Monthly Archives: August 2008

The Most Fearful Speech I Have Ever Read


By Dr. Gary North 
for Gary North’s Q&A forums:

I have just read the most fearful speech I have ever read that was delivered by a high-level American official who is in a position to know what he is talking about. No other speech comes close. I have been reading speeches for a living for over 40 years.

I am going to do what I have never done before in a newsletter. I will offer no summary and no comments. I will supply a link. Click this link. Print out the speech. Read it.

It will scare you. It scares me. Things are worse than I had imagined, and my scenario has been bad. This dwarfs my scenario. Coming from the person who delivered it, you had better take it seriously.

I have no further comments. Click. Print. Read.


The Looming Federal Default: Sooner or Later?


By Dr. Gary North 
for Gary North’s Q&A forums:

The overwhelming majority of Americans are relying exclusively on Social Security and Medicare to provide a comfortable retirement in their old age.

When interviewed, they say they think the systems are going to go bust, but they do not change their behavior and save more.

They save less. Today, household saving as a percentage of household discretionary income is negative. Americans are borrowing to maintain their lifestyles.

Most Americans now live 15 years or more after their Medicare payments begin and 14 years after their Social Security payments begin. As longevity increases, and as Medicare payments keep people alive in the final six months of their lives, which are the most expensive phase of their lives, medically speaking, these two systems will go into red ink status. The generally accepted estimate for this is 2017 for Medicare. Social Security may take a decade longer.

The United States government is now something in the range of $75 trillion in the red for these two programs. Most of this is Medicare. I report on these figures in a free department on my Website, You can verify there what I am saying here.

This means that over the life of the two programs, the Federal government will have to find $75 trillion to make the payments that it has committed to make to all Americans in their retirement years. This assumes, of course, that this liability does not increase as a result of even greater life expectancy.

Whether or not Americans live longer, this gigantic figure is guaranteed to increase. Why is this? Because the programs are not being funded today. For every year that the expected liabilities are not being covered by money set aside that will produce a guaranteed return (guaranteed by whom?), the principal that is not paid is tacked onto the total debt owed. If, this year, as is certain, $2 trillion are not set aside in income- producing assets, this $2 trillion will be tacked onto the $75 trillion obligation.

None of the investments are funded by investments in income- producing assets. The trust funds of both organizations are exclusively invested in nonmarketable, long-term United States government debt. There are only three ways to pay off his debt.

First, the government can increase workers’ taxes. Second, the government can reduce the payments. Third, the government can borrow from the capital markets. Fourth, the government can borrow from the Federal Reserve System which will create the money out of nothing to purchase additional debt.

Because the government already refuses to lay aside sufficient tax money to pay off these debts, we know what the government will do. It will either cut back on payments, or it will borrow additional money, either from the private capital markets for from the Federal Reserve System.


The government borrowing money today with a promise to pay off the loan later. This “later” can best be understood by watching Judy Garland sing “Someday, over the rainbow (way up high).”

For movie buffs, the best still image in W. C. Fields, with his top hat, dealing cards in “My Little Chickadee.” His motto: “Never give a sucker an even break.”

For moving images, any scene by Groucho Marx will work fine.
But I recommend the scene in “The Coconuts,” where he is selling Florida real estate. Chico asks what the houses are made of.

Groucho answers, “You can get them in wood. You can get them in stucco. Boy, can you get stucco!”

Economically, speaking, our best example of what we are facing is to think of ourselves as bankers who have lent trillions of dollars to borrowers. The borrowers are officially retirees, but legally speaking, there is one borrower: the U.S. government.

Think of Social Security and Medicare as long-term
mortgages. The big question is this: Which type of mortgages?

We have all heard of subprime mortgages. Very few people had ever heard of them a year ago, when the international capital markets began to break down as a result of these mortgages. The banking industry trusted them. The financial industry sold tens of billions of dollars of these toxic waste investments to their investors. No one knows how to recover the losses that these stupid loans have inflicted onto tremendously naive investors, which include hedge funds and European banks. These loans are still inflicting losses on investors.

In addition to subprime loans there are also Alt-A loans.
These loans, a year ago, were considered to be medium-risk loans.

They are the next loans up on the risk level from subprime loans.

Now, they are regarded as what would have been regarded as a subprime loan one year ago. They, too, are likely to go into default to the tune of hundreds of billions of dollars.

Then there are the ARM mortgages. These are adjustable rate mortgages. I have warned against these loans continually.

These loans adjust the overall interest rate structure for relatively short-term loans. This means that the borrower does not know what he is going to be paying a year or more from now.

If rates rise, his monthly payment will rise. If they fall, his mortgage payment will fall.

Then there are the least-known mortgages. They are called pay option mortgages. These are the mortgages most like Medicare and Social Security. Twenty years ago, they were called backward-walking mortgages.


