Thursday, July 31, 2008

Democracy: The God that Failed, by Hans-Hermann Hoppe - Excerpts

[Democracy: The God that Failed – The Economics and Politics of Monarchy, Democracy, and Natural Order. Hans-Hermann Hoppe. 2001. ISBN 0-7658-0868-4]


The world-historic transformation from the ancient regime of royal or princely rulers to the new democratic-republican age of popularly elected or chosen rulers may be also characterized as that from Austria and the Austrian way to that of America and the American way.

In the U.S., less than a century of full-blown democracy has resulted in steadily increasing moral degeneration, family and social disintegration, and cultural decay in the form of continually rising rates of divorce, illegitimacy, abortion, and crime. As a result of an ever-expanding list of nondiscrimination – “affirmative action” – laws and nondiscriminatory, multicultural, egalitarian immigration policies, every nook and cranny of American society is affected by government management and forced integration; accordingly, social strife and racial, ethnic, and moral-cultural tension and hostility have increased dramatically.

No form of taxation can be uniform (equal), but every taxation involves the creation of two distinct and unequal classes of taxpayers versus taxreceiver-consumers.

In short, monarchical government is reconstructed theoretically as privately-owned government, which in turn is explained as promoting future-orientedness and a concern for capital values and economic calculation by the government ruler … Democratic government is reconstructed as publicly-owned government, which is explained as leading to present-orientedness and a disregard or neglect of capital values in government rulers, and the transition from monarchy to democracy is interpreted accordingly as civilizational decline.

If one must have a state, defined as an agency that exercises a compulsory territorial monopoly of ultimate decisionmaking (jurisdiction) and of taxation, then it is economically and ethically advantageous to choose monarchy over democracy. But this leaves the question open whether or not a stat is necessary, i.e., if there exists an alternative to both, monarchy and democracy.

The term adopted here for a social system free of monopoly and taxation is “natural order”. Other names used elsewhere or by others to refer to the same thing include “ordered anarchy”, “private property anarchy”, “anarcho-capitalism”, “autogovernment”, “private law society”, and “pure capitalism”.

I will explain the rapid growth of state power in the course of the twentieth century lamented by Mises and Rothbard as the systematic outcome of democracy and the democratic mindset, i.e., the (erroneous) belief in the efficiency and/or justice of public property and popular (majority) rule.

The imposition of a government tax on property or income violates a property or income producer’s rights as much as does theft does. In both cases the appropriator-producer’s supply of goods is diminished against his will and without his consent. Government money or “liquidity” creation involves no less a fraudulent expropriation of private-property owners than the operations of a criminal counterfeiter gang.

Every government, and that means every agency that engages in continual, institutionalized property-rights violations (expropriations), is by its very nature a territorial monopolist.

Having to begin small, the original form of government is typically that of personal rule: of private ownership of the governmental apparatus of compulsion (monarchy).

But as the government’s private owner, it is in his interest to draw – parasitically – on a growing, increasingly productive and prosperous nongovernment economy, as this would – always and without any effort on his part – also increase his own wealth and prosperity. Tax rates would thus tend to be low.

Owing to its exclusive character and the correspondingly developed class consciousness of the ruled, government attempts at territorial expansion tend to be viewed by the public as the ruler’s private business, to be financed and carrier out with his own personal funds. The added territory is the king’s, and so he, not the public, should pay for it.

A democratic ruler can use the government apparatus to his personal advantage, but he does not own it … He owns the current use of government resources, but not their capital value … Instead of maintaining or even enhancing the value of the government estate, as a king would do, a president (the government’s temporary caretaker or trustee), will use up as much of the government resources as quickly as possible, for what he does not consume now, he may never be able to consume.

… with a “publicly” owned and administered government a new type of “law” emerges: “public” law, which exempts government agents from personal liability and withholds “publicly owned” resources from economic management.

… the mere act of legislating – of democratic lawmaking – increases the degree of uncertainty. Rather than being immutable and hence predictable, law becomes increasingly flexible and unpredictable. What is right and wrong today may not be so tomorrow.

If a democratic ruler and a democratically elected ruling elite want to expand their territory and hence their tax base, then only a military option of conquest and domination is open to them. Hence, the likelihood of war will be significantly increased.

… just as monarchy was once accepted as legitimate but is today considered to be an unthinkable solution to the current social crisis, it is not inconceivable that the idea of democratic rule might someday be regarded as morally illegitimate and politically unthinkable.

It is not government (monarchical or democratic) that is the source of human civilization and social peace but private property, and the recognition and defense of private property rights, contractualism, and individual responsibility.

In contrast to the right of self-defense in the event of a criminal attack, the victim of government violations of private property rights may not legitimately defend himself against such violations.

As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, i.e., of irredeemable government paper monies, which can be created virtually out of thin air, an practically no cost. No particular individual, not even a king, could be trusted with an extraordinary monopoly such as this. It was only under conditions of democratic republicanism – of anonymous and impersonal rule – that this feat was accomplished.

In addition to increased exploitation and social decay, the transition from monarchy to democracy has brought a change from limited warfare to total war, and the twentieth century, the age of democracy, must be ranked also among the most murderous periods in all of history.

… after the crushing defeat and devastation of the secessionist Confederacy by Lincoln and the Union, it was clear that the right to secede no longer existed and that democracy meant absolute and unlimited majority rule.

Motivated (as everyone is) by self-interest and the disutility of labor but with the unique power to tax, a government agent’s response will invariable be the same: To maximize expenditures on protection, and conceivably almost all of a nation’s wealth can be consumed by the cost of protection, and at the same time to minimize the actual production of protection. The more money one can spend and the less one must work to produce, the better off one will be.

Under democracy, everyone is equal insofar as entry into government is open to all on the same terms. In a democracy no personal privileges or privileged persons exist. However, functional privileges and privileged functions exist. As long as they act in an official capacity, democratic government agents are governed and protected by public law and thereby occupy a privileged position vis-à-vis persons acting under the mere authority of private law (most fundamentally in being permitted to support their own activities by taxes imposed on private law subjects).

Given the rules of democratic government – of one-man-one-vote and majority rule – a caretaker, whether to secure his present position or advance to another, must award or promise to award privileges to groups rather than particular individuals, and given that there always exist more have-nots than haves of everything worth having, his redistribution will be egalitarian rather than elitist.

The decision to secede involves that one regard the central government as illegitimate, and that one accordingly treat it and its agents as an outlaw agency and “foreign” occupying forces. That is, if compelled by them, one complies, out of prudence and for no other reason than self-preservation, but one does nothing to support or facilitate their operations. One tries to keep as much of one’s property and surrender as little tax money as possible. One considers all federal law, legislation and regulation as null and void and ignores it whenever possible. One does not work or volunteer for the central government, whether its executive, legislative, or judicial branch, and one does not associate with anyone who does (and in particular not with those high up in the hierarchy of caretakers).

… the decision by members of the elite to secede from and not cooperate with government must always include the resolve of engaging in, or contributing to, a continuous ideological struggle, for if the power of government rests on the widespread acceptance of false indeed absurd and foolish ideas, then the only genuine protection is the systematic attack of these ideas and the propagation and proliferation of true ones.

Political integration (centralization) and economic (market) integration are two completely different phenomena. Political integration involves the territorial expansion of a state’s power of taxation and property regulation (expropriation). Economic integration is the extension of the interpersonal and interregional division of labor and market participation.

As one approaches the limits of a One World state, all possibilities of voting with one’s feet against a government disappear. Wherever one goes, the same tax and regulation structure applies. Thus relieved of the problem of emigration, a fundamental rein on the expansion of governmental power is gone.

… under socialism, ownership of productive assets is assigned to a collective of individuals regardless of each member’s prior action or inaction relative to the owned assets. In effect, socialist ownership favors the nonhomesteader, the nonproducer, and the noncontractor and disadvantages homesteaders, producers, and contractors … since means of production cannot be sold under socialism, no market prices for factors of production exist. Without such prices, cost-accounting is impossible.

From the fact that one does not want to associate with or live in the neighborhood of Blacks, Turks, Catholics, or Hindus, etc., it does not follow that one does not want to trade with them from a distance. To the contrary, it is precisely the absolute voluntariness of human association and separation – the absence of any form of forced integration – that makes peaceful relationships – free trade – between culturally, racially, ethnically, or religiously distinct people possible.

Other things being equal, businesses move to low-wage areas, and labor moves to high-wage areas, thus effecting a tendency toward the equalization of wage rates (for the same kind of labor) as well as the optimal localization of capital.

While the judicial monopoly of governments extends nowadays typically far beyond a single city and in some cases over almost an entire continent, the consequences for the relations between the races and sexes and spatial approximation and segregation of government (monopoly) can still be best observed in the great cities and their decline from centers of civilization to centers of degeneration and decay.

