Dec32018

money matters The Seduction of Socialism

Among economic models, socialism could be said to be a fad model, falling in and then out of favor as economic models go through a somewhat predictable cycle.

I am of the opinion very little can bring about a civilizations downfall. Not a pandemic, or war, or even an atomic blast or two. Just look at Japan and their stunning recovery from being a burnt out and defeated nation at the conclusion of WW2 and then became one of most powerful economies in the world in a little more than 3 decades.

Economic collapse however has over time, buried more civilizations than any other single event.

From Alexander Fraser Tytler:

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.
The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

Breaking that down, it means eventually a democratic system, because of the majority vote stipulation of democracy, means the populace will always vote in the majorities best interests, “best interests” being the key word here.

The reason for the ultimate collapse is monetary inflation. By inflating the money supply (printing money) the prices of most if not all things will rise in price of whatever the currency is being printed. Think U.S. dollars here in the United States or Mexican Peso in Mexico.

Monetary inflation is always caused by the authority of the currency, basically the government of whatever country is in question. Inflation is not necessarily a bad thing except for one economic truth:

Wages always lag price increases.

This means the more inflation you have, and the longer you have it, the “Affordability Gap” will relentlessly widen. As prices rises, wages fall further and further behind. As the wage gap (affordability gap) continues to widen, more people “fall under the bus”, meaning they have a harder and harder time making ends meet. The result is the wealth concentrates into the hands of fewer and fewer people. Sound familiar?

If that wasn’t bad enough, as more people find it harder to pay their bills, the calls for government assistance get louder and louder. This results in the candidates promising the most benefits getting elected while those vying for a return to a sound economic model (the cessation of printing money) get voted out.

This results in more and more elected officials towing the party line of ever increasing government assistant, which in turn results in more money printing, which results in more inflation which causes even more people to need help.

Because the cause and effect of monetary inflation is not widely understood, the very policies the masses cry for (more and more public assistance) make the situation worse and never better.

It’s a vicious cycle as well as a deceptive one. The concentration of wealth is also predicted and a natural byproduct of this process. Because wealth is in essence never destroyed, the decrease in wealth in the masses also means that wealth moves up the food chain. The more people who go broke, the more money moves up. The result is the wealth continues to concentrate in the hands of fewer and fewer people.

This happens because inflation hurts the lower incomes but actually enriches the higher incomes. Imagine a family making 30,000 with no assets seeing a 5% annual inflation rate. They see their expense rise by 5% (losing $1,800 in buying power due to the inflation) and have no way of making it up.

Now imagine an individual who has 30 million in assets (regardless of what he makes). His assets also see a 5% inflation rate. His net worth will increase six million (5% of 30 million). Whereas the family making 30K only finds it harder to pay their bills, the rich person has actually gotten a heck of lot richer.

Also remember his six million came from somewhere, and using the $1,800 in loss wages figure from above, the 6 million increase in wealth means 3,333 families went under (6 million divided by $1,800) to make this one guy richer. Now that’s a fast path to the concentration of wealth!

The ugly truth is the Cycle of Failure is caused by monetary inflation. The monetary inflation is caused by governments. The monetary inflation is demanded by the very people it will devastate, mainly those in the lower income brackets. And because that bracket will get larger and larger over time, they will eventually vote themselves the “generous gifts” referred to in Tytler,s quote and the cycle will progress.

Put in another way, the rich LOVE inflation, and they LOVE when there are calls for more help, because it makes them that much richer.

Most people don’t realize voting for more government assistant will just do more damage.

But like a drug, monetary inflation is also addictive. To stop using it and go back to a healthy economic model means the withdrawal will be massively painful. And it will be so for the very same people that call for it. And like a drug, we continually need more and more of it. Think minimum wage increases and how many times it’s been raised.

As for the rich, they probably hope the masses keep calling for more assistance through more government freebies because it enriches them. But don’t expect the masses to understand this phenomenon. From Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249

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