The pay option ARM mortgage allows a borrower to pay a minimum monthly payment. This minimum monthly payment is not a complete payment in order to amortize the mortgage over a specific period of time. Whatever portion of the monthly obligation that does not cover the full amortization of the mortgage is added to the principal owed by the borrower. So, if you would normally have to pay $1500 a month, but he decides to pay only $500 a month, $1000 is added to the principal owed.

The person who elects to do this is never going to catch up.
He has such poor understanding of debt that he signed the papers.

He put no money down. He thought he was securing his future. He was securing his eviction.

Here is a summary of these loans, written 2007, by someone who maintained an air of neutrality about these loans. The author writes as if the kind of people signing these loans were careful evaluators or risks and rewards. In fact, they were mostly first-time buyers. This sort of article was common until a year ago. They are all over the Web: “Pay option mortgages.”

There are an estimated $500 billion of these loans, 60% in California. They are now about to come due. The mandatory trigger points for increasing monthly payments will start the default process rolling in the second half of this year, as the graph on the page makes clear. The first re-sets are just now beginning. They will escalate, month by month, until August, 2011. Then they trail off for a year.

This wave of unstoppable foreclosures will hit the housing market for three more years, accelerating wave month by month.

The borrowers who took on these loans are generally ignorant people who know nothing about finances. These people are guaranteed defaulters. There is nothing Congress can do about this.

These loans were supposedly justified as being only for sophisticated borrowers. This was utter nonsense from 2002 onward, when they first appeared. Only misguided people borrowed by using a pay-option mortgage.

These mortgages were touted as a rational option for lenders. By November, 2009, no institution was making them.
This was reported in the “New York Times.”

If they were wise loans, why aren’t lenders offering them any longer? Because they were always bonehead loans. Brokers who were being paid large commissions made these loans to people who they knew would default. Then they sold these loans to pools of investors assembled like lambs to the slaughter by Wall Street firms and major banks.

There were a few warnings in 2005. No one took them seriously. The experts made excuses for them. The experts were dead wrong. Experts will baptize any screwball investment offered by idiots in the final stages of a boom fostered by central bank monetary inflation.

One of the large banks that promoted these loans is the fast-sinking Wachovia. One site that has summarized these loans — after no one was making them — quotes a page from Wachovia’s Website. (This page has been dropped from Wachovia’s site.)

At Wachovia, we understand the importance of flexibility and choice when it comes to choosing a mortgage. That’s why we’ve teamed up with our affiliate, World Savings Bank, to provide you with a mortgage solution that lets you choose the monthly payment you’re most comfortable with.

Offers you payment choices that allow you to take
control of your finances. You have up to four different
payment options each month — Minimum Payment, Interest
Only, Full Principal and Interest, or 15-Year Payment

With the Adjustable Rate Pick-a-Payment, you could:

Make a lower monthly payment and temporarily increase your cash flow so you can free up cash for:

Retirement savings

Paying down high-interest debt

Funding college tuition

Make higher payments and pay off

your home loan sooner

Keep mortgage payments low during the initial years of your loan

Control your budget based on your individual
financial needs

It sounded so good. That was then. This is now.

The experts never see economic disaster coming. They go with the flow. If something worked yesterday, it will work tomorrow . . . and ten years from now. Here is a classic example. Alan Greenspan offered this sage advice on ARMs in

Calculations by market analysts of the “option adjusted
spread” on mortgages suggest that the cost of these
benefits conferred by fixed-rate mortgages can range
from 0.5 percent to 1.2 percent, raising homeowners’
annual after-tax mortgage payments by several thousand
dollars. Indeed, recent research within the Federal
Reserve suggests that many homeowners might have saved
tens of thousands of dollars had they held
adjustable-rate mortgages rather than fixed-rate
mortgages during the past decade, though this would not
have been the case, of course, had interest rates
trended sharply upward.

Thanks, Alan!

Bill Fleckenstein immediately said this advice was a
mistake, but who was he, compared to Greenspan? A nobody. He
was right, but it did not matter.

With respect to pay option ARMs, there is a site on-line that sells these mortgages — or says it does. Here, we read:

“With an understanding that pay option arms are as important and respected as any mortgage product in the market place today. Take the time to see if pay option arms is the right path for your primary home, a vacation get a way or, an investment property.”

Respected? In 2008? I don’t think so.

For a video analysis of the coming pay-option ARM implosion, see this by “Mr. Mortgage,” whose used to sell them.

[Note: the mortgage loan implosion site mentioned by
“Mr. Mortgage” disappeared on the weekend of August 4.
So did his other implosion sites. These were great
sites that monitored the implosions in housing and
banking. I hope they return.]


Mortgage debtors who cannot make their payments have two
choices: (1) stop paying and walk away; (2) stop paying and sit tight. By far, the second choice is best for them. It is also beast for lenders. Empty house are targets.

There are hundreds of thousands of owners in this second class. They are no longer paying on at all. They are sitting in their houses, rent free, waiting for the lending agency to foreclose. Recently, Freddie Mac extended the foreclosure date to 300 days from the last payment, up from 150.

