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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Commentary Of The Month
June 9, 2004
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Defending Yourself Against the Hidden Tax

By John Pugsley

The battle for individual sovereignty is a struggle to defend your own property—your life, your ideas, and the tangible things you produce or acquire. It’s profoundly moral to defend property.

The most obvious attack on your wealth comes through force: it’s known as taxation. As a Sovereign Society member, you’re no doubt working hard to ferret out legal means to reducing that theft. But few members understand the hidden tax that government levies through deficit spending.

To understand how this hidden tax works, you first need to see through the deflation/inflation statements by Fed Chairman Alan Greenspan. Last year, Greenspan told the Congressional Joint Economic Committee that deflation was the big risk facing the economy. Why does the Fed fear deflation? Simple. The banking system is a high-rise house of cards constructed completely of paper promises—IOUs. The foundation of this house of cards is federal debt. As of the end of April, U.S. federal debt was $7.142 trillion dollars. On top of this base rises a veritable skyscraper of IOUs: state and local debt, bank deposits, CDs, corporate bonds, mortgages, credit-card debt, etc., etc. Not to mention an estimated US$44 trillion in future unfunded federal obligations.

When prices start falling (deflation), debts become more difficult to service, and debtors begin defaulting on bank loans. Banks begin to fail. Greenspan, as well as all bankers, know that a significant period of deflation would cause the banking system to collapse, in the same way it did in the 1930s. As Richard Russell put it recently, "If the U.S. was to lapse into deflation, the mountains of debt that reside in every crevice and corner of the U.S. economy could give way to mass bankruptcy—and paralysis."

What does the Fed do to fend off deflation? We are told that it "lowers interest rates." Not so. Lower interest rates are a consequence of the Fed’s real action: the creation of money. When it wants to fend off a business slump, the Fed buys Treasury securities from banks, paying for them with fresh, new money it creates out of thin air. The banks get new money to loan, so interest rates fall.

Last year’s deflation fears compelled the Fed to inject so much new money into the banks that interest rates fell to the lowest rate in decades. But injecting new billions of paper dollars into the economy is a dose of the "hair of the dog that bit you." Now, deflation is no longer the problem. More money means rising prices.

And here they come. The March CPI jumped by 0.5% (an annual rate of over 6%). "Core inflation," which excludes the more volatile food and energy components, rose 0.4%, the highest monthly rate in almost two years. It’s no surprise that Greenspan has switched stories and is now concerned about inflation.

What happened? As they did in the 1970s, economists cry that we’re victims of rising energy and commodity. According to them, as rising costs of prices trickle up through the economy, the price level rises. The man in the street, and that includes Wall Street, is oblivious to the fact that blaming producers for inflation is pure hogwash.

When one producer raises his price, it cannot cause the price level to rise unless more money comes into the system to support those rising prices. There’s only one cause for a rising price level, and that is an increasing quantity of money. The Federal Reserve is the source of inflation.

Why do central banks keep increasing the money supply? Because governments keep spending. Since it’s politically impossible to raise taxes high enough to meet all the demands the public makes for more government spending, the politicians borrow. Then to keep government borrowing from gobbling up all the lendable funds in the banking system, the central bank simply monetizes government debt, by buying Treasury securities from the banks with new money.

Thus, we pinpoint the real engine of inflation: government debt. For thousands of years, the game has been the same. Governments steal from citizens through taxes and through the subterfuge of monetizing their own IOUs. And the United States isn’t alone. France, Germany, the Netherlands, Portugal, Greece, and Italy, among others, are all running deficits well in excess of 3% of GDP.

The bottom line is that when governments borrow, central banks turn those IOUs into currency. Every dollar, franc or euro central banks create is an act of theft. The larceny is carried out by stealing the purchasing power from all of us who use money.

We know many strategies for legally defending against direct taxation, but what can you do to defend yourself against the theft of inflation? Fortunately, history offers answers.

First, hard commodities are real things against which the value of money is measured. As money falls in value, real goods rise. Throughout history, the clear winners for inflation protection have been precious metals: gold, silver, platinum, etc., with gold being the standard-bearer. A substantial portfolio of precious metals is your first line of defense against the hidden tax.

Second is to hold financial assets in the strongest currencies, meaning those currencies whose governments are deficit spending at the lowest rate. Switzerland comes to mind, just as it did in the 1970s.

For the sovereign individual, however, hard assets and hard currencies are the primary defense against the hidden tax.

John Pugsley is Chairman of The Sovereign Society and the author of many books on economics, investing and politics.