, as always, is here to help. It figures it can borrow and spend all the money that the consumers won’t.

It’s ironic, but these economists who seem the US economy as a series of cogs and gears don’t seem to understand the concept of an open system. In chemistry, an open system is free to gain or lose energy from outside. Therefore an open system does not have to reach equilibrium because it can be receiving energy that keeps it constantly out of a state of equilibrium. It is only when the system becomes closed and is no longer able to receive energy from the outside that it must seek an equilibrium and, eventually, cease being dynamic.

These economists are looking at the US as a closed economy where the economy is slow to respond to the printing of money from the central banker. They don’t seem to understand that it is actually an open system receiving a great deal of energy from the outside in the form of continual infusions of goods and services from our trade partners who may want to get paid back someday. Are we to expect that the other nations of the world are just going to continue to loan us money as interest rates hover at zero, the central banker has gone on a printing spree, and our government has dedicated itself to running trillion dollar deficits until moral improves? Do we not expect that some other nation might want to use some of its savings for itself and, should that happen, interest rates will go up and not down. That’s ignoring, of course, the possibility that the United States might simply default on the debt entirely.

Perhaps, instead of comparing our situation to past economic crises, these two should have compared it to the economic collapses that dot the third world? Or perhaps they should have studied Chemistry.

Gold Sounds General Quarters: “All Hands to Battle Stations!”

I’ve never been on a warship, but I’m sure the movies present a perfectly accurate depiction of life aboard ship; then again … maybe not. But, I’m sure they do have a station of combat readiness where all members of the crew assume their stations and prepare for combat. I grew up watching certain Cold War portrayals of US versus Soviet naval vessels in tense situations such as The Bedford Incident (an excellent film, by the way) where two warships were in an emerging conflict with a heightened state of readiness on the parts of both crews. In these types of stories, the sounding of “General Quarters” is made as the ships approach a hostile situation. The fighting hasn’t started yet, but it looks like it might, and it’s time to prepare the ship and the crew for that possibility.

In the financial markets, I feel that gold just sounded “General Quarters” on Friday; The Comex price of an ounce of it rose $37 to close at $895.80. Even more telling, were that yields on the US Government’s 30-year bond rose from 2.87% to 3.31%. As I’ve said in prior blog posts, the Federal Reserve is trying to use its printing press to contain interest rates by creating money and using it to buy bonds across the board. It can’t get too carried away with this practice, though, because it’s very inflationary. The Fed is getting a free pass on inflation right now as the banking system collapses, since the majority of this newly-created money is being put into it. But the banking system is so worried about not being able to meet its cash withdrawal obligations, that they’re not loaning this money back into the economy. Consequentially, Ben has a license to print money — and not have it cause consumer inflation in the short term. Of course, these deflationary pressures will just build up and come roaring back with a vengeance once the money does start circulating. But the fiat money game has always been a short-sighted system. After all, if the currency does go through hyperinflation, they figure they can just start over with a new currency.

Meanwhile, there are some signs we can look for that the deflationary slack is starting to disappear from the system, and inflation is once again about to come roaring back:

  • The price of gold
  • Yields on long-term bonds

In inflationary times, people flee government bonds and go into gold. This causes the price of gold to go up, as well as the yields on bonds, as people demand higher and higher interest rates to compensate them for the inflationary risk being undertaken.

That’s exactly what we witnessed Friday.

Bernanke wants to keep the long-term bond yields as low as possible in an attempt to re-inflate the system. Low long-term bond yield will mean lower mortgage rates — which he hopes will get people buying houses again, as well as borrowing money on the equity they have in their home. However, in order for this to work, investors, particularly foreign, need to be fooled into thinking that inflation is gone from the system and that loaning the government money for 30 years at 3% return or so is a good deal. If they demand a higher yield, then Ben won’t get the lower mortgage rates and, consequently, won’t be able to re-inflate the system.

In other words, if you start to see the price of gold and long-term bond yields moving up, you know that Ben’s attempt is failing.

That’s what happened Friday. The reason I liken it to a “General Quarters” alarm is because the financial shooting war hasn’t started yet. As far as the average investor knows, deflation is still the order of the day, but the situation is starting to get tense. Gold is telling us that enemy warships have been spotted in the area and it’s possible that we may come under attack. Report to combat stations! Clear the gear off the deck, and baton down the hatches!

This situation could get explosive.

I’m expecting to see a sharp rise in gold and long-term bond yields over the next few weeks. No doubt, this will prompt Ben and Obama to ease off of the inflationary rhetoric. We won’t hear any more quotes about trillion dollar deficits for years to come and Ben may have to start talking about raising interest rates. This will spook the stock market and prompt another sharp drop in equity prices. From there going forward, this situation is going to get increasingly desperate and the solutions proposed increasingly weird — although, how anyone can come up with a weirder solution than Bernanke’s idea to create a “bad bank” which would warehouse all of the bad loans made — is beyond me.

Obama’s mettle is going to be tested very early in his administration and we will quickly get to see his true colors. Whether he decides to adopt to reach for the statist tools of more government control, or let the free market try to hash things out on its own, is going to become an increasingly stark decision with both solutions seemingly apocalyptic. I’m sure he’s going to put this decision off for as long as he can — but he will be forced to deal with it soon.

