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The Upcoming Top Fool Will Be a Commodity BEAR

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May 27, 2008 – Comments (27) | RELATED TICKERS: GLD , OIH , SLV

Commander #1: We've analyzed their attack, sir, and there is a danger. Should I have your ship standing by?

Governor Tarkin: Evacuate? In our moment of triumph? I think you overestimate their chances.

Gov Tarkin held his position, the Empire had destroyed approximately 27 of the 30 rebel fighters, it seem logical to stand fast. But there was a risk. Darth Vader sense it. He grab two tie fighter pilots and rolled out to meet the threat. Vader engaged the rebel pilots and took out Two, Five and Gold Leader. Red Five made his attack run turned off his scanner and made a "one in a million" shot that destroyed the Death Star. 

Like Vader I sense danger in the commodity bubble. I have closed most of my commodity longs. So it will go for the First Commodity Bears, who attacks the Commodity Bull. The first ones in will be killed (ref my MOS, MON, POT calls). The guy, who times it right here in CAPS will be a hero and Top Fool, the way the previous Top Fool arrived by underperforming all the homebuilders and residential real estate.

Many that shorted NASDAQ stocks in 1998-99 were out of cash or bankrupt before the NASDAQ bubble popped.  The commodity bubble might have more up side, but long commodities and short the US dollar is one of the most crowded trade in the world today. 

But eventually the commodity bubble will be popped. The commodity bubble is the last bubble left by the reckless Central Banks monetary inflation and government overspending. When the commodity bubble pops, like the DeathStar explosion, you had better be clear.

If Obama increase Capital gains tax or Congress reviews/rewrites the legislation in regards to commodity speculation, the commodity bubble might start deflating. 

Mish Shedlock writes about it here:

Quantifying Commodities Speculation

Three charts to see:

1.
Commodity Index Investment vs. Spot Prices

http://bp0.blogger.com/_nSTO-vZpSgc/SDwwpsrA_WI/AAAAAAAACok/KXFdcp3C00k/s1600-h/Commodity-Index-Investment-1.png 

2. Commodity Index Purchases Last 5 Years
http://bp3.blogger.com/_nSTO-vZpSgc/SDwxdcrA_XI/AAAAAAAACos/o-hN0udv-7Q/s1600-h/Commodity-Index-Investment-2.png

3. Commodity Futures Market Size

Of interest Enron's biography Smartest Guy in the Room, I will write about it later.

The Smartest Guys in the Room - California and Traders

The Smartest Guys in the Room - Jeffrey Skilling

 

27 Comments – Post Your Own

#1) On May 28, 2008 at 12:17 AM, goldminingXpert (29.44) wrote:

We're having an interesting debate on this on my blog: http://caps.fool.com/Blogs/ViewBlog.aspx?t=01008631960540474609

I tend to agree with your position. I think we're heading down, but I have picks on both sides of the mining sector. 

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#2) On May 28, 2008 at 12:41 AM, jahbu (85.47) wrote:

Yes but why are speculators running up the price?  And who are these speculators working for? Theres 2 sides to this coin. Or maybe the coin is just a distraction?

One group might say it is greed and a bubble, and once the bubble burst,  the powers that be will buy up all these exploration companies etc on the cheap.  Or bubble up all the alternative fuel options that make sense at $100 a barrel oil.  Then crash the price of oil back down to $30-50 a barrel, destroying all thoughts of energy independence from oil.  The people will be happy and go back to their old ways and long forget about silly stuff like solar, nuclear, and electric cars.  If this is true, all the PEAK OIL stuff is BS and just a scam and a bubble ready to burst.  

 I presumed this was the case for the last few years.  The oil tycoons would let Ethanol, wind, solar, etc develop a bunch of technologies and invest billions then cut their sails buy lowering prices on oil drastically.  This also allows them to buy freshly found oil reserves on the cheap.

But what if this is not the case?   What if the demand for oil is greater than the supply and there just isnt enough replacement to increase demand fast enough.  Or what if most of the oil is in foriegn countries that do not want to sale it to us anymore?  Maybe they do not want to keep giving us their valuable oil for our worthless dollars? 

What if some of them just say, "Hey I am sick and tired of the United States of America trying to bully the world and living way beyond their means off OUR oil, hmmm lets sale our oil to someone else." OR keep it in the ground for our future generations.

What about fears of War or hyperinflation of a currency of a country that is spending like drunken sailors? That just happens to be the Worlds reserve currency.

Again why are so many speculating? 

IMHO they are speculating for a hedge against a worthless dollar,  slowing supplies of CHEAP Oil in a world driven buy it, and possibilites of WAR.

