How is it that these destructive leaders attain their power?  In most cases, they are elected by a democratic process.  Once in power, they may rig elections in their favor, but they frequently gain power through legitimate elections.  How?

In a pure democracy, in which national leaders are elected by the population as a whole, the candidate that promises the most tends to win.  And, if they promise to take from the “rich” and give to the “poor,” there are always more “poor.”  The “poor” elect him, and the country is doomed, because the productive have lost their incentive.  No one will produce if the fruits of their efforts will be stolen.

Why is this process repeated over and over again throughout Latin America?  And why has the United States risen above this?

The answer is in the structure of the democratic process.  The founders of the United States recognized the limits of pure democracy and rejected it in favor of a republic.  How does a republic differ from a democracy?

In a democracy, large masses of people all vote for a single, national leader.  As indicated above, once in office, that national leader soon sees the opportunity to seize power beyond that intended for the national government.  How?  By appealing to the greed of those masses that have the power to keep him in office.  Constitutional limits on power are ignored, and the masses acquiesce as long as they get something for nothing.  The system corrupts, and corruption becomes a part of the national culture.

In a republic, the national leader is not elected by the masses.  He, or she, is elected by others who, themselves, have been elected.

In the United States, the President is elected by Electors, chosen from each state: “Each state shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole number of Senators and Representatives to which the state may be entitled in the Congress…” (Article II, Section 1, The Constitution of the United States of America).  The Constitution never envisioned the popular election of the President, as it has evolved today.

Until the Seventeenth Amendment to the Constitution was passed in 1913, Senators were chosen by the legislature of the state they represent.  After 1913, Senators were elected directly by the people of the state, thereby making their election “more democratic.”  Prior to 1913, Senators represented their states in Congress.  After 1913, Senators represented the people of the state.  Their loyalty shifted from the state to the Federal Government.

In the ideal republic, voters should only be voting for those they know personally.  Each community selects its governmental leaders from among their neighbors.  Each elected community leader, from among a community of fellow community leaders, elects a higher level of leadership.  This process continues to the top, until a national leader is selected from among those leaders that have been elected from lower levels of government.

This process makes it impossible for anyone to get elected based upon false promises, as each elector is knowledgeable of issues and knows the candidates for office well.  This process avoids the takeover of government by masses of uninformed voters, marking ballots based upon superficial information, such as name recognition or TV sound bites.

The United States is attempting to democratize Afghanistan and Iraq.  Traditionally, this part of the world was dominated by tribal government, and local leadership.  They should be teaching the U.S. how to govern – not the other way around.

To those who are critical of the leadership the U.S. has chosen in recent years, you might look to the process of their selection and understand that quality leadership requires a process that values quality over false promises.

And for those who are amazed at the populist and divisive rhetoric of our current President, including thumbing his nose at the Constitution and the Supreme Court, you need to recognize that this is to be expected as the country transitions from a republic to a democracy.

Who do you want representing the United States of America, a Hugo Chavez or a George Washington?

If you want quality leadership, you must restore the constitutional process that encourages quality.  You must restore the republic.

Crime is rampant.  Property values are about as close to zero as they can get.  Infrastructure is crumbling.  The city is bankrupt and cannot provide basic services.  The citizenry lives in chaos.  Illiteracy grows.  Civility declines into outright savagery.  This was once one of the great industrial cities of the world, and one of the most productive.  This is what happens when you tell people the way to get ahead is not to work hard, but to beg for handouts from the government.

What is the solution?  I think it is very simple, though I know it will not be implemented.

Step one is to file for bankruptcy.  Acknowledge that the obligations of the city will not be met.  How can the unproductive pay off the debt that others have incurred on their behalf?  Get rid of the debt.

Step two is to make it illegal for the city to ever go in debt again.  If it can’t be paid for out of current revenue, you can’t afford it.

