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Steve's note: Earlier this month, we ran a series of essays from my friend and colleague Porter Stansberry on a crisis building in America's finances. It generated huge interest from readers – and a lot of controversy.
So when Porter published research on the roots of the crisis and his recommendations for protecting yourself, I asked to share it with DailyWealth readers. You might not agree with everything he says... But I guarantee you'll come away with a lot to think about... New American SocialismBy
Wednesday, June 29, 2011
No one knows what to call it...
That's part of the problem. It's difficult to criticize something that doesn't yet have a proper name.
You can't just call our economic system "socialism." It's not. There's a profit motive and private ownership of nearly all assets. Socialism has neither of these. Besides, far too many people have become far too rich in our system to simply label it "socialism."
If you have ever traveled to an actual socialist country – with a power grid that never works, little public sanitation, petty graft at every turn, and endemic, horrifying poverty – you realize our system and real socialism aren't the same at all.
But our system isn't truly capitalism, either. The State intervenes in almost every industry, often in a big and expensive way. With government at all levels making up more than 40% of GDP, it's fair to say we live in a State-dominated society.
And as with all socialist experiments, it is the poor who suffer the worst economic outcomes. It is their cash savings that get wiped out by inflation. It is their jobs that disappear when regulations reduce capital investment or government debt crowds out private capital in the markets.
If the poor knew the first thing about economics, they wouldn't keep voting for socialist politicians and their programs. Alas, they don't even know the basics.
The poor in America, like the poor everywhere, still believe you can rob Peter to pay Paul. They still believe their "leaders" are trying to serve their best interests. It is a sad hoax. What has really happened is clear: Bamboozling the poor has become a way of life for American politicians.
And the poor's willingness – even eagerness – to embrace the resulting economic slavery is the linchpin of our system.
But it's not only the poor who have become addicted to the system. Businessmen like Warren Buffett embrace it, too – despite its limitations and taxes. Buffett calls it the "American System." He says it's the greatest system for creating wealth the world has ever seen.
We're not so sure.
Yes, it certainly makes it easy for big businessmen like Buffett to become wealthy. But those same benefits don't accrue to the society at large. For example... even though the value of America's production has soared over the last 40 years and asset prices have risen considerably, our debts have grown even more.
When you adjust for debt and inflation, you discover America hasn't gotten richer at all. Yes, we have become more affluent. And yes, some individuals have gotten vastly richer. But as a whole, when you add back the debts we've racked up, the country hasn't gotten richer at all.
Since the end of the gold standard in 1971, real after-tax wages, per capita, stagnated. On average, we haven't gotten any richer at all in 40 years.
 What happened over the last 40 years?
Why did so many people rush so eagerly into debt? Why did they borrow more and more to buy the same things at ever-higher prices – again and again and again? And why do people in America continue to work, day after day, for jobs that offer no opportunity and declining real wages? Most important, how did a few people end up getting so rich from this merry-go-round economic system that never takes us anywhere?
To answer this question, we need only answer one core question: Who benefits?
Whose wealth and power increases with inflation? Whose stature in society grows alongside the government? Who profits from increased spending on wars, prisons, and social programs that are doomed to fail? And most of all... who profits from an explosion in debt?
A certain class of people has the power to not only protect itself from these policies but to profit as well. These people have used the last 40 years to produce massive amounts of paper wealth. And they are now desperately trying to convert those paper accounts into real wealth, which explains the exploding price of farmland and precious metals.
This explosion of wealth at the top of the "food chain" is the main feature of what I call New American Socialism. It's a system fueled by paper money, the constant expansion of debt, and a kind of corruption that's hard to police because it occurs within the boundaries of the law.
Like the European and totalitarian socialism of the last 100 years, New American Socialism harnesses the power of the State to grow and maintain production. Like in traditional socialism, the poor pay the costs of New American Socialism. But unlike socialist systems of the past, this new American version has one critical improvement...
In the New American Socialism, the power of the system produces private profits.
In this way, it provides a huge incentive to entrepreneurs and politicians to work together on behalf of the system. This is what keeps the system going. This is what keeps it from collapsing upon itself. And this, unfortunately, is why the imbalances in the world economy will continue to grow until the entire global monetary system itself implodes.
Regards,
Porter
Further Reading:
If you want more background on Porter's thesis, don't miss his recent four-part series:
"The system is so broken, not even the already lopsided payment scheme is enough. Not even close."
"Rather than face these unpleasant facts and consider where they are leading us, most people continue to think, 'It can't happen here. This is America.'"
"We're spending half our annual GDP on taxes and interest."
"The numbers are so shocking, we expect most of our subscribers simply won't believe us."
Market NotesSILVER IS STRUGGLING Silver is holding above its recent lows... but just barely.
Starting last September, all eyes were on silver as it rocketed from about $18 an ounce to over $30. After a pause in the new year, the metal exploded higher, gaining 80% from its January low. And by late April, the explosive move was due for a big correction.
The correction came in the form of a brutal two-week, 30% drop. The rout ended in mid-May, when silver dug in a foothold near $33.50 an ounce. So far, the metal has held above that level. But it has failed to establish a firm uptrend. And this past week's trading action has pushed it down within pennies of its recent bottom.
We're still long-term silver bulls. And as Steve pointed out, the last time silver was this hated by investors, it soared fivefold in less than three years. So this could just be another "pause to refresh," like we saw in January. But if the metal drops below these levels, it will mark a four-month low. And until the trend is back in our favor, we have to say there's more grief ahead for silver.
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