Copyright © August 2006 Paul Mladjenovic. All rights reserved.

Before I address the issue of what is the "Mother of all Economic Problems", let's first take a look at some sample news headlines:

"America faces massive debt problems"
"Inflation fears grow"
"Energy prices hit record highs"
"Property taxes continue to rise"
"Rising Interest rates may harm financial markets"
"Manufacturing jobs in America go overseas"
"Housing bubble may burst"
"The dollar continues to fall"
"Eminent Domain ruling increases property seizures"
"Social Security needs reform"
"Pension crisis grows for future retirees"
"Illegal immigration becomes major problem"

I am sure that you have seen these recent headlines (or something similar). They seem like different issues with different concerns and apparently different causes. Many look at these as a batch of disconnected economic issues and problems that are part and parcel of a modern, complex society. The list is not even complete. They are part of "the problems of Life" along with drugs, pollution, crime, parking tickets, pay toilets, etc etc. Right?

Wrong. Very Wrong. All of these economic problems do have the same root cause (the "mother"). This mother either caused the problem directly or took a relatively manageable or minor issue and turned it into a major economic problem. The mother of all economic problems is government. We could make it sound studious and blame "excessive" government but government by its very nature is excessive and problematic. I don't want to expand the point to include matters such as war, terrorism, etc. I believe that government plays a necessary part in defending us in a dangerous world. Therefore, I will try to limit my comments to the general realm of economics. Let's take a closer look.

Inflation & the US dollar

In recent decades, consumers and TV pundits have bemoaned "the cost of living". We here about daily expenses for hard-working folks keep rising and that wages are not keeping up with inflation. It wasn't that long ago that the hand-wringing went on and on about how there are fewer and fewer "one-income" households. Politicians wax on pompously about how families need "two incomes now to afford what a single income used to provide". Inflation is simply government printing too many dollars as they chase the same basket of goods and services. Yes, there is a more precise/formal definition but that should suffice.

The bottom line is that managing the currency (printing dollars) is the government's responsibility. The government has power over the currency and we as participants in the US economy have little choice since we are forced to use this currency for most of our daily transactions. But it stands to reason that the more you produce of something, the less each unit is worth. "Inflating" the currency doesn't mean that the cost of goods and services go up; it's that the value of each dollar keeps shrinking because you produce too many dollars. All things being equal, If I bought something last year for $1 and this year it costs me $2, it isn't because that item doubled in value; it's because the value of my money went down.

The value of the US dollar since the creation of the Federal Reserve system (effectively America's central bank; a government entity) in 1913 has fallen by nearly 99%. Inflation is basically a hidden tax since you end up paying more without getting more. Who is causing this massive inflation? Who is debauching the value of our currency? Government.

Unemployment

Invariably when you hear about a sub-par economy, the conversation turns to jobs. When you see the protestors and commentators on TV you will probably hear the clarion call for "more jobs!" I even remember hearing one clueless "economist" on TV say "we need less corporate profit and more jobs" which is akin to saying "we need less oxygen and more breathing". The ultimate engine of job creation is profit (entrepreneurs & private corporations) while the leading cause of job destruction is government. Government increases the costs and risks of employment. You can be sure that if a job is offered to you with a salary of $50,000, the cost of hiring & keeping you employed is at least 40% higher when you factor in payroll taxes (federal, state & local) along with government mandated costs (licenses, permits, paperwork, etc.) and risks (such as employee lawsuits). As the cost of hiring legal citizens increases, employers are forced to find alternatives that are affordable.

The end result is cost-cutting measures such as "downsizing" and ‘outsourcing". Remember that these things are not problems; they are symptoms. Places like India and Mexico benefit from these cost-cutting measures. Companies get the blame but the bulk of the responsibility rests squarely with the government.

"The two-wage earner family"

One of the ongoing laments in recent decades is how America went from being a place where a family can be supported by a single wage-earner to where now it takes two wage-earners to cover the expenses of running the household. Why is that? Two primary reasons cause the necessity of the "two-wage earner family"-- inflation and taxes. Who causes inflation and taxes? Government.