Step three is to bring in the city limits to encompass just the downtown area.  With high rise office buildings, casinos, entertainment and athletic facilities to pay taxes and support only those services in the center city area, the city should now be self-sufficient.

What about the rest of the city?  That’s where my radical solution comes in.  Make the remaining portion of the city – those boarded up businesses – those dilapidated neighborhoods with burned out buildings and empty lots – make them unincorporated areas.  That means that they are not part of any city or township government.  I would eliminate property taxes on this entire area.  I would also eliminate all zoning restrictions.  I would eliminate all government, tax supported schools.  All government provided services would be eliminated, except police (supplied by the State Police), courts and county-supplied registration of deeds.  All of those other services traditionally supplied by government would be up to local communities to provide on their own, such as fire protection, education, utilities, street maintenance, trash hauling, etc.

I would have all city-owned properties in this “abandoned” area taken over by the State of Michigan, to be auctioned to the highest bidders.

What would be the result?

Well, the new, smaller City of Detroit will do just fine without its debts and with viable, tax-paying properties.

The “abandoned” portion of the former City of Detroit is now on its own.  Could it be any worse off than it is now?  Probably not.  However, it is going to have to quickly adjust to its new reality.  No longer can they blame city hall for their problems.  They no longer have a city hall.  They no longer pay taxes or seek permission for anything from city hall.  They now live in a “free country,” at least a lot closer to a free country than they have ever been.

What would I expect?  First, an influx of entrepreneurs.  You know, those people who make it happen?  Developers, educators, trash haulers, private utilities, road maintenance companies, etc.  They may have to sell their services to individual property owners, or to voluntary associations of property owners.  They will need to be creative.  They will need to be competitive.

Can you imagine what real estate investment opportunities would emerge in this environment?

I believe the Detroit area could go from being the poster child for blight and decay to being a shining example of what freedom can accomplish if we can just get government out of the way.

And why don’t I think it will happen?  Because government doesn’t voluntarily give up its power and control.  Government seeks its interest, even when doing so works against the interest of the governed.

I know your time is valuable, so I’ll be brief.

My name is John Pehrson and I’m running for president of the United States as a member of the Bull Moose Party (BMP).  Why the Bull Moose Party, you might ask?  For two reasons:

1) This is the one hundredth anniversary of the Bull Moose Party that nominated Theodore Roosevelt for president, and

2) I am the only member of BMP, which gives me full power and control over all party matters.

Now, after careful consideration, I have selected a running mate: Bill Cosby.  Why Bill Cosby, you might ask?  For the following reasons:

1) He is black, and I’m told I must select a black running mate to run against Barack Obama.

2) He has a good sense of humor, which I consider necessary if he is going to be debating Joe Biden.

Now, you might ask, what is the platform of the BMP?  Well, I’m glad you asked, because that’s where we (Bill and I) shine.

1) Immediately upon taking office I plan to repudiate the national debt.  In it’s entirety.  That $17 trillion – gone.  We ain’t goin’ to pay it.  We never were anyway, so why not recognize that right up front?

2) A constitutional amendment will outlaw the Federal Government from ever going into debt again.  Debt only makes sense when investing in something that generates income to service that debt.  Since governments never produce anything, let’s face reality and admit that government lacks both the means and the will to honor its debt.  No more debt.

3) Federal statutes.  You know those hundreds of thousands of pages of rules, laws, regulations, etc. on the books of the Federal Government?  Yep, you guessed it – gone.  There will be another constitutional amendment limiting all statutes to only those that can fit onto ten 8 ½” X 11” pages.  Since it is a requirement that everyone know the law, let’s make that requirement achievable.

4) Now that the laws are a little simpler, do we really need all those federal agencies to enforce them?  No, I didn’t think so either.  So let’s eliminate the IRS, SEC, CFTC, FCC, ATF, FDA, EPA, HUD, Energy Department, Department of Education, Department of Agriculture, Department of Transportation, