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Steve's note: In yesterday's essay, my friend and colleague Porter Stansberry described what he's calling "New American Socialism." Today, he explains where it began and how it's changed the way he invests.
A warning before you read: Porter's views are controversial. And you may not agree with everything he says. But I think it's worth your time to consider his argument...

Why a Full-Scale Economic Collapse Is Inevitable

By Porter Stansberry
Thursday, June 30, 2011

New American Socialism began with the policies of President Franklin Delano Roosevelt.
In 1933, FDR seized all the privately held gold in the U.S. and began creating the massive government programs necessary to implement socialism. To give you some idea of how much the federal government grew during FDR's reign, remember federal spending made up 3% of GDP in 1930 – a level that had been fairly consistent for most of America's history. Almost immediately after his election, he tripled federal spending to more than 10% of GDP. And by the time he died in office, federal spending reached 44% of GDP – an all-time high.
As everyone should know by now, the promises of socialism aren't affordable. Robbing Peter to pay Paul is inefficient and kills Peter's incentives. The result is usually economic stagnation, depression, and eventually a crisis that frees people from the government's confiscatory repression.
Because America was the only large economy standing after World War II, it took much longer than usual for the problems of socialism to appear in our economy. Also, the government scaled back many of FDR's policies during the post-war boom. In winning the war, we also won a generation of economic spoils.
All this changed in the 1960s.
Lyndon Johnson had delusions of government-led grandeur. His ideas of a "Great Society" and "Model Cities," along with an expensive foreign war (Vietnam), were a recipe for massive new debts and an increasing role for government in all aspects of American life.
These policies led to an acute funding problem in 1971, because the debts of socialism couldn't be financed with gold-backed money. It was far too expensive. And so we began a new kind of socialism... the New American Socialism.
What happened in 1971? The size of America's government deficits forced us to abandon gold. After World War II, the U.S. dollar became the world's reserve currency. In exchange for placing the dollar at the center of the world's economy, we made a solemn promise to always exchange the U.S. dollar for gold at $35 an ounce.
Nixon broke that promise, calling our creditors "global speculators" and telling them to go pound sand.
This move away from gold severed the fundamental tie between our economy and our money. Without the link to gold, bank reserves could be created by fiat. And they were. This led to a huge expansion of our money supply and our debts.
The power to use this debt and to control the creation of new money is the most powerful factor in our economy. The government can now create unlimited amounts of credit to control the U.S. economy. This bestows favored status on certain companies – notably banks. This lies at the core of our economy's structure. It is how fiat money privatizes the benefits of New American Socialism.
Most Americans simply don't understand our historic tie to gold made it impossible for the banking system to grow beyond clear boundaries. Gold limited the amount of currency in circulation, which, in turn, restricted how much money banks could lend. Under the gold standard, the maximum total debt-to-GDP ratio was limited to around 150%. But as soon as we broke the tie to gold, our total debt-to-GDP ratio began to grow. It's now close to 400%.
Without the tie to gold, the amount of economic mischief our government could engineer became practically limitless. No social goal was too absurd... no war too expensive... and no government insurance scheme too patently self-serving not to finance.
Today, New American Socialism has spread like a cancer throughout our country, afflicting industry after industry.
Like a cancer, once it infects an industry, it metastasizes from company to company in that sector. Suddenly, businesses cannot function without massive government aid. These corporate wards of the State weigh down the rest of our economy... making us weaker and less competitive and dragging us further into debt.
Keep in mind, this New American Socialism I'm talking about isn't called socialism at all. It goes by many names. It's been called "compassionate conservatism." It's been called "joint public-private enterprise." It's been called "government insurance."
I've been studying it for many years – finding it in one company after another. I've actually preferred having it in many of the stocks I've recommended over the years because it tends to be good for investors.
That's the most insidious thing about New American Socialism: It's a form of socialism that leaves the profit motive in place.
That's why the New American Socialism has grown decade after decade. That's why it continues to be heavily promoted by almost every mainstream media outlet and both political parties.
It leads to a kind of corruption I believe will be impossible to stop without a full-scale economic collapse.
Porter Stansberry

Further Reading:

The majority of the U.S. population hasn't gotten any wealthier over the last four decades... but a certain group is profiting off what Porter calls New American Socialism. It's "a kind of corruption that's hard to police," he says, "because it occurs within the boundaries of the law." Read more here: New American Socialism.
"Like the old Greek currency, the U.S. dollar has not kept its purchasing power," Steve writes. "Today, you must spend $1 to get what would have cost you $0.18 in 1970 – a fall in purchasing power of 82%." Find out why he says Greece Is Going Bust... And the U.S. Is Following Right Behind.

Market Notes


The trend is still down in small resource stocks... And we're still on the sidelines.
We track the trend here with the TSX Venture Index, the most widely followed gauge of tiny gold, silver, and energy firms that scour the world for the next big resource deposit. From our late-2008 "moonshot alert" until early this year, the Venture climbed nearly 250%. Many individual names soared 300%, 400%, even 500%.
But as we warned in January, these giant moves are in the past: "While some commodity markets will move higher in 2011, it's unlikely commodity stocks in general will have such a strong tailwind behind them." Without that tailwind, the Venture is struggling. And as you can see from the chart below, it has sliced down below its trendline.
We're still long-term commodity bulls. The world's addiction to "E-Z-Credit" will fuel further rises in copper, crude oil, natural gas, silver, gold, platinum, and more. But all bull markets take breathers. And as long as the commodity bull market is on a breather, we're steering clear of small resource stocks.

The trend is down in small resource stocks

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