So, someone with a $1000 month mortgage can get another $10,000 of free rent. Maybe he can gum up the system by making one payment on day 299, and get another 300 days.

In any case, lenders have been hit with hundreds of billions of dollars in losses. They can pretend that these losses do not exist, but they do exist. The lenders are sitting on top of hundreds of billion dollars of uncollectible mortgage debt. They are doing their best to avoid admitting to the auditorium’s that these are nonperforming loans. They are doing their best to keep these loans from being written down to zero. They are therefore not for closing on homes rapidly.

On the homes that they have foreclosed on, they are not holding auctions in which buyers can submit any bid they want, with the low bid winning. Instead, lenders are establishing a lowest-bid minimum, and this minimum is above any bid that a rational investor or buyer is willing to submit. So, the lenders buy back 95% of these properties each time they list these properties for sale. These shadow sales constitute as much as 40% of the homes sold in California. This makes it look as though the housing market is not in a state of collapse in California. It looks good, but it is a gigantic delusion.


As surely as holders of pay option mortgages will default, so will the U.S. government default. But there is a huge difference. Mortgage lenders can evict mortgage holders in default and gain ownership of their houses. There is no way that “lenders” to the U.S. government can evict the government for non-payment.

This relieves today’s politicians from having to make payments above the minimal required payment to be re-elected.

Year by year, month by month, day by day, the government is adding to principal owed to future retirees by not setting aside funds to pay the beneficiaries of the two old-age programs. The funds are immediately spent by the government. Any funds not paid out to today’s growing army of elderly recipients is borrowed by the Treasury and spent. The Treasury issues IOUs to the two trust funds, but these IOUs are not counted as part of the official on-budget debt.

This is deception. The voters don’t understand. Congress likes the results: deferred day of judgment.

You may think: “Why don’t people in charge blow the whistle?” Only one senior official every did. He is David Walker, the Comptroller General of the United States until early this year. He resigned to head Peter G. Peterson’s newly created foundation, which is devoted to warning the voters about the looming bankruptcy of the government.

[Note, as is true of so many Websites, the outfit
allowed the Website designer free reign. Like all
programmers, he is young, has a huge screen, and has
chosen as his default rate 1024×758 pixels, which
produces small print. So, anyone who is older — I am
one — who uses maximum resolution of 800×600 cannot
easily view the Website.]

Almost no one in authority warned bankers and Wall Street firms against subprime mortgages, Alt-A mortgages, and pay option mortgages. The experts assume that the deal-makers know what they are doing. The deal-doers don’t know. As Warren Buffett has said, there are three phases of the cycle. Each is dominated by one group: (1) innovators; (2) imitators; (3) idiots. We are in phase three.


A year ago, the capital markets were hit by a crisis.
Losses are now estimated at $400 billion. That crisis continues.

It is likely to get much worse, as leveraged investments — borrowed short, lent long — produce more losses.

Almost nobody warned the public. The experts would not have listened. They never do.

Yet, without warning, the capital markets seized up. This is what happens to capital markets. Things go well for years.
Then there is a crisis. Everyone in power says, “We had no warning.”

The Federal government today can still sell its debt. There is a rush for liquidity in a recession period. But there will come a time when, just like the capital markets in August 2007, there will be an unforeseen lock-up of the market for Treasury debt. The Federal Reserve will then have to inflate by buying this debt.

The bankruptcy that is guaranteed by the two pay option mortgages known as Social Security and Medicare will be paid off in a wave of inflation. This inflation will begin long before the trust fund of Medicare goes into the red in 2017.

There will be a default. That default will be mass inflation. The on-budget debt of the United States government will force the FED’s hand before the off-budget debt does. But if it doesn’t, the backward-walking mortgage of Medicare will force the default.

We will have to take out medicine earlier or later. I predict earlier.


Gary North’s Economic Edge™


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The Quest for Clarity

by Eric Rauch

After last week’s article was posted, several responders questioned the need for “interpretation” at all. The argument is old and goes something like this: “The Bible is quite clear and communicates its message easily enough so that a child can ‘get it.’ People who want to ask questions about what this or what that ‘means’ are simply trying to make the Bible say more than it actually intends.” Although there is some truth behind this concern, the purists who try to make such an argument are often tragically misinformed in just how much hermeneutics—the study of interpretation—is used on a daily basis. We don’t just interpret what we read in the Bible, we interpret facial gestures, road signs, tones of voice, emails, news stories, jokes, behaviors, and any other number of things on a daily basis. Proper interpretation is the key to living in God’s world.

