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Can you Support The Troops and Support The Federal Reserve?

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October 02, 2009 – Comments (9)

In this blog I will attempt to show you that two commonly held American beliefs are actually completely incompatible. They stand in direct opposition to each other and can not be reconciled. This post is intended to help you question your own thought process so that you may come to a better understanding of the interrelationships of economics, liberty, monetary policy, and foreign policy.  None of these things exist in a vacuum and, as I'm about to show you, some institutions harm people in other institutions. 

"Support the Troops" even if you don't support the war is among the most widely held beliefs in America.  Another widely held belief, often shared by the same people, is that the Federal Reserve is a necessary institution. Monetary policy and financial regulation must be conducted by a central authority.  These two positions are actually in direct opposition to each other.  The efforts of the Federal Reserve harm the very troops Americans "support."

Defining Americans' "Support the Troops" slogan

In order to engage this line of reasoning, we must first decide what Americans mean when they say "Support the Troops."  To be honest, this is a gray area.  I don't know what each individual really means when they say it.  Do they support warfighters as a rule of thumb?  Do they believe that the troops provide for their liberty, and so they must be taken care of?  Do they believe that the troops are making great sacrifices?  Or do they just say it because they would rather just repeat the slogan rather than face a backlash of criticism for appearing to not support the troops?  I honestly can not say what each individual American believes.  However, I must start with the basic premise that Americans "Support the Troops" and do not support any action that would bring harm to American troops through no fault of their own.  This harm must include any negligence by thir superiors, any wrongful prosecution, undue economic hardships, or any violation of contract by the federal government.  I think we can all agree on that these situations would be things Americans who support the troops would find unfavorable. 

The Contract

When a young person enters the military, they enter into a voluntary contract (assuming no draft is in place, which is a form of slavery and a wholly separate issue.) The contract is for a specific time limit.  The pay is lower, on average, than their civilian counterparts, particularly among the officer corps.  The difference, however, is made up in housing, medical, and educational benefits.  These benefits can be quite extraordinary.  The remaining equilibrium of recruiting is made up through the relentless pro-State propaganda that brings in a small fraction of patriotic young people (the number is higher during times of war) and the depressed economic conditions in the country (the number is higher in a depressed economy.)  All of these factors contribute to the make up the initial pool of available men and women that agree to the terms of their first contract.

Things get a bit more complex when the servicemember decides to get out or enter into a second contract.  With the average contract being 4 years for enlisted and 6 years for officers, a second contract makes the likelihood of being a "lifer" a much greater probability.  A "lifer" is the military term for a career servicemen.  Career soldiers are important to the service, as they represent the knowledge of previous experiences and the leadership to instruct the new generation.  Regardless of your support of military institutions in general or warfighting in general, if you "Support the Troops" then you will understand that the "lifer" is an important competent of military competency.

The contract decision for a "lifer" then is quite different for the decision of a new recruit. The lifer now has experience and perhaps a technical skill that can be useful in the private sector.  They have completed a higher education, in general, than the recruit.  In order for the government to "negotiate," they must offer something more.  The bargaining chip employed here is retirement.  After 20 years, the government will provide a generous pension to all servicemembers.  This is a desirable agreement, and usually puts the second enlistment soldier over the top.  Once a soldier does eight or ten years, it is very likely they will do the final half of their career to earn their retirement.  Once again, labor equilibrium is found.

(Side note: I got out after 10 years. I'm a different bird.)

But what if that promise of retirement was not all it's cracked up to be?  What if that retirement benefit was destroyed through a reduction of purchasing power?  Would you be willing to support policies that purposely destroyed the government's ability to fulfill its financial obligation to the soldiers you support?   

The Benefit of Inflation

Inflation is defined as a persistent rise in prices.  This is the modern definition, however it is not the only definition.  Persistent price increases happen for a reason.  Here we must distinguish between the fluctuations in commodity prices (think oil last year) and real persistent increases over time, which is a purely monetary phenomenon.  Persistent price increases occur from currency devaluation, an increase in the amount of currency avaialable relative to the market need.  This is the classical definition of inflation.  We refer to it as "printing money out of thin air, " a cute euphemism for the practice of bringing about inflation.

Supporters of big government, and the Federal Reserve, point out a very obvious benefit of a moderate policy of inflation.  Debts contracted by the goverenment can be paid back more cheaply if the currency used to pay back the debt is less valuable than the currency received.  If the government borrows $100 over 10 years, and then devalues the currency by 3% per year, while the rate of interest is 2%, the government makes a "profit."  (I use quotiation marks because the idea of profit here is completely different from the profit earned in the private sector. It's a separate discussion but if you wish to delve into it further hit me up in the comments section.)