People have not changed their habits yet, not anywhere close!  If they crashed the price now, the world would be back in this same situation within a few years.  No way, not know.  Oil will go to $200 a barrel, after that it may crash back down to $100, in combination with high interest rates in the USA.  Not until most folks are whipped out. 

Besides it has to get bad enough that US citizens give up our national parks and coast lines to the big oil boys.  Our oil companys need room to grow and they are getting the shaft all around the World.  They need Alaska and our coast in a bad bad way.  Will they use high oil prices to achieve their goals? ABSOLUTELY!  Listen to any republican radio talk show!  The propaganda is so dern heavy it is hilarious. 

IMHO this is what all this BS is REALLY all about.  They want the rights to these areas to drill. They know the oil is there!  They know it is in a geopolitically safe area!  They just need the pain in the arse citizens of the USA to give it to them!  They dont give a dern about Global warming, pollution, or peak oil.  THEY need room to grow their profits for their shareholders!  Whatever story it takes, whatever pain it takes.

I agree this is a bubble, but not yet, they havent achieved their goals.

When the Congress and Senate give in to drilling in Alaska and off the coasts, it will be time to get the heck out of oil stocks fast.  Just my 2 cents, it is almost impossible to find out anything concrete when it comes to oil.   I have researched till my eyes turn red and I am still not sure which flip of the coin to believe.

They want more oil drilling, when what we really need is a diversified energy plan. Natural gas, hydro, geothermal, nuclear, coal, wind, solar, and any other cool stuff all rolled up in a ball!  But why would big oil want that?  Do you think Good ol boys in the Newspaper industry like the internet?  What about the good ol boys in the Music business?   Heck no!  It is competition that they would rather squash then be the front runner in.  They will lose, and good ol boys like T Boone Pickens that adapts and jumps with both feet forward will prevail.

Or maybe it is just Enron speculators, and once the government regulates them, this nightmare will end.  I do not buy it.

Jahbu

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#3) On May 28, 2008 at 1:11 AM, camistocks (< 20) wrote:

So does that mean that Jim Rogers will be wrong? He still likes commodities, of course not those that are at all time highs. I agree that oil will correct at some point, however I read that oil related companies trade at PEs as if oil was $80. So a downturn should be priced in.

Sure soft commodities, especially rice are a bit ahead of themselves and may correct.

Always remember, something like 3 billion people in Asia, South America and Eastern Europe have the chance to get a better lifestyle, like ours. This is because most economies have opened themselves to the global trade. They want to eat better food, buy a TV and want to drive a car (or two).

This is a huge thing!

BTW, nice videos about Enron. 

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#4) On May 28, 2008 at 1:23 AM, FleaBagger (28.98) wrote:

So from what I understand from those videos, California regulators are as innocent as doves, and everything would have worked out fine if only meanies at Enron hadn't exploited the freest market in the US? Because, you know, California was a prime example of a free market. It was almost like totally deregulated.

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#5) On May 28, 2008 at 1:37 AM, camistocks (< 20) wrote:

Free markets don't work. This is like as if there are no laws. Wild West. In a developed society laws/regulations are needed.

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#6) On May 28, 2008 at 1:41 AM, goldminingXpert (29.44) wrote:

free markets=developed society. The more government you have, the closer you get to North Korea or some hellhole in Africa. Communism/miltary authoritarianism have lots of laws and regulations and yet their economies run in reverse.

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#7) On May 28, 2008 at 1:52 AM, goldminingXpert (29.44) wrote:

from that video... "Free markets... looking for loopholes" absolute [b***s***] free markets have no rules, and therefore no loopholes. California created a partially free market, which isn't a free market at all.

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#8) On May 28, 2008 at 1:54 AM, camistocks (< 20) wrote:

GMXpert,

what about something in between? I have not ment total control. North Korea? Come on. Just regulations. No regulations/free market is wild west. Not exactly what a developed society is IMO.

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#9) On May 28, 2008 at 2:10 AM, goldminingXpert (29.44) wrote:

I'm a libertarian, so I believe in no government economic involvement other than the insurance of free trade amongst the states. Econ 101 states that government is inefficient in everything it does, therefore, the most efficient approach is to get as close to eliminating it as possible. Instead of creating a free market, California created a complex market with loopholes and and complex laws... free markets don't need herds of lawyers.

