The Breaking Point

by James Dale Davidson

  Equally, clause 41, touching “the ancient and right custom” of all merchants to enjoy “safe and secure” entry and exit from the country without being burdened by “evil tolls,” reiterated a range of precepts of the commercial moral syndrome. Among them were easy collaboration with strangers and aliens, competition, encouragement of initiative and enterprise, openness to inventiveness and novelty, investing for productive purposes, industriousness, thriftiness, and optimism.

  The authors of the Magna Carta may have been mainly feudal aristocrats with prowess in warfare whose attitudes were largely informed by the guardian syndrome, but clause 40 shows their insistence on preserving the integrity of the commercial syndrome.

  Although no one in 1215 was thinking in terms of the moral syndromes that serve as the ethical foundations of the two ways of making a living, Saire de Quincey, Robert Fitz Walter, and their comrades-in-arms apparently understood the fraught consequences when “guardians,” such as King John, offered to peddle justice to the highest bidder (“To no one will we sell, to no one will be refuse or delay, right or justice”). Seen in the context of the thirteenth century, many of the other clauses of the Magna Carta were injunctions aimed at banning the trade of right or justice. For example, clause 36 stated, “Nothing in future shall be given or taken for a writ of inquisition of life or limbs, but freely it shall be granted.”

  The Magna Carta barons’ labors to establish the rule of law were fruitful because they were reacting against a despotic sovereign who had challenged them with a comprehensive array of wrongs to be righted. King John and the other Angevin rulers had thoroughly compromised the ethical foundations of governance, turning the kingship into an example of what Jane Jacobs calls “a monstrous hybrid.”

  Her signal modern example of a monstrous hybrid is the late, unlamented Soviet Union. When commerce is organized according to guardian values, you get disaster. She writes that guardian economic planning leads to emphasis on guardian priorities. Because production and trade are not part of the syndrome, the commerce involved becomes corrupted, while its moral foundations are ruined. The consequences can be disastrous whether the economy is placed at the disposal of central planners at Gosplan (the USSR State Planning Commission), central planners at the Federal Reserve Board, or legions of private extortionists and crony capitalists.

  Not the least difficulty arising from growing political domination of the economy is the fact that it is associated with increasingly pervasive dishonesty, as per the political precept “deceive for the sake of the task.”

  Make-Believe Well-Being

  You can follow the statistical trail etched by increasing political domination of the US economy. It is manifested in the escalating corruption and data fiddling that understate inflation, overstate economic growth, and seriously undercount unemployment. There could hardly be a better, more succinct summary of the misreporting of US economic data today than that provided by Mikhail Gorbachev in a speech in the last days of the Soviet Union, in which he complained that “the world of day-to-day realities and that of make-believe well-being were increasingly parting ways.”12

  Lies, rather than truth, are precisely what you should expect when the political portion of a mixed economy becomes predominant. Honesty is a precept of the commercial syndrome. It is not solely a Western convention, as Jacobs reminds us, but a requirement for the success of commerce in every human culture.

  Why do government statisticians lie and fabricate good news in an economy when growth has stalled? Because they are influenced by the governing guardian moral syndrome, where loyalty to the system and the willingness to “deceive for the sake of the task” are prized precepts. They lie to deceive you, to “simulate”—even if not necessarily to stimulate recovery—because political viability depends upon it. And the lies themselves have an effect on economic activity.

  When you can be convinced that economic growth is accelerating, your job and business are secure, and prosperity will soon accelerate, you are more likely to spend and invest. The same can be said of others. Property developers will launch new projects. Retailers will accumulate inventories they expect to be purchased by newly solvent consumers. If politicians and their loyal lackeys in the Bureau of Labor Statistics can convince you that political management of the economy is more effective than it really is, the result is likely to be at least a temporary uptick in economic activity. People will spend more, borrow more, accumulate more inventories, and invest in more marginal undertakings than they would do if the president held a news conference and patiently explained that, no, there has been no real recovery from the Great Recession—it was all a statistical illusion fabricated by fiddling inflation measures.

  The evolution of a heavily indebted centralized state with pure fiat money has led almost inevitably to a departure from the rule of law. Fiat money gives central bankers, like former chair of the Federal Reserve Ben Bernanke and current chair of the Federal Reserve Janet Yellen, almost unlimited power over your finances, including the power to dilute your future by counterfeiting trillions of dollars out of thin air, much of which is lavished on politically connected big banks that are “too big to fail.”

  That is OK where the authorities are concerned, because in their eyes you are just another neofeudal debt serf.

  The Too-Big-to-Fail Metamessage

  The breakdown of the rule of law could itself be a trigger of collapse. This is the metamessage inherent in “too-big-to-fail” crony capitalism. The authorities do not tell you overtly that we are close to collapse. But their policy of diluting your future, by spending trillions from an empty pocket to bail out leveraged “too-big-to-fail” institutions, speaks loudly. It tells you that the authorities believe the economy is so fragile that unless they indenture you to keep the gag going, at almost any price, it would collapse.