It’s strange how history works. Obama is going to be thrust into the middle of a situation that was not his doing, but rather the culmination of a number of generations before him: to allow banks to control the issuance of currency, to endorse fiat money, to attempt to control the financial markets. As Ludwig von Mises wrote in a Critique of Interventionism, the state intervening in the free market causes even larger crises later, which forces even more interventionism. The end result, Mises wrote, was that eventually the government must control everything. That’s the decision Obama’s going to be forced to make, and once he does, it’ll set him on an irrevocable path which will define his administrtion.

It’ll be interesting to see how things shake out.

Props to Obama’s First Two Days

I have to say that it’s nice to have a Democrat in power again. I have some Republican readers out there (just embrace it, Kevin; talk to Taylor — he’ll help you) who I know will find it very annoying for me to be joining in the celebration of Obama’s first couple of days. But, I have to say, that I like what Obama’s done so far: moving to close Guantanamo and the CIA’s secret prisons is simply awesome. The very existence of these programs is not only Un-American, but, I believe, unconstitutional.

Where, in our Constitution, does it say that the United States can take people into custody and detain them for years at a time without bringing them up on charges? I was hoping that the justice system would actually reject Bush’s programs, but the years went on and nothing happened. It seemed that someone in the Bush Administration decided to leave the people detained in Guantanamo for the next President to sort out. (I felt this even before Bush got re-elected in 2004.)

For that matter, Iraq seemed little more than a talking point in the “War on Terror” in Bush’s second term; other than sending some additional troops into Iraq, what really changed there? For that matter, what did the additional troops accomplish other than to give John McCain something to ramble on about during his campaign for President? I love what The Daily Reckoning’s Bill Bonner said about the Iraqi journalist throwing a shoe at Bush: “What’s wrong with our American journalists? Have they no shoes?”

Indeed, I wondered the same thing about a lot of people. How could we allow the Bush administration to rewrite the power of the executive branch before our very eyes and have so little outrage? So, I am pleased to see Obama’s first acts being so definitive to curtail the obvious abuses of the prior administration. Although, Wall Street doesn’t seem quite so happy about it.

As Taylor pointed out in his last comment,

“The percentage decline is the worst ever for the Dow on a president’s first day in office. That would break the old record, 2.9%, set on Nov. 22, 1963, when Lyndon Johnson took over after John F. Kennedy’s assassination.”

Of course, there’s a maxim on Wall Street that the first two years of a new Presidency will be down years and the last two will be good ones.

Still, that was a particularly violent reaction to Obama’s first day.

Although, I made money. As you can see in the chart below, Barrick Gold has been doing just fine over the 3 months since Obama was elected President. On that fateful day of which Taylor spoke, when the Dow was down 4%, Barrick was up some 5.8%. What can I say? Gold’s been treating me well.

Barrick Gold Over the Last 90 Days
Barrick Gold Over the Last 90 Days

That’s not to say that I think this stock isn’t going to see some rocky times ahead. I do think the forces of liquidation are taking a breather — for now. The volatility of this week is more the Wall Street traders showing their displeasure at the forces of Socialism that Obama represents. But I expect it to stabilize over the next few weeks. In fact, I’m expecting a bit of a rally. It’s going to be a sucker’s rally, though; but I still expect it’s going to trap a lot of people who are thinking that the worst is behind us.

Barrick will probably be taken down a peg or two in the upcoming collapse, but it’ll come back. I can’t say the same for the rest of the stock market. We’re making the bitter transition from a consumer-driven economy to a producing one. The first stage is that the businesses that catered to consumer spending need to leave the scene to clear the field for the new companies. That means you can expect a lot of companies going bankrupt this year.

As for me, I’m doing a bit of trading. As you can see from that chart of Barrick, it seems to be hovering between a range of $31 and $36. That’s a pretty healthy trading range to buy in at the bottom and sell at the top, and that’s what I’ve started doing. I’ve turned some extra profit from it so far. I expect that all my profits will be taken out by the upcoming collapse, but those profits should help to cushion the blow. It’s the buying at the bottom where you can expect to make some real money.

I can only hope that these easing up on the powers of the executive branch may indicate that, perhaps, my fears of him being the next FDR and implementing a lot of BS controls — such as gold confiscation — may prove false.

Mercifully, false.

The Mythology of Modern America

You’d have to live in a cave to not know that Barack Obama became President today. (Well, actually, the people in caves probably know this, too.) From the flood of random text messages to the stories in the media, America seems swept up in “Obamamania”. I started pondering why this was.

It seems to me that many Americans believe in the power of democracy — that there is no problem beyond the ability of the collective wisdom of the whole to solve. That the common men and women of this country can work together to, not only make this country better, but put us back on the right course. In essence, that “We The People” can recapture our past glory. Underpinning all of these beliefs, is the idea that a properly-functioning democracy will naturally construct a society for the betterment of all, and that democracies only fail in these regards when they are corrupted by special interests and large corporations.

It’s not overtly stated, but the idea almost seems to be that the common man is good, and the big corporation is evil. If we have a government of the common man and free of the big corporation, then peace will reign and justice will prevail.

To me, this seems the modern American myth, and who better to represent the fulfillment of this myth than Barack Obama.

Being born the black son of a single, white woman — who had no wealth to speak of — certainly fits the criteria for being an “Everyman”. That he made the unlikely climb in politics to the highest office in the land bears all the hallmarks of the unlikely rise of the champion from obscurity to fame. That he’s intelligent and well-spoken serves to help the story even more because it shows that merit and talent do not come from “breeding” but rather from hard work. That he does not come from privilege suggests that he is in touch with the struggles we all face; that he is charismatic suggests that he can set about fixing the things about America that are broken. And, so, Obama seems the perfect candidate to fulfill the promise of democracy. Hence, why there is such a messianic aura about him: he is the one who has been foretold that will fulfill the promise of democracy.

