Wednesday, February 21, 2024

What is a Flight from the Dollar?

A friend asked what a “flight from the dollar” looks like. I can certainly give my understanding expressed in easy-to-understand language.

A “flight from the dollar” happens when the citizens, or even the global financial system, rejects the dollar as a store of value. Here’s a little history to explain the context.

In the late 1800s, a dollar could be exchanged for 1/20.67 of an ounce of gold. This was the “gold standard,” whereby a dollar was “worth” (i.e. could be exchanged at any bank for) 1/20.67th of an ounce of gold. The banks accepted freely any amount of dollars in exchange for gold at that rate. The standard, as long as it remained in place and was respected, helped banks maintain a safe amount of reserves, a conservative amount of loans (made with real savings), and well-backed credit advances (i.e. credit creation based on commercial paper such as bills of lading and the like); and it kept the economy on a relatively even keel. The fact that every bank had to give out one ounce of gold for $20.67 in paper money kept them – and the dollar – honest, so to speak.

In 1913, the US created its first central bank, which became the arbiter, instead of private banks, of the amount of credit creation that would take place. The original rules applied by the central bank were pretty sound. Credit loans to banks were based only upon commercial paper. However, in the longer term the rules changed. Within a couple of years the central bank began to do what central banks have done for centuries, i.e. they began creating extra additional credit, which the government used to cover wartime and other expenses. 

The first episode of inflationary credit creation (what economist Edward C. Harwood labeled “inflationary purchasing media”) appeared during World War I. As the US central bank began to allow the expansion of credit above what was prudent (according to Harwood), the government spent it on the war effort. When the war was over, the central bank tried to contract that credit, which forced the country into something of a recession in the early 1920s. 

Then during the subsequent years Harwood noted that a lot of “inflationary purchasing media” had still not been cleared from the system, which was maintaining prices too high and encouraging bubbles in real estate (in Miami at the time), and in the stock markets. By 1928-29 he began to warn the public through articles published in financial journals that the previous monetary expansion was still in the system, which would probably end in another contraction. 

Indeed, a peak was reached in 1929. The central bank noticed the problem and tried to correct the imbalance by contracting the money supply. It was the right thing to do, because the excessive credit did indeed need to be withdrawn. Was the contraction too quick? Was the timing wrong? No one really knows, although multiple theories exist. At the same time, the government put in place some very strict trade policies that caused complications in the import-export markets, and we got the 1929 crisis, which extended several years into the 1930s.

In 1933 Roosevelt, in an attempt to save the gold standard, decided one day (literally) to force people to turn in their gold so that he could devalue the dollar down to 1/35th of an ounce. He explained that he didn’t want private “speculators” to profit from the devaluation. He also started the country on a centralizing-regulatory-socialist binge with his New Deal policies. Ownership of gold was outlawed. Much money was wasted in the various efforts, and the economy didn’t recover until the 1940s. By then the second world war was brewing. 

When the soldiers got home in 1945, they went right to work and got the place up and running pretty quickly, thereby probably absorbing the excessive credit created for the war effort. Given the difficulties experienced in the 1920s, the Western World decided that they needed to fiddle with the gold standard again. Global officials met up in Bretton Woods in New Hampshire and decided that the world would go onto a modified dollar-gold standard, i.e. the dollar would stay on the standard at 1/35th an ounce, and the rest of the world would use the dollar in international transactions. Somehow, they thought this would be better than a plain gold standard. 

This plan gave the US both a tremendous advantage and a tremendous disadvantage. The advantage is that nations needed to exchange their exports for dollars in order to do business, and some countries’ banks also bought tremendous quantities of US bonds as capital assets. Therefore the US could print just about whatever it wanted, and the dollars flowed around the world and never came home to roost. It's called “seignorage.” 

The disadvantage is that it is the equivalent of giving a credit card to a 16 year old.* 

It worked pretty well at first back in the early 1950s, but lavish money printing soon started again, creating another bout of creeping price inflation in the US. After all, it is not easy (or perhaps it’s impossible) for central bankers and politicians to determine with precision the amount of dollars that should be created and shared to maintain the Bretton Woods global monetary system. In around 1959, Harwood and others began to notice that in spite of the Bretton Woods fix at 1/35th of an ounce per dollar, the “price” of an ounce gold in dollars was increasing above $35 in certain markets. In other words, people were realizing that the dollar was losing its value. That’s when Harwood started getting people onto gold numismatic coins, gold stocks, gold “annuities,” and Swiss financial instruments, some of the very few ways to invest legally in gold and safe foreign assets.

