Category: Investing and Financial Doomsday

The Advisability of Investing in US Treasury Bonds

In a prior blog, I questioned the wisdom of two financial advisors, Dr. Lacy Hunt and Van Hoisington who were recommending that investors put their money in long term obligations of the US Government. I consider this advice to be financial suicide. Enter Roger, a new blog reader, who has left a slew of comments yesterday saying that I did not really understand that the true genius of these two and the power of US Treasury Bonds as we continue on in our deflationary environment. Before we get to the meat of Roger’s feedback, let’s take a look at how US Treasury bonds have done over the past few years. 

Continue reading The Advisability of Investing in US Treasury Bonds

Paul Krugman’s Return of Depression Economics

A few months ago I commented on Dr. Paul Krugman’s receipt of a Nobel Memorial Prize for Economics. Well he just recently released an update of a ten year old book he has called, The Return of Depression Economics and the Crisis of 2008. Personally, I don’t see how Dr. Krugman is qualified to talk about the return of the current financial crisis given that he didn’t see it coming. However,  if real insight or predictive power were required for macroeconomists to write books, the field wouldn’t exist. 

I haven’t read the book, so I’m not going to judge the proverbial book by its cover, but judging by the reviews off of Amazon Dr. Krugman doesn’t spend much time in this book addressing our current financial crisis. It would seem that the theme of the book is that more regulation is needed to correct various situations that he feels are excessive and most of the situations he presents (such as Long Term Capital Management) are ten years old. Towards the end of the book, Krugman presents his analysis of the current financial crisis. I am not the least bit surprised to read that he feels that our current crisis was the result of insufficient demand. Continue reading Paul Krugman’s Return of Depression Economics

Ack! Contrarian Overload

When I was a teenager “Alternative Rock” was just coming on the scene. In the early days, Alternative Rock was just that- the alternative to the music that was consumed by the masses. But then people decided that Alternative Rock was cooler than Pop Rock and suddenly there was a movement en masse out of pop and into alternative. The result was that the term “alternative” became increasingly ironic because it was, in fact, simply the new pop marching under a different label. Rebellion, as they say, is best done through conformity.

The reason I bring this up is because I’m starting to feel that way regarding investing and the mainstream media. A couple of years ago economic contrarians where the lepers of the financial media. Everyone seemed to know that the stock market was the place to be, as Dr. Jeremy Siegel wrote, for the Long Run. After all, the Federal Reserve was firmly in control of the economy, and they would never let a prolonged market downturn occur. 

People aren’t saying that anymore. Last week the New York Times ran a story saying that the ten year period ending last month was the worst for stock market returns in the history of the S&P. As the story said, if you factored in Consumer Price Inflation, the S&P returned a negative 40.4% over that ten year period. Now media pundits are lining up to say that the economic troubles we are in are going to get worse still. A friend of mine just forwarded me an article saying that, if the stock market were to return to historical bear market averages for price-to-earnings, that the S&P would soon see levels of around 500 or so- a decline of another 40%. Continue reading Ack! Contrarian Overload

Why Diversification is a One-Way Ticket to Poverty

I got another client for my investment advisory services today; an old friend of mine meet me for breakfast. We always had good conversations, and this was no exception. I thought my readers here would benefit from a condensed version of what we discussed. As we were meeting to discuss investment strategies, the specific focus of our conversation was how to position yourself to survive a crash in the dollar- a topic which I know something about.

My friend brought up the topic of the Weimar Republic. He is quite a history buff and I know that he recently completed reading a book on the rise of the Nazis. Today he was wondering how stocks did during that period. The answer was that the broad stock market took quite a hit during that period, but, as a wealth preserving measure, the stock market certainly did far better than say bonds or cash did (although the calculation are a little complicated because of the currency switching). But if we were to place ourselves in that situation, would we place ourselves into the equivalent of a broad based stock mutual fund.

The answer was an obvious no. Not only would we need to survive hyperinflation and the collapse of the Weimar Republic, but also the ensuring World War that saw the devastation of the country. Who would want to own the German stock market over that time? But, if you owned shared in a company that did survive, such as BMW, you would have an investment that would have preserved at least a portion of the wealth you had put into it. If your investment horizon was even longer, BMW would, I’m sure, show quite a return on your investment- even if you had invested on the eve of the hyper-inflationary affair.

Of course, we are acting here with the gift of hindsight. We have knowledge now that BMW is a good car company in 2009, so if we are picking German companies to have owned in 1920, BMW seems a good one. That brings us to the topic that is on everyone’s mind today: where should I put my money in order to best preserve and perhaps grow it in the future. Many people will tell you that the answer to that question is unknowable without the future knowledge that we possessed in our hypothetical Weimar example. They’re wrong. The future really isn’t as hard to predict if you know where to look.

It should have been fairly obvious to anyone who lived in the Weimar Republic that their currency was in trouble. They had lost a war and been saddled with a war debt that they could not possibly pay. Sure, they may have maintained the debt for a time, but how could anyone have thought that such a debt would eventually get paid off? As it turned out, it didn’t survive the first serious post-war economic downturn.

We are not in such a different situation today. It should be obvious to most anyone that the United States is never going to pay off its debt. It would be far too onerous. Instead, there will come a time when the debt will be rendered worthless either because of default of hyperinflation of the currency. We know that day will come eventually, so it’s not as if our own future is so hard to foretell. Given that knowledge of future events, how should we preserve our wealth?