It’s no wonder a lot of Democrats try to lower the expectations America has for Obama down to the range of the practical. No one can live up to fulfilling the expectations that came from a generation weaned on Hollywood magic and fairy tale endings. Unfortunately, I’m even more pessimistic. I feel that this administration will leave everyone disappointed except the cynics who were predicting it to fail from the get go.

It’s not that I doubt Obama’s character, but that I believe that the entire mythology is just that- a myth.

There is nothing divine about a representative democracy. The Bible does not say that, “on the 8th day, God created the House and Senate”. In terms of incarceration and capital punishment, our society is far less free than the police states of the world. Furthermore, to think that the US Government is going to somehow right the wrongs of our economy misunderstands what a government is or actually can do.

A government does not make anything. Any wealth the government has must first be taken from someone else. A government can not create wealth; it can merely distribute it. This being the case, the best that a government can do is, as Adam Smith said in The Wealth of Nations, to give “peace, easy taxes, and a tolerable administration of justice.”

I would hope that Mr. Obama will be better than his predecessor in terms of the administration of justice. For that matter, I would hope that Mr. Obama can do better in the peace department as well, but we’ll have to see. As for easy taxes, I don’t think Mr. Obama is going to do well in that regard. He wants the Government to stimulate us out of this recession, and we’re either going to have to pay for that with taxes or the printing press. Each exacts its toll in its own way.

I try to remain optimistic, but Mr. Obama scares me. Not because I believe ill of the man, but because I believe him to be a honorable person who feels a deeply-held responsibility to fulfill this prophecy that the rest of America has set up for him. It’s a prophecy that can’t be realized, and to attempt to do so is a fool’s errand. What’s worse, the most dramatic and frightening changes in the policies of the United States seem to have come from men who sincerely believed they were fulfilling their mandate to do the right thing by taking decisive action:

Woodrow Wilson gave us income tax, the Fed, and the first World War.

FDR gave us the end of the gold standard, a number of laws that were unconstitutional (that included gems such as making it illegal for Americans to own gold, social security, the longest and most severe depression in America’s history) and the second World War.

George Bush believed that his country needed him to guide them through the dark times of 9/11 and gave us the “War on Terror” — complete with the Patriot Act, an invasion in Iraq, another war in Afghanistan, and the largest deficits this country has ever seen.

Contrast any of these Presidencies with that of Bill Clinton or George H. W. Bush, and it seems clear to me that the greatest damage is done to our country not by Presidents who are corrupt or ineffectual, but by Presidents who believe they must give the people action.

And here we are at the dawning of a Obama’s administration and we seem to have the same horrible combination: a well meaning man of conviction facing a crisis and a nation that wants a quick fix.

This isn’t going to end well.

The Nationalization of the Banking Industry

I’ve often said that world governments work in close cooperation with the world’s banking industry. It’s a natural partnership; one creates the money for the other to spend. Of course, our government was founded to be something different. It says right in Article I, Section 8 of the US Constitution that the Congress shall have the power, “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

Despite the fact that Section 8 of the Constitution uses the word “coin” in lieu of print, it is not a blanket prohibition against the issuing of paper money as many of my Libertarian friends believe. The same section of the US Constitution specifies that Congress does have the power “To borrow Money on the credit of the United States”. During the War of 1812, the US Treasury was issuing paper interest bearing notes in order to finance the war and to circulate in lieu of bank notes which were greatly reduced in circulation due to the expiration of the charter of the Bank of the United States in 1811. In a letter by Thomas Jefferson to celebrated French author Say,  dated March 2, 1815 Jefferson wrote:

The government is now issuing treasury notes for circulation, bottomed on solid funds and bearing interest. The banking confederacy (and the merchants bound to them by their debts) will endeavor to crush the credit of these notes; but the country is eager for them a something they can trust to, and so soon as a convenient quantity of them can get into circulation the bank notes die.

So it’s not that the US government was not able to issue notes of paper that would circulate, but that it could not “print” money. That is to say, it could not issue fiat money that was legal tender. The treasury notes that the government issued were a paper money, but the notes were promises to pay gold and silver at a future date. More importantly, no one was under any obligation to take them. Compare that to our present day paper money which must, by law, be accepted for “all debts public and private.” 

The Constitutionality of the government issuing fiat money as legal tender has often been questioned as I discussed in my book. The Supreme Court of the United States declared the United States government had no authority to declare fiat paper money as legal tender in 1871, but President Grant appointed two justices to the Supreme Court who favored fiat money and that decision was soon overturned with Knox v Lee. The problem is that, as Thomas Jefferson himself wrote as Vice President in 1798 that the US Government lacks the Constitutional power “of making paper money or anything else a legal tender,” and yet that is what it has done and continues to do. 