Certainly many Americans will agree that stiffing the Chinese on money we have borrowed to finance our government is a great idea. (Sarcasm only partially intended.)  Unfortunately, the Chinese are not the only people the American government has obligated to repay.  Not only have they promised Social Security benefits to generations of workers, but they have also promised a definite standard of living to American career soldiers in exchange for their service, as I explained above.  Had they not engaged in this negotiation, there would be fewer career soldiers.  It is part of the give-and-take market process that determines the labor force.

This money is owed to the people serving.  It is owed to the troops you support.  Would you feel comfortable knowing that the government must violate this contract?  That it has no choice?  The reason that it must violate this contract is because the Federal Reserve engages in a practice of inflation and has done so for the 96 years of its existence.

Much ink has been spilled on the Federal Reserve, inflation, the dollar losing 96% of its value since the Fed took over (with the directive to protect the dollar), fiat money, and fractional reserve banking.  I am going to assume that if you are still reading, you have a solid grasp of the basics.  The point of this post is to help you see the interrelationships of these institutions and for you to see that these two beliefs: Supporting the Troops and Supporting the Federal Reserve, are incompatible.

The Federal Reserve destroys the purchasing power of military veterans.  This point is irrefutable.  It has done so for 96 years.  Should the Federal Reserve bring about mass inflation (persistent double digit inflation), veterans will not receive the puchasing power of their obligation from the government at the level they were promised.  This is a violation of their property rights.  It is unethical.  Please do not "Support the Troops" and turn a blind eye to this fact.

Objections

This is a blog post and not an academic paper.  I don't have time for the latter.  I can think of many objections, and can adress them here, or I can let you make the objections and I will address them in the comments.  I'll take the latter path to save me some time. 

I hope you are all having a profitable year.

David in Qatar

Note to Facebook friends.  Due to time constraints, I've had to take a break from FB.  I've deactivated my account, but did not delete it.  Work has been very busy and I have had to prioritze some things.  Responsibility sucks, doesn't it?  Hopefully things will settle down soon.

9 Comments – Post Your Own

#1) On October 02, 2009 at 3:26 PM, leohaas (31.56) wrote:

As usual, argumented quite eloquently!

But it is flawed.

As you mention, the destruction of purchasing power (of all people who are paid in US dollars, by the way; not just the veterans) has been going on for 96 years. No veterans still alive signed up before this all started. Therefore, they could have known what would happen to their pensions. Typical retirement calculators always take inflation into account.

Of course, it is appropriate to discuss whether this is fair. You have a point there. And no doubt the recruiters do not explain that voluntarily. Just like they don't volunteer information on stop-loss...

By the way, I don't think there are a lot of people out there who "support" the Federal Reserve like they support the troops. "Support" for the Federal Reserve is more like "support" of taxation: a necessary evil. In that respect, your word choice is misleading. But then again, as a Libertarian you probably compare taxation to armed robbery (just like you compare the draft to slavery).

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#2) On October 02, 2009 at 3:35 PM, jstegma (29.25) wrote:

"Support the Troops" is just a reference to the Vietnam anti-war types who spit at the troops when they returned.  

Under the gold standard, would a large discovery of gold cause inflation?

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#3) On October 02, 2009 at 3:57 PM, whereaminow (20.23) wrote:

leohaas,

Thanks for the comment.

I agree that soldiers "could have known" about the effects of inflation on their retirement.  My experience is that they don't know.  In my ten years, I never met one person that understood those effects. However, I have many retired friends who now do. :)

Unions, historically, have a better understanding of inflation dating back to the earliest negotiations.  They do take purchasing power into account.  In Germany, trade unionists have been very strong anti-inflation (despite being pro-socialism) historically as they have a long memory of inflationary problems.

I agree also that many support the Federal Reserve as a necessary evil.  I believe that when you support a necessary evil you end up with more evil.  It's a bit like continuing to bang your head against a wall because you don't have any better ideas.  Don't blame the wall when you get a concussion.

I think the draft is slavery because it is.  It means that the government owns your life.  It's a violation of person's right to life.  You can not claim that are people can evade the draft.  If they do, they face the loss of property, loss of income, and persecution. 

I think taxation is worse than armed robbery.  At least the robber has the guts to carry out the act himself.  When people support taxation they are asking another to do the stealing for them.  They're theives and cowards.  Why are they shocked when the theif they vote for appopriates the money for something else?  Bizarre.