For those who truly believe that the Bible does not need to be interpreted, I would ask the question: “Do you read the Bible in its original languages?” If not, then the very Bible that you are reading is an interpretation. In fact, a translation is an interpretation by its very definition.1 How can you be sure that the translators were correct in their judgments and decisions? How do you know that they did not introduce their personal biases and beliefs into their translation? And for those of you who do read the original languages, which one do you read? We don’t have the original manuscripts of Paul, Isaiah, or Moses, so how do you know that your “copy” is an accurate one? Do you ever get something new out of a familiar passage? If so, then which interpretation is correct, the “new” one or the “old” one? These are difficult questions that everyone must wrestle with, believer and unbeliever, Protestant and Catholic, Jew and Gentile.

I see a clever billboard each day on my commute home. It is an advertisement for McDonald’s and specifically for their breakfast items. It has a picture of an Egg McMuffin and the text beside it says: “First we break ’em, then we fix ’em.” In order for this sign to communicate what is intended, the reader must do a double-interpretation of the word “fix.” At first glance, the sign seems to be communicating “fix” as the opposite of “break,” as in: “Dad fixed the broken lamp.” But what the sign is really doing is equivocating on this formal meaning of “fix” and substituting the less formal meaning of “prepare” or “cook.”2 But, without the picture of the Egg McMuffin, this second meaning would never come out. If the McDonald’s marketing team had attached this text to a picture of french fries or a milkshake, the equivocation of breaking and fixing eggs would have been lost; the sign would have been meaningless. McDonald’s is counting on viewers to be able to interpret their sign—to “get” the equivocation and catch the humor—based on the amount of information given. In this instance, context is paramount to proper interpretation.

Another example comes from Richard Pratt’s book, He Gave Us Stories. Pratt tells a short story of an individual named John who finds a piece of paper containing the cryptic message: GET HELP!

John was a competent reader of English; he had a basic understanding of what “get” and “help” mean. At first, John thought he knew what the note meant. But two strangers suddenly came up to him. The first one pointed at a passing car and said, “I saw where that note came from. A little boy dropped it as he was pulled into that car. You’d better call the police.” But the second person interrupted. “Don’t listen to him,” she insisted. “I wrote the note for a friend and dropped it by accident. My friend is sick, and I want him to get some help.”3

Just as John came to learn, words are open to many interpretations, depending on context. Was this note a plea for help from a scared child, or was it good advice from a concerned friend? John had no way of knowing which stranger was giving the right context so he went away frustrated, realizing that the note could mean many things. Even two-word sentences are not free from interpretive arbitrariness.

So then, what’s to be done? If even a simple sentence can be misinterpreted, how can we possibly hope to understand the comprehensive story of the Bible? One emailer asked me about the “analogy of faith,” which I broadly defined as using the “clear” passages of Scripture to help interpret the “unclear.” His question was: “Who gets to decide what’s clear and what’s unclear?” This is a very perceptive question. The analogy of faith can be subjective, just like every other interpretive tool. This emailer further made the point that some see James 2 as being the “clear passage” while others understand Romans 4 to be “clear” on the issue of faith and works. Quite true. Is there a resolution to this? Can we ever get away from the subjectivity? We’ll look into this more in the weeks to come…

Eric Rauch is the Director of Communications of American Vision.

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Posted by on August 21, 2008 in Uncategorized


Using the Power of Civil Government to Steal


by Gary DeMar

I received the following email in reference to a statement that I made on my radio show that “taxation is stealing.”

“I was discussing taxes with a person on FaceBook on the issue of the election and he brought up the argument that the government should be allowed to step into society and create social programs to help the people. He then argued that there is nothing wrong with using taxes to give to others.”

Here is what the person he was debating with on FaceBook wrote in response: “You keep calling taxes ‘stealing.’ Where is this idea coming from? I find this particularly odd because this very issue is the one Jesus was addressing when he said, ‘Render to Caesar what is Caesar’s.’” He then goes on to discuss his view of the “historical context” of the period. He argues that Jesus summarized any objection to an oppressive government by stating, “‘Pay your taxes!’ So, when you repeatedly call the government’s taxes ‘stealing,’ I have to wonder if you’re thinking biblically OR as one raised in a context espousing conservative political beliefs which are being passed off as ‘biblical.’” I wonder if his call for a “just pay your taxes” policy is really his attempt to espouse liberal political beliefs which are being passed off as “biblical.”

There are several problems this person’s use of Matthew 22:21 to deal with modern-day taxing policy in the United States. First, because governments compel people to pay taxes because they have the power to do so does not mean that what they are doing is legitimate. It’s still stealing even if we as citizens (which most of the Jews living under Caesar were not) are obligated to pay. If someone strikes me, and I’m to turn the other cheek, the person who struck me is still wrong in what he did. In fact, Jesus calls him an “evil person” (Matt. 5:39). Civil officials must also “render to God.”

Second, as citizens of the United States, we do not live under Caesar! This may come as a shock to Christians, but it’s true. In principle we are to render unto Caesar what belongs to Caesar only when we define our “Caesar.” We live under the Constitution of the United States at the federal level in which we have multiple freedoms, including the right, according the First Amendment, “to petition the government for a redress of grievances.” That means that we do not have to settle for “pay your taxes.” We can complain, debate, and vote out of office those who are abusing their office and violating the Constitution. The Jews living under political oppression had no way to “redress their grievances” since they did not have a political voice. We do.