Our modern arrangement does not have the US Government itself issuing the fiat money, but instead it is issued by the Federal Reserve, a private bank. As I mentioned at the state of this post, this arrangement, of the government giving legal tender powers to a private bank that then controls the issuance of money is an old one. It was first tried in England with the Bank of England acting as the monetary extension of the policies that were enacted by Parliament. The reason the government uses its powers to endow a separate body with one of the most fundamental and abusive powers of the state is simple: it garners the support of the monied interests by allowing them the power to control the issuance of the currency. As long as the government is then allowed to monetize its debt by having a central bank uses some of its money creation power to buy government bonds, then both parties are happy; the government has de facto use of a printing press and the private bankers give the legal tender the aura of respectability in return for using the printing press for their own private purposes in the meanwhile. 

But what should happen if the bankers go broke? It might seem a paradoxical question given that they have the power of the printing press, but what would happen if they made so many bad loans that to use the printing press to inflate away the loses would pose too large a threat to the system? I don’t ask this situation lightly, because it’s the situation we’re in today. As the New York Times January 16th story states, the Rescue of U.S. banks hints at nationalization.  With mounting loses, the government has had to step in an absorb bank loses as well as give banks additional funding by way of acquiring equity stakes in these banks. But we are now at the point where the government is basically the largest shareholder of banks such as Citigroup, and, by also being in the position to decide who has to bear what loses and how much of these loses to absorb, the government is now in the position to decide whether a bank shall remain in business and how much profit it will be allowed. This is, of course, in addition to its powers as the single largest shareholder of these banks. 

In essence, the puppet of banking has slipped off the hand of government in this puppet show and any casual observer can tell that its really the entire banking industry has collapsed down to the government’s printing press. Furthermore, the government is now engaging in the seemingly capricious decisions of what gets the benefit of the printing press and who doesn’t. If the banking system, why not the auto industry? If the auto industry, why not, as Hustler Publisher Larry Flynt asks, the porn industry. After all, pornography has fallen on hard times too. 

This situation is dangerous for the government, because it presents the spectacle of modern finance to the public in a way that makes it easy for the common man to understand how the powers of government are being used in a very arbitrary way for the benefit of certain groups. They will also quickly come to under stand that if they are not amongst the groups who are benefitting, then they are amongst the groups that are being made to pay for it. Although, in this case, the payment will be made by way of inflation. The printing press will run and bailout the banking and the auto industry, but the rest of us can do nothing but watch as our money loses value.  This will expose the simple truth of Frederic Bastiat who wrote that “Government is the great fiction by which everyone endeavors to live at the expense of everyone else.”

Drugs and the FDA: An Argument for Liberty

Cat recently commented:

It’s unfortunate that you pick the FDA as a target, since the FDA has semi-recently deregulated some aspects of its guardianship to the detriment of society. I’m talking about the herbs and supplements industry, which now peddles untested, unverified snake oil at every pharmacy near you. Getting rid of the FDA entirely means more snake oil, not less. The FDA’s practices are not perfect, as medical professionals will tell you. I have heard that drug makers often conceal unfavorable or neutral (no better than placebo) studies and submit only the highly-favorable ones to the FDA. In the absence of all information about a drug, another Vioxx could very well slip through.

I personally think closing that hole is preferable to opening it wide. Peddlers of snake oil already do such cherry-picking of “studies” to sell their concoctions directly to people. I can find Bach’s Flower Remedy (homeopathic garbage) on the shelf next to the Sudafed (proven decongestant), for pete’s sake! I shiver to think of all beneficial medicines being lost in that sea of misinformation. It’s already hard to Google any combination of symptoms without landing upon the webpage of a “naturopath” or a “homeopath”, neither of which require rigorous medical degrees. Journalists, who don’t know science from pseudoscience, keep doing stories about acupuncture, chiropractors, and other sham treatments that are no better than placebo. As a people, what we know about medicine is being directed by insufficiently skeptical people and spiritual nonsense in the name of making a buck.

In the Libertarian quote above, it says (tellingly) “For example, during a 10-year delay in approving Propranolol (a heart medication for treating angina and hypertension), approximately 100,000 people died who could have been treated with this lifesaving drug.” Note it does not say that the treatment would have saved any of those 100,000 lives. It just says that they could have been treated with the drug had it been approved sooner. Well, yes. But so what? How many would have actually been saved? How many would have died of a heart attack anyway, or an embolism or a stroke? High blood pressure (mostly) comes from lifestyle factors that predispose people to other risks of premature death.

Propranolol was the first drug of its type. Ten years isn’t a terribly long time to study the effects of something new before giving it to human beings. Is there any specific incompetence being alleged, or is this just about delays? Getting something faster isn’t always better. Drug companies mix up untold numbers of completely crap drugs for every drug that might show a little promise. Fast-tracking them all into human guinea pigs is fixing the problem of “delays” by supplanting it with the problem of “untested drugs hurting people”.

I tend to read a lot of medical blogs and there’s a lot of controversy surrounding the use of experimental drugs. For one thing, they’re usually insanely expensive. Cancer, which is a huge magnet for experimental drug treatments, involves lots of drama and controversy and heart-wrenching stories. So-and-so didn’t get Experimental Drug A and died. What they don’t tell you is that So-and-so would have lived maybe 4-6 extra months at a cost of $200,000 to be paid by somebody else (usually Medicare). Nobody would ask for $200,000 experimental drugs if the bill wasn’t going elsewhere (unless they were very rich). A staggering number of people get cancer now because they are living long enough to get cancer. The risk grows with age. They get old, they get cancer, and we throw pots of money at them to treat them even though the cancer likely won’t kill them before something else does.