Also, the wild west wasn't so wild. Actually, not wild at all. http://www.mises.org/journals/jls/3_1/3_1_2.pdf

"that the Western frontier was a far more civilized, more peaceful, and

safer place than American society is today."'Z The legend of the "wild, wild

West" lives on despite Robert Dykstra's finding that in five of the major

cattle towns (Abilene, Ellsworth, Wichita, Dodge City, and Caldwell) for the

years from 1870 to 1885, only 45 homicides were reported-an average of 1.5

per cattle-trading season.') In Abilene, supposedly one of the wildest of the

cow towns, "nobody was killed in 1869 or 1870. In fact, nobody was killed

until the advent of officers of the law, employed to prevent killings."' 

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#10) On May 28, 2008 at 4:51 AM, podrag (< 20) wrote:

We will need a credit contraction before this happens. This means banks going bankrupt, not being bailed out. Otherwise you keep on with the massive M3 growth which will continue to fan the flames in food, energy and commodities in general.

How will the price of commodities come down unless the Central Banks stop creating so much excess money and credit?

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#11) On May 28, 2008 at 8:55 AM, GNUBEE (25.07) wrote:

Completely free markets can allow gross negligence on the part of large corporations. I am all for the market setting the price, but when Enron decided to have power generation plants shut down to spike the price, that is why you need some oversight.

 

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#12) On May 28, 2008 at 10:16 AM, AnomaLee (28.62) wrote:

Commodity prices will sharply fall if economies sharply fall...

I don't know how bad the global downturn will be, but there is always a large pool of buyers and an actual need for commodities. The problem is if there is a larger pool of sellers.

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#13) On May 28, 2008 at 10:38 AM, madcowmonkey (< 20) wrote:

Podrag has it nailed. When the Central Bank stops, then we will see a drop, how big? I don't know, but neither the banks failing nor gold dropping sounds good. Good post abit. I think some people will be burned trying to time it. I would still like to see what the latter half of 2008 holds though.

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#14) On May 28, 2008 at 11:38 AM, FourthAxis (< 20) wrote:

Usually I'm with you, but not this time.  If you show me cheaper commodities, I'll show you more ways to use them.  Think about why the world population hasn't been living like us; they couldn't afford to.  We are beginning to give them more resources to spend and if commodities become cheaper, they will buy more!

Just my $0.02 

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#15) On May 28, 2008 at 1:35 PM, AnomaLee (28.62) wrote:

Also, are you saying all commodities in general? The only way that can happen is through a stronger currency. Without that I don't think you can lump commodities into one entity. 

Not every stock or every commodity is going to jump off a cliff, but we've already seen huge corrections in wheat and other commodities that have large weightings in commodity indexes.

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#16) On May 28, 2008 at 6:37 PM, ATWDLimited (< 20) wrote:

No currency correction soon. only a short resurgence by Fed liquidity, to stabilize the market. What will happen is modeled in my post, The official Dollar Report, and view  the graph I made. Try using the beta version 1.0 Caps blog search that I made, it is great.

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#17) On May 28, 2008 at 6:39 PM, ATWDLimited (< 20) wrote:

Add on, don't forget national debt/total debt/leverage of the US dollar, future debts will out strip growth, inflation will rise faster than growth, so in the end it will accelerate out of control, hyper stagflation.

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#18) On May 28, 2008 at 7:15 PM, abitare (34.56) wrote:

ALCON,

Thank you for the replies. Let me state, the commodity bubble may get much, much bigger before it is taken out. It depends on the Central Bank printing press and how much inflation is created before there is a reaction to force the FED and Congress to act responsible. This may take years and/ or the US FED may lose its charter.  Jim Rogers said this week the FED will be gone in the next ten years. It is a big statement.  I think he might be right, that is another post.

goldminingXpert,

We will take a look.

jahbu

Yes but why are speculators running up the price?  And who are these speculators working for?

Take a look at Mish post, Funds are holding commodities instead of Central Bank funny money in their portfolio, to hedge against inflation and as an investment holding, it is a consequence of to much liquidity, inflation and ridiculously low rates.

Or what if most of the oil is in foreign countries that do not want to sale it to us anymore?  Maybe they do not want to keep giving us their valuable oil for our worthless dollars? 

They will take dollars as long as we let them buy up our assets. We sold $290 billion to foreign interest last year. Buffett says we are like the rich farm kid, who would rather sell the land then farm it. That is what the US is doing to support this SUV suburban culture. The Grandchildren will be serfs.

What about fears of War or hyperinflation of a currency of a country that is spending like drunken sailors? That just happens to be the Worlds reserve currency.

Again why are so many speculating? 

I am expecting deflation, and that Americans will/are losing the world reserve currency status. Americans are going to get a lot poorer in the next decade.

Or maybe it is just Enron speculators, and once the government regulates them, this nightmare will end. 