The word choice was for the audience.  I'm not trying to change your mind.  I find that some people dismiss certain lines of thought outright, without reflection, but will be less inclined to do so when presented with an obvious paradox.  That was the purpose.  There are people who support the Federal Reserve, not just as a necessary evil, but as an essential part of American capitalism/mercantalism. 

David in Qatar

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#4) On October 02, 2009 at 4:08 PM, whereaminow (20.23) wrote:

jstegma,

Any creation of money beyond market need is inflationary.  Under a classical gold standard (the gold exchange standard that most countries engaged in during the 20th century was not a classical gold standard), mining is driven by market forces.  Excessive mining will be unprofitable, as it drives down the price of gold.  As gold becomes more scarce, more mining is done.

Historically, inflation has been extremely rare under a gold standard.  It has occured when governments went off the standard to print money for wars (War of 1812, Civil War, Revolutionary War, World War I, Vietnam War for example were all inflationary) and when governments actually debased the gold coins.

Another historical problem has been bi-metallism, where governments attempted to fix the gold-to-silver price, which is a disastrous scenario.  This was popular in the 19th century and led to numerous problems eventually blamed on the gold standard (by people who wanted to see it abolished so that they could gain control of the money supply.)

David in Qatar

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#5) On October 03, 2009 at 5:52 PM, jstegma (29.25) wrote:

Has there been an instance where a country converted from fiat to gold standard?  I think doing so would drive up the real price of gold, especially if the country making the switch didn't have a huge supply of gold built up. 

It seems like if we were going to convert to the gold standard, we'd want to try to game the system as much as possible before hand by acquiring gold with soon-to-be worthless fiat money.

I just think going to the gold standard would be an incredibly tricky thing to pull off without creating a depression from hell.  You can argue that the current system is entirely a scam, and maybe it is, but it more or less works too.  The US is basically on top, so it's probably not time to get too cute.  

You gotta keep in mind that it isn't really about what's fair.  It's about winning.  Whining about fairness is for losers.  We don't want to be fair.  We want to win.  The US is winning.  Let's not stop winning in the name of fairness.  Some country or another would benefit from the US going back to the gold standard, but it wouldn't be us.  Financing that monster military is important and we'll keep doing it.  If the govt taxes us through inflation to pay for it, then so be it.  I'd rather have some invisible taxes than to have some other country telling us what to do.  Balance of power is not talked about much these days, but it should be.

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#6) On October 03, 2009 at 6:22 PM, whereaminow (20.23) wrote:

jstegma,

I do understand your line of reasoning. I really do.  And honestly, I used to believe the same as you.   As long as military superiority was maintained, no matter what the cost, all is well.

Unfortunately, that's not the way it works. We have technical superiority.  We do not have military superiority.  It's an illusion.  I know it.  I've seen it first hand.  I can't explain to you how I know it, you'd have to see it for yourself.  There is a reason we are not winning and it has nothing to do with technology.

There's another important thing to remember.  America was winning long before it had a large technical superiority in warfighting.  America "won" because it allowed the most freedom of exchange among its private citizens.  The Romans "won" at the beginning of their empire for the same reason.  They failed when they destroyed their currency, overestimated their military superiority, and expanded the welfare state.  The decline of the Roman civilization so closely resembles America's it is striking.  The Soviets even made many of the same mistakes we are committing.  You can't destroy your currency. Military superiority disappears overnight if the soldiers are broke.  It disappears gradually if you send them on endless wars without clear objectives.  Combine the two at your own peril.

Likewise, America "won" without a central bank for over 100 years.  Every country has one now, and so many of them are "losing."  Its certainly not because our bureaucrats are smarter than theirs.   

I don't support a gold standard.  I support a free market in currency (Constitutional Amendment would be required for this to happen - and it never will.)  There is no reason for the government to control the money supply. Money never had to be decreed for use.  It arose naturally and should have stayed that way.  Unfortunately, governments found out how profitable it can be to take the money away from the people.  Game over.  Instead of protecting the people from fraudulent currency, they created more fraudulent currency than the world had ever seen.  Money should enter the economy the same way as clothing and food.  Remove legal tender laws and there would be no depression.  Smart people would find the reliable money producers and they would become the most valuable.  Everyone else would follow.  That's how the market works.

Finally, as I've written about before.  The most recent historical examples of countries that stayed on 100% reserves was the Bank of Amsterdam, which was a refuge from inflationary European governments for 170 years from 1610-1780. The Dutch profited greatly from this scenario.