I go back and forth on this. Extending life is precious, but at what cost? The most expensive years of a person’s life are currently their last ones, and those are the years which suck Medicare dry. Old people stacked like cordwood in nursing homes, scarcely able to talk or feed themselves, getting run by ambulance to the super-expensive ER periodically because the attendants don’t want to take any chances of getting sued for the slightest missed symptom. Eventually the oldest wind up in an ICU where the relatives, upset and unwilling to let go, demand that everything possible be done. They’re not paying, so why not ask for every life-extending measure possible?

We got here in part because of malpractice lawsuits. An 80 year old woman passes away in an ICU and the family is looking to collect. The doctors can’t say “no” to unrealistic demands because a jury of non-scientific, non-medical people will judge their actions and render a verdict on their professional competence. Such juries are easily swayed by emotional appeals and pseudoscience. Very few people think, “Well, grandpop is pushing 90, he had a good life, let’s put him in a hospice and let him die peacefully.” The doctors and nurses themselves are starting to become very upset about how much they must prod and poke and torture people who are clearly dying because it’s the family’s wishes and the victim can’t speak up. This is the medical system that lawyers have won for us.

In many countries where medical care is paid for in part by the government, they’re beginning to do studies on various treatments to see which ones are the most cost-effective. It’s a hard thing to do — to put a price on a few hours or months of life — but it needs to be done as scientifically as possible. Those treatments which do not offer cures but merely prolong life (such as Propranolol) need to be scrutinized. Many older drugs are, surprisingly, as effective as newer drugs, but for a fraction of the cost. That’s why insurance companies keep coming up with tiers of drug coverage. They want to direct treatment first to the old standbys before paying out the nose for the newest tiny tweak of the same old molecular structure.

In Norway, when my blood pressure began to rise, my doctor there was confident enough to say “get some exercise and it will fix itself”. He didn’t shove me out the door with a bottle of diuretics in one hand and a bottle of statins in the other. And you know what? He was right. I made the effort and my blood pressure is now below average. Denying people Propranolol for ten years might have resulted in a few dying who might not otherwise have died, but how many of those people could have been saved (for free) by modifying their lifestyle?


The thing about life is that no one really has the answers. We come into this life with the promise that we will someday die. The decisions that we make could hasten or delay it. Smoking is an activity that is virtually guaranteed to shorten the length of your natural life, and yet people smoke. Part of it must stem from their desire to shorten their life, and part of it probably had to do with the pleasure they seem to get from smoking. The state could step in and outlaw smoking, and then we would all live healthier lives. Is the state justified in doing so?

What this question is really asking is to whom our body belongs. If our bodies belong to the government, then the government is right to step in and enforce actions to protect its property from harmful habits such as smoking. If, on the other hand, our bodies are entirely our own property, then the state is far out of bounds to do so. Obviously, this is the ideological framework from which I view the question.

If we start with the notion that our bodies are all our property and it is our responsibility to care for them,  then let’s look at the question of drug use. If a drug is not falsely advertised and we have all the information needed to make an informed decision as to whether to use it or not, then on what authority is the state to step in and say that we can not use it? Why should the FDA take ten years to approve or disapprove of a certain drug? Would not their time be better spent ensuring that the drug was properly represented to the people who wished to take it?

Bringing up the issue of Nutraceuticals, Cat wishes the the FDA would take a more heavy handed approach with the industry. This is an area where I feel that the FDA is adopting the correct approach by policing the  claims that the industry makes rather than the products themselves. If we’ve established that a given substance isn’t going to kill you, and there may be some anecdotal stories to suggest that it might help with such and such, then I don’t see the problem with selling the product with the claim that it might possible help with such and such. If the product is advertised truthfully, as something that “might” help, then what’s the harm in someone deciding to buy it? 

Sure, there might be some more effective product out there, but the placebo effect of expectation often corrects the problems that we might be having. And for consumers who are more serious about their health, they can do more serious research and find far better solutions. I think the people that buy most Nutraceutical products buy them on impulse as they walk through the store. If they keep buying them, then they must find some good in them. Or perhaps they buy them for the same logic as people buy lottery tickets. “Eh, couldn’t hurt.”

I do wonderful it Cat has thought the entire issue through when she brings up the notion of bringing down blood pressure through lifestyle and exercise. The truth is that a lot of American’s problems are lifestyle related, and I think on some level we all know that. There is not pill that can make up for poor diet and exercise. All pills can do is treat the symptoms. So if we understand that, as Cat and her Norwegian doctor seemed to, then why adopt the position that we need stricter government rules regarding the FDA and Nutraceuticals. The truth is that virtually all of the products offered by the Nutraceutical industry treat areas that are largely lifestyle choices: depression, sex drive, and the common cold. We all know that there’s no easy fix for these things, yet we seek them anyway. 

Furthermore, the medical profession is an excellent example of what happens with too much government regulation. The medical profession got a monopoly from the government to dispense healthcare. Now, working together with the pharmaceutical industry, they dominate American economic life by controlling inordinately larger portions of our paycheck for products that, for the most part, are poor replacements for the lifestyle choices we have all made. To me, this just shows the end result of what happens when the government tries to use regulation and bureaucracy to shield us from ourselves; corporations take over and industries set out to pad their own wallet. 

Now it may be that in an entirely Socialized system where their is no profit motive present in healthcare, that the common sense advice given by your doctor is more common place. The doctor would have no monetary incentive to suggest a drug, therefore the more common sense approach is offered. This avenue, while seemingly desirable, is arrived at by the government forcing individual resources toward the system that it desires best and the resulting hard choices of spending money to prolong life left to a system that is trying to spend as little as possible for the benefit of the collective.