  That is why they resort to financial repression, robbing you with near-zero interest rates, to subsidize banks and debt-driven consumption. As reported by Henny Sender in the Financial Times, a calculation by Swiss Re in 2015 suggested that US savers were robbed of $470 billion in interest income after the collapse of Lehman Brothers due to the Fed’s ZIRP and financial repression.13 They conjured tens of billions a month out of thin air to purchase Treasury issues to finance deficit spending that does not pay its way—the Keynesian pretense notwithstanding.

  The more meager the results from ever-greater amounts of debt “stimulus,” the more desperate they become. Since 2000, the explicit national debt has almost tripled to $17 trillion. But this is fine with the authorities. They want to “invest” more. They plan to double the debt again to keep the bogus measures of GDP inching higher. For what? The metastasizing debt has stimulated a meager $2.4 trillion growth in GDP from 2000 through 2013. And of course, even this meager growth rate of 1.5 percent is exaggerated.

  Diluted Statistical Fantasies

  We explore elsewhere how intentionally understated inflation exaggerates real GDP growth. Now the US Bureau of Economic Analysis (BEA) has outdone itself in proclaiming statistical fantasies. As part of its 2013 revision to the way it calculates GDP, the government will no longer tally pension funding as it is allocated to retirement accounts, which are included as “wages” in the GDP calculations. Instead of actual cash outlays, the BEA will now count corporate promises to someday, maybe, fund pensions.

  What can you learn from the lies that the government tells you?

  Don’t throw up your hands and walk away. There is a metamessage hidden in the statistical fabrications. The authorities’ anxieties to exaggerate GDP growth should not be overlooked. They tell you that the whole debt-financed system is predicated upon growth. Without GDP growth, the rapidly compounding debts and unfunded liabilities become unpayable. The whole system threatens to topple over like a bicycle reduced to crawl speed.

  For a hint of how unstable the system is, you need only glance at the FY2012 US government budget deficit as calculated according to GAAP.14 It hit $6.9 trillion that year
against a GDP of $13.67 trillion. In other words, the federal government’s GAAP deficit was just a bit above 50 percent of GDP. To truly balance the budget for the year would have required a tax hike of an impossible 50 percent of GDP. To grow out of the debt would require an equivalently impossible acceleration in the rate of growth. No major economy has ever grown as fast as the threshold growth rate required to approach solvency for the US government given its obligations.

  Without growth, it becomes ever more obvious that people in the bottom 95 percent of the income distribution face a bleak future of neofeudal debt servitude. In a system where fiat money is borrowed into existence, slow growth is the other side of the coin to debt serfdom. The economy grows on expanding debt and cannot survive without it. Its prospects, and yours, certainly don’t seem bright in a circumstance like now, in which powerful groups position themselves to grab the biggest possible slice of a shrinking economic pie.

  No Recovery for the Middle Class

  All the quantitative easing and other desperate measures to goose ever-diminishing returns to growth have amplified the gap between the owners of financial assets and the long-lost American middle class.

  As Izabella Kaminska of the Financial Times wrote in the May 16, 2013, issue of FT Alphaville, even though housing and equities may have recovered, a large portion of the United States, specifically younger adults, has been disenfranchised from the economy.15 QE propped up the financial sector, but for the economy to truly recover, much of the liquidity that’s been created needs to be redirected to those people who have been frozen out of the economy.

  What you see at work here is the shuffle and divide of people responding to a dying economy that is approaching peak consumption. The top 5 percent, the owners of the economy’s financial and productive assets, continues to pursue the American Dream of the good life. Meanwhile, increasing numbers among the bottom 95 percent have failed to keep pace by substituting debt for income in the attempt to maintain consumption. Now many are giving up. Suicide rates are higher than in the Great Depression. People are responding by the million to the demoralizing prospect of debt serfdom by dropping out.

  Paradoxically, the first effect of mass dropouts from the labor force has been to reinforce the illusion of recovery. When the labor force shrivels, the authorities can pretend that the unemployment rate fell because fewer people were looking for work. But note that the long-term stability of the parasitic state, which depends upon taxes paid from the proceeds of debt-based growth, is called into question when the dropout rate rises too quickly. That is exactly what has been happening.

  Since January 2009, ten people have dropped out for each person who was added to the labor force. In March 2013 alone, 663,000 persons left the labor force, bringing the total of working age adult Americans outside the workforce to an all-time high of 89,967,000.16 That number has continued to soar.

  This is why the average American adult spent just 3.57 hours out of every 24 on work and work-related activities, according to the Bureau of Labor Statistics American Time Survey. Americans as a group spend more than twice as much time sleeping as we do working. No wonder the US economy is crawling along at stall speed.

  Part and parcel of an unprecedented decline in the labor force is a huge surge in the number of Americans claiming disability. Every month, 14 million people now get disability checks from the government. Since 2008, far more people have been placed on disability entitlements than in jobs. I see the surging labor force dropout rate, with millions claiming disability, mostly for back pain and mental illness—health problems that are the most subjective and easily fiddled—as rational responses by low-income people facing dead-end life prospects.

  Should You Flee?