Third, the Tenth Amendment to the Constitution informs us that “the powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.” This clearly states that the Constitution is a document of delegated limited powers. If legislators enact laws and create programs that they do not have the constitutional right to do, then they are in violation of their oath. If they pass tax laws to pay for these unconstitutional programs, then they are stealing. We still have to pay our taxes, but they are still stealing.

Fourth, the Constitution is a contract that elected officials are bound by oath to follow as the “supreme Law of the Land” (Art. VI, clause 2). The Constitution does not give elected officials carte blanche authority to enact laws because the people want them to create programs that will needed to be funded by taking money from some citizens so other citizens can benefit. Legislators, presidents, and judges can only do what the Constitution specifically states they have the authority to do.

Fifth, our founders understood that a written Constitution (contract) was needed because of human nature. Thomas Jefferson wrote in the Kentucky Resolution of 1798: “In questions of power, then, let no more be said of confidence in man, but bind him down from mischief by the chains of the Constitution.” There’s a very good reason why a prohibition against stealing is codified in biblical law. John Eidsmoe makes an excellent summary point:

Knowing the tendency of power to corrupt and aggrandize, [the founders] designed a Constitution that would chain down that dangerous servant and keep it from becoming a fearful master. They accomplished this end by carefully limiting the powers of government; by separating the powers vertically among federal, state and local levels and horizontally among legislative, executive and judicial branches; and by providing checks and balances whereby each branch and level, guarding its own powers against encroachments by the others, would check and balance the other branches and levels and force them to adhere to their constitutional limitations. This constitutional system has made the United States of America a great and free nation for over two centuries.

The majority of Americans are ignorant of these principles. If citizens vote for governmental officials to enact laws and programs that are not supported by the Constitution, then they are involved in theft as well. Just because a voting majority wants a program enacted and funded by tax dollars does not make it a legitimate constitutional expenditure. A majority vote does not overrule the text of the Constitution or nullify an oath to uphold the Constitution.

Gary DeMar is the President of American Vision.

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Posted by on August 18, 2008 in Uncategorized


Revisiting the New Deal (Reprint)

The Free Market
The Mises Institute monthly, free with membership


Volume 24, Number 11
November 2004

The New Deal Debunked
Thomas J. DiLorenzo

Macroeconomic model builders have finally realized what Henry Hazlitt and John T. Flynn (among others) knew in the 1930s:  FDR’s New Deal made the Great Depression longer and deeper. It is a myth that Franklin D. Roosevelt “got us out of the Depression” and “saved capitalism from itself,” as generations of Americans have been taught by the state’s education establishment.

This realization on the part of macroeconomists comes in the form of an article in the August 2004 Journal of Political Economy entitled “New Deal Policies and the Persistence of the Great Depression:  A General Equilibrium Analysis,” by UCLA economists Harold L. Cole and Lee E. Ohanian. This is a big deal, since the JPE is arguably the top academic economics journal in the world.

“Real gross domestic product per adult, which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939,” the authors write. And, “Similarly, private hours worked were 27 percent below trend in 1933 and remained 21 percent below trend in 1939.” 

This should be no surprise to anyone who has studied the reality of the Great Depression, for US Census Bureau statistics show that the official unemployment rate was still 17.2 percent in 1939 despite seven years of “economic salvation” at the hands of the Roosevelt administration (the normal, pre-Depression unemployment rate was about 3 percent). Per capita GDP was lower in 1939 than in 1929 ($847 vs. $857), as were personal consumption expenditures ($67.6 billion vs. $78.9 billion), according to Census Bureau data. Net private investment was minus $3.1 billion from 1930–1940.

Cole and Ohanian write as though they were surprised—even shocked—to discover these facts, not so much because they were bamboozled by the Myth of the New Deal, but because of their devotion to “neoclassical model building” as opposed to the study of economic reality. They label as “striking” the fact that the recovery from the Great Depression was “very weak” (a dramatic understatement). And why is it so striking?  Because “[t]hese data contrast sharply with neoclassical theory.” 

The neoclassical theory of depressions might well be thought of as a Frankenstein’s Monster theory. As explained by Cole and Ohanian, “The weak recovery is puzzling because the large negative shocks that some economists believe caused the 1929–33 downturn—including monetary shocks, productivity shocks, and banking shocks—become positive after 1933.” Thus, according to neoclassical theory, the economy during a depression is somewhat like a prostrate Frankenstein’s Monster, with economists playing the role of mad scientists who “shock” the beast into becoming a living being once again. They do this with various “injections” of government spending or easy credit that will supposedly cause a “roaring” recovery (just as the rejuvenated beast roared as he left the laboratory to terrorize the townsfolk in the movie, Young Frankenstein).