As a result of this overproportional growth of low and even underclass people and an increasing number of ethnically, tribally, racially mixed offspring especially in the lower and lowest social strata, the character of democratic (popular) government will gradually change as well. Rather than the “race card” being essentially the only instrument of politics, politics becomes increasingly “class politics”. The government rulers can and will no longer rely exclusively on their ethnic, tribal, or racial appeal and support, but increasingly they must try to find support across tribal or racial lines by appealing to the universal (not tribe or race specific) feeling of envy and egalitarianism, i.e., to social class ( the untouchables or the slaves versus the masters, the workers versus the capitalists, the poor versus the rich, etc.).

Whether intended or not, the welfare state promotes the proliferation of intellectually and morally inferior people and the results would be even worse were it not for the fact that crime rates are particularly high among these people, and that they tend to eliminate each other more frequently.

Welfare must be recognized as a matter exclusively of families and voluntary charity, and state welfare as nothing but the subsidization of irresponsibility.

To be a conservative means nothing specific at all except to like the existing order, whatever that may be.

Social education and social security provide an opening for the rebellious youth to escape parental authority (to get away with continuous misbehavior). Old conservatives knew that these policies would emancipate the individual from the discipline imposed by family and community life only to subject it instead to the direct and immediate control of the state. Furthermore, they knew, or at least had a hunch, that this would lead to a systematic infantilization of society – a regression, emotionally and mentally, from adulthood to adolescence or childhood.

A return to normalcy requires no less than the complete elimination of the present social security system: of unemployment insurance, Social Security, Medicare, Medicaid, public education, etc. – and thus the near complete dissolution and deconstruction of the current state apparatus and government power.

What the countercultural libertarians failed to recognize, and what true libertarians cannot emphasize enough, is that the restoration of private property rights and laissez-faire economics implies a sharp and drastic increase in social “discrimination” and will swiftly eliminate most if not all of the multi-cultural-egalitarian life style experiments so close to the heart of left libertarians. In other words, libertarians must be radical and uncompromising conservatives.

The modern welfare state has largely stripped private property owners of the right to exclusion implied in the concept of private property. Discrimination is outlawed. Employers cannot hire whom they want. Landlords cannot rent to whom they want. Sellers cannot sell to whomever they wish; buyers cannot buy from whomever they wish to buy. And groups of private property owners are not permitted to enter in whatever restrictive covenant they believe to be mutually beneficial.

In civilized society, the ultimate price for ill behavior is expulsion, and all-around ill-behaved or rotten characters (even if they commit no criminal offense) will find themselves quickly expelled from everywhere and by everyone and become outcasts, physically removed from civilization.

Egalitarianism, in every form and shape, is incompatible with the idea of private property. Private property implies exclusivity, inequality, and difference. And cultural relativism is incompatible with the fundamental – indeed foundational – fact of families and intergenerational kinship relations. Families and kinship relations imply cultural absolutism.

Once the principle of government – judicial monopoly and the power to tax – in incorrectly accepted as just, any notion of restraining government power and safeguarding individual liberty and property is illusory.

Among the most popular and consequential beliefs of our age is the belief in collective security. Nothing less significant than the legitimacy of the modern state rests on this belief.

… statists from Thomas Hobbes to James Buchanan have argued that a protective state would come about as the result of some sort of “constitutional” contract. Yet who in his right mind would agree to a contract that allowed one’s protector to determine unilaterally – and irrevocably – the sum that the protected must pay for his protection? The fact is no one ever has!

In short, the more the state has increased its expenditures on “social” security and “public” safety, the more our private property rights have been eroded, the more our property has been expropriated, confiscated, destroyed, or depreciated, and the more we have been deprived of the very foundation of all protection: economic independence, financial strength, and personal wealth.

In short, while we have become more helpless, impoverished, threatened and insecure, the U.S. government has become ever more brazen and aggressive. In the name of “national” security, it “defends” us, equipped with enormous stockpiles of weapons of aggression and mass destruction, by bullying ever new “Hitlers”, big or small, and all suspected Hitlerite sympathizers anywhere and everywhere outside of the territory of the U.S.

The empirical evidence thus seems clear. The belief in a protective state appears to be a patent error, and the American experiment in protective statism a complete failure. The U.S. government does not protect us. To the contrary, there exists no greater danger to our life, property, and prosperity than the U.S. government, and the U.S. president in particular is the world’s single most threatening and armed danger, capable of ruining everyone who opposes him and destroying the entire globe.

Every American supposedly pays taxes to the U.S. government and is thus de facto, whether he wishes to be or not, implicated in every government aggression.

As taxpayer or draftee, every Iraqi is implicated in his government’s defense just as every American is drawn into the U.S. government’s attack. Thus, the war becomes a war of all Americans against all Iraqis, i.e., total war.

No clear distinction between combatants and noncombatants exists. Everyone is an enemy, and all property provides support for the attacked government. Hence, everyone and everything becomes fair game.

How in the world can anyone expect that a majority of an increasingly degenerate people accustomed to the “right” to vote should ever voluntarily renounce the opportunity of looting other people’s property? Put this way, one must admit that the prospect of a social revolution must indeed be regarded as virtually nil.

Tuesday, July 29, 2008

Major General Smedley Butler Quotation

[Double Medal of Honor Winner]

I spent 33 years and four months in active military service and during that period I spent most of my time as a high-class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism.

Sunday, July 27, 2008

Voltaire's Bastards by John Ralston Saul - Excerpts

[Voltaire's Bastards: The Dictatorship of Reason in the West. John Ralston Saul.
1992. Vintage, New York. ISBN 0-679-74819-9]


Reason is a narrow system swollen into an ideology. With time and power it has become a dogma, devoid of direction and disguised as disinterested inquiry. Like most religions, reason presents itself as the solution to the problems it has created.

Elites quite naturally define as the most important and admired qualities for a citizen those on which they themselves have concentrated. The possession, use and control of knowledge have become their central theme – the theme song of their expertise. However, their power depends not on the effect with which they use that knowledge but on the effectiveness with which they control its use. Thus, among the illusions which have invested our civilization is an absolute belief that the solution to our problems must be a more determined application of rationally organized belief. The reality is that our problems are largely the product of that application. The illusion is that we have created the most sophisticated society in the history of man. The reality is that the division of knowledge into feudal fiefdoms of expertise has made general understanding and coordinated action not simply impossible but despised and distrusted.

The essence of rational leadership is control justified by expertise.

Our business leaders hector us in the name of capitalism, when most of them are no more than corporate employees, isolated from personal risk.

… reason is not more than structure. And structure is most easily controlled by those who feel themselves to be free of the cumbersome weight represented by common sense and humanism.

Solutions are the cheapest commodity of our day. They are the medicine-show tonic of the rational elites.

Neither Capitalism nor Socialism can pretend to be an ideology. They are merely methods for dividing ownership and income.

This absence of intellectual mechanisms for questioning our own actions becomes clear when the expression of any unstructured doubt – for example, over the export of arms to potential enemies or the loss of shareholder power to managers of the loss of parliamentary power to the executive – is automatically categorized as naïve or idealistic or bad for the economy or simply bad for jobs.

Efficient decision making is, after all, a characteristic proper to authoritarian governments. Napoleon was efficient. Hitler was efficient. Efficient democracy can only mean democracy castrated.

All in all the building of weapons has become the most important source of make-work projects in the late twentieth century. Neoconservatives may condemn Franklin D. Roosevelt's WPA projects, but at least they kept the countryside clean and were reasonably cheap.

… there has been a gradual undermining of the idea of a general social consensus. All of this has been fueled by a slavish devotion to the rational certitude that there are absolute answers to all questions and problems.

More often than not, the problems of a state relate to the refusal of local elites to do their job – that is, to provide competent leadership and to protect the interests of the population as a whole. This includes improperly managing resources, failing to adjust to changes in technology or simply losing interest in leadership and management. Exploiting the pleasures of power without assuming the accompanying responsibilities is the most common means by which established elites inadvertently destroy their own nations.

Governments and large corporations always have more material than their critics. That is one of the privileges of power. They also have access to captive research institutes and bevies of "independent" professors, who are kept on contract to provide supportive studies and statements. How is the citizen to choose among so many "true" statements? The factual snow job is one of the great inventions of the twentieth century.

When faced by questioning from non-experts, the scientist invariably retreats behind veils of complication and specialization. Of course it is complicated. But there is no other profession in which the sense of obligation to convert the inner dialect into the language of man is so absolutely absent. Through this form of secrecy the scientist makes it impossible for the citizen to know and to understand and therefore to act, except in ignorance.

Whatever the constitutions of the nations may say, the reality today is that judges and courts are more important legislators than the elected representatives. This is the third element in the decline of the elected assemblies. Just as parts of the representative's power have gone to the executive and to the administration, so another part has gone to those who argue and apply the law. As the lawmakers have declined, the law itself has grown into a seamless structure. Like administration, it has become both a substitute for policy and a body behind whose back policy can be made.