Poverty

Poverty has always been a big problem for our world. Every attempt to wipe out poverty invariably aggravated the problem. The first thing that people say is "the government must do something! We need to take more resources from some well-heeled sector and transfer it to the poor. Many people believe that you can wipe out poverty by a simple forced transfer of money through taxation, welfare and similar government initiatives. In one form or another that has been the most typical route for our world over the centuries. Yet, poverty persists.

The primary reason is that government has always done more harm than good for "the poor." It is no coincidence that the highest rates of poverty are always in countries or areas that have a high concentration of government! Look at the poorest countries in the world. What is the most powerful common denominator in those poverty-stricken countries? These countries are usually Marxist, communist, fascist or socialist. The common thread through these destructive ideologies is that they are very top-heavy in government. The bottom line is that more government means more poverty. Look at the United States during the 1930s. We called it "the Great Depression" but really it should have called "America's last great socialist experiment". Roosevelt's "New Deal" should have been called "FDR's Raw Deal". The lesson: more government means more poverty.

Housing bubble

The housing bubble that recently popped was not a market-driven event. The artificial rise in housing prices and the pain associated with the now-evident dropping prices (foreclosures, mortgage problems, etc.) show us a major crisis that was created by the government. How? First see the cause of the housing markets artificial rise during the 2000-2005 period. What happened? Several key government-driven events occurred:

1. Money supply & credit (controlled by government) were expanded exponentially
2. Interest rates (controlled by government) were lowered drastically
3. Lending standards were lowered to allow almost anyone to get a mortgage
4. Bankruptcy laws were very lenient (made less lenient in October 2005)
5. Government-sponsored enterprises (GSEs) bought mortgages from banks

This combination of factors took a bull market in real estate and turned it into an overblown bubble that had to pop. The government runs the printing presses and it sets the interest rates. To increase home ownership, the "benevolent" hand of government lowered lending standards to the point that many people that had no business buying a property bought very easily. Banks had no problem giving John Q. Public a huge mortgage at low interest rates on over-priced property since they were not ultimately on the hook for the money. The banks could make their money at the closing (points, etc.) and immediately sell the mortgage to GSEs such as the Federal National Mortgage Association (FNMA) and be rid of the risk of carrying these vulnerable, sub-prime loans. FNMA bought mortgages with a total worth in excess of $2 trillion in the past six years. All these factors contributed to a huge housing bubble with hidden yet unavoidable problems that are now coming to the surface.

As you can see, government involvement in the housing industry drastically warped supply and demand and now you an ugly situation unfolding. More and more homeowners are having trouble keeping up with their mortgages. Homebuilders are now struggling. Realtors and mortgage companies are shrinking their staffs. Foreclosures are skyrocketing. Millions are now at risk. The great economist Ludwig von Mises (see www.mises.org) observed that artificial booms fuelled by credit and currency expansion are always followed by inevitable busts. To add insult to injury, local governments across the country raised property taxes to record levels causing further headaches for those seeking to hold onto their homes. The aftermath is now clear; millions are suffering due to the unfolding bust in the housing bubble.

Illegal Immigration

One of the most controversial issues lately is illegal immigration. The economic implications are great. We have somewhere between 12-20 million illegal immigrants in the U.S. This is causing great problems for us in areas such as social services, employment, crime, etc. Why is it such a controversial crisis?

Ask yourself a simple question; "Who is in charge of securing our border?" The answer is simple. Government. Even with something so obvious and so elemental (securing a defined border) the government is an abject failure. This means increased costs (taxes, etc.) and risks (job loss, crime, etc.) for us. But really, there are two culprits here. The U.S. government is the obvious one but we must also acknowledge the Mexican government as well. Mexico's government is nearly socialist and over the years it has wreaked havoc on its own economy. This is now obvious. After all, what is the reason most often cited for why illegal immigrants cross our border? "They come seeking economic opportunity". The lesson here is clear: There are more economic opportunities in countries that are freer (less government) than there are in countries that are less free or not free at all (more government). When will we learn this lesson?