Ideologically, I must reject such a system. Were individuals able to make their own choices in regards to how they spent their health dollars, there would certainly be a fair amount of snake oil sold. However, I feel that a fair amount of snake oil will be for sale anyway, because a quick fix has always been the most deeply coveted solution in any crowd. By, despite money spent by consumers to chase false promises, we would also have individuals looking at their own healthcare and making their own decisions and some of these decisions would be very enlightened. Indeed, in a world where false advertising is forbidden and the consumers are able to make all of their own choices, I think we would see a result were some people made extremely rational decisions and some made rather poor ones. That is always the result when people are left to their own devices. To try to collectivize everything means that one central body must make the hard decisions for all of us and that’s a world where the individual choice has been removed. Would it not be more rational to allow each of us to make these choices for ourselves?

How I Spent My Christmas Vacation, Part II

Cat recently commented:

Sounds almost like somebody I knew who stalked me for a while. He could say the most awful things to me, then would be the sweetest, most awesome innocent person ever around my friends and family. Practically nobody believed my story because how could such a *nice* guy do such things? Maybe, they reasoned, I had done something to deserve it?

I’m glad the police didn’t fall for his “poor innocent me” act and that you have continued to remain organized and determined. I’m sorry Auby has to go through this. I am glad she has somebody around to help protect her and be her advocate.

I’m glad you had a good holiday that no jackass could ruin!

Yea, I suppose lots of women have a hard time with stalkers who seem nice at some point in their lives. I can say that my vacation gave me more experience with Restraining Orders than I thought I would ever get. 

Here’s a few tips for people who find themselves in this situation. First, the State of California issues a Temporary Restraining Order (TRO) in order to protect someone from someone else. Other states issue what they call a Protective Order, and the term Restraining Order is just used for civil procedures. This lead to some complications when we followed the advice of the Office in Charge and took the restraining order to the police. They were not able to act on it because it was not termed a protective order, which is what they were used to seeing. 

But when you look at California’s TRO and compare it to other state’s Protective Orders, it is clear that California’s TRO actually goes beyond what other states Protective Orders do. It’s just called something different here, but it can be hard to communicate that to Police Officers. At any rate, after the hearing regarding the TRO, the state can issue a Permanent Restraining Order/Protective Order. Now you have something that law enforcement in other states can recognize, but you’ll need to contact a district attorney for the state in question in order to get the Protective Order “domesticated” (i.e. put into their law enforcement computer system so that his name will come up whenever he’s stopped and they can check for guns). A Texas DA told us that all we had to do was send the Protective Order to Law Enforcement, and that that was all that’s needed. Oh, that’s another thing about the California Protective Order, it says you can’t own a gun for the entire length of its term. 

The issuance of the Protective Order is apparently what the Office in Charge of the case was waiting for, because he brought jackass in for questioning the very next day. He explained to him, over his continued protestations of innocence, that if he continued to contact Auby that he would be in violation of the law and that he would arrest him. We haven’t heard much from him after that. He did sent a few lines of anonymous text one day, just to prove that he was undaunted, but the it seems that he has gone away.

This is a dramatic change from how he was acting before the Office in Charge did that. He was constantly sending her messages. In order to further build the case against him, I thought it was best to engage him and allow him to give himself away, but Auby was so disgusted by him at this point that she would have none of it. So, in order to build the case, I impersonated Auby when he would contact her. 

It’s strange, but it seems he fell in love with me. I’m only partly kidding. In order to see what he would do I told him (as her) that she was breaking up with me and that she wanted him back. His tone changed immediately and he henceforth started playing hard to get. Auby explained that she expected this of him; that he wanted to be emotionally unavailable in order to punish her for leaving. Therefore he behaved in a perfect paradox: he would not go away when he was unwanted, and would not be available when it was indicated he was desired. In some moments that I find the most clear about this case I asked him (again, as her) just how it was possible that a relationship might work between the two of them. He indicated that he had no idea. Which again goes to show the absurdity of the situation. 

Jackass was pursuing a relationship he was himself unprepared for with someone who was more than done with him. He had delusions that he would win her back and would, in fact, say so on many occasions. In some of his more bizarre ramblings he would indicate that he had evolved beyond taking no for an answer and that she would eventually come crawling back to him. But when the prospect was put in front of him that he might really have a chance to get back into her life, he really had nothing to say. He softened his tone considerably, but he had nothing to say. 

We maintained this illusion till the end. I felt that if he felt that his plan to win her back through constant harassment and threatening behavior was going according to psychotic plan, then we would be less inclined to pursue any violence against her. Others cautioned me that we might be demonstrating that I we were in fact not afraid of him because we were engaging him, but as we had previously met with law enforcement and were acting in cooperation with the authorities in trying to build a case against him, I felt that we had little to fear in this regard. The night before the hearing, he contacted her again. Again he had little to say. I’m sure that the hearing date was on his mind and he was just trying to stall and give her assurances so that she wouldn’t go through with it. 

How hard it must have been for him to have his bubble pricked in such a way. To find out that not only does your ex not want you back, but that she has sent all of these communications to the police who went over them with him line by line. To discover, at the hands of the law, that she wasn’t coming back, and that if he pursued her any further, he would be arrested. Though I wasn’t able to witness that moment, I know it  must have been crushing for him. I can’t say that I’d have it any other way.