“The monetary base increases more than 100 percent between 1933 and 1939,” the authors write, making the case that such a “monetary shock” should have returned the economy to normalcy. They invoke the authority of well-known macroeconomists Robert Lucas and Leonard Rapping, who once proclaimed that “positive monetary shocks should have produced a strong recovery, with employment returning to its normal levels by 1936.” 

But as Murray Rothbard showed in America’s Great Depression, it was the easy money policies of the early and mid-1920s that created all the malinvestment that was the trigger for the Great Depression. The only wise thing to have done was to allow the liquidation of hundreds of overcapitalized businesses to occur. Instead, the Fed increased the monetary base by 100 percent in five years, causing more of the same overcapitalization problems that were the source of the problem in the first place.

On top of that, virtually every single one of FDR’s “New Deal” policies made things even worse and prolonged the Depression. Austrian economists have known this for decades, but at least the neoclassical model builders have finally caught on—we can hope.

Cole and Ohanian apparently emerged from the rarified world of macroeconomic model building for a long enough period of time to discover that the so-called First New Deal (1933–1934) was one giant cartel scheme, whereby the government attempted to enforce cartel pricing and output reductions in hundreds of industries and in agriculture. This of course was well documented in John T. Flynn’s book, The Roosevelt Myth, first published in 1948. Henry Hazlitt had also written about it some 15 years earlier. “New Deal cartelization policies are a key factor behind the weak recovery, accounting for about 60 percent of the difference between actual output and trend output,” the authors write.

The fact that it has taken “mainstream” neoclassical economists so long to recognize this fact is truly astounding. For generations their own neoclassical textbooks have taught that cartels “restrict output” to raise prices. It has also been no secret that the heart and soul of the First New Deal was to use the coercive powers of government to prop up wages and prices by cartelizing the entire economy.

FDR and his advisors mistakenly believed that the Depression was caused by low prices, therefore, high prices—enforced by threats of violence, coercion and intimidation by the state—would be the “solution.”  Moreover, it is hardly a secret that if less production takes place, fewer workers will be needed by employers and unemployment will subsequently be higher. Thus, the First New Deal could not possibly have been anything but a gigantic unemployment-producing scheme according to standard neoclassical economic theory.

FDR’s tripling of taxes, his regulation of business, and his relentless antibusiness propaganda also contributed to a worsening of the Great Depression, but his labor policies were probably the most harmful to the employment prospects of American workers. In this regard the most disappointing thing about the Cole-Ohanian article is that they do not even cite the pioneering work of Richard Vedder and Lowell Gallaway—Out of Work: Unemployment and Government in Twentieth-Century America—first published in 1993.

Indeed, it is somewhat scandalous that they do not cite this well-known work while making essentially the same arguments that Vedder and Gallaway do. They recite many of the same facts about labor policy:  The NIRA codes established minimum wages for less-skilled and higher-skilled workers alike; employers were told that they must bargain collectively with unions, which were given myriad legislated advantages in the bargaining process, all enforced by the newly-created National Labor Relations Board. All of these policies made labor more expensive. Consequently, as the economic law of demand informs us, the inevitable result has to be less employment.

Strike activity doubled from 14 million strike days in 1936 to 28 million a year later, and wages rose by about 15 percent in 1937 alone. The union/nonunion wage differential increased from 5 percent in 1933 to 23 percent by 1940. Newly-enacted Social Security payroll and unemployment insurance taxes made employment even more expensive. What all of this means is that during a period of weak or declining derived demand for labor, government policy pushed up the price of labor very significantly, causing employers to purchase less and less of it.

Vedder and Gallaway conducted an econometric evaluation of these labor cost-increasing policies and concluded that most of the abnormal unemployment of the 1930s would have been avoided were it not for these policies. They estimated that by 1940 the unemployment rate was eight percentage points higher than it would have been without the legislation-induced growth of unionism and government-mandated employment costs. They conclude that “The Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs” (p. 141).

Cole and Ohanian reach the exact same conclusions, but express them in the somewhat convoluted language of the “top economic journals”:  “New Deal labor and industrial policies did not lift the economy out of the Depression. . . . Instead, the joint policies of increasing labor’s bargaining power and linking collusion with paying high wages prevented a normal recovery by creating rents and an inefficient insider-outsider friction that raised wages significantly and restricted employment . . . the abandonment of these policies coincided with the strong economic recovery of the 1940s.”

This last conclusion—that the abandonment of FDR’s policies “coincided” with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In “Regime Uncertainty:  Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in 18 years.

In short, it was capitalism that finally ended the Great Depression, not FDR’s harebrained cartel, wage- increasing, unionizing, and welfare state expanding policies. It’s good to see that the Journal of Political Economy, the University of Chicago, and UCLA are finally beginning to catch up to the libertarian scholarship of Richard Vedder, Lowell Gallaway, Robert Higgs, Jim Powell (author of FDR’s Folly) and such predecessors of theirs as Henry Hazlitt, John T. Flynn, Murray Rothbard, F.A. Hayek, William H. Hutt, Benjamin Anderson, and others associated with the Austrian School.

