FUNDAMENTAL TRUTH #48: “Government benefits aren’t from the government. They’re from the taxpayers.” -Old Pithy

Posted by PITHOCRATES - January 11th, 2011

The Concept of Other People’s Money

A lot of people don’t understand how a bank works.  Or government.  In fact, banks and government are similar in one respect.  They both ‘give’ things away.  Banks loan money.  Government gives out benefits.  But before either gives anything away, they have to take from other people first.  Banks take money from depositors.  And government takes money from taxpayers.  That’s how they get the money that they give away (bank loans and government benefits).

You see, banks and government have no money of their own.  They work with other people’s money.  Yes, they can make money.  Banks via fractional reserve banking.  And government via monetary policy (lowering the discount rate, selling bonds and treasuries or simply printing money – we call this fiat money).  But there’s a danger when they do.  If they make too much money, we get inflation.  And a lot of bad things follow inflation.  Higher interest rates.  Higher prices.  And an overheated economy that eventually crashes into recession.  Which causes higher unemployment.  So they have to be careful when they’re making money.

If inflation is such a bad thing, then why do they even make money in the first place?  That’s a bit complicated.  To get a simplified understanding, think of a bank.  Businesses borrow from banks to expand their business.  When they expand they create jobs.  Everybody likes this.  Jobs.  So we try to help them get the money they need to expand their businesses.  But banks often don’t have enough money from their depositors to loan to all these businesses.  Fractional reserve banking solves that problem.  This allows the banks to lend more money than they have in their vaults from their depositors.  Creating more money allows more economic activity.  And that’s why we make money.  But we have to be careful not to make too much.

Money is only as Good as our Faith in It

More economic activity means more jobs.  And more taxes for the government.  This is why the government likes a little inflation.  A little bit allows economic activity.  And what is economic activity?  People trading with each other.  A worker trades his or her skills for groceries.  Of course, an office worker in midtown Manhattan can’t easily trader his or her office skills for a dairy farmer’s milk and cheese in Wisconsin.   But that’s okay.  Because we have a medium of exchange to make trading easier.  Our money.

You see, it’s things or services we want.  Not the money.  Money just lets us trade what we do with what others do.  We’ve used different types of money throughout history.  Specie (like gold and silver coins).  And commodities (tobacco, food, whiskey, etc.).  Specie and commodities have intrinsic value.  They’re worth something besides their value as money.  And because of this, it is not easy to make more of it.  Because a printing press can’t print gold, silver, tobacco, food, whiskey, etc.  So you can’t ‘stimulate’ the economy like you can with fiat money.  Of course, this can be a good thing.  Because you can’t over-stimulate the economy like you can with fiat money.  There are pros and cons of each type of money.  And there’s been a lot of debate between competing types of money (such as the gold standard versus fiat money). 

Money is only as good as our faith in it, though.  Because specie and commodity have intrinsic value, it’s easy to have faith in it.  It’s pretty hard to make this kind of money worthless.  But it’s easy to make fiat money worthless.  All you have to do is print too much of it.  You do that and people won’t want to use it.  Because they will have little faith that it will hold its value.

Inflation Reduces your Purchasing Power

How bad can it get?  Let’s illustrate with an example.  Let’s say you dug down about 30 feet in your back yard and discovered gold.  And you worked your butt off to bring it up to the surface, smelt it and pour it into gold bars.  Now you want to trade that gold for a new car, a 60″ plasma television, a state of the art home theater sound system, an in-the-ground swimming pool, some property on an island in the Caribbean and a few other extravagances.  You see all of these things for sale.  But the sale prices are all in dollars, not weights of gold.  Not a problem.  Because you can sell your gold for dollars. 

Think of a scale.  Put your gold on one side of the scale.  And put dollars on the other side.  When the scale balances (when both sides equal the same value, not weights), you have the value of your gold in dollars.   Let’s say your gold equals $1 million.  Lucky for you because that’s the total price of everything you want to buy. 