David in Qatar

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#7) On October 05, 2009 at 2:04 AM, jstegma (29.25) wrote:

I see where you're coming from.  The US military is used too surgically and for "peaceful" purposes.  But I look at us as the decendants of the Romans.  The thing to keep in mind about the Romans is that they looked upon ruthlessness as a virtue.  When it come down to it, Americans are just as cruel as any other dominant civilization.  If the US used its military power more cruelly, we'd see the value of having it, as well as the necessity of it.  People around the world aren't really any different.  We're monsters when it comes down to it.  When the economy burns down, you want to have that military power to slaughter your enemies.  We have that.  We can't take it for granted.

I think a lot of the differences of opinion people have is due to our views about the nature of man.  I think people are incredibly mean.  Hitler was a fairly normal occurrence.  Stalin, Pol Pot, Mao, etc.  All mass murderers.  1940's Japan.  We're just lucky that we survived them.  Look up Edward Teller on Wikipedia and think what would have happened if he'd been on the Russians' side.  Lucky.  We can't afford to roll the dice again. Monsters.  Smart monsters.  Like you have to be able to beat Kasparov at chess.  War strategy is extremely important.  Soldiers aren't starving, but regular Americans probably would be if we let our guard down.  Think Putin.  

So with that in mind, you can see why the government has to tax.  Now think Congress.  They have their head up their *ss.  So the government has to tax via inflation, which has only been about 3% since the founding of the Fed 100 years ago.  It's not that much to ask.  

Now think about the supposed "real long-term return" of the stock market - something like 8%.  That's BS.  Total f*ckin' BS.  But it's held up during the Fed years.  Enough that people believe that sh*t.  Do that math.  It's total cr*p.  But people believe it, for now anyway - under that hated Fed.  

Someone is gettin' f*cked.  You know who it is?  Foreigners.  They buy these Treasuries.  They send us valuable stuff in return for this garbage.  It's a power grab.  We turn right around and turn that sucker money into tanks and planes and bombs.  They work, and we get the benefit.  What are our children gonna do, pay some ancient debt?  Please.  Take advantage of what people in other countries are willing to give us.

Think about it.  What does Iran send?  Oil.  What fuels the planes we'll use to bomb them?  Iranian oil.  Stupidity.  Listen to the man talk.  And then use him and his whole country for sex.  It's a game worth playing.  And we do.  With the Fed.  It's a racket.  Bank error in our favor - collect Chinese manufactured goods and Middle Eastern oil.  

And be the #1 world power while you're at it.

Fair?  I don't know.  It's like f*ckin' a blonde hottie who's too dumb to know any better.  It's not a question most people would ask.  But tell me the consequences of fair, and most people will answer real quick.  

I say let someone else try being "honest" with their monetary policies.  If it works, we can just bomb them and copy them.  

 

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#8) On October 05, 2009 at 2:05 AM, jstegma (29.25) wrote:

+1 rec for an interesting discussion as usual.

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#9) On October 05, 2009 at 11:08 AM, leohaas (31.56) wrote:

Maybe it is time for soldiers to unionize if that is the only way for them to get inflation protection.

More and more I am figuring out why I so strongly disagree with your opinions. I admit, I can be slow at times. To summarize a few items from this discussion (which I enjoy very much, by the way):

1) Support for the troops is incompatible with "support" for the FED (quotes are mine). Disagree because you are comparing apples and pears.

2) Tolerating "necessary evil" is like banging your head against a wall. Nonsense, because there is no need to bang your head. Necessary evil is by definition, well, necessary. Except in your utopia, of course.

3) Draft is slavery. While I agree it is better to have a 100% professional army (having served as a conscript myself in a mixed professional-drafted army), we need to realize that freedom is not free. There are times in the defense of a nation that having a large and strong army is needed. I just wish the politicians in my native country would have understood that back in the 1930's: it would have saved my parents' and grandparents' generation a lot of unnecessary heartache. The backbone of such a strong army needs to be professional, but if we'd ever be threatened by an invasion of foreign troops, that professional army may not be enough. In that case, some form of a draft or conscription is needed, for the alternative is subjugation!

4) Taxation is worse than armed robbery. Even in your utopian world, there still needs to be some form of government. And that government needs money to perform its tasks. Paying and properly equiping its soldiers comes to mind as an example. That money must be paid by the citizenry, and those citizens must be forced to do so. If not, the vast majority of people just would not pay. Paying taxes is one of your patriotic duties!

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