Gold is the obvious choice. Not only does it become more desirable in times of crisis, it can help you bribe officials when you flee the country… if it comes to that. Try doing that with a mutual fund. But if we wanted to step away from the goldbug position for a bit and recommend broker sold securities so we can be respectable at dinner parties, which ones present themselves as tempting targets?

I talked about two different investment options that I found attractive: foreign Real Estate Investment Trusts (aka REITs) and, my personal favorite, Barrick Gold. Each presents an attractive option; foreign REITs are yielding in the neighborhood of 15% in foreign currencies and Barrick gives you exposure to gold while being a dividend paying stock. Ultimately, it seems he seems to be favoring Barrick. That took me by surprise a bit given that he works closely with real estate projects. I though the foreign REITs would have been a natural choice, but it seems he’s taking the political upheaval possibilities pretty seriously. 

We also reviewed his tax situation. I told him about a maneuver he could use to make his kids private school tuition tax deductible. It’s perfectly legal and it should save him a fair amount of money. I took real pride in knowing the difference I can make in people’s lives. When the whole world’s going down the tubes, the smallest victories have meanings. I vaguely remember the closing lines of the movie City of Joy with Patrick Swayze. The movie was brutal in its depiction of life in India, and, at the end, Om Puri says something like “The odds are stacked against being human.”

Swayze’s character replied, “That’s why it feels so good to beat the odds.”

In the Eye of the Hurricane

Gold sold off a bit today; the Comex spot price was down $25 or so to $880, which is close to where it started the year. The talking heads are see this kind of action and come up with the headline that “Gold falls on speculation rally went too far.” Of course, I wonder how they came up with that conclusion. It’s not much over where it opened this year or the last. So what rally are they really talking about?

Sure, gold has come back a lot from when the central banks where elephant stomping it with paper gold claims back in October, but when you see headlines such as “Treasury needs to borrow $493B in current quarter” (which is two trillion dollars annualized) I’d expect to see gold going a lot higher than that. But I can’t say I’m surprised. In fact, I was hoping for it.

Since I’m actively trading a portion of my shares of Barrick Gold (ticker symbol ABX), the volatility helps me to make money. It just becomes basic at that point: buy low, sell high. If you buy and it dips lower, just hold it. You can’t keep gold down in an economy that is running trillion dollar deficits; it’ll come back up, just be patient. But in terms of exploding off the charts like we saw in the late 1970s through early 1980s, the central banks are doing their level best to keep that from happening. That means you have gold going ever higher, only to be pushed down in a flurry of Comex future contract selling. I mean hey, if you know the powers that be are doing all they can to play hell with your favorite commodity, you might as well try to profit from it- right?

I spent some time looking over the blogs I wrote back in October. When I read them I almost question who wrote them. I know it was me, but the day to day events I’m describing is almost too fantastic to be believed. The Dow Jones Industrial Average having one days swings in excess of 10%. Gold falling down to $745 only to make it all the way up to $920 soon thereafter, only to give most of it back up… only to rise again. The volatility of that period seems to have given way to the complacency of this one. People seem to have accepted the idea that deflation is upon us, but that the magnitude of the inflationary policies of the US Government and the Federal Reserve will ameliorate what’s going on. Furthermore, many people seem to also believe that the Federal Reserve will then be able to mop up all of that liquidity once inflation rears its ugly head and that we’ll somehow end up alright.

In that way, I suppose we see ourselves as a being in the eye of the hurricane. We know that we just went through a bad storm. It’s pretty clear that it’s still raging, but we feel safe in this weird pressure pocket between the forces of high pressure and low pressure. We know that eventually we’re going to have to endure the other end of the storm, complete with its ferocious eye-wall, but things are OK for now. For that matter, people believe, they will eventually be OK again. I suppose they are right in that way, but the long term eventuality they are thinking of is much father away than they’re thinking.

The truth is, we’re not talking about things go back to normal in a year or two. That’s just not going to happen. Instead, this crisis is only going to get worse, and we will have episodes of volatility just as we did last year. It’s not going to get better next year, or the year after. This crisis is going to drag on year after year after year until, eventually, the whole system crashes. It’s just like I told the church congregation on Saturday, we aren’t witnessing a recession. We are witnessing the death of our financial system. You see, we one had productive industries in this country, but we decided to replace them with a printing press. It defied common sense, but the Keynesians told us it would work out… but it’s not working out… and here we are.

So gold is down a bit today. Fine. I hope it goes a bit lower, because that’s where I have my next buy order in for Barrick Gold stock. Gold and gold mining stocks are experiencing constant upward pressure, but they keep getting knocked about by a financial system that won’t accept its own demise. The bankers sell gold short in an effort to keep its price down while those of us who know better, keep buying more. The strain between the two has resulted in larger premiums between the price for physical gold and the Comex spot price. Right now the premiums seem to be around $100 or so. Not as high as they were in October and November, but still high enough to show the strain between the demand for physical gold and the forces at work in the market for paper gold.

Then there are the bystanders just sitting around and hoping that everything works out OK, that they will get to keep their job, and that they might someday be able to pay off those credit cards. They don’t know what the future holds, but they hope. Unfortunately, when gold breaks lose and the system collapses, these are the people who are going to be absolutely devastated. In the song lyrics of Aimee Mann, “It’s not going to stop, ’til you wise up.”

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.

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.