A week later you have all the details worked out.  You’re ready to write your checks.  But the day before, the government printed more money and doubled the number of dollars in circulation.  When you increase the number of dollars, you decrease the value of each dollar.  In this case, they doubled the amount of money so money is now only worth half of what it used to be worth.  This makes you furious.  Because if you had waited only one more week, you would have gotten $2 million for your gold instead of $1 million (same amount of gold on one side of the scale but twice the amount of dollars on the other).  Worse, not only did the price of your gold go up (after you had already sold it at the old price), but prices everywhere went up.  The stuff you were about to buy for $1 million now costs $2 million.  Now you can only buy half of what you want.  Because doubling the amount of dollars in circulation cut your purchasing power in half.

Other People’s Things

This is the time value of money.  Money decreases in value over time because of inflation.  The greater the inflation rate, the quicker the money in your wallet loses value.  During times of high inflation, people will not want to hold onto their money for a long time.  They’ll want to spend it fast.  Because they’ll be able to buy more with it sooner than they will be able to later.  And it’s the things they want to buy that have real value to them.  Not the money.

Things, not money.  That’s what people want.  And that’s what government benefits are.  Things.  Other people’s things.  You can’t just print money and give it away.  Because you need things to buy with that money.  So not only do you need taxpayers to pay taxes.  But you need them to make the things (and services) people want to buy. 

The greater amount of benefits the government hands out, the more of other people’s stuff they have to take.  That’s why there is a limit on the amount of benefits that government can hand out.  The things the government does to pay for those benefits reduces economic activity.  And increases unemployment.  Unemployed people can’t make stuff or perform services.  And they have less stuff to take.   No matter how much fiat money the government prints.

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FUNDAMENTAL TRUTH #44: “Liberal Democrats have to lie because there are more taxpayers than tax consumers.” -Old Pithy

Posted by PITHOCRATES - December 14th, 2010

Tax and Spend and Do as I Say

Liberal Democrats like to tax and spend.  And they are also so full of themselves that they like to tell other people how to live their lives.  Because they think they are smarter than us.  And know what’s best for us.

Funny thing.  A lot of these liberal Democrats are rich.  Like Nancy Pelosi and her San Francisco constituents (you need to be rich to live in her neighborhood).  Though they’re rich they prefer to spend other people’s money.  And spend a lot of it.  They take the concept of ‘redistribution of wealth’ to new heights.  As long it’s other people’s wealth, that is.

Not many agree with them.  Liberal Democrats make up about 20% of the electorate.  So theirs is a minority opinion.  Which can be a problem when you want to tax and spend.  Because that other 80% tend to have real jobs.  Which means they pay the taxes that liberals like to spend.  And they’re none too keen on giving up their hard-earned money so a bunch of rich liberals can assuage their guilt for being rich.

Democracy Ruined the Good Old Days for the Privileged Classes

Being a 20% minority has its problems.  Especially when you want to tell how the other 80% should live.  They lament that we live in a democracy.  Where people have the right to vote.  Unlike in the good old days.  Where your blood determined rank and privilege.  There were no questions asked.  You did what you want.  Because you could.  And there was no voting.  No silly inconvenience of elections.  No, back then the rich and privileged classes knew how to live.  And the suffering masses knew their place.

But, alas, the miserable Founding Fathers had to go and muck all of that up.  Liberty.  The biggest pain in the ass the entitled classes ever had to deal with.  Nowadays, the privileged just can’t do what they want.   You need to win elections.  They need to get others to vote their way.  They need others to agree that their living the good life is in the best interest of the country.  And how do they do that?  They lie, of course.  And make as many people as possible dependent on their generosity.  Their generosity with other people’s money, that is.

Of course, it wasn’t always other people’s money.  It used to be their food.  In the 1790s, things were getting pretty bad in France.  For the suffering masses, that is.  The ‘Third Estate’.  Things were going pretty darn well for Estates 1 & 2.  The rich nobles.  And the rich clergy.  And we know how all that ended up.  Bad.  For Estates 1 & 2.  The Third Estate (i.e., the poor suffering masses) grew tired of going hungry and suffering famine.  So they stormed the Bastille and kicked off the bloody French Revolution.  Because they were hungry.  And the rich and privileged were not.  But I digress.

Using Class Warfare to Demonize their Political Opponents

Sadly, for the rich and privileged, the American and French Revolutions changed things.  The ruling minority could no longer rule as they pleased.  They had to consider the majority.  There would now be taxation with representation.  Like in Great Britain.  People paying the taxes would have a say in how the politicians spent those taxes.

