Copyright 2012 by John T. Reed

Recently, a reader said I take politics too seriously and that it doesn’t matter.

Today, I got a complaint that my headline articles are getting too narrow, not enough about politics which he enjoyed reading in 2008.

Save yourself

First, here is my big picture take on politics:

America in July 2012 is a large ship that is moving too slow and that is on fire. The slow movement represents the economic stagnation; the fire, the skyrocketing debt-to-GDP ratio.

People are saying we can’t focus on the fire now because we have to focus on getting the ship moving faster. Bullshit! If the crew of a burning ship does not focus on the fire, it will burn to the water line and there will be no ship left to get moving. Similarly, the soaring debt-to-GDP ratio is going to render the U.S. dollar worthless, and with no currency, there is no economy. Hyperinflation will be much worse than the Great Depression.

So the emergency that must be fixed right now is getting the debt-to-GDP ratio to go down, not up.

Okay, I just told you what needs to happen. The necessary policy is cutting federal spending 45% overnight so that we stop borrowing from the world bond market to fund U.S. entitlements and government operations.

So there you have the policy we need.

Are we going to get it? Hell, no!

What if Romney wins and the Republicans take control of both houses? Will we get federal spending cuts then? Hell, no!

When’s the last time you saw a Romney TV commercial talking about lowering the debt-to-GDP ratio? Republicans do not want to fix these things. Or at least they have no interest in risking their re-election to fix them. The notion that supporting Republicans with money or your vote will put America back on the right track is absurd. Unless the Republicans are willing to enrage the American people and risk not being re-elected in 2014, they will merely tinker at the margins of the “fire” on the ship.

For example, they may repeal ObamaCare. They will extend the Bush tax cuts for all. They will probably reduce the rate of growth in federal spending.

But what will that do with regard to our exhausting the U.S. government’s ability to sell bonds? Maybe delay our federal bankruptcy and descent into hyperinflation for another six months or a year.

Better you should move your money offshore than contribute to Romney’s campaign. That is no exaggeration. I mean that precisely and have done precisely that myself.

Save your breath about people like me are the problem; that if we just fight hard enough with ads and bumper stickers we will win. “We” aren’t running if “we” refers to people who want the debt-to-GDP ratio to go down. Politicians on both sides are only interested in power and their offices, not in saving the country. Neither party will put lowering the debt-to-gdp ratio into their platform. If they did, I would reconsider.

I joined the Army at age 17. I risked my life in Vietnam and was almost killed twice. I campaigned for JFK in 1960 and have participated in 13 presidential campaigns in one way or another since then.

I no longer believe in the Easter Bunny, Santa Claus, or the Tooth Fairy—or in politicians. If you believe in any of those things, you need to grow up. And that’s not just talk. You are on the burning ship.

Discussing what policies and laws we ought to have is mildly interesting and needs to be done. But the correct policies have no chance of happening until after the hyperinflation. Even then, the left will blame capitalism, as they did in the Great Depression. And the public may believe them, as they did in the Great Depression and ever since. In that case, America will probably turn into, not Western Europe, but the Soviet Union. It took the Soviet people 70 years to get rid of that insanity. Or America could return to freedom and free markets and the rule of law and deregulation and responsible fiscal policies. I do not know which way it will go. I am pessimistic. The left took over education in this country. That may have been the crucial battle. The public now believes Marxism, now called “safety net” and “progressive taxation” for better-PR purposes, is the no-question-about-it correct approach to public policy. Thank you unionized teachers and socialist college professors. The 2012 election sure as hell is not the crucial battle.

Today at lunch, I continued my reading of the book The Economics of Inflation: A Study of Currency Depreciation in Postwar Germany by Costantino Bresciani Turroni. I must translate that subtitle into 21st century English. First, “currency depreciation” is another way of saying “price hyperinflation.” The war he is referring to is World War I which took place in the period 1914 to 1918. In other words, the book is about what we now usually call the wheelbarrows-full-of-cash hyperinflation that occurred in Weimar Republic Germany.

The author is not just some Italian guy. He was stationed in Berlin when the war ended until 1924 when the hyperinflation ended. He was on the victorious allies Reparation Commission, head of the Export Council in Germany, and economic advisor to the Agent-General for Reparations. In other words, he was an economist whose full-time job was to be in Berlin throughout the hyperinflation there trying to get money from the Germans paid to the victorious allies. Understanding the hyperinflation as it was going on around him was a big part of his job.

Conclusion: Many got rich from the hyperinflation. Most were devastated by it. Time and again he refers to those who understood the hyperinflation and recognized how to protect themselves and those who either were too slow or who were simply oblivious. Eventually, the whole country figured it out, but only very late. All they talked about all day every day was the Deutsche-mark-to-U.S.-dollar exchange rate —at that time, the U.S. dollar was world’s most valued currency. But by then, most Germans had lost their savings. They belatedly figured out that they should have moved their savings into foreign currency and—to a lesser extent—into hard assets.