This state of affairs lasted far longer than anyone thought possible, until 1971. France was getting wise about the loss of value of the dollar, and De Gaulle began asking for his nation’s gold at the official $35 price. Gold at $35 had become a good deal. It all came to a halt when Nixon “closed the gold window,” i.e. refused to pay out gold for dollars. (See this for a detailed explanation.) 

Since then, even though in the mid-1970s Americans could start owning gold again, the world has been on what is called a “fiat standard,” i.e. no standard at all. Over the rest of the decade, gold went from $35 to $800 in 1980, 23 times its previously fixed exchange rate. 

That’s a flight from the dollar.

Even though no longer in an official monetary role, gold still remains a good barometer of the value of currencies around the world. The dollar has continued to decline, and today the ounce of gold costs around $2,026. Yes, the gold exchange rate is “volatile.” But in fact it is not gold that is volatile. It is the paper currencies. After all, smart people watch economic policy and events, and when things start to get frisky, they start looking for ways to preserve the purchasing power of their money. The increased demand creates exaggerated swings in the “price” of gold. But in fact the one thing that remains constant is the underlying, on-average, longer-term stability of gold’s purchasing power. 

And the “price” of gold is one way you can measure the “lost value” of the dollar.

* Today the US debt is over $34 trillion and climbing rapidly. This is WAY more than US production can sustain (about 145% of GDP). It is also especially dangerous when price inflation and cheap public borrowing sets in and when the Fed (rightfully albeit somewhat late) decides to take corrective action via higher interests rates. Over the past year or so, the yearly interest rate on the debt is now up to $500 billion, which is about 2/3 of the entire annual US military budget. (And here’s another interesting chart that I hadn’t seen before.)

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Saturday, March 11, 2023

Measuring Economic Freedom vs. Human Freedom

The Fraser Institute's study of economic freedom in the world for 2022 (data from 2020) has just been published. As usual, the stars of the show are Hong Kong and Singapore, with New Zealand not far behind. The US is at seventh place.

One might ask: How can an island that is completely under the thumb of a Communist nation be the most free nation in the world? And how can a country (New Zealand, No. 4) be considered free if its people just passed a law forbidding anyone born on or after January 1, 2009 from buying tobacco, ever? Not just before they reach the age of 21, but forever. (Good luck with that....)

Free image from

Okay, I get the measuring sticks used by this study. They are purely economic. The measurements concern:

  • Size of government
  • Legal systems and property rights
  • Sound money
  • Freedom to trade internationally
  • Regulation

But aren't there a few more criteria that they should include? For example, I could imagine adding these:

  • Freedom of the press
  • Not just the size but the intrusiveness of government
  • Government stability and autonomy
  • Monetary stability

And maybe others.

In researching this question, I answered it for myself. Fraser has also published what it calls the Human Freedom Index. In this study, Hong Kong drops to the 34th place, Singapore to 44th, and the King of the Roost is ... wait for it ... SWITZERLAND!

I could have told you that. My favorite country.

Here are the criteria for the human freedom index:

  • Rule of law
  • Security and safety
  • Movement
  • Religion
  • Association, assembly, and civil society
  • Expression and information
  • Relationships
  • Size of government
  • Legal system and property rights
  • Sound money
  • Freedom to trade internationally
  • Regulation

So be careful which index you use for decisions about your future. Frankly, what is economic freedom without human freedom, I ask you?

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Wednesday, April 13, 2022

The Dollar's Reserve-Currency Status Might Be In Jeopardy

If you have ever wondered about the global use of the dollar as a reserve currency, you might be interested in this article now published at Seeking Alpha.

(I hope you can open it; if not, I can send a transcript. Just leave a comment, which I will not publish, with your e-mail address.)

Sunday, March 27, 2022

What Should Young People Do With Their Money Today?

