Market Watch - October 5, 2012
The saying “Big is Bad” certainly is prophetic as it relates to the current status of the economy; particularly the consolidation of power in our federal government, and the consolidation of power in our banking system.
Both the federal government and the banking system operate in as much secrecy as they can get away with. Every time the public demands a secret be revealed, it uncovers government misdeeds that never should have been concealed from the public in the first place. Ditto the banking system with only 5 banks accounting for 57% of the deposits in this country, and the bank’s ally, The Federal Reserve System, a secret organization for creating and making money out of nowhere, which has bankrupted this country with government loans and inflation.
Throughout history, large central governments have, without fail, caused disintegration of every great society. Today in America, we have both the dominant central government and the secret banking system called The Federal Reserve. 230 years ago the Founding Fathers, born, raised and educated in the Age of Reason, wrote into the Constitution several clauses that resulted in a separation of powers: hence, prohibitions against common, known, historical government sins that ruin civilizations, such as the destruction of the country’s purchasing power with debt, war, and the consolidation of too much power in the central government. 100 years ago those powers were destroyed in this country with three pieces of legislation.
1913 Legislation that has ruined the United States
Creation of The Federal Reserve System. In December of 1913, President Wilson issued an executive order creating the Fed. Congress did not authorize The Federal Reserve System. The stated intention of the Fed was to “take away control” from the big banks who were dominating the smaller banks. The aftermath of the creation of the Fed was the opposite. It has helped big banks to consolidate their power. As pointed out above, the 5 largest banks hold 57% of the country’s deposits. That is an enormous amount of power which has been used to help the banks at the expense of the taxpayers. Remember, these banks are TOO BIG TO FAIL. Banks that are too big to fail are too big to exist. They should be broken up so that no bank has such a dominant position that they can influence the outcome of a political election. All treasury secretaries and Federal Reserve chairmen over the last 40 years have come from the above referred to institutions, either directly or indirectly.
16th Amendment to The Constitution providing for the income tax. The Constitution specifically prohibits taxes on income (Section 9 – 4th paragraph). The result of the taxation on income is obvious—it is terribly unfair, and it encroaches upon our individual liberties. It is socialism, and it’s the best way to build a large central government. The result of the 16th Amendment passed in 1913 and providing for an unlimited tax on income, is exactly what the writers of our Constitution wanted to avoid. By having graduated income tax rates for different people, the government sets up classes. What has happened to our “classes” of people? We are fighting amongst ourselves.
Direct election of U. S. Senators rather than their appointment by each state legislature. Amendment 17, destroyed one of the great separations of power in the Constitution, the separation of powers between state and federal government. The Senate has two primary responsibilities, (1) it votes upon presidential appointments, and (2) is responsible for treaties (war). By having U. S. Senators elected by the populace, rather than appointed by each state legislature, each Senator becomes beholding to their contributors and not to the state legislatures who previously appointed them to the U. S. Senate. The reason each state legislature appointed the Senators was so that the Senators primary attention could be devoted to legislation affecting their state. Prior to amendment 17 in 1913, it was very difficult to get the Senate to vote favorably on going to war. Senators are now not accountable to their state legislature. They are accountable to their political contributors, the bulk of which comes from big banks and big businesses who profit from war: WWI, WWII, Korea, Vietnam, Gulf States, Iraq and Pakistan, all since 1913. So now, the Senate is answerable to political contributors rather than to the state legislature. This is exactly what the Founders wanted to avoid.
Increase in Federal Government Spending (Since 1913) |
|||
Year |
GDP |
Federal Government Spending |
% of GDP |
1912 |
37.4 Billion |
3.1 Billion |
8.3% |
1920 |
88.4 Billion |
11.3 Billion |
12.8% |
2011 |
15,490.0 Billion (*) |
3,600.0 Billion (**) |
23.2% |
(*) $15.5 trillion
(**) $3.6 trillion. 30% of the $3.6 trillion ($1.3 trillion or 8.4% of our GDP) is created by the Fed with a printing press and then “borrowed” by the government to supplement “insufficient” tax revenues.
Examination of the chart is telling. The U. S. got into WWI in 1917 and got out 11 months later at the end of the war in 1918. Notice that from the initiation of this legislation in 1913, to only 1920, government revenue as a percentage of total annual spending increased to 12.8% of our GDP from 8.3%. By 2011 those expenditures were 23.2% of our GDP. Continually borrowing more than a trillion dollars a year to supplement government spending is unsustainable. There will be an acute currency collapse, much like that occurring in Iran right now, which is really just a devaluation of Iran’s currency. Or there will be the cronic currency collapse we’ve experienced for years called inflation. Common sense dictates it is ruinous to borrow as much as 8% of the country’s GDP every year, just to sustain federal government expenditures.
Solution
Consolidation of power has created our problems. Disbursement of powers was at the heart of the Constitution. They fooled us in 1913. They will not fool us again if we are smart enough to break up the banks and big businesses who are choosing our presidents and senators for us.
Change the income tax amendment (number 16) to specify a limit on individual and corporate income taxes not to exceed 17%. That is the amount of money our economy can bear to contribute economically to a central government and still remain a competitive economy. That amounts to $2.6 trillion for the federal government this year, which is enough to run our government, and then some!
Withdraw the 17th amendment. Have U. S. Senators appointed by each state legislature as was originally intended. That will also keep big bank and big corporate money out of states where they have no business, and where campaign contributors just want to control the state’s senate vote.
Putting U. S. Senators’ appointments back in the hands of state legislatures will return a power to the states which will make it more difficult for the federal government to go to war. War is the road to dominant central government and financial ruin. Phasing out the Federal Reserve System will keep us out of debt, and retard inflation. A cap on income tax rates of 17% would provide for everything required of the federal government by the Constitution. These actions are Constitutionally reasonable solutions that would reverse the damaging effects of 1913.
Summary
Stocks do not look like a very good investment at this point. World stock market indexes are collapsing. U. S. indexes are spurred on only by QE3. To put that in English: The Fed continues to make money out of nowhere and give that money to banks to lend. Banks loan the money to brokers who buy stocks, which allows the market to remain at this unrealistically high level. Brokers have the quickest access to bank cash. Brokers purchasing stocks in volume cause values in the markets to increase. The market is remaining at unrealistically high values because of QE1, 2 and, now, 3.
Gold remains at almost $1800 an ounce, and silver remains over $35 an ounce. Both values represent substantially less money now than they will in a currency crash, or further devaluations. As inflation proceeds in our economy, the value of gold and silver will increase in proportion to the increase in inflation.
Bonds pay almost no income. While the general stock market is not very interesting, certain AAA rated stocks, with long-term records of increasing dividend payments, can be attractive. A few of those stocks that are currently underpriced are General Dynamics (selling at 10 times earnings and yielding 3.4%), Johnson & Johnson (selling at 22 times earnings and yielding 3.5%), PepsiCo (selling at 19 times earnings and yielding 2.6%), United Technologies (selling at 16 times earnings and yielding 2.8%) and McDonalds Corporation (selling at 18 times earnings and yielding 3.6%). The rest of the A+ group of stocks does not yield enough of a dividend payment to make the investment more attractive than holding cash.
In conclusion, conservative investors should remain in high quality, dividend paying stocks whose record shows strong dividend increases over the years. Cash is still king; especially now with so many financial problems in our economy. Investors should not expect dramatic, positive increases in corporate earnings, or in stock values, for several years until structural problems in our country are faced and resolved. Until then, continued stagnation will probably be the order of the day!
Caveat Emptor.
George Rauch
October 5, 2012