Although the book notes that people generally put too much money into hard assets and stocks. Foreign currency could be used any time for any purpose. Hard assets, as I have written, are illiquid and in some cases, go obsolete while you are waiting for the right time to use or sell them. Stocks are a crap shoot. Germans were fleeing from the mark to anything other than the mark and many found themselves in stocks as a result.

Stocks crashed at times and in particular at the end of the hyperinflations, e.g., the Austrian stock market crash in January 1924. Hell of a deal when you fight for six years against hyperinflation finding some salvation in the local stock market. Then, suddenly, the hyperinflation ends overnight, as it always does, and the stock market figures the market was propped up by the hyperinflation and it crashes because of the absence of the hyperinflation. What money you were able to preserve in the stock market is wiped out by the hyperinflation “disease” being cured. An extremely cruel irony.

Anyway, the big picture lesson from the whole 1914-1924 period in that part of the world is that rearranging your assets and liabilities so as to avoid loss or even profit from the hyperinflation is crucial. Just choosing two aspects, those who moved their money to foreign currency saved that part of their net worth and those who kept money in German marks or Austrian krone lost it. There were other tricks than just those two, but they illustrate the starkly different endings from being in the right versus the wrong assets and liabilities. See my book How to Protect Your Life Savings from Hyperinflation & Depression for more info.

So now I get complaints that I am not writing so much fun stuff critiquing political campaigns. In four or five years I will be getting criticized for not having yelled “Fire!” louder and more persistently.

But here’s a little political commentary for old times sake.


There is a big debate about whether Romney outsourced at Bain. He says he did not. Obama says he did. Obama is lying, but that is not the issue.

Romney should have made his companies as efficient as possible and that means using the lowest-cost-adequate-quality suppliers and subcontractors at all times, including foreign suppliers and subcontractors.

The notion that there is something wrong with outsourcing is a colossal joke. Americans have been outsourcing since 1492.

Take off all your clothes that you are wearing right now and look at their labels to see where they were made. Put the ones made in the USA back on. Carry the ones made outside the USA to the sidewalk and set them on fire. I predict you will be arrested both for the fire and for being naked in public.

As I write this, I am wearing a Ralph Lauren polo shirt that was made in The Philippines. The Wrangler jeans I am wearing were made in Costa Rica; my J.C. Penney briefs, Honduras; and my Nike Pegasus 27 sneakers, China. Only my Thor-Lo socks were made in the USA. I outsourced all my clothes other than my socks to other countries. Roughly speaking, so did you and every other American. So whom do you think you’re kidding if you have been bad-mouthing outsourcing?

Have you ever eaten a banana in the U.S.? You outsourced that, too. Bananas could be grown here in greenhouses or some such, but it is cheaper to buy them from countries where the climate lets them easily be grown outdoors.

And some of you guys want me to be writing about such nonsensical political debates? I am more embarrassed by them than interested in them.

I wrote an article saying energy independence was an idiotic goal. It still is albeit one that is surprisingly within reach now because of fracking and such.

The ultimate principle underlying condemnation of outsourcing is that we should ban all imports, foreign tourism by Americans, and the hiring of foreigners to provide any sort of service. That would result in the rest of the world banning our exports and their citizens being tourists in America or hiring Americans to help them in any way. We tried the no-foreign-trade craziness in 1930 with the Smoot-Hawley Tariff. It was a disaster and huge cause of the Great Depression.

By the way, I often say we are going to get hyperinflation probably within the next four years. And that hyperinflation is generally accompanied by several other laws, namely: wage and price controls, captial controls, financial repression, rationing, and anti-hoarding laws.

Capital controls often include banning all imports, foreign tourism by Americans, and the hiring of foreigners to provide any sort of service. So the demagogue know-nothings condemning outsourcing by Bain or the U.S. Olympic committee may get a chance to live in a world where everyone takes that position. That would knock our standard of living back to about 1955—the days of one bathroom, no central air, small closets that were all we needed. God knows where our flat screen TVs will come from or how we will be able to pay for them.

‘You did not build your business without help’

Another hot topic today is Obama’s speech on Friday the 13th where he said that successful business men only achieved that success because of a great teacher (union member no doubt) or because of a bridge that customers and suppliers went across (built by union workers who got the “prevailing wage” no doubt).

In fact, increasingly, entrepreneurs are successful today in spite of government, not because of it.

The right is saying Obama is revealing his true ideology.

Ya think? Would that be the same ideology that guys like me and Rush and Sean Hannity and Mark Levin and Mark Steyn and Thomas Sowell and Walter Williams and many others have been saying Obama believed in since 2007?