We are living in unusual times. The US has never had so much debt, and its central bank has never created so much money out of nothing. Most central banks around the world are following suit. 

As of March 27, 2022 at 4:45 PM Eastern Time
Watch it evolve here:
National Debt Clock

History suggests that at some point the crap will have to hit the fan. What will that moment look like, and how will it affect the younger generation? 

Most youngsters have no idea what’s coming or how to protect themselves. Those that have some savings probably won’t have much choice other than to put them in a bank account. Most will have little money to save, so they will be forced to go with the flow, "play it by ear" as I like to say.  

But still, there are traditional rules to follow. The first rule seems to be to put some money aside as soon as one is able. The purpose is to build a cushion for the proverbial “rainy day.” Young people should do this now before trouble begins. And this advice applies most urgently to young families. Common knowledge says to put away, little by little, about six to twelve months of living expenses. 

Young people should keep credit to a bare minimum, pay off the principal every month, and watch impulse buying. Be smart and humble. Make do with a good second-hand car and merely adequate housing until they have the necessary savings put aside.

And budget, budget, budget. My own rule as a young adult was actually very simple: “Spend nothing above the essential, with only very rare exceptions.” That worked very well.

Buying of gold coins can be entertained at some point once the above is achieved. (But be careful where they are stored.) 

Then one could venture out towards other investments. Examples: Depending on one’s capacity to manage rental property (land or habitat), and also on the state of the real estate market (i.e. not now), that might be an option. Depending on one's plans for moving or not, one could buy a home.

Then, if finances permit, there's the option of branching out from there to rental property of some sort. That’s assuming, of course, that one will not be changing jobs and moving to another state right away, and that one has the time and inclination to devote to this side business (for that's what it is).

Eventually stocks and bonds can be considered, in an effort to build up a retirement account that will grow and provide an adequate income later in life. One can find reasonable advice about that almost anywhere. Caveat: If the investor decides to go with an investment advisor, just be careful about the fees. Compare, compare, compare.

And here again, watch the timing in a “macro” sense. The best time to buy is when the market is in a recession and the investor's own employment situation is secure – a rare combination. Some say don’t try to time anything at all. Just start accumulating little by little over time. That’s possibly the safest way to go about it.

If the whole show comes to a halt because of the monetary nonsense that has been going on since the last century, then it will be survival mode for most of us. The young will do whatever they can just to get through it, but they will have little to lose. Those who have some savings will need to keep a level head, not panic, and stick to the basic rules we have trusted to date.

One really can’t say much more. The current situation is unusual in many ways, and yet in other ways it's classic. As has happened so many times throughout history, currencies all over the world are all being debased, which is easy to do because they are all reliant on a “fiat” monetary system. In other words, no currency in the world has a solid foundation, such as a gold standard or equivalent, as was common in the past. They have all been manipulated, inflated, and deformed to the point of potential rupture. 

In our modern world, cryptocurrencies have been introduced, which is of course new. We don't know yet how they will turn out. Meanwhile, some old standbys are still available. One such is gold, which retains its “barometer” function over the long term, from what one can see so far. 

The Swiss franc is also still a beacon in a sea of monetary folly. In the 1970s it was 4 to US$1. Now it’s 1 to US$1.07. Unfortunately, Switzerland no longer accepts US citizens' money in their banks, due to burdensome reporting regulations between the two countries. Other forms of investing there might exist, however.

It would seem to me that a disruption is inevitable. But if, when, and how? Only a fortune teller would pretend to know. 

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Sunday, March 20, 2022

So When Will the Next Recession Strike?

Lots of elements of our current economic situation point towards a disruption of the status quo sooner or later. Here is a list:

