Market Observations with Rob Kirby

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Capitalism: Derailed, Dumbed-Down or Deceased?

by Rob Kirby, Kirby Analytics. November 19, 2007

When the Berlin Wall fell back in November 1989, many in the west looked upon the event as being symbolic of the triumph of Capitalism over Communism. Remember the warm and fuzzy feeling?

Our collective attention, albeit for a brief moment, was redirected toward the great debate of how the peace dividend would be spent.

The peace dividend is a political slogan popularized by US President George H.W. Bush and UK Prime Minister Margaret Thatcher in the early 1990s, purporting to describe the economic benefit of a decrease in defense spending.

With the United States mired in conflict[s] throughout the Middle East, some of you might now be wondering if indeed there ever really was a "peace dividend."

If we take a cursory look at "official government numbers" [see below], we can empirically see that YES, there has been a discernable peace dividend with the defense budget dropping from the 6 – 8% range to the high 3% range of GDP:

Source: The Heritage Foundation

Or has there?

The Beauty of Off-Balance Sheet Accounting

What the little picture above does not show is how much of the current Middle East conflict[s] are being financed;

A significant chunk of Federal spending is so far "Off Balance Sheet" that it would make the CFO of Enron blush. Its not just the war in Iraq funded via special legislation; The other major expense is FEMA. This "Emergency" spending on an ad hoc basis makes the deficit appear smaller than it really is.

What this really means, folks, is that the real defense budget, like Consumer Price Inflation [CPI] is MUCH LARGER than official statistics would have us believe.

But why would anyone want to deceive us?

To answer this question, I direct your attention to none other than rep. Ron Paul (R), currently running for the nomination to be the Republican Party's candidate for President of the United States of America (from a speech delivered in the House of Representatives on July 9, 2002):

"It is now commonplace and politically correct to blame what is referred to as the excesses of capitalism for the economic problems we face, and especially for the Wall Street fraud that dominates the business news. Politicians are having a field day with demagoguing the issue while, of course, failing to address the fraud and deceit found in the budgetary shenanigans of the federal government - for which they are directly responsible. Instead, it gives the Keynesian crowd that run the show a chance to attack free markets and ignore the issue of sound money."

So, just who are these "Keynesians" who seem to be such ardent proponents of unsound money, anyway?

Well, let's just say that they are not capitalists. As Dr. Paul points out,

"Capitalism should not be condemned, since we haven't had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It's not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!"

So, if we're to believe Dr. Paul, it seems that "core" to where we find ourselves economically speaking is unbridled credit creation [fiat currency] and fiat money's chief advocate – Central Banking.

But doesn't Central Banking and Capitalism go hand-in-hand?

The answer is a resounding no!

To wrap one's mind around this fact, they need look no further than the words and thought of Edward Mandell House, chief advisor of President Woodrow Wilson from 1913 to 1921:

House was a Marxist whose goal was to socialize the Untied States. In 1912, House wrote the book "Philip Dru: Administrator" in which he stated that he was working for "Socialism as dreamed of by Karl Marx." In this book, House laid out a plan for the conquest of America, telling how both the Democratic and Republican Parties would be controlled, and be used as instruments in the creation of a socialistic government. And he asked for the establishment of a state-controlled central bank, which were both proposed in "The Communist Manifesto". And it was in 1913, during the very first year of the House-dominated Wilson Administration, that both of these proposals became law. The Federal Reserve Act was passed, which brought into power a private central bank to create the money of the United States, taking this power away from the united States Congress. And the 16th Amendment to the United States Constitution, the graduated income tax as proposed by Karl Marx, was also ratified.

You see folks, Central Banking is, and always has been, a key tenet of Communism — not Capitalism.

This is reality.

Now I ask you all; is it really any wonder that in a world increasingly dominated and controlled by the tentacles of Central Banking [i.e. the Federal Reserve] – that American jobs have been systematically outsourced, currency, institutions and Constitution debased, all seemingly to the benefit of a Communist country – China?

Makes you wonder what would have happened if the good guys had lost the Cold War, eh?

Today's Market

Overseas equities began the week on a sour note with Japan's Nikkei Index falling 112 points to close at 15,042. North American markets did not fare well either with the DOW off 217.90 to 12,958.90, the NASDAQ falling 43.86 to 2,593.38 and the S & P giving up 25.45 to 1,433.35. NYMEX crude oil futures gained .94 to end the day at 94.78 per barrel.

Interest rates were sharply lower with the benchmark 5 yr. bond falling 12 basis points to 3.56% while the 10 yr. bond eased 8 basis points to 4.07%.

On foreign exchange markets the U.S. Dollar Index gave up .03 to end the day at 75.81.

The precious metals complex was pummeled with COMEX gold futures losing 8.90 to 778.00 per ounce while COMEX silver futures lost .31 to 14.22 per ounce. The XAU lost 8.54 to 164.13 while the HUI gave up 13.82 to 398.22.

On tap for tomorrow, at 8:30 a.m. Oct. Building Permit data is due, expected 1210K vs. 1261K. Also at 8:30 a.m. Oct. Housing Starts data is due, expected 1200K vs. 1191K. Then at 2:00 p.m. FOMC is due to release the minutes from their Oct. 31 meeting on interest rates.

Wishing you all a pleasant evening and a very happy Thanksgiving!

Rob Kirby

© 2007 Rob Kirby

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Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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