How I Spent My Christmas Vacation

I spent Christmas of this year in Dallas and not in Los Angeles as I had previously claimed in this blog. The reason for the deception was, as I mentioned in the Dec. 7th post, I had received death threats from my girlfriend’s loser ex-boyfriend. I did not feel they were credible, but by the same token, I wanted to try to ensure as much safety as I could for ex-wife and daughter who were going to be visiting. It’s one thing to feel that death threats aren’t to be taken seriously when your life is potentially at risk; it’s another to do so when the lives of others who are staying under the same roof are also at risk. So I opted for a bit of deception.

Not that it really did me much good. We already had travel plans to be out of town when the hearing was scheduled for. So we had to go before the court and ask for a new hearing date. Many times in these matters you fill out the form and the bailiff takes it straight to the judge; you don’t get a chance to interact with the judge directly as part of your request. To help remedy this, we attached a declaration to the request. A declaration is a statement signed under penalty of perjury. The format we used was as follows:


1. I am someone who is currently appearing before the court in regards to somecase. If called upon to testify I could and would testify as follows:





Signed under penalty of perjury for the State of California in _______ County on this ___ Day of December, 2008. 

You just fill in the numbered items with what you’re testifying to. Auby, my girlfriend, filled out the declaration with the facts that she was traveling to Dallas on the date of the hearing. The judge granted the request, but the declaration was attached to the reissued restraining order and was now part of the document that required it to be served to Jackass the stalker. This meant that we would be serving him with proof that we would be in town. Ah well. So much for that plan. 

I was also pondering acquiring a firearm for the holidays, but was never like having the combination of firearms and children around. If I did pick one, I’d half to favor one such as a Beretta 9mm which has three safeties. There have been incidents where a police officer loses his firearm to a perpetrator, but the perpetrator could not work the safeties on the gun and instead threw the gun down and fled. You don’t read of those kind of incidents happen with something like a Glock 9m, which has no safeties. In fact, here’s a video of a police officer shooting himself in the foot with his own Glock; safeties are a good thing. 

Firearms are ultimately rather risky devices. They can be useful in repelling attackers, but also cause unintended harm and even death. I decided against retaining a firearm because I weighted the remote possibility of unintended harm outweighing the also remote possibility of actually being attacked by Jackass the Stalker. In making this decision, I might be somewhat prejudice because I had my own incident with a firearm growing up. A 12-gauge shotgun was accidentally discharged in my direction as I walked across the room. I felt the blast against my back as it rushed past me, and bore through the kitchen cabinet door. The blast went on to bore a hole through the three of the thin-separator walls of the trailer we stayed in when we were hunting. I got lucky. 

I didn’t want to take another chance, so I opted to just to trust in the cowardice of the person who was threatening me. Not that I didn’t first try other resources. Auby and I stayed in touch with the police at the university Jackass was attending. The first time we called in to the police we informed them that one of their students had violated his retraining order. This prompted the police department to open an investigation into the doings of Jackass, and that meant that one particular police office had been assigned to the case. This officer became our point of contact with the university police. 

The officer in question had actually spoken with Jackass; he had gotten spooked when he first got served by the restraining order and took it upon himself to go talk to the police to tell them that he was completely innocent of what he was obviously guilty of. That was actually a really bad move on his part, because lying to authorities is a felony- just ask Martha Stuart. Not that he has been arrested and charged with one, but he just dug himself deeper into a hole by going to the police of his own accord and lying to them. In so doing, he committed a crime far more serious than the one he was trying to avoid. He also merely served to arouse the suspicions of the officer in charge of the case. 

We started a relationship between the officer in charge of the case and ourselves. We continued to document when he would contact us and we would always forward this information to the officer in charge. He seemed to want to make an arrest of get a subpoena to confiscate his computer and have it reviewed by a computer expert, by all the district attorneys involved seemed to busy to waste the their time on this case. That’s a shame, because it would have been nice to have Jackass confronted by the police and found out for the liar that he is. As it was, I merely had to place my faith in the cowardice that I knew ran deep in him. It had always been part of his modus operandi to be meek in person but say horrible thing over the internet. I could see no reason why now would be any different. 

Christmas was wonderful. Jackass contacted us several times and, in cooperation with law enforcement, we encouraged him to reveal himself more and more. We put this evidence in a useful format so that Auby could readily refer to the parts she needed when the hearing arrived. On that fateful day, Jackass was a no show- as we had well expected. In the case where only one of the parties shows up, the court almost always sides with the other party, and so it was with us. Our temporary restraining order was made into a permanent (well, 2 years anyway) protective order. 

The next step is to get this California Protective Order domesticated into the State of Texas so that his name will be entered into the Texas law enforcement databases. I’ll let you know how that proceeds.

Why Stay in America

Cathy, or Cat as she likes to be called, left this comment a while ago:


Hey Preston, have you looked into living somewhere else? I don’t mean that in a rude way. I mean, have you looked into the countries of the world and found one that is not entirely ruled by corruption and bankers? One that’s a bit more your style?

I feel another way we can create change is to vote with our feet and take our value with us. If you have enough money to invest or have needed skills, most countries in the world will be happy to accept you.