  • The Federal Reserve has been blowing up the money supply over the past few years, with the result that markets are skewed, e.g., real estate and the stock market, which I will come right out and say are bubbles.
  • Price inflation has raised its ugly head, inspiring Fed actions that may or may not work. (John Williams on his website Shadowstats would show a much higher figure, but he's behind a paywall now. [Congrats to him, but too bad for us.])
  • The Covid responses around the world have disrupted the supply chains and been responsible for a least a part of the price inflation – but which part? Hard to say. Here's a chart giving only the supplies that Russia provides. You can imagine the rest of the world.
  • The world seems to be dipping into a precursor of World War III, or at least a period of daring moves on the part of some globally aggressive players, which makes everyone jittery.
  • The dollar's reserve currency status is undergoing a test as China and Russia pair up to circumvent recent sanctions on Russia's banking system.
  • The yield curve has recently started to invert, which some say is a harbinger of bad times to come.
  • US bonds have been extremely expensive for the past few years (yields are the inverse of the cost of the bond), but loss of reserve currency status could definitely put a wrench in those works, causing a flight from the dollar and from US bonds. (Having said that, the US bond still seems like the tallest reed in the field of bond choices.)

Even from a business cycle point of view, one can be certain that there will be a recession, and probably sooner rather than later. But as I’ve said before, no one has ever consistently (important word there) predicted when a recession will occur. So any effort to do this is really risky. The chances of being right are probably about 50-50, but the resulting damages from being wrong are astronomical. 

On the other hand, I see no reason one can’t try to protect oneself from potential recessions all the time, which is what E.C. Harwood and others at AIER wrote about over the years. (Send me your e-mail in the comments, which I won't publish, for a copy of his last book, The Money Mirage.)

The Money Mirage
E.C. Harwood

Will the Federal Reserve governors stop trying to increase interest rates (which increase is supposed to depress price-inflationary pressures) because of the war and its effects on the US? Or will they plow through with their original intent and risk being blamed for any damages that critics might later say (justifiably or not) that they caused? 

A more interesting question is: Do the Fed governors really know what they are doing? If you've read a few of my blog posts, you know my answer to that one.

My guess is this: Should any whiff of recession come around the corner during this war and its consequences, the Fed will soften its interest-rate-raising program. But who knows if we will get that whiff? Only time will tell.

Friday, February 04, 2022

So I hear Europe has energy problems

A friend asked me recently if Europe has energy problems. Yes, I replied, and for a number of reasons. 

Europa on the back of a bull (Zeus)
From Creative Commons

Off the top of my head:

- Everything including electricity, gas, heating oil, and gasoline is overtaxed and therefore expensive.

- Price inflation is happening everywhere in the world including Europe, particularly in those commodities.

- With the recent price inflation, the EU as a whole and each individual country feel the necessity to help the lower income brackets (e.g., students, the unemployed, low income families) with stipends to cover the increased cost of heating oil and electricity along with everything else.

- Given the Climate Change hysteria, there is great pressure to diminish the use of fossil fuels in everything including heating and cars, which puts more pressure on the electric grid.

- Popular sentiment is still very anti-nuclear, and yet Europe, and most particularly France, is extremely advanced in nuclear technology. France has the most energy input from nuclear in the world, I believe, and could be completely energy independent because of it. But the politicians are dismantling them one by one to please the progressives. Macron is currently trying to persuade the country to develop nuclear energy, but it will be an uphill battle. So far he has faced little blowback. (Do you suppose people are beginning to see the problem?)

- Germany has many coal burning plants, but likewise they are dismantling them to please the progressives. The more this happens, the more expensive and rare energy gets. They will soon be beholden to Russia for their natural gas supply.

Europe has little natural gas and refuses to frack (again, for the progressives). Therefore, a number of other countries will be buying more and more of it from Russia. Most of it comes in through two major pipelines, one through Eastern Europe, and a new one coming in under the Baltic. The US has been trying to stop that pipeline, but obviously Europe doesn’t want to stop it and so they have been kowtowing to Russia. The US was providing lots of natural gas for the past few years, but Biden, by stopping the pipeline construction, has indirectly stopped that.

- The wind mills and solar panels are beginning to irritate the locals, e.g., in the North Sea where it disturbs the fisheries, and across the countryside that is still very populated. Plus these types of energy are really not economical and will not solve the energy needs.

So you think they have problems?

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Monday, December 13, 2021

Gold versus Bitcoin


 Two "coins"

Interesting, isn't it, that bitcoin is often portrayed as a gold coin. Well, I think there is a reason for that. If you're curious, you might find this article interesting:

Seeking Alpha - Katy Delay Blog

I wrote it for the financially unsophisticated reader. If you have questions, please don't hesitate to ask and I'll do my best to find the right answer. I'm not an expert myself, but I've acquired a basic understanding of the crypto technology.