The fixation of most eighteenth-century thinkers on inviolable legal codes was produced by two factors: their desire to end the intolerable rule of arbitrary, absolute authority and their belief in some sort of social contract. Their assumption was that this contract would automatically encapsulate and defend acceptable social standards.

… at the heart of justice must be the citizens' belief in the laws they obey and their collaboration with the authorities. The actual statutes do not exist because everyone would act in a criminal manner without them. They are there to lay out general social standards and, above all, to deal with a small minority who have always rejected responsible behavior. There is an assumption in any social contract that the constituted elites are protectors – for better or worse – of that social agreement. The idea that a civilization could function with its elites as the principal abusers of the contract is impossible. And yet that is precisely what we have.

A real belief feels to the believer to be a natural state and does not respond to questioning. That is one of the reasons we have so much difficulty dealing with the Islamic world. They don't want to discuss fundamentals. They are not interested in a rational analysis. They believe the way we once believed. Not only do we find this incomprehensible and frustrating, we also find it troubling, because their certainty is a reflection of our own past.

… the free market may be a good, bad, or insufficient idea, but, in any case, it is just a crude commercial code. Now it is regularly equated with or given credit for or even precedence over the freedom of man. But the freedom of man is a moral statement on the human condition, both in the practical and in the humanist sense. To equate it with a school of business is to betray a certain confusion.

Heroic leaders always encourage the people to dream, as if the capacity to dream were a positive political attribute. In truth, it has more to do with unleashing our fears, which then swell into the limitless realms of fantasy.

The Westerner's inability to mind his own business shows a lack of civilization. Among his most unacceptable characteristics is a determination to reveal what he thinks of as himself – his marriages, divorces and children; his feelings and loves. The European likes to think of that as an American characteristic, but the difference between the continents is merely one of degrees. Any man or woman produced by the Judeo-Christian tradition is dying to confess – unasked, if necessary. What the Buddhist seeks in the individual is, first, that he understands he is part of a whole and therefore of limited interest as a part and, second, to the extent that he tries to deal with the problem of his personal existence, he does so in a private manner. The individual who appears to sail upon calm waters is a man of quality. Any storms he battles within are his own business.

In a world devoted to measuring the best, most of us aren't even in the competition. Human dignity being what it is, we eliminate ourselves from the competition in order to avoid giving other people the power to eliminate us. Not only does a society obsessed by competition not draw people out, it actually encourages them to hide what talents they have, by convincing them that they are insufficient. The common complaint that we have become spectator societies is the direct result of an overemphasis on competition.

Thursday, July 24, 2008

The Sacking of America by Darryl Schoon

Wonder what the banking whoopla is all about in the US, England, and elsewhere? The main issue is the path down which central banks have taken us. Here's a commentary on this:

Tuesday, July 22, 2008

Tom Hodgkinson Quotation

… the final insult is that we pay the government between a quarter and a half of our income for the privilege of being patronized and bossed around.

Sunday, July 20, 2008

Alan Greenspan Quotation

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Thursday, July 17, 2008

Hermann Wilhelm Goering Quotation

Naturally the common people don't want war; neither in Russia, nor in England, nor in America, nor in Germany. That is understood. But after all, it is the leaders of the country who determine policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.

Tuesday, July 15, 2008

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State by James Dale Davidson and Lord William Rees-Mogg

The third and last book by investment advisors Davidson and Rees-Mogg. I sure wish they could write another circa 2008. This volume talks in detail about how things had progressed through 1997, pretty much on track from their projections in 1987. The struggle continues between large and small scale forces of violence, wealth, and government – but the mega states appear to be gradually losing. Davidson and Rees-Mogg have numerous suggestions about how the affluent can avoid the carnage. For the rest of us, their megapolitical insights indicate what to watch out for, and when to run for the hills as best we can. Be forewarned.


We believe that much can be learned by analogy between the situation at the end of the fifteenth century, when life had become thoroughly saturated by organized religion, and the situation today, when the world has become saturated with politics. The costs of supporting institutionalized religion at the end of the fifteenth century had reached a historic extreme, much as the costs of supporting government have reached a senile extreme today.

The changes implied by the Information Revolution will not only create a fiscal crisis for governments, they will tend to disintegrate all large structures. Fourteen empires have disappeared already in the twentieth century. The breakdown of empires is part of a process that will dissolve the nation-state itself.

As technology revolutionizes the tools we use, it also antiquates our laws, reshapes our morals, and alters our perceptions.

In cyberspace, the threats of physical violence that have been the alpha and omega of politics since time immemorial will vanish.

The state has grown used to treating its taxpayers as a farmer treats his cows, keeping them in a field to be milked. Soon, the cows will have wings.

Western governments will seek to suppress the cybereconomy by totalitarian means.

There is a high probability that some who are offended by the new ways, as well as many who are disadvantaged by them, will react unpleasantly. Their nostalgia for compulsion will probably turn violent. Encounters with these new “Luddites” will make the transition to radical new forms of social organization at least a measure of bad news for everyone. Get ready to duck.

… information technology will destroy the capacity of the state to charge more for its services than they are worth to the people who pay for them.

Instead of relating to a powerful state as citizens to be taxed, the Sovereign Individuals of the twenty-first century will be customers of governments.

The civic myths reflect not only a mindset that sees society’s problems as susceptible to engineering solutions; they also reflect a false confidence that resources and individuals will remain as vulnerable to political compulsion in the future as they have been in the twentieth century.

In our view, the key to understanding how societies evolve is to understand factors that determine the costs and rewards of employing violence.

We put violence at the center of our theory of megapolitics for good reason. The control violence is the most important dilemma every society faces.

It is precisely the fact that violence does pay that makes it hard to control.

Conventional thinkers of all shapes and sizes observe one of the pretenses of the nation-state – that the views people hold determine the way the world changes.

… formulations of economic justice in the modern context presuppose that society is dominated by an instrument of compulsion so powerful that it can take away and redistribute life’s good things. Such power has existed for only a few generations of the modern period. Now it is fading away.

We expect that representative democracy as it is now known will fade away, to be replaced by the new democracy of choice in the cybermarketplace.

The civilization that brought you world war, the assembly line, social security, income tax, deodorant, and the toaster oven is dying. Deodorant and the toaster oven may survive. The others won’t.

Every social order incorporates among its key taboos the notion that people living in it should not think of how it will end and what rules may prevail in the new system that takes its place.

Part of the reason that Rome fell is simply that it had expanded beyond the scale at which the economies of violence could be maintained.

The most profound causes of change are precisely those that are not subject to conscious control. They are the factors that alter the conditions under which violence pays.

Other things being equal, the more widely dispersed key technologies are, the more widely dispersed power will tend to be, and the smaller the optimum scale of government.

… politics in the modern sense, as the preoccupation with controlling and rationalizing the power of the state, is mostly a modern invention.

As we write, there is as yet little evidence of an articulate rejection of politics. That will come later. It has not yet occurred to most of your contemporaries that a life without politics is possible. What we have in the final years of the twentieth century is inarticulate disdain.

This is worth remembering as you plan ahead. The twilight of state systems in the past has seldom been an polite, orderly process.

As the millennium approaches, the new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution.

Another revealing hint that mass democracy is not controlled by its customers is the fact that contemporary political culture, inherited from the Industrial Age, would consider it outrageous if policies on crucial issues were actually informed by the interests of the people who pay the bills.

During the Industrial Age prior to 1989, democracy emerged as the most militarily effective form of government precisely because democracy made it difficult or impossible to impose effective limits on the commandeering of resources by the state.

… we expect nationalism to be a major rallying theme of persons with low skills nostalgic for compulsion as the welfare state collapses in the Western democracies.

A delicate etiquette shrouded straightforward analysis of labor relations during the industrial period. One of its pretenses was the idea that factory jobs, particularly in the middle of the twentieth century, were skilled work. This was untrue. Most factory jobs could have been performed by almost anyone capable of showing up on time. They required little or no training, not even the ability to read or write. As recently as the 1980s, large fractions of the General Motors workforce were either illiterate, innumerate, or both. Until the 1990s, the typical assembly line worker at GM received only one day of orientation before taking his place on the assembly line. A job you can learn in a single day is not skilled work.

The ability of workers to coerce their employers into paying above-market wages depended on the same megapolitical conditions that allowed governments to extract 40 percent or more of the economy’s output in taxes.

Information technology is making it plain that the problem faced by persons of low skill is not that their productive capacities are being unfairly taken advantage of, but rather the fear that they may lack the ability to make a real economic contribution.

For the first time in history, information technology allows for the creation and protection of assets that lie entirely outside the realm of any individual government’s territorial monopoly on violence.

One bizarre genius, working with digital servants, could theoretically achieve the same impact in a cyberwar as a nation-state. Bill Gates certainly could.

Private financial institutions and central banks will adopt unbreakable encryption algorithms when they realize that the U.S. government – and it may not be alone – has the capacity to penetrate current bank software and computer systems to literally bankrupt a country or sweep the bank account of anyone living almost anywhere.