Norway was a great experience for me because it taught me that you can have a fiscally conservative yet socially liberal government. Norway not only wasn’t in debt, it had money to spare. Taxes were high, costs were high, but I felt like I was part of something much bigger than myself. Most people I knew there didn’t feel outrage about paying those taxes because the government generally did good things for the people with the money. There was a bit of corruption, there were scandals sometimes, but on the whole it was a great place and I often wish I could return.

France taught me that it is possible to have an engaged society that debates everything. I had many long lunches with friends, questioning life, politics, philosophy… everything. France has its problems, to be sure. They are different problems than the USA faces, in many regards. It was eye-opening to realize that countries could have their problems yet still function on a basic level. That you could move somewhere and trade one set of problems for another set of problems that was more to your liking. A doctor paid me a house call — a house call! — after I had been ill for a week with strep throat. Sometimes the bus drivers or the metro drivers would go on strike and make it really hard to get the laundry done but… house calls!

The luckiest thing that ever happened to me, I think, was that I had to have emergency abdominal surgery the week before I came back to the USA. The cost was minimal. Once I came back to the USA, no health insurer would accept me because of “pre-existing conditions”. Had I come down with peritonitis just a week later, I would have been on the hook for tens of thousands of dollars in emergency care despite the fact that I was financially able to pay $500 a month or some other ungodly amount for free-market health insurance.

I think some of the more “socialist” countries in Europe have struck a nice balance (Norway, Sweden, Denmark, Finland, Holland). Some haven’t (UK, France, Germany, etc).

Maybe there’s a place in the world where you would feel such a nice balance has been struck?

PS: The reason my name changed to “Cat” is because many European languages have no sound for “th”. Rather than become “Kat-ee” or “Kaz-ee” I decided that almost anyone could pronounce “Cat”.



OK Cat, if that’s what you’d like to be called. 🙂 To answer your question, no I haven’t considered living some place else. There are three main reasons for that:


  • My daughter lives here and she needs a father. 
  • I really do love this country and I feel it needs people like me in the crisis that it is going through. The “common people” are going to be blindsided by this and are going to be looking for answers and I’d like to provide them some. 
  • This is going to be a worldwide depression. There are few safe places to go. Macroeconomic theory and policy has permeated virtually every government on the face of the planet, so almost every government is going to be making the same mistakes. The advantage of being in the United States is that this country was the birthplace of the free-market economy. If it can’t take root again here, then I can’t see it doing well anywhere else.

In regards to your experiences in Europe, I appreciate you sharing them here. Socialism tends to do best in countries that have a high amount of natural resources per capita. It also needs for its citizenry to be rather homogeneous because in Socialist countries the government has a lot of power of its citizenry. If the government and the citizenry agree on what is “best” then the the two can live in harmony. If, on the other hand, the citizenry is diverse, then there is no consensus on what is “best” and the government will tend to take actions that are only pleasing to a few select groups.

The United States has embraced virtually all tenants of Socialism. As former Presidential Candidate of the Socialist Party of the United States Norman Thomas said, “”The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” I find it hard to identify anyway that we are not a Socialist nation, outside of the field of medicine as you pointed out. 

The field of medicine is touchy. There’s aren’t a whole lot of easy answers. But, prompted by Cat’s comment, I visited the Libertarian website and viewed their official position on Healthcare. Here’s what they had to say:

Making Healthcare Safe and Affordable


As recently as the 1960s, low-cost health insurance was available to virtually everyone in America – including people with existing medical problems. Doctors made house calls. A hospital stay cost only a few days’ pay. Charity hospitals were available to take care of families who could not afford to pay for healthcare.

Since then the federal government has increasingly intervened through Medicare, Medicaid, the HMO Act and tens of thousands of regulations on doctors, hospitals and health-insurance companies.

Today, more than 50 percent of all healthcare dollars are spent by the government.

Health insurance costs are skyrocketing. Government health programs are heading for bankruptcy. Politicians continue to pile on the regulations.

The Libertarian Party knows the only healthcare reforms that will make a realdifference are those that draw on the strength of the free market.

The Libertarian Party will work towards the following:

1. Establish Medical Saving Accounts.

Under this program, you could deposit tax-free money into a Medical Savings Account (MSA). Whenever you need the money to pay medical bills, you will be able to withdraw it. For individuals without an MSA, the Libertarian Party will work to make all healthcare expenditures 100 percent tax deductible.

2. Deregulate the healthcare industry.

We should repeal all government policies that increase health costs and decrease the availability of medical services. For example, every state has laws that mandate coverage of specific disabilities and diseases. These laws reduce consumer choice and increase the cost of health insurance. By making insurance more expensive, mandated benefits increase the number of uninsured American workers.

3. Remove barriers to safe, affordable medicines.

We should replace harmful government agencies like the Food & Drug Administration (FDA) with more agile, free-market alternatives. The mission of the FDA is to protect us from unsafe medicines. In fact, the FDA has driven up healthcare costs and deprived millions of Americans of much-needed treatments. For example, during a 10-year delay in approving Propanolol Propranolol (a heart medication for treating angina and hypertension), approximately 100,000 people died who could have been treated with this lifesaving drug. Bureaucratic roadblocks kill sick Americans.

I have long maintained that the FDA is just another example of a government “watchdog” organization that has been taken over by the companies it was supposed to be regulating. There have been a number of drugs that were approved by the FDA that had to be recalled because they killed people. Eliminating the FDA would be an excellent step towards lowering the tax burden. 

I will discuss healthcare at greater length in a future blog.