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Wednesday, June 30, 2021

Evolution of a Central Banker - 2012-2021

 I wouldn't want to be a central banker for anything in the world. Just imagine: the whole world is hanging on your every word – indeed, every facial expression – to see how the economy will fare in the coming months. And look what such a job can do to your smile....

[Click on the image for a larger version]

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Monday, May 10, 2021

Youthful Infatuation with the Climate Mystery

 The climate gurus and the virtuous young are trying to lead us somewhere. I just wish I knew where.

[Drawing by Kate Greenaway, 1888, illustration for Robert Browning's The Pied Piper of Hamelin]

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Friday, May 07, 2021

The Economics of Socialism: A Primer for Young Adults

A young friend recently asked me for my opinion of socialism. She and I both admit that the theory sounds so appealing to idealistic youth. She told me she thinks it isn't realistic, but she doesn't have the necessary ammunition to use in debates. So here are some thoughts about socialism:

Underlying premises

Humans are a social species, and most people are instinctively caring

Source: Neuroscience News

We are empathetic towards animals and people who seem to be suffering. On a family level, we usually try to help a relative who has special needs. Some go above and beyond and create charitable nonprofits with a mission to help others. Take the examples of the Red Cross, the Salvation Army, or the many churches that organize activities to help locals. 

Also, most people also have an innate sense of fairness and of the universality of basic human rights. For example, every person should have an equal right to life, to a maximum of liberty, to be able to speak one’s mind, to worship freely, to own things and land, and to be treated equally under the law. 

At the same time, God, or Nature if one is not religious, has made each of us distinct from one another. We are not equal. We do not all have the same talents or strengths or weaknesses. We do the jobs that we can do, and we earn our living as best we can. 

Obviously, some people can do or create things that provide tremendous benefits for everyone. Steve Jobs or Sam Walton come to mind. As a result, our free society and the market economy give them more income than the rest of us. "Equity," i.e. equal income (as it is interpreted today), is not natural. And this seems acceptable when everyone has a job and things are going well. However, sometimes things get tough, and people begin to feel that rich people are way too rich. (This has an economic explanation, but that will be for another day.)

The socialist proposal

For those reasons, when a politician comes along spreading the notion that we should all be "equal" in lifestyle, and that government can create programs to take care of the needy, to make life more comfortable for the less talented, and to spread around the wealth more "equitably," we tend to feel that it might be a good idea. Plus it seems logical that government should be able to centralize charitable efforts and therefore be more efficient. In fact, this sounds pretty great.

The problems

As it happens, however, there are several problems with this notion:

1.  Forced taxation without verification: Unlike nonprofits, which can survive only if they receive enough voluntary donations from a generous but discriminating public, governments can force taxpayers to contribute. And this is true no matter how well or poorly run the government programs are. 

Furthermore, the distribution centers required by national programs are dispersed all over the country, and the financing and management are not easily visible. This means that the taxpayer has no real way to verify whether any particular government program is well run or even successful without a great deal of effort. With private and sometimes locally run nonprofits, donors can watch the finances and judge the results to help them decide whether to give or not. But taxpayers do not have that facility. As a result, government programs:

a. tend to become bloated, wasteful, and inefficient;

b. very often cause more harm than good (see examples below); and

c. distort the financial equilibrium of the economic relationships surrounding the activity. Example: Medicare establishes the prices of certain medical interventions and drugs at lower than market level. This in turn encourages hospitals and doctors to increase their prices for private payers, such as insurance companies and individuals without insurance, just to make up the difference. (This partly explains the high cost of medical care and drugs in the US.)

2.  Lost charitable-giving incentive: Potential donors to private charities, believing they have already “contributed” to these government programs, decide to reduce their giving to charities, and the charities reduce their activities, either for lack of money or of “customers.”

3.  Psychological damage to beneficiaries: Receivers of benefits come to believe that they deserve help from the government and that what they receive is not charity. Often they begin to doubt their own capacity to improve their lot in life. Example: Benefits for unwed mothers encourage some parents not to marry, often leaving the mother with most of the personal and financial care of their children. It might be quite normal for such a mother to begin to believe that she doesn’t deserve to have a faithful husband, a father figure for her children and family co-caretaker, and that she cannot provide for her children without the help of government handouts.

