There is something seriously wrong in America. We all sense it, but few in the mainstream media are willing to mention it or can effectively articulate it within the public's sound-bite oriented attention span.
It isn't just about the remnants of the financial crisis; it isn't the protracted jobs recession and slow recovery; it isn't the trillions of dollars in deficit spending; it isn't the degree of rampant financial malfeasance. It is something deeper, and it will soon be the central theme to your investment strategy and financial security.
On the surface it might appear we have lost our optimism about the future and our confidence that America is still the "shining city upon a hill" that countries around the world admire and look to for leadership. Though our children mouth the platitudes taught by older generations, they ring hollow in the hallways with video surveillance, motion sensors and metal detectors when recited by them. The high-minded ideals seem misplaced in unemployment lines where graduates stand with freshly minted advanced degrees in hand, huge education debts and little hope other than the faint possibility of a non-paying internship.
It isn't that the American people have changed. Our government has changed.
We need to examine our shifting cultural norms and our elected representative government.
America was a country based on a strong moral compass and a belief system. Today we see decay and people who have lost their faith in America as the place where possibilities abound and everyone can have the American dream if willing to work for it. Today many in pursuit of that dream are working three jobs with no benefits and no longer getting by as they fall into the grips of the lending shylocks. People who consider themselves middle class no longer have retirement plans like their parents, are working longer hours to assist with their children's horrendous college costs and, are often forced to support their grown children. Barrack Obama's election evidenced the desperation for anyone perceived to offer change, and how quickly we are disillusioned. It seems it is all just great theater aimed at making us feel we actually have some choice.
Unknowingly we are steadily marching toward a currency crisis across the entire global fiat-based money system. This crisis will force us to make choices about our personal freedoms that are startling to contemplate today and would have been unthinkable ten years ago. Our leaders have become propaganda machines promising change but delivering the lobbyists' agenda that appears to only make matters worse. So what is to be done?
First we need to realize we are sacrificing our liberty for the basic needs of safety and survival. Few recognize this insidious cancer. Many will think this harsh, but consider the personal freedoms we have surrendered in the last decade, for what we are told is a matter of national security:
- Personal surveillance has become ubiquitous—surveillance cameras, metal detectors, security guards in public and even private gathering places.
- Borders are tighter, money movement is tighter and government reporting requirements have increased.
- Regulations, fees and taxes are exploding at all levels of government while basic public services are shrinking.
- Personal Information under the Patriot Act has made available unlimited amounts of personal information to the government's watchful eye.
- A more than one-trillion-dollar annual military budget (including an off-budget-sheet war) is spent to enforce police activities in over 130 countries, yet we can't implement a half baked response to an oil spill or a devastating hurricane. These are complete government failures to actually deliver the security we have entrusted to it.
I am a realist without a political agenda to sell. My interest in politics in this discussion is limited to what it means to our investment strategy. I simply want to survive and give the next generation a better, safer and freer world than I was born into. Shorter term I want to accumulate and protect my wealth. Soon politics as usual will be over as the blunt force of reality hits home.
Fuzzy words and happy-face economics will be wasted on a public that wants real solutions to real problems of retirement, healthcare, education, taxation, housing etc. These demands escalate when standards of living fall and unrealistic expectations and senses of entitlement are crushed. This is where we are currently in the ongoing transition.
Here is an outline of what is happening, followed by suggestions for your future financial decisions.
In The Road to Serfdom (1944), F.A. Hayek showed how governments, supported by a collectivist mindset, always tend towards totalitarianism. Even the most libertarian government thus far created, the government of the United States, has slipped incrementally towards totalitarianism over the past two centuries. It is an inherent trait of government.
The degree of socialism in America increased substantially after the establishment of the Federal Reserve System (1913) and the measures taken during the Great Depression (1929-46) which it created. Ever since the early 1900s we have had a two-party system dominated by socialists—the Republican Party advocating conservative socialism, the Democratic Party advocating social-democratic socialism. Both share the principle that the government should "run" and "mould" society by using legal force and intervention to transfer property and personal wealth to enable ‘redistribution of wealth'.
The differences are only in the particular ways the government should run society:
- Social democrats tend to prefer heavy taxation, large wealth transfers to the poor, and nationalized industries, and oppose price controls, regulations and behavioral controls.
- Conservatives tend to prefer lower taxation, a smaller welfare state, regulated (cartelized) industries, price controls, product controls and behavioral controls.
The modern Republican Party is center-right on the left-right paradigm. As with the Democratic Party, this obscures the wide range of views Republicans hold on how much control the State should be allowed. Their 2008 presidential nominee John McCain, like Barack Obama, strongly favored socialism, though with a right-wing flavor. Thus, the two main candidates in 2008's presidential election represented a false choice—really no choice at all. One candidate, Ron Paul, stood in stark contrast to the candidates favored by the mainstream media and political establishment. As expected, he was neutralized by the mainstream media as a zealot with an unsound political view.
WHAT IT MEANS TO YOUR FINANCIAL STRATEGY & PLANNING
It is almost indisputable that the U.S. government will become larger, more controlling and more interventionist. It will exert more power over our personal decision making, including our investment choices, which will be increasingly represented in terms of what is in the best interest of the State and national security. They will increasingly be policed by taxation, regulatory reporting and predatory restrictions on available options.
Anticipating government policy and legislative initiatives is no longer the sole domain of those playing the regulatory arbitrage game and professional fund managers. It is becoming a necessary strategy for all investors as a more totalitarian federal government continues to evolve.
GOLD & SILVER
I would fully expect to see a black market in gold if the government goes the route of confiscation. This would favor smaller denominated physical assets such as coins and possibly smaller bars. I am skeptical that the government will choose this route since there is too much precedence for black markets appearing.
Predatory taxation is most likely since mechanisms are already in place to police such an approach. Offshore holdings such as "Gold Money" where the physical gold is easily moved and converted seems appropriate. Unfortunately this is as regulations presently stand. The G20 countries are all in this together and they are very focused on tax haven countries that would harbor taxable holdings. Government will make it illegal not to report these holdings and when you move them you will have many difficulties, plus possible felony issues. Other gold/silver holding options can be made extremely difficult if governments choose to target them.
Don't try to outguess what the government is going to do. Since it has only so many options, you can put together a decision tree of alternatives in advance, then watch government activities closely for signals and shifts. Legislative and regulatory actions are usually well telegraphed, as professional fund managers have known for years. It is now a strategic imperative for all investors. The trick will be to stick to your strategy and not to be lulled by the spin that will accompany government actions. They will be camouflaged or misrepresented but not hidden.
So how does this strategy actually protect you over the long term? Government legislation and regulation is often ripe with loopholes—the world where accountants, tax advisors and lawyers live. You can be assured that new options for your decision tree will emerge if you are vigilant and know this is integral to your long term investment strategy. Welcome to 21st century investment management.
For the full unabridged research paper - see: EXTEND & PRETEND: A Matter of National Security
Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private venture capital fund.
Disclosure: No POsitions