Monday, April 26, 2010

The Epic Economic Battle of Our Time

By Paul Mladjenovic
Copyright 2010. Paul Mladjenovic. All rights reserved.

As we look at the headlines that are swirling around us…

“Potential for financial system crisis is still feared”
“Greece has continuing economic problems”
“The Federal government is considering Value-Added-Tax”
“California fighting off bankruptcy”
“Federal government bureaucracy growing fast”
“Unemployment is persistent difficulty for economy”
(…and so on)

These seem to be all disjointed headlines. A patch of problems here… a crisis over there… and some difficulty over here. Worry and concern seem to be everywhere and for good reason. Prosperity seems as unreachable as the stars.

What will hopefully dawn on people is that there is a common thread throughout all this upheaval. It is really the epic economic battle of “Freedom vs. Statism”.

Statism is the idea that “the State” should be more and more involved in the economic and personal lives and businesses of general society. Statism is the growing use of government power and bureaucracy in an attempt to force certain economic outcomes. More statism is about more coercion, control and confiscation ostensibly in an attempt to allegedly “solve economic problems”. We see statism in obvious and not so obvious ways. We see growing statism at the federal level and also at the state and local level. We have seen it in the prior presidential administration and we are definitely seeing it in the current one.

There is the statism that you see…

• More federal involvement in the auto industry, the banking industry, Wall Street, etc.
• More government control, coercion and confiscation in the healthcare industry
• More state taxes and more state spending followed by yet more taxes.
• More government debt in places ranging from California and Illinois to Greece and Spain.

And then there is the statism that you don’t immediately see…

• inflation and currency crises due to government mismanagement of the currency.
• The multi-trillion-dollar growth of unfunded liabilities (such as Medicare).
• The back-room deals for financial firms that will end up costing taxpayers dearly.

I am sure that you can come up with your own examples. The point is that the “big picture” tells us that all of this is part of the tapestry of the larger battle that we should be aware of; the one between freedom and statism.

In the economic world, freedom is a reference to the “free market”. The free market is simply peaceful, voluntary exchange between buyers and sellers. For a nation, it is millions of people and businesses trading value for value in a voluntary way. The exchange is typically money for goods and services but the hallmark of this exchange is that it is about peaceful exchange…that is the essence of a free market…FREEDOM.

The net result of this free exchange is economic growth. The buyers get goods and services while the sellers get paid for their cost of production plus a profit. The profit, then, is utilized for growth whether we realize or not, whether we acknowledge it or not. The bottom line is that this activity is about PRODUCTION. Production is a critical part of a healthy, growing economy. Without the production of goods and service, what consumption can there be?

In that voluntary exchange, profit is the crucial key to growing that business in particular and the economy in general. Profit is the catalyst for job creation, innovation and business expansion. The primary beneficiary of this private growth and expansion is the government. As profits grow and jobs are created, this ultimately results in greater tax revenue for government. But what if government…the state…grows faster than the economy’s ability to sustain it? You must remember that statism and government is not merely paperwork, taxes, laws, regulations, bureaucracy and what we see. Keep in mind that statism (as embodied in government) is CONSUMPTION BY FORCE.

The embodiment of statism (government) siphons its resources by force from the economy. If it is kept at a reasonable (low) level, then both the free market (the economy) and the government can co-exist just fine. If government is kept at a reasonable level, general prosperity is relatively easy to achieve. However, this is not the case today. Far from it!

I came from a now-defunct communist country (the former socialist paradise of Yugoslavia). My family and I learned that painful economic lesson all too well. When you tear away “communist rhetoric”, what you have is an economy totally run by government bureaucracy where “consumption” is king and “production” is basically decimated. What you had left was a country where the general populace was hungry and constantly in need of the basics of life. You had an economy that was top-heavy in “wants and needs” unfulfilled and totally lacking in the means (production!) to fulfill those wants and needs (translation: Poverty!)

The Yugoslavian government thought that an easy way to fix the problem was simply to flood the economy with “more money”. After all, the government (statism) was in charge of printing money. Surely you can make everyone better off by printing trillions of “dinars” (the currency at the time) and give the economy some good old-fashioned stimulus…Right?

Wrong. It didn’t solve the crisis of production. Of course, what it did “produce” was hyper-inflation. By now, the people had enough. Social chaos and conflict ensued and this led to civil war and total breakdown. Yugoslavia was no more by 1994. At the heart of all this was a case of statism gone too far.

The lesson is that freedom and a healthy, thriving free market is critical…CRITICAL…to the long-term success and viability of an economy. And yes…it is even critical for the government’s own well-being and for the well-being of those that are dependent on what it offers.

What worries me is that this lesson is being ignored right now in America. I can’t change that. But I can certainly inform some people about what personal strategies would be needed. You can stay informed by getting a free subscription to the Prosperity Alert newsletter.

For more immediate information on specific strategies, you can view my recent essays or just take note of a few points (among others) that I remind my readers and students about:

1. Keep accumulating gold & silver physical bullion. Inflation and currency troubles are on the way so diversify away from potential currency issues (remember that currencies are managed by government).
2. If you are in a high-tax, high-spending state (such as California), explore the feasibility of moving to a lower-tax, limited-government state.
3. Assess your lifestyle and situation and find out where you are vulnerable when it comes to “the necessities of life”. I will cover more of this topic in future issues of the Prosperity Alert.
4. Regardless of your party affiliation, vote for lower taxes and limited government….the country depends on you to make the right choice!

I guess the amazing thing about this conflict that I write about…”Freedom versus Statism” is this:
If freedom wins, that is good for both freedom (and prosperity) and government as well. However, if statism wins, that would be bad for freedom in the short-term but it would ultimately be bad for government in the long-term.

The question is… will we learn this lesson the easy way… or the hard way?! Stay tuned…


Paul Mladjenovic, CFP is a financial seminar leader, author of Stock Investing for Dummies and the editor of the Prosperity Alert newsletter. FREE BONUS to new subscribers: Get a free 56-page ebook on budgeting to help you gain control over your finances! The tips and strategies in this ebook are more needed than ever! Get it today by subscribing to the Prosperity Alert.

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