The fact that the fading industrial era’s first stab at conceiving the information economy is to think of it in terms of a gigantic public works project tells you how grounded our thinking is in the paradigms of the past.

Soon after the turn of the millennium, anyone who pays income taxes at rates currently imposed will be doing so out of choice.

In the 1980s, it was illegal in the United States to send a fax message. The U.S. Post Office considered faxes to be first-class mail, over which the U.S. Post Office claimed an ancient monopoly. An edict to that effect was issued reiterating the requirement that all fax transmissions be routed to the nearest post office for delivery with regular mail.

… the view that the state improves the functioning of the economy by massive reallocation of resources is an anachronism, an article of faith roughly equivalent to the widespread superstitions at the close of the Middle Ages that fasting and flagellation were beneficial for a community.

… we believe that foreign aid and international development programs have had the perverse effect of lowering the real incomes of poor people in poor countries by subsidizing incompetent governments.

The ideology of the nation-state was that life can and should be regulated in a positive way by subsidizing undesirable outcomes and penalizing desirable ones. To be poor is undesirable; therefore, the poor were subsidized. To become rich is desirable; therefore, punitive taxes were laid on the rich to make life more “fair”.

As new, more market-driven forms of protection become available, it will become increasingly evident to the large numbers of able persons that most of the supposed benefits of nationality are imaginary.

Sovereign Individuals will also have to cope with the corrosive consequences of envy – a difficulty that sometimes detains monarchs, but which will be more intensely felt by persons who are not traditionally venerated but invent their own sovereignity.

The “losers and left-behinds” in the Information Society will surely envy and resent the success of winners, especially as the deepening of markets implies that this will be increasingly a “winners take all” world.

While the leading states will no doubt attempt to enforce a cartel to preserve high taxes and fiat money by cooperating to limit encryption and prevent citizens from escaping their domains, the states will ultimately fail. The most productive people on the planet will find their way to economic freedom.

Governments in the industrial era priced their services on the basis of the success of the taxpayer, rather than in relation to the costs or value of any services provided.

… it is to be expected that one or more nation-states will undertake covert action to subvert the appeal of transience. Travel could be effectively discouraged by biological warfare, such as the outbreak of a deadly epidemic. This could not only discourage the desire to travel, it could also give jurisdictions throughout the globe an excuse to seal their borders and limit immigration.

The United States is one of just three jurisdictions on the planet that impose taxes based on nationality rather than residence.

The United States has the globe’s most predatory, soak-the-rich tax system. Americans living in the United States or abroad are treated more like assets and less like customers than citizens of any other country.

As the larger, more inclusive national grouping begins to break down, with the more mobile “information elite” globalizing their affairs, the “losers and left-behinds” fall back upon membership in an ethnic subgroup, a tribe, a gang, a religious or linguistic minority. Partly, this is a practical and pragmatic reaction to the collapse of services, including law and order, formerly provided by the state. For persons with few marketable resources, it often proves difficult to purchase access to market alternatives to failed public services.

By eliminating the beneficial impact of competition in challenging underachievers to conform to productive norms, the welfare state has helped to create legions of dysfunctional, paranoid, and poorly acculturated people, the social equivalent of a powder keg. The death of the nation-state and the disappearance of income redistribution on a large scale will no doubt lead some among the more psychopathic of these unhappy souls to strike out against anyone who appears more prosperous than they. Therefore, it is reasonable to suppose that social peace will be in jeopardy as the Information Age unfolds, especially in North America and in multiethnic enclaves in Western Europe.

If the past is a guide, the most violent of the terrorists of the early decades of the new millennium will not be homeless paupers but displaced workers who formerly enjoyed middle-class incomes and status.

… the most predictable and vulnerable assets of the rich in the coming Information Age may be their physical persons – in other words, their lives. Which is why we fear Luddite-style terrorism in the coming decades, some of it perhaps covertly encouraged by agents provocateurs in the employ of nation-states.

When state and local taxes are considered as well, democratic government at all levels confiscates the lion’s share of each dollar earned in the United States. Predatory tax rates made the democratic state a de facto partner with a three-quarters to nine-tenths share in all earnings. This was not the same thing as state socialism, to be sure. But it was a close relation.

Hong Kong, of course, is not a democracy. Indeed, it is a mental model of the kind of jurisdiction that we expect to see flourish in the Information Age. In the Industrial Age, Hong Kong had no need to be a democracy, as it was spared the unpleasant necessity of gathering resources to support a formidable military establishment.

Now that information technology is displacing mass production, it is logical to expect the twilight of mass democracy.

A system that routinely submits control over the largest, most deadly enterprises on earth to the winner of popularity contests between charismatic demagogues is bound to suffer for it in the long run.

… our expectation is not that politics will be reformed or improved, but that it will be antiquated and, in most respects, abandoned. By this we do not mean to say that we expect to see dictatorship, but rather entrepreneurial government – the commercialization of sovereignty.

It will be perfectly reasonable for you and significant numbers of other future Sovereign Individuals to “vote with your feet” in opting out of leading nation-states to contract for personal protection with an outlying nation-state or a new minisovereignty that will only charge a commercially tolerable amount, rather than the greater part of your net worth. In short, you would probably accept $50 million to move to Bermuda.

… it is doubtful that firms will be able to survive the increasing penetration of market forces into what have heretofore been “intrafirm relationships”. As a result, firms will tend to dissolve as information technology makes it more rewarding to rely upon the price mechanism and the auction market to undertake tasks that need doing rather than having them internalized within a formal organization. As information technology increasingly automates the production process, it will take away part of the raison d’etre of the firm, the need to employ and motivate managers to monitor individual workers.

We believe that as the modern nation-state decomposes, latter-day barbarians will increasingly come to exercise real power behind the scenes. Groups like the Russian mafiyas that pick the bones of the former Soviet Union, other ethnic criminal gangs, nomenklaturas, drug lords, and renegade covert agencies will increasingly be laws unto themselves. They already are.

The end of an era is usually a period of intense corruption.

Unfortunately, you will not be able to depend upon normal information channels to give an accurate and timely understanding of the decay of the nation-state.

The deeper and richer textures of history are precisely the parts that tend to be edited out in the twenty-five-second sound-bites and misconstrued on CNN. It is much easier to convey a message that is a variation on an already understood theme than it is to explore a new paradigm of understanding.

As we move toward the next century, a high proportion of people in the growing cognitive elite have been given little religious or moral education in the family. The commonest religion of the elite is an agnostic humanism … A godless, rootless, and rich elite is unlikely to be happy, or to be loved. This inadequacy of the initial moral education of what will be the dominant economic group of the next century is likely to be reinforced by their life experience.

In every field it has been the radical who has won, and the conventional thinker who has fallen behind, who has literally fallen out of the race. Our politics may be led by conventional thinkers – Bill Clinton, Helmut Kohl, John Major – but our most successful businesses are led by radicals with a keen understanding of the new technological world; the archetype is Bill Gates. Conventional thinking has been discredited by its inability to deal with the rapidity and the sheer force of change.

Of all the nationalities on the globe, U.S. citizenship conveys the greatest liabilities and places the most hindrances in the way of becoming a Sovereign Individual. The American seeking financial independence will therefore obtain other passports as a necessary step toward privatizing or denationalizing himself. If you are not an American, it is economically irrational to become a resident of the United States and thus expose yourself to predatory U.S. taxes, including exit taxes.

The fastest-growing and most important new economy of the next century will not be China but the cybereconomy. To take full advantage of it, you will need to place your business or profession on the World Wide Web.

Thinking about the end of the current system is taboo. To understand the great transformation in the Information Age, you must transcend conventional thinking and conventional information sources.


Frederick C. Lane
… one of the most distinctive characteristics of governments is their attempt to create law and order by using force themselves and by controlling through various means the use of force by others.

Chinese Proverb
Of all the thirty-six ways to get out of trouble, the best way is – leave.

Alan Greenspan
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

Christopher Lasch
Ambitious people understand, then, that a migratory way of life is the price of getting ahead.

Sunday, July 13, 2008

The Great Reckoning: Protect Yourself in the Coming Depression by James Dale Davidson and Sir William Rees-Mogg - Excerpts

This is the second book (1993) in a series of three written by investment advisors Davidson and Rees-Mogg. It is a fascinating history and commentary on megapolitics and the changing scale of violence in the world since World War I. They argue powerfully that economic power is shifting away from mega states like the U.S. to smaller entities, corresponding to decreasing scales of effective military force. Lots to consider, much to draw from the lucid writing style, and not a dull moment. Be forewarned.


History shows that once nominal growth slows in a heavily indebted economy, there can be no recovery until the excess debt is eliminated.

Just as we believed it was impossible to sustain an economic system which attempted to prevent anyone from profiting, so we believe it will prove impossible to sustain a political economy which attempts to prevent anyone from losing.

In a world with growing legions of unhappy losers, it may be important for you to anticipate coming episodes of delusional thinking.