The Enron model works until someone gets caught. Enron used Market to Make-believe, which is still used today by most banks.

camistocks,

So does that mean that Jim Rogers will be wrong?

Jim Rogers started this trade back in 2000. It has worked for 8 years. Oil is up 500% gold is up 300% etc…. JR also like China it is down 40% this year. Like I said it would be in 30 Dec 07.

Always remember, something like 3 billion people in Asia, South America and Eastern Europe have the chance to get a better lifestyle, like ours. This is because most economies have opened themselves to the global trade. They want to eat better food, buy a TV and want to drive a car (or two).

So what, since when do we care what people want? Let them eat Cake. There have always been poor starving masses, just because they want, does not mean they will receive. Case in point: ethanol the US is putting 20% of its corn in to its gas guzzlers. Does that sound like a country that cares about what some third world peasant wants?

FleaBagger,

The movie is outstanding. Rent it buy it, the Smartest Guy in the Room. You will be better able to comment on the egregious behavior of Enron.

podrag

How will the price of commodities come down unless the Central Banks stop creating so much excess money and credit?

Take a Read of Mish Sherlock’s posts he is writing on the theme. Aligned.

GNUBEE

that is why you need some oversight.

Yep, aligned, the problem was Enron was one of the largest supporters of the GOP and helped Arnold get elected.

AnomaLee

Commodity prices will sharply fall if economies sharply fall...

Aligned, the problem is people are substitution commodity positions for currency, because the currency is being over produced.

madcowmonkey,

Podrag has it nailed.

Yep, take a look at the videos I posted on ECON401 The BRIC story, there is a chapter about Volkner and Regan’s policy with 20% interest rates to save the dollar.

FourthAxis,

The dollar has uses to; I use them everyday as currencies. If the FED raises rates to double digits the commodity bubble will implode. Ref Regan and Volkner 80-84.

 

1/3 of the world still lives with out electricity, running water like peasants from 2000 years ago. An even higher percentage are illiterate, it does not matter how they WANT to live, in exchange for what? Good will? A prayer?

AnomaLee,

If the FED raises rates double digits to support the dollar, commodities will implode (ref Volkner and Regan 1980). Take a read of Mish post.

 

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#19) On May 28, 2008 at 10:08 PM, jahbu (85.47) wrote:

I pretty much agree with ya man, but not yet. They want the rights to drill!  Neil Bortz, Newt, and the like are pounding their high horse in 6th Gear!  Check out his site.  http://newt.org/

Drill here, drill now, pay less.   They are making bumper stickers for cripes sake!

If gas goes down, they will not get their way.

They will support the dollar/switch to the Amero and blast up interest rates, but not yet!

The pain has to become much worse or the Congress has to give in much faster.

Just my opinion

 You say deflation, I say much more inflation until they drop the Volker.  Time will tell :)

The Elite bankers are losing control over the world(through education of people).  But they wont give up without a fight.

That's what scares me.

Jahbu

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#20) On May 28, 2008 at 10:12 PM, abitare (34.56) wrote:

FYI Mish Shedlock again:

"A still better way of looking at it is that commodities speculation is symptom of a much larger set of problems:

Fractional Reserve Lending

Past monetary inflation

The Fed's willingness to blow bubble after bubble

Loose lending standards by the Fed

Carry trades in Japan
Runaway spending by Congress

All of the above points pertain to other central bankers and foreign governments as well.

The Fed openly encouraged speculation in the wake of the dotcom crash. Greenspan was the biggest cheerleader for both derivatives and ARMs. The result was the biggest housing bubble the world has ever seen.

Although monetary inflation is benign now, the passthrough effects of past monetary inflation are still being felt.

The Fed's Role

The Fed can provide liquidity but not capital. That is a given. If you disagree, please see No Helicopter Drop For Failed Banks. More importantly, the Fed can only provide liquidity, it cannot dictate where the money goes, if indeed it goes anywhere at all.

If the Fed steps on the gas once again (monetary printing), it is highly doubtful that money finds its way into job creation or a recreation of the housing bubble (two places the Fed arguably would like it to go). Past experience shows that bursting bubbles do not get reinflated, and given there is rampant overcapacity in practically everything, liquidity is unlikely to foster job creation.

Instead the money will look for a new home, and that home may be the last place the Fed wants it to go: continued commodity speculation. Congress could intervene, but that will not address the root problem: Fractional Reserve Lending and the Fed itself.

By the way, if Congress does intervene, it does not guarantee that speculation in commodities will end, it might merely shift futures trading from one market to another."

 

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#21) On May 28, 2008 at 10:49 PM, jahbu (85.47) wrote:

So why do you think this will be a deflationary recession?  Maybe we are using the words to mean different things. 