Better late than never. 


Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland and author of The Real Lincoln (Three Rivers Press/Random House, 2003). His latest book is How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present (Crown Forum/Random House, 2004) (tomd@

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Posted by on August 14, 2008 in Uncategorized


So What’s Special About Christianity


by Gary DeMar

We at American Vision are hearing rumblings from a number of people in the Christian community that Christians are being told not to engage the culture with a distinctly biblical approach to social and political issues. So what standard is a Christian to follow when evaluating the moral boundaries of society? Some Christians will claim that we aren’t to bother with what goes on in the world. Let the world go to the devil. Others claim that it’s just not the church’s calling. Abortion may be bad, but it’s not our job to say so to anyone outside the church. Homosexuality may be immoral, but there is no word from God for the civil magistrate to obey.

The more scholarly among us say that we are to follow a Natural Law ethic. “Charles Darwin destroyed natural law theory in biological science. . . . His successors destroyed natural law theory in social science. In the 1920’s, quantum physics destroyed natural law theory in the subatomic world. This immediately began to undermine modern legal theory.”1 The shattered foundation of Natural Law theory, like Humpty Dumpty, can never be put together again as long as evolution remains our national religion.2 At the moment, Natural Law theory is dead given materialist assumptions that are firmly rooted in every major secular university and law school in the country. If Natural Law is ever revived, it will have to follow on the heels of biblical law, the very thing Christian Natural advocates want to avoid. You can’t have one without the other. Take a look at William Blackstone (1723–1780) on this.

Thus when the Supreme Being formed the universe, and created matter out of nothing, he impressed certain principles upon that matter, from which it can never depart, and without which it would cease to be.
                                                                       * * * * *
This law of nature, being co-eval with mankind and dictated by God himself, is of course superior in obligation to any other. It is binding over all the globe, in all countries, and at all times: no human laws are in validity, if contrary to this; and such of them as are valid derive all their force, and all their authority, mediately or immediately, from this original.

                                                                       * * * * *
Upon these two foundations, the law of nature and the law of revelation, depend all human laws; that is to say, no human laws should be suffered [permitted] to contradict these.3

When Clarence Thomas tried to use Natural Law theory during his Senate Judiciary hearing in September 1991, he was immediately criticized by Sen. Joseph Biden. As long as Thomas defined Natural Law as Biden did, then Thomas’ appeal to it was acceptable. But if he defined it as “Higher Law,” the belief that God was its author as Blackstone did, then his view of Natural Law would not be tolerated. Biden wrote an article that appeared in the Washington Post4 in which he claimed the following for his version of natural law:

  • It does not “function as being a specific moral code regulating individual behavior.”
  • It is not “a static set of unchanging principles.”
  • It is “an evolving body of ideals.”

Basically, natural law is whatever the courts say it is. “In our system,” Biden writes, “the sole obligation of a Supreme Court justice is to the Constitution. Natural justice can supply one of the important means of understanding the Constitution, but natural law can never be used to reach a decision contrary to a fair reading of the Constitution itself.” This is why the Left wants to be the gatekeepers to the Supreme Court by mandating a liberal litmus test to all prospective judges. Biden’s article does not tell us anything about how we determine what’s right or wrong. Morality is a matter of “individual choice.” And if these new Christian social theorists get their way, they won’t have anything to say either.  

Why Christians believe there is refuge either in cultural indifference or Natural Law is a mystery to me. William Wilberforce, upon being struck with the oppression of the slave trade, wrote in his diary, “Almighty God has set before me two great objectives: The abolition of the slave trade and the reformation of manners.” Had the British government “not been in the hands of Christians there seems little reason to have expected it to mount its massive, expensive, and voluntary campaign against slavery.” If modern anti-reformists had their way, the institution of slavery would still be with us. The cultural escapists would claim that slavery isn’t their concern, since their duty is “spiritual,” to preach the gospel. Slaves would be welcomed to attend Sunday services. The balcony or some other designated area would be reserved for them. Once the benediction was said, they would be marched back to the plantation for another week of enslavement. But they would have heard the Gospel!

A Natural Law theory not tied to biblical law would have done nothing for slaves since there were many Natural Law advocates who believed, following Aristotle’s view of Natural Law, that some men were by nature inferior. Enslavement was best for them. There were others who believed that only an ethical system based on the Bible could set the standard for reform. John Stott writes about revivalist Charles Finney’s views on social reform.