Merde.  Pardon my French.  Or so said the rich and privileged classes.  Who now had a problem.  If the rich and privileged were no longer entitled to a better life, how could they then live a better life?  I mean, let’s face it, these people aren’t exactly busting with ability.  Most couldn’t find their way out of a wet paper bag.  So what does one do with no ability?  Scheme deviously.

And one of the most devious and effective tools?  Class warfare.  You attack the people with ability who have earned their wealth.  Something that few liberal Democrats can do.  Because they have no ability.  So they demonize those that do.  Business owners.  Corporate America.  And you tell the poor masses that the only reason that they’re poor is because the rich business class is exploiting them.  And that they, the liberal Democrats, will rectify that situation.

Lying to Independents and Moderates

So they give them stuff.  They tax the rich.  And give stuff to the poor.  Which makes the poor grateful.  And dependent on the government.  Grateful and dependent, of course, equals votes.  This giving of other people’s money isn’t limited to the poor, though.  They make the not-so-poor special interests even less poor with this same generosity.  This generosity of other people’s money.

It’s a full-proof deviousness.  When the rich and privileged classes shower the poor and special interests with other people’s money, they get their votes.  And it’s a lot more than 20% of the electorate.  But it’s not quite a majority, though.  So they have to lie to another group of people to push them into the majority.  And who are these people?  Moderates and independents.

These people, though, are a problem.  They have honest jobs.  They don’t stand to prosper by voting liberal Democrat.  And they’re not likely to respond well to a campaign slogan that says we want to raise your taxes so others can live better without working as hard as you do.  People just don’t choose to pay more.  So others can have more.  While they go with less.  It’s why some people will drive 5 miles to save 2 cents per gallon of gas.  People choose to pay as little as possible.

Liberals Hate Ronald Reagan.  But they Campaign like him to Win.

So how do you get people who won’t benefit by voting for you to vote for you?  By demonizing your opponent.  The Left destroyed Newt Gingrich because he wanted senior citizens to ‘wither on the vine’.  Or so they said.  He never said that (he said Medicare would wither on the vine after enough people took proposed government subsidies to move into private insurance policies).  But all moderates and independents heard was that he wanted to kill senior citizens.  And that was enough.  His approval ratings plummeted.  To save his party, he resigned.

This is the only way liberal Democrats can win elections.  By lying.  They never run openly.  They never say they want to raise your taxes.  Far from it.  Because people don’t want to pay more taxes.  Few can even afford to.  No, when they campaign, they try to sound like the great conservative, Ronald Reagan.  Why?  Because the majority of Americans approved of his policies.  So they hide their true selves during the elections.  And hope and pray (figuratively, of course) that the moderates and Independents have short memories.

They have to do this because of one very inconvenient fact.  There are more taxpayers than tax consumers.  Which is a double-edged sword for liberal Democrats.  On one hand, more taxpayers mean more tax money.  But, on the other hand, because of Democracy, it also means more people they have to successfully lie to.  Merde.

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FUNDAMENTAL TRUTH #34: “Sure, until you win the lotto you’re all for sticking it to the rich.” -Old Pithy

Posted by PITHOCRATES - October 5th, 2010

Money Envy

Class warfare is a different kind of warfare.  During the English Civil War, the Protestants and the Catholics were trying to kill each other.  They didn’t want to have anything to do with each other.  Protestants didn’t want to be Catholic.  Catholics didn’t want to be Protestant.  But in class warfare, it’s a little different.  The poor want to be rich.

The poor hate the rich because they have it so much better than the poor.  But they don’t hate the idea of being rich per se.  Just who gets to be rich.  Because, given half the chance, they’d choose to be rich if they could.  Why?  Because the rich typically don’t go wanting for food, shelter or clothes.  They also get to have all the neat toys to play with.  And they wear some nice bling.

So the poor don’t really hate the rich.  It’s just money envy.  After a child grows up he or she may notice that they like money.  They see they have no money of their own.  So they want their mother’s or father’s money.  Because there are limits, and sometimes outright rejection, they seek money elsewhere.  As they grow up, they may get a job.  Sell drugs.  Prostitute themselves to conventioneers.  Marry into it.  Steal it.  Become a ward of the state.  Or play the lotto.

Whose Money is it Anyway?