The industrial economy based primarily upon the manipulation of raw materials at a large scale is giving way to the information economy based upon the manipulation of data at a small scale.

By 1992, gross interest on the national debt claimed 62 cents of every dollar of federal income tax.

More than you may now imagine, you are vulnerable to financial, economic, and political collapse. You may even be vulnerable to physical violence.

The Information Revolution made possible by the microchip helped overturn Communism and will contribute to the death of the welfare state.

Estimates of total losses in the Japanese property market range as high as 50 percent or $10 trillion, a loss wealth equivalent to every stock market on earth plunging to zero. Even more modest estimates, in the range of $3 trillion, amount to a loss of wealth roughly equivalent to that if all China had disappeared.

… the theory of “megapolitics.” According to this theory, historic changes in the ways that societies organize are largely determined by the physical limits on the exercise of power. In essence, we imagine how the world would change if there were no laws or constitutions, and human affairs fluctuated solely according to the changing dictates of physical force … As technology and other factors change the limits within which force can be exercised, they change society … Yet even the most polite and prosperous nations ultimately have no choice but to evolve according to the changing costs and rewards of projecting and resisting power.

You can depend on the fact that normal channels of information will seldom give you advance warning of major political and economic events.

Before violence in society can be controlled, the costs of policing violence must be low. It must be relatively easy to overpower those who act in violent and predatory ways. Whether this is possible depends on many factors beyond the reach of political authorities.

The 1990 will be a cold decade for the weak who must battle the strong for the savings of the thrifty.

… the ultimate logic of the Information Revolution is to undercut the effectiveness of offensive weaponry and undermine all organizations operating at a large scale.

Future aggression will be undertaken by guerrilla war, subversion, and terror, tactics that cannot be countered by cruise missiles and bombardments targeted from space. Henceforth, Third World dictators will rely less on armies and more on terrorists. When they gain nuclear weapons, they will deliver them by overnight express, not by missiles that can be shot down.

The military equipment and structure the United States has purchased with trillions in Cold War spending is largely unsuited to combating the threats of the 1990s. The new and ancient enemies of Western civilization that will emerge to disrupt the peace will not be continental powers like the former Soviet Union, or even anachronistic 1930s-style dictators like Saddam, but small countries and fragments of countries, bands of terrorists, religious fanatics, drug lords, and criminal gangs.

For forty-five years, the map of Europe was frozen by the Cold War. This was the longest period of stable borders in Europe since the fall of Rome. The 1990s will be a boom time for map-makers. It will be a period of devolution, not just in Europe, but throughout the globe. Multi-ethnic empires will come apart. We will see the breakup not just of the Soviet Union .. but of India, Canada, China, Yugoslavia, Ethiopia, and other countries.

In the days before TV newsmen started describing every story as a “crisis”, the word was not merely a term of suspense. It had a specific meaning now largely lost. A “crisis” was “a turning point, a critical time, or a decisive turn.” It was “a state of affairs in which a decisive change for better or worse is imminent.”

A society that has no use for information about getting ahead is likely to have little use for reason, either. Its day-to-day life is likely to be ridden with demons and delusions.

The hope that government can provide everyone with a high standard of living, good health, and security against misfortune, quite apart from his abilities and values, has been an article of faith in all Western democracies for most of this century. It is now an anachronism, bound to be disappointed, no matter how reckless the monetary or fiscal policy any set of leaders chooses to adopt.

There is a widespread assumption that economic progress since World War II has become permanent. Practically everyone in modern industrial countries accepts the unargued conviction that another depression is no more likely than an invasion from Mars. This illusion is part of a general overestimation of the powers of governments.

People who live in delightful, well-mannered suburbs, who never have to physically contest for their lives and property, often fail to grasp the subtle logic of violence. It is a mistake seldom made by hardened criminals. Criminals are normally connoisseurs of power’s subtleties.

The challenge to prosperity is precisely that predatory violence does pay well in many circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.

The ultimate cure for violence is superior force. It sounds like a simple contradiction, but it isn’t. To achieve peace, a society must find ways to muster enough force to suppress predatory violence and curtail the incentives to use it.

Settled agricultural society made both taxes and crime paying propositions. Where there was accumulated wealth to take, there was always someone willing to take it.

Miniaturized technologies miniaturize institutions. In time, the microchip will destroy the nation-state. It will give small groups and even individuals the capacity to employ violence in ways that could overturn governments and destroy large organizations.

When megapolitical conditions make the attainment of sufficient military power dependent upon greater national wealth, as has generally been the case in recent centuries, leaders have stronger incentives to tolerate the emergence of private property rights, sound money, and economic freedom.

Unfortunately, the trend of technology is increasing the number of groups that can employ predatory and destructive violence.

The breakdown of large political systems and the proliferation of borders and barriers are likely to be inimical to economic growth and human freedom.

Since the eighteenth century, those who have thought systematically about the rise and fall of nations have noted similar symptoms of decline: high taxes, high prices, widening gaps between the rich and poor, strong special-interest groups, failures of motivation, a decline in education and everyday competence, a high tendency to import, high budget deficits, and more.

A characteristic of empires in their twilight is that they are burdened with high costs and inflexible leadership. In each case where a predominant country has faltered since the sixteenth century, it did so after its leaders stiffly resisted efforts to cut costs to competitive levels, opting instead for higher taxes and more spending. In each case, resources were fatally overextended. Economic supremacy was forfeited to another country enjoying lower taxes and lower costs.

The educational system of a hegemonic power is likely to be geared toward training mandarins. It is a cliché that an Oxbridge education earlier in this century trained students for the civil service, rather than civil engineering. America’s elite education today is also more adept at training persons to redistribute income than to produce it. Ten lawyers graduate in America for every engineer, as compared to ten engineers for each lawyer in Japan.

The combination of vast law firms, litigation for profit, tight government regulation, and grotesque costs is regarded by many economists as one of the reasons why American industry has ceased to be competitive with Japan.

With health care bankrupting many individuals, while making small and even large businesses less competitive with foreign companies that operate without such hideous costs, it was all but inevitable that a cry would rise up for adoption of a latter-day version of the National Health Service. People going broke always wish for someone else to pay the bills. It is a marker on the road to bankruptcy. As in so many other respects, history repeats itself.

Typically, economic downturns sharpen the demands of selfish, local interests and reduce international cooperation. Indeed, this is one of the chief reasons that slow growth periods are times of protectionism and trade war.

The message of history is that cooperation declines along with economies. As world growth prospects diminish, ethnic solidarity and nationalism increase. Horizons narrow. Groups tend to hoard political advantages and seek regulations that reserve for themselves as much as possible of the smaller pie.

Military defeat in Afghanistan meant not just the end of the Soviet empire, but the public disgrace of the command economy in Russia as well. It meant the end of a century of enchantment with the doctrines of Marx. His ideas will still be in books. And many of them will still be believed. But they will be believed mainly in American universities and backwater, Third World mining towns. Marxism at long last ceased to be a contemporary ideology.

The building of factories for mass employment, along with the spread of firearms, gave unskilled workers a rare opportunity to seize wealth. Every such shift of megapolitical power engenders a new ideology to justify the new outcome.

What is happening is not that capitalists are suddenly succeeding in exploiting the workers, but rather that technological change is making it more difficult for workers to exploit the capitalists.

The advent of large-scale enterprises in the late nineteenth and twentieth centuries enabled labor unions to extract higher wages for their members – higher than would be justified by their true economic contributions. They did this by threatening to strike, or, in many cases, sabotage the operations of the enterprises in which they were employed … In essence, industrial workers received a political payoff in addition to their economic wage – a legalized shakedown payment for not sabotaging the operations of the firms where they worked.

The decay of union power as economies move into the Information Age is hardly a random development. It is a predictable consequence of the declining scale of enterprise and therefore the increasing costs of redistributing income through disguised blackmail. Both the economic base and the class ideology of socialism are in rapid decline. The industrial worker, having had his summer of class power, must now give way to new interests and ideas, based on emerging rather than declining technology. Because unions can no longer extract political blackmail from employers as readily as they used to, it is hardly surprising that the share of income claimed by essentially unskilled workers is falling while the percentage earned by the well-educated and the capitalists is rising.

One of the mysteries in the ordering of human life is the way that otherwise inadequate or even dysfunctional social systems can be made functional by religion.

Freedom of religion is possible only where governments function competently on a large scale. It was the advent of new megapolitical conditions – the Gunpowder Revolution – that made religion, in Radcliffe-Brown’s words, “primarily a matter of belief.” The new technology of power facilitated the development of markets and the growth of the nation-state, developments that altered religion’s previously crucial role in organizing social life. The fact that freedom of religion became possible in the most advanced economies over the past few centuries is itself evidence of religion’s declining importance. Religion could only become a matter of choice when it no longer mattered so much what religion one chose.

Part of what makes Islamic law effective in discouraging crime is that it is “old-time religion”, unamended by modern sociology and sophisticated apologies for crime. All religions discourage theft and murder. But where Islamic law is in force, this discouragement does not speak in a soft voice.