I mean all REAL ASSETS up verse the US dollar.  They may be able to reinflate the dollar with high interest rates in the future, in synch with Private/Public Partnerships with SWF and the Military Industrail Complex/Big Oil grabbing key REAL assets(water, toll-roads, farm ground, ports, etc.) in our country.  China, etc is running out of Real Assets to trade their dollars for.

Are we on the same page or?

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#22) On May 28, 2008 at 11:17 PM, abitare (34.56) wrote:

I think it will be severe. I think it will me more likely stagflation until rates rise. Things you own will come down in value, things you have to buy will go up in costs. The US debt is so high and its productive capcity is low. Take a look at Peter Schiff's videos, he is calling for long term dollar decline and severe recession.

In a pure recession all asset values fall will with reduced consumption. I am looking at asset deflation in the US. Loss of US forces in Iraq, could cause hyper inflation and parapolic commodity prices. 

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#23) On May 31, 2008 at 3:17 PM, TDRH (99.63) wrote:

Would appear that oil is due for a correction/profit taking, but without alternatives, and the continued weakening of the dollar the overall trend should continue to be up.    

The question that I have is how the recent legislation emissions in the US will affect the competitive landscape.   If effectively enforced, there will be all new winners, and some big losers.  Really do not have a good handle on it yet, but the carbon credit/emissions market could really take off.  This could produce some opportunities if invested properly. 

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#24) On June 02, 2008 at 5:32 PM, abitare (34.56) wrote:

TDRH,

Thank you for the reply.

There are many things affecting the US market and commodities will be very volatile, I think many believe they will continue up forever. We have been here before in 1980s, same story different times, double digit interest rates and the commodity bubble will be popped. Although, I think much higher inflation will come before this happens.

Money travels very fast. You no longer need to keep assets in one currency or one asset class. Pension, hedge and investment banks are putting money where the risk/reward is best. Central banks across the world have been printing paper money and creating huge amounts of credit to keep asset values high.

Resources / commodities have a finite limit and are costly to extract. But the amount of Central Bank funny money is unlimited, just keep adding 00000. GWB has double the US debt, devaluing the dollar and punishing pensions, Banks etc... that hold onto the dollar. They are reacting by holding commodity contracts instead of unlimited funny money. 

Oil is up 600%, $20 to 130, since Bush was elected. There is a lot of dollar collapse priced into oil. Americans can and will reduce the amount of oil they consume. They will or they will go broke, the unemployment is just beginning. If oil stays high, more and more unemployment will come.

I do not support legislation, but it is coming anyway as a kick back. Many US companies are already building and investing in alternative energy.  GE is going into wind big time.  

but the carbon credit/emissions market could really take off.  This could produce some opportunities if invested properly.

WSJ had a good write up on a couple of traders, who made millions on this new exchange. I will try and find the article.

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#25) On June 08, 2008 at 4:36 PM, steelpoker (< 20) wrote:

You are using the "dollar" to keep score and to call the run in commodities a bubble.

What is a dollar worth anyways???  It is nothing more than a promise to pay an abstract value.

 At least we know commodities have real intrinsic value and are useful.

I'll stick with my Oil, Natural Gas, Copper, and Silver any day.  You can have my greenbacks.  LOL.

 - Steel

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#26) On June 08, 2008 at 11:46 PM, abitare (34.56) wrote:

steelpoker,

I am aligned somewhat. Until the FED raises interest rates. 

This not the first time there has been a bull commodity market. In the 1970-80 there was the same theories, then came Paul Volkner. Interest rates went 20% and the commidity bull market was crushed. Gold, silver, oil etc. was a lousy investment for 30+ years.

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#27) On June 09, 2008 at 6:56 PM, ATWDLimited (< 20) wrote:

So that would kill the housing/credit market, so you can not do that. Real incomes are not high enough, so borrowing supports the system. This would aggravate the recession, and stop business expansion dead in it's tracks. At the same time, the US economy and government will be at short falls and in the red, while if Democrats win, taxes will rise, Combine this with deficits at the state and local level, it would kill every one, because the investment in jobs, infrastructure and more, would stop, the tax revenue decline, the borrowing increase and the dollar rise a little, but not enough to make any difference in the fact that the economy is running on empty. Long run fiat currency collapses. That is how it is designed. The same goes for our democracy, Alexander Tyler. Replace the country idea with the dollar, because the two are linked, because it is the government that gives the credit notes.

HERE, THE Fall OF DEMOCRACY and the $Dollar

When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:  A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage. Alexander Tyler

 

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