4.  Abusive taxation: Taxes must rise to cover the government programs. Taxpayers begin to resent the forced and excessive taxation, especially when their total tax burden rises above 17-20 percent, statisticians have found. As a result, they find ways to hide their income, move it offshore, or perhaps simply decide to earn less. As a result, no additional taxes are collected, and everyone’s standard of living decreases as less work is done across the nation.

5.  Conflict of interest: Even without increased tax revenue, governments do bring in lots of money, and because they don’t have to watch their expenses or make a profit like an ordinary company, they start increasing the number of employees and creating lots more agencies to handle all the additional duties we have given them. Congress votes themselves and their employees raises and extra benefits that most companies couldn't afford. After all, they don’t have a “bottom line” to prevent them from overspending our money, and in the case of the federal government, no balanced-budget requirement forces expense control. As a result, the nation (i.e. the collective "we") starts to go into debt.

6.  Corruption: Politicians realize they have become powerful and can manage huge sums of money, sometimes in favor of their own constituents, which in turn helps with reelection. This encourages corruption. You have perhaps heard the dictum: Power corrupts; absolute power corrupts absolutely. This dangerous combination of power and money starts to attract unsavory types who crave power. Some can become so powerful they start to act like little dictators. (Andrew Cuomo is a good example.)

These are some of the unintended consequences of excessive government size and control. The charitable actions could be better and more efficiently performed by smaller, more localized groups, but the more the federal government tries to interfere, the greater the unintended consequences. It can get so bad that the whole country suffers. 

The French case in point

For example, in the 1970s the French people voted for a socialist government that put in place a number of seemingly helpful redistributive programs. These included, among other things, the imposition on companies of strict employment contracts with expensive conditions for letting employees go; generous unemployment benefits; healthcare for everyone; and free education up to the university level for everyone who can pass a certain test. (Sound familiar? This is what Bernie Sanders, Kamala Harris, and Alexandria Ocasio-Cortez want for America.)

Rigid employment contracts

What has been the result? Companies, handicapped by the strict terms of the employment contracts, hire fewer employees. Small entrepreneurs may no longer risk opening a business at all because it’s too expensive. Employees who are hired must work harder. The labor market becomes imbalanced, now favoring employers over employees because there are more people looking for work. In France today, hundreds sometimes apply for one position. Since candidates are desperate, this means that employers can offer lower wages and make people work harder. This is exactly the opposite consequence from what was intended, isn’t it?

Generous unemployment benefits

French unemployment hasn’t gone below 6 percent since the 1970s when they began their socialist experiment. Today it’s at 8 percent, and it has been up to 11 percent and more. Some even say that governments have an incentive to fudge those numbers as well – I can attest to the fact that many potential unemployed are either in some kind of useless training program (a "stage de formation") or are still in school well beyond their scholastic aptitude. See below for the official statistics since 1968. (The word “ans” means age. The graph shows total unemployment [red] and unemployment according to age group. The blue one is 15-24 year-olds.)

French Unemployment

And another thing: Generous unemployment benefits encourage recipients to hold off looking for work as long as they can. It’s such a painful process and so many people apply for the few open jobs that the chances of finding work are low. "Why bother? I’ll just wait until my benefits run out. And anyway, I paid into the system so I deserve to take advantage of it.” 

And for those who still can’t find a job after a year or more of inactivity, there is something called the “Revenu de solidarité active.” This translates to “Active Solidarity Income” and resembles “Universal Basic Income,” another great-sounding but counterproductive idea of BS, KH, and AOC, which the current US government would love to put in place.

Universal healthcare

Healthcare for everyone sounds wonderful. But what actually happens is that people start going to the doctor or the emergency room for anything and everything. Sometimes they don’t have to lay out any money at all, or at worst a small percentage of a very low fee. Everyone knows that lower prices mean more buyers. All one has to do is to offer something for free to find out how many takers will appear out of nowhere. (Strangely enough, even one penny seems to make all the difference in the world! I know this from an experiment I once did on Craigslist.)