During this phase in their life, politicians, college professors and the media bombard them with messages of income redistribution.  Fair share sacrifice.  Taxes on the rich.   And all around fairness.  It all sounds good.  And right.  Those damn rich people.  How dare they?  Why them?  Why not me? 

Well, some inherited their money.  Like the Kennedys.  Some married into it.  Like John Kerry.  They live like rich royalty from days of old.  When there was a true aristocratic class that could actually own people.  But they are there, fighting for you.  Liberals.  Taking away other people’s money and giving it to the more deserving.  And the poor are all for that.

A luxury tax?  Yeah, stick it to them.  An inheritance tax?  Sounds good to me.  How about taxing their assets?  Their net wealth?  Because some of those rich bastards don’t even work.  They invest their money.  Sure, they pay a confiscatory capital gains tax on their earnings, but their earnings pale in comparison to their overall wealth.  We need to go after that pile of wealth.  Redistribute it.  Along egalitarian principles.  Level the playing field.  Close the gap between the rich and the poor.  The way the liberals look at it, it’s the government’s money anyway.  So the government can spread it around as they damn well please.

Poor/Rich – It’s All Relative

Most of these rich bastards are not Kennedys or John Kerrys, though.  Most are self-made.  Through hard work.  And personal sacrifice.  Most are small business owners.  They borrowed everything they could.  They mortgaged their homes.  They risked their children’s college funds.  And they made something.  A small business.  Created jobs.  They hired people.  Something the Kennedys and the John Kerrys of the world don’t do.

Most of these small business owners are ‘S’ corporations.  They aren’t big corporations with corporate officers.  No finance or a legal department.  They’re just people who work 80+ hours a week.  They may never see a million in annual revenue.  But they’ll probably make more than $250,000.  And, being an ‘S’ corporation, that makes them rich.  Even if they leave the money in their business to grow it.  But the IRS still taxes them like they’re rich fat cats lighting their cigars with $20 bills. 

Yes, they’re small business owners.  But they’re still pretty much middle class people.  Do the poor hate them, too?  Sort of.  Simply because they have more than they do.  And the politicians, college professors and the media point out how wrong that is.

Congratulations.  And Thank You

And then one day you buy a lotto ticket and, overnight, you become rich.  Congratulations.  It’s nice to have another rich person to tax.

Yes, you won the lotto and now you’re rich.  How does that feel?  Are you looking forward to redistributing your winnings?  For egalitarian principles?  Help close that gap between rich and poor?  Or have you become a greedy rich bastard?  Like all those others you used to hate until you became one of them?

Whether you do or not doesn’t matter.  For the IRS will be coming after you.  With their hand out.  For their share, a sizeable chunk of your winnings.  Your windfall will push you into the highest tax brackets.  And, guess what?  If you don’t pay your ‘fair share of taxes’ willingly, they’ll come after you.  Or seize your wealth.  And as sad as that may be, few will pity you.  Just as you did not pity those before you were rich.

Be Careful What You Vote For

Class warfare is good for politics.  Because there are always more poor people than rich.  And poor people are useful to someone running for public office.

But they don’t like you.  They don’t really care about you.  They care about only one thing.  To keep you poor.  For should you win the lotto, the chances of you voting for high taxes and income redistribution are slim to none.  Your egalitarian principles will fly out the window.  Which won’t help them.  So should you become rich, they will vilify you.  Come after you with a vengeance.  To take your wealth.  And return it to the rightful owners.  Themselves.  The government.  So they can use it as they please.  To buy votes.

And how will you feel then?  You might want to think about this ‘what if’.  Because you could win the lotto one day.  Inherit wealth.  Marry into it.  Or even earn it.  I mean, be careful what you vote for while in college.  One day you might make something of that education.  You may very well become rich one day.

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How Long Can We Rob Poor Old Peter?

Posted by PITHOCRATES - October 3rd, 2010

How Much for Your Vote?

Imagine that you have 5 good friends.  You meet one day each week to relax and decompress over drinks and good bar food.  Let’s say each of you spends $20 on food and another $20 on your bar bill.  So that’s a total of $40 spent each week on a frivolous benefit you don’t need but enjoy.  Your spouse isn’t all that enthused but it’s only $40.  So you get a pass.  Because you work so hard to earn your pay that your spouse can’t begrudge you this little stress reliever.

