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When I Was Wrong

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Copyright Martin Armstrong all rights reserved January 12th, 2013

TAX-REF (3)A lot of people who insist upon a return to the gold standard hate my guts. Others claim I have betrayed them because I do not support that view. There is a huge difference between theory and reality and indeed Adam Smith’s Invisible Hand applies meaning those in power will act also only in their own self-interest not what is good for the people. One of the handouts we will be providing for the upcoming Sovereign Debt Crisis Conference in Philadelphia March 16th is the proposal we put together back 1995 to revise the tax code and prevent the Sovereign Debt Crisis. Those were the days of the “Contract with America” whose chief architect was Richard “Dick” Army. This proposal was an effort to revise the tax code for you may recall the big debate back then was the “Flat Tax” that the Democrats hated.


I found myself in the middle of an interesting debate and shuttled back and forth between Dick Army and Bill Archer trying to come up with a viable plan to head-off what we are going through today. Our computer was forecasting total chaos and the Sovereign Debt Crisis. One of our forecasts caught the eye of even the Department of Energy that from the $10 low, oil would soar to at least $100 by 2007. Mark Pittman of Bloomberg News even covered that forecast. As I keep saying, everything is interlinked.

The two central points that we were trying to get Congress to do in order to prevent the Sovereign Debt Crisis of today, were straight forward.

1)      Eliminate the income tax and adopt a consumption tax.

2)      Spin off Social Security into a separate wealth-fund with private fund managers.

On the tax side, despite all my efforts, I was dead wrong that the course of the nation could be put back on the right track to avoid what we still must go through today. It did not matter that I could prove that more revenue would be generated by a consumption tax compared to the income tax. It did not matter that a consumption tax would be inclusive meaning even illegal aliens would pay and this would effectively eliminate the “underground economy.” No matter what efforts I put in, it became abundantly clear, where I was wrong was ignoring politics and its self-interest. I even testified for Bill Archer before his House Ways and Means Committee.

I was sitting in Dick Army’s office. He had his feet up on his desk sitting back enjoying a smoke. As we went through all of these points, he said to me one thing that illustrated how futile it was to try to help the country and save our future. Dick said the problem with the consumption tax replacing the income tax would be impossible. When the Republican lost power with the changing mood of the people, the Democrats would then impose both an income and consumption tax. So reality sets in. It did not matter that you could design a better wiglet. Could you sell it? Because the tax code has been like a yoyo, unless you structurally alter politics to prevent constantly changing everything with each election, there will never be a lasting solution. As far as the Social Security fund was concerned, Democrats objected to any private funds management. Their view – they should play with your money and never give such power to the private sector.

I even debated Steve Forbes (flat tax) and Democratic Government Jim Florio at Princeton University. I championed the consumption tax between the two extremes. Nothing really matters. All my efforts to change the course of events yet to come were meaningless. We are compelled by the cycle of Creative Destruction.

I had worked on the idea of taking the IMF’s (International Monetary Fund) SDR (Special Drawing Rights) and try to create a return to an international gold standard to put a check of spending. That would not even get a discussion going because it involved giving up sovereignty. No matter what effort I put in, it was painfully clear – the computer was correct – I was wrong. It is what it is. There is no changing destiny. When Marx tapped into that jealousy of wealth, he unleashed a dynamic that could not be prevented. It did not matter that even one of the Ten Commandments states plainly thou shalt not covet thy neighbor’s possessions which is precisely what socialism does. Nowhere in the Ten Commandments do we see that all people should have the same wealth. The income tax was destroying society sending capital and jobs fleeing offshore, creating an underground society off the books, while eradicating all personal liberty. It appeared that the prohibition against coveting thy neighbor’s possession was really a fundamental tenet to maintain an orderly society and a restraint upon war that is always economically motivated.

So I have been there – done that – and all those ideas sound very nice. There is no one who was in the midst of all this as much as I was. I could see what the computer was forecasting. Even armed with that information, I could not prevent the future from unfolding. Dick Army was right. Politics changes direction and because the number one thing Democrats attack is always to punish people who earn more than the average, there would be no hope of creating lasting reform. The attitude of the Democrats has been that we should give them our money so they can play with it – coveting your neighbor’s possessions that even God forbid. Hence, there will never be any lasting reform when things can be altered all the time. Lacking any consistence, the only way to restructure involves political reform and that is hopeless until we Crash & Burn. This is why I say there will NEVER be a gold standard, reasonable tax reform, and it is too late to save Social Security since it is now negative. We simply have to Crash & Burn. Sorry – I tried! I was wrong – the computer was right. So now, we simply have to survive because government pursues its self-interest and that is opposed to that of the individual.