As the scale of enterprise rose over the past five centuries, and banking developed in its modern forms, it became ever more difficult for a nation operating under Islamic law to compete. A strict prohibition on lending for interest prohibits a passbook savings account, as well as a fixed-interest government bond.

In the Information Age, the traditional Islamic prohibition against usury will be less damaging to economic efficiency. Even if it is not set aside by an Islamic Luther, the falling scale of enterprise implies lower capital costs, and thus marginally less damage done by limiting debt markets.

Long wave crises in the economy recurring every fifty to sixty years are often associated with human life span. It is commonly argued that individuals who experienced the previous crisis must die out before their descendants can repeat their mistakes. There is logic in this. But it is possible that the causality is reversed. Humans may be limited to an adult life span of fifty to sixty years because crises recur with that rough frequency.

If there is a depression as we expect, one of its consequences is likely to be a thoroughgoing disillusionment with government, and government promises on intervention to forestall fluctuations of the business cycle. Nonetheless, so long as governments retain substantial resources at their disposal, there will always be a demand for rationalizations of far-reaching government actions.

Ironically, the best place to look for a market to go straight down is in the richest country. It is there that the bias towards optimism is likely to be most acute. The best place to find a stock that will shoot straight up is in an underdeveloped market in a poor country, because savings there will tend to be hidden under the mattress, and potential investors will persistently overlook opportunities.

A wicked feedback of perverse incentives reinforces the criminal values and delusional thinking that trap the underclass in poverty. This trap is shut all the tighter because its outlines are hidden by the miasma of race.

Recent estimates suggest that fully one-third of the adult population of the United States cannot perform simple arithmetic calculations. Anything more complicated than flicking to the channel with the music videos, and they are over their heads.

Far more than is commonly acknowledged, poverty is not the cause but the consequence of perverse values and antisocial behavior.

Claims of “racism” do not explain the failures of the underclass. But they bode ill for the future of major cities in the United States, and, to a lesser extent, Europe. They fit into an ancient patter of delusional thinking among the poor that has often culminated in violence. That such claims are now so prominent is itself a hint of both megapolitical vulnerability and economic closure.

By the peculiar logic of the welfare state – which seeks to prevent anyone from losing – to be a victim is to be a winner. The more victimized one is, the higher the recompense he can claim.

The turn away from analytic rationality and the blinking of facts by black leaders are sell signals for the central city. Historically, the claim for rewards based on status rather than achievement has been associated with economic decline. And that, in turn, encourages dishonesty, counterproductive behavior, and delusional thinking.

A general characteristic of the destitute is that they are prone to delusional thinking. They are far more likely than the rich to believe in black magic, the evil eye, predestination, astrology, and confining cultural taboos.

… the function of the delusion – to exonerate the loser from responsibility for his misfortune. The poor man’s pig cannot simply die. It must have been killed by the village “sorcerer”, who usually just happens to be the person in the village who is most successful at fattening his own pigs. It is not incidental that the farmer with the pigs is also likely to be most able to bear the burden of redistribution. For the sorcerer or conspirator to achieve this amazing feat requires that he possess occult knowledge not generally available. It also requires that the inner circle to which the sorcerer belongs have some wicked purpose. This could be devil worship, cannibalism, repugnant sexual practices, a commitment to enslave the world – or whatever seems likely to disqualify the conspiracy from common sympathy. The wicked purpose is essential. Otherwise the loser is still subject to the reproach that he failed to obtain the powerful knowledge himself. To be entirely exonerated, it must appear that he could not be privy to the occult knowledge without forgoing his moral standing – or even risking his soul.

Lacking an infrastructure capable of securing property and policing the safety of individuals, Third World countries have fallen prey to economic destitution, rampant crime, corrupt police, and guerrilla war. In these circumstances, the distinction between ordinary criminal gangs plundering the public and guerrilla movements imposing “taxes” has blurred. This is especially true as modern technology has made it easier for rebellions to sustain themselves with little or no outside help.

The drug lords are the wealthiest people on the planet … The drug cartels are not rinky-dink, back-alley criminals. They are financial superpowers, endowed with all the worst possible traits for attacking the foundations of social order. They are unscrupulous. Violent. Adept at clandestine organization. And richer than governments.

A stable system of property rights, an honest political force, and a dependable judiciary are historical accidents, rare in the experience of the world. They are hard to create, and easy to destroy, especially under current technological conditions, which make it easy for small groups to wield effective military power.

If governments, even in countries like Germany, Sweden, and France, cannot create jobs at tolerable costs during times of relative prosperity, what is the basis of confidence that they can do so in the face of true depression conditions?

We have argued that government spending per se did not cure the depression. Then what did? The answer is obvious, but not simple. World War II. The outbreak of a devastating war in Europe and the Pacific did restore demand to languishing sectors. Far from confirming the hypothesis that government spending can easily prevent depression, the World War II experience raises many doubts. Its effect did not merely rest with the fact that the war was expensive. Rather, a great part of World War II’s impact was that it curtailed supply, destroyed competitive capital, killed talented personnel, and reorganized world monetary, trade, and property rights.

The guerrilla wars that flared into the open after World War II were set in motion by the bitter reaction of peasants to the impoverishment that followed the collapse of the world price of rice.

The economies of much of Asia, Africa, and the Americas had experienced little or no growth for centuries before they were opened to European contact and their institutions forcibly changed. A reversion to old forms of misgovernment and institutional weakness could hobble growth into the indefinite future.

Dozens of economies, from Ethiopia to Mozambique, are not just temporarily depressed. They are collapsing. Falling apart at the seams. When slumps extend from years to decades, and the infrastructure decays, the roads fall apart, bridges wash away, and copper wire from the telephone lines is hammered into bracelets, this is not a temporary departure from the path of economic growth. It is something more permanent. Then end of the line.

The immense, and false, assumption was that the authorities could counteract a depression if one began. This proved untrue in 1930. It is no more likely to be true in the 1990s. Even recognizing that a slump is underway is often beyond the vision of the authorities.

We believe that a major reason why underdeveloped economies are more prone to inflationary than deflationary crises is that the great majority of assets in such economies are tangible assets, like land, mineral deposits, buildings, livestock, equipment, and inventories that cannot be completely wiped out by inflation. A plot of land and a buffalo will still be worth something, no matter how ruthlessly governments devalue the currency.

Personal property taxes are not well suited for an age of intangible assets that can be moved or hidden. But this won’t necessarily prevent some hard-pressed state and local governments from reaching for confiscatory personal property taxes in a slump – especially in jurisdictions where the owners will be a racial or ethnic minority distinct from the majority of voters. A wealth tax at the national level is also a possibility, in spite of the fact that it would be an obvious violation of the U.S. Constitution. The constitutional amendment that provided for an income tax did not repeal the earlier ban on a capital tax. But such niceties may not withstand the rush of circumstances. Remember, Franklin Roosevelt confiscated gold, which was a clear infringement of the prohibition against taking property without compensation.

The balance sheet of the United States has been run into the ground, not by the rich, but by politicians catering to constituencies who want something for nothing … part of the problem has been the growth of income redistribution – which reflects the deteriorating capacity of governments to maintain order.

We expect that taxes on the rich will rise in the coming depression, especially income taxes, because deflation increases the return to creditors.

As you consider the future, remember, it is unusual for a debtor country to allow its citizens free latitude to move capital outside its borders.

There is a likelihood of a surge of downgrades in asset prices of municipal bonds that will be triggered by defaults and redemptions of muni bond mutual funds that will drive down prices in illiquid markets. We anticipate a multi-stage process of collapse for instruments of state, municipality, and agency debt – much like that undergone by Third World debt during the 1980s.

We are optimists in believing that America will take a deflationary course, and thus retain its institutions. But make no mistake. At the depths of the coming depression, the very survival of the U.S. government will be widely questioned. Disillusionment and delusion will abound. Violence will be widespread. Tribal and nihilistic antagonisms will lead to greater terrorism, especially in the cities of America.

Part of the reason that Americans save so little is the assurance that they will be protected from many of the high-cost contingencies, like retirement security and medical care in old age, that induce savings in the first place. Too much income redistribution and too much income equality can actually undermine stability.

We can forecast with firm conviction that the government will not acknowledge that a depression has begun until it has been underway for eighteen months to two years.

A major confirmation of the onset of the depression will be a concerted effort on the part of political authorities to locate scapegoats for the slump. Every slump and market crash in history has been blamed on something other than a decline in economic prospects. The pattern is infallible.

Governments hungry for reelection will panic as the asset deflation gathers force. Their first response will be an attempt to counter the contraction with easy money.

Many believe that services are depression-proof. This is wrong. Spending on services is relatively stable in an ordinary recession, because most recessions are inventory adjustments. A depression is a different story. Services are slower to fall, in some cases, but when they do, they take longer to recover.