High costs of gas & energy

Oil and gas cost much more due to 2 causes; inflation and supply & demand. Inflation is a government creation as you know by now. Supply & demand data shows some interesting stuff:

1. 90% of the world's oil reserves are controlled by government entities (national oil companies such as Aramco). Private companies such as Exxon Mobil only control 10% of the world's oil reserves.
2. Aside from the cost of oil itself, the next biggest part of the cost is taxes. People rail about private oil company profits (The average net profit for a company is 9 cents on the dollar) yet taxes dwarf that figure. Taxes embedded in the price of gasoline, for example, range from 24-52 cents on the dollar (depending on what state, etc.).
3. We get gasoline from refined oil. Yet we didn't build a single oil & gas refinery in the United States during the past 25 years due to government regulations, mandates and outright bans. These restrictions greatly limited the supply of gasoline as consumer &industrial demand continued to soar.

There are actually more reasons than this but you get the point. In this segment, I give government a slight "pass" since Peak Oil is a major problem facing us (Peak Oil is the cornerstone of the supply & demand issues facing the energy market). However, government in recent decades made it much more difficult for us to become energy independent and it certainly played a major part in the skyrocketing energy costs especially in this decade.

Eminent domain abuse

This is a terrible problem that I find especially disgusting. The Supreme Court decision from the summer of 2005 unleashed a nightmare for property owners across the country. Basically, eminent domain means that the government can take your property and you can't do a damn thing about it. This is "legalized plunder" in its raw form. Yes, the government does "compensate" you (the government decides how much) but it is generally a "take it or leave it" proposition. This is a virulent and frightening attack on our private property rights. No one should be "forced" to relinquish his or her property. Government should exist to protect our rights, not to violate them.

Eminent domain is a hideous concept that comes with many additional problems associated with it. What if you blow the whistle on local government corruption? The risk could be that local officials would use government power to take your home or business as retribution. In other words, eminent domain could be used as a chilling way to affect other important rights such as the right to public expression as a concerned citizen. Please take the time to address this since it will affect you or someone you know about. Some great websites that are fighting eminent domain abuse are www.castlecoalition.org and www.freestarmedia.com. I hope that you will consider giving them your support since they are doing great work on behalf of property owners everywhere in our great country.

Pension & Social Security problems

For a very long time, we have come to the idea that a pension from our company or government agency is a "given". You work long enough at a job, you'll get something later on for your retirement. You probably even heard of agencies there to protect your retirement benefits such as the Pension Benefit Guaranty Corporation (PBGC). This agency was set up by the government to be a safety net that bailed out failing private pension plans. The PBGC would get the funding for this mission from taxpayers.

Several points need to be made:

• Government regulations have made pensions more costly so more and more employers are dropping them.
• A private pension you get will be overcome by current & future inflation.
• Most government pensions are under-funded so more taxes will be exacted on you and I to cover the shortfall.

Besides private pension plans, you have to also consider the issue of Social Security. We are forced to pay for Social Security with growing social security taxes. Since people are living longer than ever before, more money will be necessary to cover current and future retirees. Future un-funded Social Security liabilities are huge and growing faster than our economy. depending on whose data you trust, total liabilities during 2010-2025 will run anywhere from $32-to-$50 trillion. By everyone's admission, this debt will grow higher with each passing year. This is a staggering sum that dwarfs our country's Gross Domestic Product. How are we going to pay this massive debt?

The first point to keep in mind is that government runs Social Security. The second is that we are forced to pay for it and forced to participate. If we were allowed to keep this money and save/ invest it as we see fit, we could do much better. Even if the alternative is a mandatory IRA where the funds are placed in a savings accounts, you would still do better than the current system. Find out more about this important issue at websites such as www.socialsecurity.org.