On the other side, the government budget for healthcare has become underfunded because of the above, and also due to poor management (see higher above). Plus the socialist French government decided to limit the number of medical students. Today, this means not enough doctors, and very poor pay. 

The work environment for nurses and other hospital personnel has become insufferable, with many hours of overtime, sometimes unpaid. The collective result is a worsening quality of care, difficulty finding employees, and a limitation on the services and facilities. I have noticed a substantial reduction in the quality of care in France since I first arrived in the 1970s. It may seem cheaper, but in the longer run the system is visibly self-destructing and eventually will fail.

Free college education

And what about education? Just as in the US, public school teaching quality has diminished substantially. Nationalized curriculums and unionized teachers have produced a real tragedy in the quality of education in both countries. To improve the statistics (but not the quality), the nationalized tests have gotten easier. Almost all French teenagers pass the “bac” exam permitting them to go to college. 

Although in the US many students go into debt (which is another tragedy with a different economic cause), in France university schooling is free. On the other hand, there are so many students that the universities are overcrowded. And many students (similar to the US) end up quitting in frustration after a year or two. They have not gotten any alternative training, so they have basically wasted those years of their life. Or they graduate with degrees and high expectations that don’t guarantee them a job. Although French students don’t go into debt themselves (unless they or their parents need it to pay for food and lodging), the government (i.e. the people) accumulates the debt instead. 

The financing trap

To finance all of these goodies, taxes are incredibly high in France, both on income and on anything and everything else. Examples: almost everyone pays income tax, but also a 20 percent tax on many things they buy; there are huge taxes on gasoline, which almost triple the price at the pump (as of today, $2.95/gal US versus $8.05/gal France); taxes on one’s real property exist just as in the US, but also another tax just for living in a home (called a “taxe d’habitation”); payroll taxes increase the employer’s payout over 150 percent and lower the employee’s take-home pay by about a third; and on and on. 

Typical French payroll statement in 2016:

Gross salary €1,660.67 + overtime €237.19 = €1,897.86

Taxes paid by employer over and above gross €565.58

Taxes paid by employee from gross €378.23 + €19.63 = €397.86

Net salary of employee €1,500

Total cost to employer €2,463.44

Ratio employer cost to net salary = €2,463.44 / €1,500 = 1.642


Eventually, this situation must come to a crisis. And indeed, there have been more and more frequent protests by ordinary people whose standard of living is decreasing, some of whom can no longer afford to pay for the necessities of life. These protests stopped a bit with the virus, but they will start up again as soon as people are more comfortable about going out, especially after the end of the summer vacation period. (Did you hear about the French “yellow vest” protestors in 2019?)

The paradox

You would think the French people would wake up and see the source of the problem, but many of them cling to their fantasy about socialistic redistribution schemes. There are a number of political parties, but only a few would attempt to change the generous fundamentals, and these parties are not popular. It is a situation that will come to a very bad denouement within the next decade or two, in my opinion. 

Clearly, every country that tries a high degree of socialism must eventually either fall into poverty and civil unrest, or liberate the economy from its chains. Some Scandinavian countries have been able to turn back, such as Sweden and Denmark. Others like Venezuela – which used to be a very rich country – have fallen to the bottom of the heap and now experience extensive poverty, lack everything including basic necessities like toilet paper and food, and are approaching civil collapse.

Impossible dream or Machiavellian ruse?

Why don’t people see these obvious signs of failure? Socialism has never been successful anywhere in the world, and without exception the more a country adopts it, the worse off things become. I think it is simply because people vote with their emotions – from their gut – and don’t take the time to study reality. Plus they are easily cowed and then stirred up by ambitious politicians – a sort of maddening of the crowd. And finally, the emotions can run very strong and very deep, almost as if changing one’s mind is dishonorable, or would mean rejection by one's peers, or even might be fatal.

As for the politicians, I must believe that they are innocently enamored of their fantastical but naive beliefs. Otherwise, the alternative is that they know the truth but prefer to advocate for personal gain, civil unrest, and social collapse, figuring “après moi, le déluge” (“after I’m gone, let the flood waters rise”) as Louis XV is supposed to have said a few years before the French Revolution.

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