Insurance coverage will change to reflect the hardening attitude of society toward drug addition, alcoholism, and “illnesses” that reflect life-style choices. When potential employees are eager and plentiful, there will be less reason for employers to foot the bill for personal difficulties.

Within three to four years of the onset of the slump there will be significant reforms in the practice of law in the United States.

Oil was only one of three industries (the others being food and tobacco) to report net profits in 1932, the deepest year of the depression.

Because the U.S. government in particular is insolvent at its current level of promises, you almost can count on seeing more regulation that will do the wrong thing. It will protect dying industries, suppress innovation, and slow the transition to the new economy. The glacial pace of court action to resolve bankruptcy filings and provide clear titles to repossessed properties will also inevitably retard the adjustment process.

… it is more likely than most people now imagine that public schools in the United States will more or less disappear in the coming decade. Educational entrepreneurs will enjoy a rare opportunity to compete in providing effective elementary and secondary education to children whose parents will be able to spend vouchers on their services.

The hope of thinking people must be that the retrenchment leads to a more enlightened, nonlinear liberalism with enhanced appreciation for the market as a complex system, not to a fascist closure of the economy.

The U.S. government is destined to become the world’s largest pawn shop, converting and liquidating assets inherited from bankrupt financial institutions, failed government-sponsored enterprises, and citizens defaulting on government-insured mortgages.

To protect your liquid funds we recommend that you buy Treasury bills to park cash. U.S. Treasury bills will remain the lowest-risk debt instrument issued in America.

In investment, it is when things look their best that false values are being created. It is when things look their worst that the foundation for growth is being rebuilt.


Daniel Patrick Moynihan
From the wild Irish slums of the 19th century Eastern seaboard to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows a large number of young men (and women) to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future … that community asks for and gets chaos.

G.J. Whitrow
Since the state of equilibrium between survival and starvation which they normally experience is often finely balanced, it is not surprising that they usually consider it dangerous to deviate from their traditional customs and habits.

Thursday, July 10, 2008

Blood in the Streets: Investment Profits in a World Gone Mad by James Dale Davidson & Sir William Rees-Mogg – Excerpts

This 1987 book foretells much of what has happened in the intervening 21 years, and is still ongoing today. Essentially, there is a shift in power from large-scale megapolitical units such as nations to smaller entities which can exercise considerable military force. Things will get tough as the big powers-that-be bow out far less than gracefully. Be forewarned. There are two more books by these authors that will be excerpted shortly.


The greatest profits can always be had by buying when prices are most depressed by pessimism.

In our view, you must turn to megapolitics to find the answers to the deepest puzzles of economic and political life. We believe that the worldwide economic collapse that began in 1929 had origins in the hidden workings of megapolitics. We think that megapolitical forces are now at work undermining the basis of today’s prosperity.

“Megapolitics” literally means “politics in the largest sense.” It is the study of raw power. It is an attempt to analyze the most basic factors that govern the uses of power in the world.

Technology influences our perception of reality itself. In the seventeenth and eighteenth centuries people thought in terms of “a clockwork universe”. No one would ever have thought that way without a clock. The key to the hidden workings of history is technological.

[Technology] and other megapolitical variables ultimately determine how power is exercised. Because power sets the rules by which the economy functions, the meanderings of megapolitics can determine whether we have prosperity or depression.

Only when one nation has an overwhelming share of economic resources and power does the world economy seem to function smoothly. Only then is there likely to be free trade and open movement of goods, services, people, and capital across borders. The last Great Depression coincided with a significant megapolitical development – the effective collapse of that day’s dominant power – Great Britain. A similar erosion of American power is now well advanced.

But upheavals that would threaten your investments will not just threaten your investments alone. They could threaten your livelihood, your plans for retirement, and the hope for a good life for those you love.

The slowness of most people to think deeply about the world around them gives a great advantage to people who do think.

Weapons technology is the major megapolitical force that determines the power equation. When it is cheaper and easier to project power from the center to the periphery, the number of political units in the world declines. Those that remain are more encompassing. And economies tend to prosper. When it becomes more costly to project power and cheaper to resist, borders and barriers proliferate. The number of political units in the world multiplies. Economies stagnate.

It took power to knock down barriers to trade, including high tariffs, so that capital could be invested freely, and raw materials and manufactured goods could be transported cheaply to market. It took power to transform the legal systems of technologically backward societies to forms that allows for property ownership and investment.

It is a very rare characteristic for people to anticipate developments before they occur. Why? Because they seldom think about the deepest causes of what goes on. By concentrating on surface appearances, people can be easily misled.

… megapolitical forces that make the world poorer are more likely to be self-reinforcing. As people become poorer, they cannot afford the costly weapons needed to sustain more encompassing political ecologies. So the prospect of successful offensive action declines. As borders and barriers proliferate, everyone becomes poorer. The process feeds on itself.

Almost all [military] massacres occur when you are following tactics that used to work. This is just another way of saying that reality tends to change much faster than perceptions of reality.

Except in North America, where World War I provided a brief impetus to growth, the following period was one of stagnation. Real income sagged. Debt skyrocketed. Trade barriers emerged everywhere. Commodity prices sagged, then collapsed. Output shriveled. International debts were repudiated right and left. A wave of bankruptcies spread across borders, with no effective lender of last resort to halt the collapse. Unemployment reached unprecedented levels. The Great Depression had arrived.

As menacing as terrorism is, however, what is at stake is not merely a matter of containing terrorists. It is a matter of economic stability. The shifting balance of power in the world is the most important hidden threat to the economy today.

Today, if we think about it at all, we take for granted that one predominant power succeeding another will respect the rules of international trade and investment, and extend full protection of those rules to the displaced power. But this assumes far too much.

There is no necessity that any nation be clearly dominant. At times, the world economy has operated from a scaffolding built and maintained by weak hands. This made it prone to collapse.

For most of the nineteenth century, the United States was content to ride free on the international order provided by Britain.

Part of the reason for the growing interdependence of U.S. and British investment was that London was the world’s most highly developed capital market. By comparison, Germany had and still has only rudimentary stock markets. American investment poured into Britain for the same reason that Japanese investment comes to the United States today – it is the only capital market large enough to accommodate the cash.

Thirty years passed between the effective collapse of British authority in World War I and the assumption of American hegemony in 1945. These were thirty of the worst years in this or any century. Thirty years of chaos, years of horrible wars and depression.

As it happened, the world economy had a new and more vigorous champion in the United States. Thirty years of chaos was all it took to make the transition. We may not be so lucky the next time around.

We are living in another twilight hour in the cycle of power. In Southeast Asia. Iran. Lebanon. Latin America. Africa. The sun is setting now on the American Empire, as it once set on the British Empire.

As this century progressed, the military cost differential favoring the cosmopolitan powers reversed dramatically. Putting air or naval power to work at the other end of the globe requires increasingly huge investments. Estimates of the full cost of an American aircraft carrier battle group now range as high as $20 billion [1987].

Disorder today is far more threatening because of its collapsing scale. It is micro-disorder, motivated by the discontent of small groups. As the margins of American power recede at the periphery, the raw power of these groups rises. So does their ability to disrupt arrangements they do not like. They cannot be stopped, as World War II was stopped, by forcing the surrender of a large-scale network of command. There is no single chain of command that has the authority to stop terrorism. Nor can anyone negotiate a compromise to meet demands of many of the small groups now wielding military force. A reversion to a lower scale of military technology, with increasing advantage to the defense, means a reversion to a smaller scale of political unit. It means a reversion to grievances that are local, tribal, idiosyncratic, and sectarian. Grievances that mark deeper divisions of religious belief and ethnic animosity. Grievances that in practical fact cannot be negotiated because they are hopelessly overlapping and contradictory.

… to whom would capitulation in the Middle East be offered? Abut Nidal? The Hezbollah? The Jewish Defense League? The question answers itself. Any accommodation that would satisfy one small group would infuriate the next. The declining scale of military technology means that peace will be the hostage of an increasing number of restless souls. How bad can matters get? The final level of disintegration will not be reached until there is a change in the cost trends explained above.

The transition from feudalism that brought Europe from a collection of petty feudal interests to the modern system of independent nation-states was marked by the Hundred Years War, a war named by an optimist. It actually lasted 116 years.

The United States could decisively project power in Grenada. It cannot deter the Sandanistas. Nor stop terrorists. And no one even dreams that force could be effectively used again to prevent the confiscation of property or to insure fulfillment of contracts such as payments of debts. In spite of trillions spent in military budgets, America has not exercised such real power for more than a decade [1987]. The Pax Americana lasted little more than a generation, from 1945 until Vietnam.

Whenever a far-reaching event happens, the first question you should pose to yourself as an investor is, “Why did this event happen now, and not five years ago – or ten years from now?”

In the era before widespread expropriations, major American companies could help defend their properties by encouraging anti-Communist sentiment. This helped bring popular support for military action abroad to police the safety of investment.