One of the biggest issues with these programs is the concept of "moral hazard". Moral hazard is a critical issue that is rarely mentioned in economic news. It is the idea that people will behave less responsibly with their money or resources based on flawed data or expectations. Social Security is a good example of moral hazard. If everyone gets the idea that they have a guaranteed retirement, they will be much less careful about their financial planning duties. They will spend more since they are convinced that "Social Security will be there for me". They will be less apt to be diligent savers and investors. This may very well be the greatest flaw regarding Social Security as millions of future retirees will be shocked by the financial shortfalls facing them at retirement. Keep in mind that part of that shortfall is the fact that inflation grows faster than any benefit increases that will be given to payees.

The year 2008 will start the time bomb ticking since it is when the first wave of baby boomers start drawing from Social Security funds for their monthly living expenses. How many millions right now are not saving & investing to cover their future retirement shortfalls?

Medicare

And don't forget the healthcare costs that await us. Many of us are not saving for the coming healthcare costs associated with our twilight years since it is assumed that "government will take care of our medical costs through Medicare & Medicaid". The problem is that the potential Medicare costs will be greater than Social Security; it will exceed $50 trillion. What will happen to retirees when the inevitable shortfall hits? Will taxes skyrocket while services plummet? Moral hazard soon becomes a tremendous financial & health hazard. The government has unwittingly created this scenario and current politicians will not make any hard choices now to alleviate future difficulties. More likely, they will "make reforms" (this is code for "make some cosmetic changes now, avoid hard solutions and postpone the problem for future politicians to deal with it").

Healthcare

Healthcare has been a hot political topic in recent years. It is related to the previous issue. Everyone comments about the costs & availability of quality healthcare. The complaints about expensive drug costs, HMOs, medical insurance, etc. continue and get louder during election years. Invariably the call is issued for "government to do something about it". The phrase "healthcare crisis" ends up in the headlines. Yet, think about this: in 1964, government involvement in the healthcare industry was minimal yet there was not a single headline in any major newspaper screaming about a healthcare crisis. That year healthcare was widely available and affordable. That year you would be hard-pressed to find a single major headline with the words "healthcare crisis" in it.

In 1965, Government intervention started with the creation of Medicare. This was the beginning of the end as government intervention and involvement grew and grew. Slowly, the healthcare industry became more bureaucratic and more problematic. As government intervention grew more pronounced, the healthcare crisis emerged.

Now there are many that say "the problems are too difficult to overcome. We need nationalized healthcare". Keep in mind that "nationalizing an industry" is the same as "bureaucratizing an industry". Ultimately, it ends up meaning "destroying an industry".

Critics of American healthcare usually say that Canada's healthcare system is the better way. Unfortunately, that system is in crisis and headed for the emergency room. History has shown us ...conclusively... that every government-run healthcare system ended in collapse. The bottom line is that the primary problem with healthcare is government.

Government misinformation.
Many people, organizations and entire industries must rely on government data to formulate decisions regarding the current and future use of resources such as people, assets & money. If the data is faulty, then bad decisions with subsequently bad results occur. Much of the data that the government provides is either flawed by accident or actually quite purposeful. Even Alan Greenspan, during his rein as the head of the Federal Reserve, wouldn't rely solely on government data. He usually turned to private sources to gain a more accurate picture of the economy's condition.

A good example of government misinformation is the "Consumer Price Index" (CPI). It is supposed to be the official measure of inflation. They make a reference to something called the "core rate of inflation" which is inflation with food & energy costs factored out. This drives me crazy. How can you have a true rate of inflation without factoring in the price of food & energy? Everybody eats and everybody uses energy; you can't ignore these costs since they are among the most necessary in our day-to-day activities. Why leave them out? There are reasons for it. First, when you hear " the core rate is only 2%" it sounds a lot better than reality (the realistic rate of inflation is around 8%). The media then reports this to the public. People then say "hurray! Inflation is under control." The difference between 2% and 8% is huge. The impact on people's finances over time would be enormous. People and organizations would obviously plan & behave much differently under one rate versus the other. They would definitely change their buying, saving & investing habits. Wouldn't you? Under an 8% inflation rate, many more people would be apt to invest in hard assets such as gold and silver and less in paper assets (such as bonds and bank accounts, etc.).

