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Tuesday, January 15, 2008

Our Legacy of Debt and Suze Orman's Ignorance

Suze Orman is one of the most popular investing gurus in the world today. She was recently asked about the idea of the gold standard in the video link below – an idea was championed by Congressman Ron Paul who is currently running for president of the US. I found her answer deeply disturbing. It showed that she had virtually no economic knowledge whatsoever. I do not necessarily believe in the gold standard either, but I do respect the viewpoint and I am aware of the substantial research and history that goes into the theory behind it.
Also she may not have any knowledge of history, considering the fact that Central Banks in the US have already been dismantled twice by US presidents when nobody thought it was possible. She says she does not waste her time worrying about such things – I guess someone who gives financial advise to millions of people does not need to know basic economics.

see Suze Orman’s comments here:

I would characterize her answer as offensive to economists and intelligent people who understand the basics of the gold standard – even to those who do not necessarily believe in it. Not to mention her arrogant, condescending, and dismissive attitude. I would call her attention to the comments made below by one of the most respected economists in history and two term chairman of the Federal Reserve Alan Greenspan:

Question: Why do we need a Central Bank?
Answer: “The question is a very interesting one. We have at this particular stage a fiat-money, which is essentially money printed by a government -- and it is usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced – either a gold standard or currency board or something of that nature -- because unless you do that, all of history suggests that inflation will take hold with very deleterious effects on economic activity.”
-Alan Greenspan, Oct 15, 2007

see Alan Greenspan’s comments here:

There is no question that when a currency is fixed to something, it limits how much of it can be produced. This is similar to how your checkbook is limited to the amount of money you have in the bank – if you want to spend more money you have to put more money in the bank. With a gold standard the government would have to get more gold in order to print more money. Inflation happens when more money is printed without increasing the amount of gold in the bank -- causing the money's value to decrease. People who already hold money lose the value in the money they hold - this acts as a tax on their holdings. With our current "fiat currency," inflation happens regardless of the gold's standing, because people have a notion in their head that the money has value - in other words the currency-standard is probably the products for which money can be exchanged, rather than the gold. The realities of monetary policy are impossible to change or ignore, and they are the easiest tools with which to accomplish wealth and power. As Murphy famously restated the golden rule: "He who has the gold, makes the rules." The reverse could also be said: "He who makes the rules, gets the gold."
On the less pessimistic perspective, printing more money (i.e. inflation taxes) can be a good short-term tool for governments to buy things without getting more gold or to decrease the value of their debt. However, when they do this it also decreases the value of money that is held by people. Inflation then destroys their savings. This is why few people save dollars anymore -- most people invest in stocks and bonds. They hope that these investments will go up in value more than the rate of inflation.
Inflation has destroyed businesses, retirement accounts and livelihoods. Inflation has destroyed empires. It has started wars. It has led to the deaths of millions of people. It is inevitable when the currency is not fixed to anything.
The US began going off the gold standard in 1932 and completely de-linked it in 1972 under Richard Nixon. Since 1972 the currency has inflated over 30%. The theory is that as long as it happens slowly, people wont really notice. However, in recent years we have inflated rapidly. The US does not have enough money to pay for what it does between the welfare state and foreign interventions. So we have borrowed a substantial amount from other countries like China. The rest we create by printing money.
As we increase the debt by borrowing money we inflate our currency to pay it. Soon, our creditors will realize this and stop giving us money: eventually, it is impossible to expect countries to loan us money, if the money we pay our debts with is of less value than the money they gave to us. Recently, the current Chairman of the Federal Reserve, Ben Bernake, admitted to congress under oath that this current system of financing is unsustainable.

“We are relying pretty heavily on borrowing from abroad which is our Current Account Deficit. I think that is sustainable for a while because foreigners seem quite interested in acquiring U.S. assets – we have very deep and liquid financial markets. However….that is not a long term, sustainable situation by any means and we need to be working to bring that current account deficit down over time.”
--Ben Bernake, July 18, 2007

Suze Orman demonstrated that even the guru can be ignorant and uninterested in issues which literally are life and death to our country. It is one thing for the farmer or a plumber who does not have time to be ignorant. It is a travesty when someone who has become a millionaire by giving financial advise is so dismissive.
Any financial advise should include a note that no person should allow themselves to be dependant on the government. The victims of Hurricane Katrina experienced a microcosm of the way the government works. Unfortunately, whether we like it or not, our wages will continue to be garnished and our products will continue to be taxed to pay for the government’s activities and obligations.
The government treats our money like it grows on trees and we encourage them to do so by asking them to take care of us from cradle to grave. Americans must once again believe in self-reliance and realize our government cannot meet this burden. It must set priorities. It cannot run a welfare state and conduct interventions in foreign countries all at once. People should demand that their politicians talk about this issue. There is a virtual consensus on the issue across the government, the only question is when will we deal with it. My guess is that it will take a crisis. That is not on the horizon right now. However, certain natural or human disasters could quicken the pace at which that day arrives. Let it not be said that nobody spoke out. At some point either us or our children will deal with it.

What a legacy.

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