  When the Roman Empire was in the throes of collapse, a question frequently asked of soothsayers by the newly impoverished was, “Should I flee?” They literally ran for the hills rather than stay put and go broke paying oppressive taxes. Today, there seems to be no place to flee, but millions have contrived to drop out by faking backaches and hallucinations. I see this as symptomatic of the breakdown of the rule of law and another trigger of the Breaking Point.

  As Joseph A. Tainter reports in The Collapse of Complex Societies, a review of the historic record shows that complex social systems are prone to collapse when the marginal return on investments in complexity deteriorate. Tainter reviewed the collapse of seventeen past civilizations, with special focus on the Western Roman Empire. According to Tainter, after a complex society reaches a stage of declining marginal returns, the mathematical likelihood of collapse in due time increases. He pointed out that if Rome had not been taken over by Germanic tribes, another group would have eventually overthrown the city later on. While marginal returns on investment are growing, however, societies might be able to survive. His point is that societal collapse occurs under stress, when organizational change becomes a necessity. Therefore, collapse can be an economical alternative and is not intrinsically catastrophic—it is a rational process that may benefit a large portion of the population.

  Rightly understood, the current crony capitalist system, embodying the dilution of your future through financial repression and QE, represents at least a perversion, if not the total abandonment, of the rule of law. Within the foreseeable future, the pronounced dropout trend will precipitate a crisis. Even if the authorities try to continue “kicking the can down the road,” the road the United States has followed over the last half century is a dead end. That’s why you need to be alert, stay safe, and prepare for the Breaking Point before the sweep of events makes that impossible.

  Notes

  1 http://www.bl.uk/magna-carta/articles/magna-carta-english-translation.

  2 Heward, Edmund, Lord Denning: A Biography (London: George Weidenfeld & Nicolson, 1990), 10.

  3 Comment by radio host Tavis Smiley, perhaps quoting the title of the book by Christine Mace and Mark Temkin.

  4 Kern, Fritz, Kingship and Law in the Middle Ages, trans. S. B. Chrimes (Oxford, 1956), 127–29.

  5 Turley, Jonathan, “Nixon Has Won Watergate: Barack Obama’s Imperial Presidency Is Just What His Controversial Predecessor Wanted,” USA Today, March 26, 2013.

  6 Milbank, Dana, “In AP, Rosen Investigations, Government Makes Criminals of Reporters,” Washington Post, May 21, 2013.

  7 See http://rsf.org/index2014/en-index2014.php#.

  8 See http://www.aclu.org/blog/technology-and-liberty-national-security/irs-says-it-will-respect-4th-amendment-regard-email.

  9 http://www.globalresearch.ca/top-constitutional-experts-obama-is-worse-than-nixon/5335177.

  10 See Ferguson, Niall, The Great Degeneration: How Institutions Decay and Economies Die (New York: Penguin, 2013).

  11 Jacobs, Jane, Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics (New York: Vintage Books, 1994).

  12 Quoted in Jacobs, Systems of Survival, 99–100.

  13 Sender, Henny, “Weak Growth Suggests QE Might Not Have Been Worth the Costs,” Financial Times, April 12, 2015.

  14 Williams, John, “ALERT GAAP-Based U.S. Budget Deficit,” Shadow Government Statistics 496 (January 17, 2013).

  15 http://ftalphaville.ft.com/2013/05/16/.

  16 http://www.zerohedge.com/news/2013-04-05/people-not-labor-force-soar-663000-90-million-labor-force-participation-rate-1979-le.

  Chapter Eight

  FATCA, Dumb, and Happy

  What the “Worst Law Most Americans Have Never Heard of” Means to You

  Our ancestors . . . possessed a right, which nature has given to all men . . . of departing from the country in which chance, not choice, has placed them, of going in quest of new habitations, and of there establishing new societies, under such laws and regulations as, to them, shall seem . . . most likely to promote public happiness.

  —Thomas Jefferson, 1774

  As 2014 drew near, financial institutions around the world busied themselves closing the accounts of Americans. Know it or not, if you are
an American, you are now among the lepers of world finance. Thanks to Obama’s Foreign Account Tax Compliance Act (FATCA) enacted in 2010, by many accounts “the worst law most Americans have never heard of,” it will henceforth be practically impossible for you to live or do business in any jurisdiction outside of the United States.1

  CNN Money reported the story in September 2013, stating that, in light of the new act, banks around the world had begun telling their US customers to take their money elsewhere. The act aimed to recoup hundreds of billions of dollars that the United States lost each year from tax evasion, but many international banks decided they’d be better off losing US customers than having to comply with the new complicated law. The law would require every foreign financial institution in the world to contract directly with the IRS to supply detailed information on the accounts of US persons, with estimated costs of hundreds of millions of dollars each for a large financial institution (totaling up to $1 trillion worldwide). Some Canadian firms put the estimated aggregate compliance costs as high as $2 trillion, an estimate endorsed by the US Chamber of Commerce. “Estimates for implementing the information-collection measures demanded by FATCA run into hundreds of millions of dollars each for a large financial institution and in aggregate up to $1 trillion worldwide.”2

  A lot of money. Make no mistake about it, this is not just another installment in penny ante “financial repression.” This is a full, East German–style lockdown. It is remarkable in many ways.