Secondly, changing the way inflation is calculated affects other important data that we rely on. The Gross Domestic Product (GDP) is a case in point. The GDP is looked at as a measure of how well our overall economy is growing since it supposedly tracks the country's economic output. Keep in mind that to calculate the GDP growth rate, you would have to factor out the inflation rate. How would that affect the reported GDP rate? Well, if the pre-inflation GDP rate is 5% and the inflation rate is 2%, then we say we have a real GDP growth rate of 3% (5 minus 2). The announcements in the media would then report "economy grows by 3%" and everyone says "gee! that's great." But... they play games with the "core rate". If they subtracted 8%, then the GDP would be a NEGATIVE 3%; in other words, the economy would be shrinking instead of growing. Does anyone want to report a shrinking economy in an election year? If everyone thought that the economy was shrinking instead of growing, would they change their behavior? Again, of course they would. They would probably also change their voting habit as well.

This wretched and flawed data reportage (be it accidental or purposeful) radically changes the investment decisions that millions of people make. It radically changes what guidance and advice investors and consumers get from their advisors and financial institutions. It also turns many potentially good decisions into losing decisions. For all those politicians and bureaucrats within the sound of my harried voice; Please.... PLEASE... if you can't make a materially positive impact on the economy then at the very least give us some reasonably reliable data so that we can make better economic decisions for ourselves and our loved ones. Can you at least do THAT?!

To find out more about shaky and dubious government data and statistics, check out a great website by John Williams at www.shadowstats.com. He makes an interesting observation that had we stuck to the old (more reliable) ways of reporting data, the inflation rate would be nearly 8% and the unemployment rate would be 12%!

Identity theft & privacy
Identity theft has been one of the fastest growing problems our society has ever faced. In this time (the "information age") we have to be more diligent about our privacy. There are many out there trying to take advantage of you by way of your private information. Yet the greatest invader of your privacy is the government. No one demands more information about you than the government and it uses this information to track you, your health and your financial affairs. We are legally obligated to provide tremendous amounts of information through endless paperwork and reporting to numerous agencies. A lot of the information that we provide to private sources (doctors, credit card companies, etc.) is because of government rules, regulations & mandates. This means more abuse for innocent people not only from government agencies ("legal abuse") but from criminals and other private invaders ("illegal abuse").

Need I say more? GOVERNMENT IS THE PROBLEM. Someone may ask "Paul, why are you so negative about the government?" Believe me that I am very pro-government when it comes to defending this country and its' citizens from attack (both external and internal). However...

I have been in business for over 25 years and have been constantly analyzing the economy and financial markets for the sake of thousands of my clients and students. I kept investigating economic problems and issues from a "cause and effect" perspective. I continuously asked myself "why" and "how" regarding the various economic issues of the day, day-in and day-out for over 2 ½ decades. I analyzed not only the modern American economy but also about economics stretched across 5,000 years of human history and across the world. Virtually every major man-made economic problem that affected an entire community or nation led back to one cause... the government.

Why is government the cause of so much suffering?

Remember that government is an instrument of force. Government force manifests itself in obvious and no-so-obvious ways. Government force takes the form of war or the form of taxes and regulations. Government always acts through confiscation, coercion or control. Because government acts on a macro-basis, it can affect an entire industry, sector or country. Government actions affect a city, county, state, nation, continent or even the world. People that run government (politicians and bureaucrats) have tremendous power and yet there is remarkably little responsibility or consequence in using or misusing this power.

Look at the U.S. congress for example. It can spend (waste?) trillions of taxpayer dollars and create all sorts of problematic legislation but there is no consequence for any congressman that votes idiotically on an important bill. In fact, stupidity and profligacy are rewarded! As a congressman, you could vote the wrong way on every bill that is presented and you will still get all the perks of power along with very lucrative retirement benefits. Outrageous! There are more reasons but I don't have the space right now to include everything.

What we need to do as responsible Americans:

The greatest single step that we as Americans can do can be boiled down to a single, simple statement:

SHRINK GOVERNMENT AS MUCH AS POSSIBLE. That means that we must...