I wrote another article in which I said all that is necessary for bad men to prevail is for good men to have filters. This “You did not build your business by yourself” flurry in the media is the filter folks—your Bill O’Reillys, your Greta VanSusterens, your ABC/NBC/CBS/CNN on-camera folks—slowly letting it slip—as a sort of testing the water with their big toes—that maybe, just possibly, Obama is as radical an America-hater as about a hundred tons of evidence said all along. They are more interested in avoiding offending Democrats so they can keep their high-paying gig than the truth. “The spin stops here, except for the spin that I am a middle-of-the-road guy who is too reasonable to ever say Obama is a socialist, no matter how overwhelming the evidence.”

What am I supposed to write about this latest socialist gaffe that Obama let slip? Am I supposed to pretend that this is news like O’Reilly is?

Not gonna happen.

You want an article about Obama raising taxes on those who make more than $250,000?

He’s a freaking Communist and a demagogue. What else is there to say? Democrats have been using the Grover Norquist no tax increase pledge to paint the Republicans as protecting their rich friends. Grover, one of my fellow Harvard MBAs, screwed up. As Milton Friedman said, spending is taxes, not just taxes, because all spending eventually has to be paid for by taxes. Norquist should have gotten people to sign a no-debt-ceiling raise pledge instead. The Tea Party freshmen elected in 2010 sort of informally did that, then many reneged switching to politics as usual after swearing they would not.

The largest percentage of Americans want that tax hike on the rich. I know. They were educated by union teachers and 60’s hippy college professors. It was in all the papers. They think the additional money collected because of such a tax will go to pay down the deficit. It will likely push tax rates beyond the Laffer Curve peak, beyond the Hauser’s Law limit, which means it will produce less tax revenue not more, thereby making the deficit worse. Furthermore, there is not a snowball’s chance in LaJolla that Obama would pay down the deficit with any additional revenue. He would give it to unions or minorities to buy votes as he always does.

Am I supposed to write about the Ryan plan which, last I heard, does not touch Social Security? If I had the power, I would end Social Security cold turkey—even though I am about to receive my first Social Security check. There is no money to pay for it. Political solutions like means testing, raising the retirement age, taxing Social Security benefits, etc. would make things significantly better, but only in the sense of postponing the federal bankruptcy. I want the threat of federal bankruptcy to be ended, not postponed.

There is no concern about that among the ignorance-is-bliss, “Jersey Shore”-watching public and no political will to educate them or ask them to support getting the federal government out of the pension business—which is a subset of the handing-out-taxpayers’-money-to-buy-votes business—which must be ended in its entirety all across government programs. That is, pensions, medical care, safety net, veterans benefits, etc. All of that is charity or quasi charity and needs to be paid for out of the pockets of the needy or by voluntary charity contributions.

You want a little Dodd-Frank analysis? Will it prevent too-big-to-fail bailouts in the future? It makes the “Too Big” bigger. Otherwise, it is a bunch of nonsense. My solution? End FDIC insurance. My wife retired as an FDIC bank examiner.

Without FDIC insurance, banks can do whatever they want with their deposits. They have to abide by fraud laws. They probably would have to be extremely transparent to attract deposits without FDIC insurance. Good. About time.

And when banks say they need FDIC insurance to prevent runs on the bank, I say, “Bullshit! Just match maturities.”

That means you offer various time deposits as is done now. Like three months, six months, one year and so on. But the bank can only lend those deposits for periods that match the length of time the depositor agreed to. So there can be no run on the bank. There would be no penalty for early withdrawal. Rather, the deposit would be locked in, a phrase known to the grown-ups in the business world but not to consumers, who are a sort of child-like Eloi who are the subject of many laws to protect them from their own laziness and stupidity.

So you buy a Certificate of Deposit that has a term of, say, two years. The bank lends that money and only that and similar two-year money out for two-year periods. You cannot withdraw it sooner because the bank relied on your two-year promise to lend it to a borrower who also made a two-year promise. If you want to withdraw at the end of the two years, fine. That will coincide nicely with the loan being paid off.

What if it is not paid off? Then the bank needs to find the money elsewhere to pay you back, like from their profits or personal net worth. And if they can’t? They go bankrupt and get no bailout. Because of matching maturities, relatively few depositors will lose their money.

Depositors, on their part, need to be more careful about doing due diligence on their bank and with regard to spreading their money around to multiple banks so the failures of one bank does not wipe out all their savings.

Is Romney going to do that? Not that I know of. So why talk about it other than as an academic exercise? Academic exercises generally bore me. I am interested in what actions we should take, not in what we should write in a letter to Santa.

Should you pay attention to politics? To the extent that it is a “ship” on which you are traveling and the sinking of which would hurt you, you’d damned well better at least pay attention to how much time you have to get off and how to get off.

The actions we need to take are the “narrower” things I have been writing about lately. I will leave it to others to discuss the arrangement of deck chairs on the burning ship. My propensity to talk about a wide variety of things is inversely proportional to the scope of any emergency we are facing. The debt-to-GDP ratio emergency is extreme.

John T. Reed