Social involvement was both the child of evangelical religion and the twin sister of evangelism. This is clearly seen in Charles G. Finney, who is best known as the lawyer turned evangelist and author of Lectures on Revivals of Religion (1835). Through his preaching of the gospel large numbers were brought to faith in Christ. What is not so well known is that he was concerned for ‘reforms’ as well as ‘revivals.’ He was convinced, as Donald W. Dayton has shown in his Discovering an Evangelical Heritage, both that the gospel ‘releases a mighty impulse toward social reform’ and that the church’s neglect of social reform grieved the Holy Spirit and hindered revival. It is astonishing to read Finney’s statement in his twenty-third lecture on revival that ‘the great business of the church is to reform the world . . . . The Church of Christ was originally organised to be a body of reformers. The very profession of Christianity implies the profession and virtually an oath to do all that can be done for the universal reformation of the world.’5

Finney saw no contradiction between preaching the gospel and social reform: “The Christian church was designed to make aggressive movements in every direction—to lift up her voice and put forth her energies against iniquity in high and low places—to reform individuals, communities, and government, and never rest until the kingdom . . . shall be given to the people . . .—until every form of iniquity shall be driven from the earth.”6 In a footnote, George Marsden informs his readers that “Letters on Revivals—No. 23,” from which the above quotation is taken, is “left out of modern editions of these letters.”7

When we dig a bit deeper into Finney’s thought, we learn that he too met resistance by advocating reform efforts. He was amazed that the church treated “the different branches of reform either with indifference, or with direct opposition.” Finney described opposition to reform efforts as “monstrous” and “God-dishonoring.”8 A careful study of Scripture and history will show that Christians involved in this world have made a profound difference. But you would never know it by listening to the cultural retreatists of today.

Gary DeMar is the President of American Vision.

Are you interested in leaving a comment on the American Vision blog related to this article? Click here to type in your comment directly into the blog.

1 Gary North, Political Polytheism (Tyler, TX: Institute for Christian Economics, 1989), xxii.

2 Gary DeMar, “The Religion of Evolution,” Biblical Worldview (October 2002).

3 William Blackstone, Commentaries on the Laws of England, 4 vols. (Chicago: The University of Chicago Press, [1765–1769] 1979), 1:38, 41, 42.

4 Joseph R. Biden, Jr., “Law and Natural Law: Questions for Judge Thomas,” The Washington Post (September 8, 1991), C-1.

5 John Stott, Involvement: Being a Responsible Christian in a Non-Christian Society, 2 vols. (Old Tappan, NJ: Fleming H. Revell, 1984, 1985), 1:23. Emphasis added.

6 Finney, quoted from “Letters on Revivals—No. 23,” The Oberlin Evangelist (n.d.) in Donald Dayton, Discovering an Evangelical Heritage (New York: Harper & Row, 1976), 21.

7 George M. Marsden, Fundamentalism and American Culture:  The Shaping of Twentieth Century Evangelicalism, 1870–1925 (New York: Oxford University Press, 1980), 252, note 5.

8 Finney, quoted from “Letters on Revivals—No. 23 in Dayton, Discovering an Evangelical Heritage, 20.

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Posted by on August 12, 2008 in Uncategorized


The Case Against Obama

You’ve Heard Obama’s Speeches
Now Discover the Reality Behind the Rhetoric

“Outstanding exposé of the ultimate political opportunist. From his ultra-liberal views to his multitude of shady associates, this book gives a glimpse of the man behind the messiah mask.”

-Amazon reviewer

“My liberal grandmother is reading The Case Against Barack Obama, and is almost choking over her sharp inhales.”

-Reader Comment

In The Case Against Barack Obama: The Unlikely Rise and Unexamined Agenda of the Media’s Favorite Candidate, investigative journalist and National Review Online political reporter David Freddoso removes the gilt from the golden candidate, exposing Obama for who he really is: the #1 most liberal U.S. senator whose policies and inexperience could put our country in serious jeopardy.

Like any convincing argument, Freddoso supports The Case Against Barack Obama with sound evidence and facts. Delving into Obama’s legislative record, interviewing his colleagues, and analyzing Obama’s books and speeches, Freddoso does the research that the media has neglected. His conclusion? Obama the Orator is very different from Obama the Legislator. From his history of supporting corrupt Chicago politics to his extreme liberal voting record, The Case Against Barack Obama proves that Obama is not the politician of “change”, but the politician of status quo.

In this shocking exposé, Freddoso builds his case by revealing what the nightly news hasn’t told you, including:


  • Obama’s extensive connections to corrupt Chicago politics—while he claims to be a reformer  
  • Obama’s plans to increase taxes—amid rising fuel and food prices, he just voted to raise taxes for anyone making more than $32,000  
  • Obama’s dangerous mix of inexperience and poor judgment—evident in his shifting policy positions and the Rev. Wright scandal  
  • Obama’s radical voting record—he repeatedly voted against legislation to protect babies born alive during failed abortions 

No doubt there will be other books about Barack Obama, but The Case Against Barack Obama is the first comprehensive and critical look at the man who would be president. Freddoso builds a rock-solid case against Obama’s “bipartisan reformer” façade, going where most journalists—and books—refuse to tread.

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Posted by on August 11, 2008 in Uncategorized