1. Reduce taxes at all levels government (federal, state, county & local)
2. Reduce regulations at all levels of government
3. Reduce government spending at all levels of government
4. Abolish the federal reserve (government mismanagement of our currency)
5. Take as much personal responsibility for our lives (retirement, health, etc.)

I realize that some of you (many?) may see this as too radical. The only reason that it is radical because the size, scope & reach of government has grown enormously since the Great Depression. At this point, "tweaking" the problem is much like re-arranging the deck chairs on the Titanic. The economic challenges are growing relentlessly as you are reading this.

Here are some suggestions & resources for you:

1. Understand economics to make better financial & business decisions. That means learning about how the economy works. See great websites such as...

• The Mises Institute (www.mises.org)
• Free Market News Network (www.fmnn.com)
• Financial Sense (www.financialsense.com)
• Foundation for Economic Education (www.fee.org)
• Safe Haven (www.safehaven.com)

2. Support organizations that will help you & the country deal with government such as...

• The Institute for Justice (www.ij.org)
• Downsize DC (www.downsizedc.org)
• Center for Smaller Government (www.centerforsmallergovernment.com)
• The Future of Freedom Foundation (www.fff.org)

3. Become as self-sufficient as possible.

• Reduce your debt as much as possible
• Start a home-based business
• Cut your expenses & invest as much as possible
• Don't become dependent on Social Security, etc.
• Accumulate some gold & silver (as inflation rises)

4. Stay informed. Feel free to get a free subscription to my email newsletter Prosperity Alert at www.supermoneylinks.com. You'll get some solid information to help you avoid economic problems and increase your prosperity.

5. Vote for smaller government & more freedom. If you are serious about increasing your freedom & prosperity (shrinking government!) then you should consider voting for the libertarian party. The democrats & republicans will not shrink the government. Once you get past their rhetoric, you really see two parties fighting over who will grow it more. Remember the following points about politics:

• Government is Frankenstein's monster.
• Politics is the competition over who will become Dr. Frankenstein.

Only the libertarians are out to unplug the monster. Find out more about the Libertarian Party at www.lp.org. No, you don't have to agree with every single point they make (I don't). But libertarians are the most serious about shrinking rampant government.

6. Manage your taxes. Taxes you pay (both directly as a taxpayer or indirectly as a consumer) are greater than any other expense in your budget. Learn more about decreasing your personal taxes. Reducing your taxes isn't just about keeping more money in your pocket. It also means less money that is handled and misused by the government. Find out more at sources such as www.taxcutcentral.com and the National Taxpayers Union (www.ntu.org).

You must understand why I point out the problems about excessive government. I was born in a communist country (The former socialist republic of Yugoslavia). We must shrink government as soon as possible since the current data & evidence suggests that the current economic climate could very easily produce a second (and more severe) depression.

Please don't misunderstand me. I don't believe that government is all bad. Government is very necessary in some extremely important functions for our society. It is the most appropriate entity for protecting and defending us from external & internal attack. I pray that our government maintains a very strong national defense especially in this hostile and dangerous world. Unlike other critics, I will keep cheering our military as they face-off against those terrorist thugs in the world that wouldn't think twice about killing us and those we love. In addition, government can be the most convenient way to maintain our judicial system and a few other projects for safeguarding the populace. However, government is best limited to these missions and nothing more. Unfortunately, it crossed the line during the early 20th century (starting with FDR's New Deal) and has relentlessly grown since then. This is wrong and we will pay the price unless we can shrink this ubiquitous, bureaucratic & intrusive leviathan.

If we want to build a more peaceful and prosperous world, we need more freedom and less government. For society, that is probably history's greatest lesson. When will we learn it?

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SPOTLIGHT ON AARON RUSSO & HIS GREAT MOVIE...

IMPORTANT NOTE: In light of the above article, I strongly encourage all my readers to visit Aaron Russo's website www.freedomtofascism.com. Russo recently completed one of the most important films of our time entitled "America: Freedom to Fascism". Go to his website for more details. In my view, Russo's efforts with this ground-breaking movie deserve our society's attention and support.