Firms with high-tech, low-scale, portable investments dependent upon foreign parts and service tended to survive best in areas of property rights instability. If companies move their assets, or withhold needed supplies and repairs, they could not be so easily pushed around by foreign governments.

As an investor, you should remember that multinational firms will be increasingly vulnerable as the technology involved in their operations matures … As the Socialist government in Greece, among others, has convincingly demonstrated, a cheap and effective way to seize assets from private investors is to regulate companies into bankruptcy. They then take over the shell that is left behind.

In some countries, with prominent examples in Africa, the analogy between the government and the street gang has become complete.

The United States no longer has the financial resources to enforce stable international monetary arrangements. That is why the Bretton Woods system of fixed exchange rates collapsed. This is why the value of major currencies fluctuates up and down like a yo-yo.

Default is coming. It is coming for the same reason that it always comes. Ever since the Middle Ages, the decay of power has been a leading indicator of financial upheaval.

A debt crisis is only incidentally a problem of money. It is a problem of power.

Debt proliferation reflects the decay of the predominant power. An important factor here is the decay of military capacity to police the security of international investment. This leads to a breakdown of the global system, as local elites usurp property rights and impose restrictions on trade that damage the world as a whole.

The rising nations have large profits to invest because they are gaining a greater share of the world sale of tradable goods. Those profits go into the only capital markets large enough and safe enough to accommodate them – those of the once-supreme power.

International debt expansion continues until the sovereign debtors have milked the once-dominant power to the limit.

Remember that a bailout of the banking system, which the authorities will surely attempt in the event of a debt collapse, does not necessarily mean a bailout of bank holding companies or shareholders. Depending on the political climate and administration at the time the music stops, there might even be a de facto nationalization of major American banks – an outcome less farfetched than it may seem … In a time of crisis, the government may be the only entity large enough to save the vulnerable banks.

Soviet Communism, based on economic monopoly, cannot thrive or even survive in a decentralizing world where monopoly is deadly. Although they may not know it, the dilemma Marxists face today is that their system is fundamentally at odds with the technological foundation upon which modern economies are developing.

When Communists suppress price movements in a dictatorial economy, they also suppress the information needed to move scarce resources to the point of greatest need. For that reason, a Communist system uses resources inefficiently, a point that led [N.G.] Pierson to suggest that famine could be a problem in Communist systems. Years later, the Soviets collectivized agriculture and proved him right.

Because computers bring to small firms techniques of management, communication, and finance that were formerly available only to the largest enterprises, they reduce economies to scale even in low-tech or no-tech fields. If this theory is right, the optimum size of almost every enterprise in the world has been reduced – a development that spells trouble for the giant, old-line manufacturers in the West, but is even worse news for Communist economic systems.

Surprisingly, it is far more common for workers to exploit capitalists. In general, this is the function that labor unions perform. They raise wage rates above the market-clearing level.

The American proportion of total world capital markets is dramatically higher than it would be if Russia had not destroyed its own. This has enabled the United States to attract a greater share of foreign investment, subsidizing trade and budget deficits far larger than America could otherwise support.

We believe that developments in China, and to a smaller extent, the USSR, could strengthen deflationary forces in the years to come. China has already moved from being a buyer to a seller of grains. Within the next few years, the disciplined Chinese labor force will be producing manufactured items for export. As this trend develops, it will place downward pressure on Western prices and wage rates. A Chinese worker will toil for an entire day for the pay that a U.S. auto worker receives in seven minutes.

Print enough money and inflation will result. No doubt about it. And if banking authorities wanted deflation – as they almost never do – they could have it by simply slashing the money supply. Remember that, if you remember nothing else.

Roughly speaking, you get inflation when financial assets fall in value relative to real assets. You get disinflation or deflation when financial assets rise relative to real assets.

Increases in the money supply may be absorbed as higher financial asset prices. This means greater value for bonds and stocks, not higher prices for goods.

Black Thursday, October 24, 1929, the day the stock market collapsed, was also the day Herbert Hoover indicated that he would sign Smoot-Hawley. We doubt that this was a coincidence … Be alert to similar bad news today. Passage of new protectionist legislation could mean the downfall of the stock market, widespread debt default, and a business contraction of the sort that has not been seen since the 1930s. Watch for it.

A flattened yield curve is an omen of bad economic times. When the yield curve flattens it is usually because short rates have risen. Recession is the usual result. Only one other time has the yield curve flattened because of collapse in long-term rates. That was in 1927. The result was depression.

Governments are broke, more broke than they ever were in the thirties. Those who expect inflation are right to point out that all that stands between governments and the abyss is the printing press.

It is therefore our prediction that the long-run instability of money will eventually have to be corrected through a return to gold. Such a reform may be years away. It will probably happen only after a crisis. We think it is more likely that the return to gold will happen as a general act of governments attempting to solve a deflation than as a desperate measure to correct a hyperinflation. Either is possible. But if the economy should fall into the abyss of deflation, a remonetization of gold may prove to be the “politically practical” solution – in a way that gold did not seem politically practical during the inflation of the 1970s.

If gold is remonetized at a high price to reliquefy a deflated world economy, it is almost a political certainty that many governments will institute a windfall profits tax on gold owners. They may go further and confiscate gold as the United States did during the Great Depression. Therefore, holding more than trivial amounts of gold as a hedge against deflation may be futile, unless you can afford to store it in a safe location, such as in Switzerland. The shrewd investor should take note and be prepared.

Within your lifetime or that of your children, persons without sufficient means to protect and support themselves may become economically superfluous. Indeed, they could become even more useless than the slaves of ancient times, who at the darkest moments of bad luck could at least command the means to survive so long as hard labor was in demand. Someday, technology may antiquate even that security. With nothing to offer and no way of making a living, people without capital could be truly dispensable in a violent world.

If a free flow of goods and capital is maintained, investment will migrate to other countries, where costs will be lower and opportunities greater. This will lead to surplus capacity for the world as a whole.

That added burden of unproductive government expenditure, especially for military purposes, tends to raise costs and create institutional rigidities that reduce its capacity to make the most of emerging opportunities. We believe that it is no coincidence that every transition of economic predominance going back centuries has involved the rise of a new power enjoying much lower taxes than the one it displaced. The nations rising to positions of clear manufacturing supremacy all did so at times when they enjoyed the advantages of cheap defense.

It is only when one nation’s costs for projecting power are low that the perverse impact of power in the world is likely to be minimized. When the superior economy can employ power cheaply, it can knock down barriers to trade, reorganize political institutions to reduce their drag upon the economy, and police the security of investment internationally. When the military costs for the predominant power are high and rising, this is an indication that the megapolitical conditions for optimum growth have passed. Unless some new invention miraculously reduces military costs, the leading nation will falter under its heavy burden.

A declining scale of production increases the role of market forces in the setting of wages and prices … industries with high fixed costs tend to be characterized by non-market wage rates, otherwise known as “exploitation of the capitalists by the workers.”

Another important characteristic of declining scale is to eliminate middle-management positions. Smaller operations require fewer layers of bureaucracy between the top management and the floor worker. As the scale of industrial operations falls, many middle management jobs will be eliminated along with well-paid jobs for low-skill production labor.

The reduction of start-up costs means greater independence for enterprise, independence of government, commercial, and investment banks, and even independence of public investors.

The economics of material plenty would turn the economics of scarcity inside out. The new economics would have a negative sign. It would be the economics of exclusivity and privacy. People would aim to escape congestion, in other words, to escape other people.

Unlike the old industrial technologies with their roots in the science of the nineteenth century, economies organized around the new technologies will offer little prospect for the accumulation of capital to unskilled or semiskilled labor. In short, working for a living will become much less rewarding than thinking for a living. And indeed, even many forms of thinking will be better done by machines harnessing advanced forms of artificial intelligence.

Barring an unprecedented recovery based upon the Information Revolution, the workings of the product cycle will eventually reduce the United States, in relative terms, to a latter-day version of Spain, a once-predominant economy, beggared by uncontrollable costs and massive deficits.

In the long term, radically decentralizing technologies could undermine the economics of the city. Most large cities are already suffering from the decline of manufacturing and the fall of the relative value of unskilled and semi-skilled labor. Cities are essentially artifacts of centralization.

If past patterns apply, exchange controls are likely for the United States. Therefore, investors with large holdings should diversify internationally. Get your money out now, while you can … You will not go far wrong by keeping substantial funds in Switzerland, Germany, Britain, Holland, or even Austria.

“Always leave a profit for the other guy.” This Rothschild principle is among the most important of all the rules of prudence. You will not go broke making profits.


Eric Drexler
With advanced technology, states need not control people – they could simply discard people … States have needed people as workers because human labor has been the necessary foundation of power. What is more, genocide has been expensive and troublesome to organize and execute. Yet, in this century, totalitarian states have slaughtered their citizens by the millions. Advanced technology will make workers unnecessary and genocide easy. History suggests that totalitarian states may then eliminate people wholesale.

Nathan M. Rothschild
The best time to buy is when blood is running in the streets.