So, each week, you each spend $40 for a total weekly cost of $240 (6 X $40).

Now let’s say Friend 1 loses his/her job.  You feel bad for your good friend.  You want to help cheer him/her up during a difficult time.  So you insist that he/she still joins you on your weekly stress reliever.  The others will split his/her tab.  So that’s $240 split 5 ways.  Each of the 5 now pays $48 each, or $8 more each week.  If you do this for 4 weeks, that’s an additional $32 out of pocket per month (assuming a nice even number of 4 weeks per month).

Let’s say Friend 2 also loses his/her job.  You insist he/she still joins your weekly gathering.  So that’s $240 split 4 ways.  Each of the 4 now pays $60 each, or $20 more each week.  If you do this for 4 weeks, that’s an additional $80 out of pocket per ‘month’.

Let’s say Friend 3 also loses his/her job.  So that’s $240 split 3 ways.  Each of the 3 now pays $80 each, or $40 more each week.  If you do this for 4 weeks, that’s an additional $160 out of pocket per ‘month’.

Let’s say Friend 4 also loses his/her job.  So that’s $240 split 2 ways.  Each of the 2 now pays $120 each, or $80 more each week.  If you do this for 4 weeks, that’s an additional $320 out of pocket per ‘month’.

Let’s say Friend 5 also loses his/her job.  So that’s $240 split 1 way.  You now pay $240, or $200 more each week.  If you do this for 4 weeks, that’s an additional $800 out of pocket per ‘month’.

Get the picture?  You’re generosity will eventually cost you a house payment. 

The lesson here is that the more generous we are with other people’s money, the more those ‘other people’ have to sacrifice.   Not the people collecting the benefits.  It’s always the same.  People always have the best of intentions.  But they only make things worse in the long run.

This is what is happening in advanced welfare states all over the world.  And in the United States.  It’s not the greed of Wall Street.  It’s our greed.  And the insatiable greed of Washington.  For our money.  So they can give it to people in exchange for their vote.

Learning from the Past

Trend analysis is an invaluable tool.  People use it to determine which stocks to buy.  Businesses use it to judge the results of past business decisions.  Why?  Because we learn from history.  At least when we choose to.  And that’s the problem with government and an entitlement-based constituency.  They refuse to learn the lessons of history.

The more generous government gets with other people’s money, the more demanding we get for government benefits, the trend is clear.  The worse the life of that poor, dumb bastard who still has a job gets.

And yet people persist in blaming the greed of Wall Street.  Thomas Jefferson warned about the corruption of government by Big Finance and we see it happening.  But we blame Wall Street.  Not Big Government.  Who received boatloads of money from Wall Street for relaxing the mortgage requirements and having Freddie Mac and Fannie Mae buy up all those risky mortgages (giving us the subprime mortgage crisis and the Great Recession of 2008 – (to be determined)).  And a slew of other sweetheart deals they made with each other.

Or we blame the greed of the doctors, hospitals and the drug manufacturers.  Not ourselves for wanting other people to pay for more and more of our health care needs.  Or government for forcing doctors and hospitals to charge the private health insurers more to cover the costs they incur when the government discounts their Medicaid and Medicare invoices.  Or the lawyers for the huge cost of litigation they cause with their numerous lawsuits against the doctors, the hospitals and the drug manufacturers (so numerous that it’s a wonder anyone actually survives from using their products or services).  All which taken together provide fodder for government to take action to solve the ‘health care crisis’.

No, we the people need to point our finger at the truly greedy.  Government.  And ourselves (those who seek all those government benefits).

Give Pete a Chance

With that primer, now read America on the brink of a Second Revolution by Paul B. Farrell of MarketWatch.  It’s not necessarily a cheery outlook.  But it does note that things could get better if we had another Ronald Reagan.  And they would.  Speaking of learning the lessons of history, we all would do well to learn the very good lessons of the Reagan years.  Not the lies and misinformation put out by those in Big Government and the mainstream media.

You can’t keep robbing Peter to pay Paul.  Because eventually Peter will have no more money.  What about Paul then?  How will he get by when there is no one left to rob?  Well, stay tune, Paul.  You’re going to learn the hard way pretty darn quick.

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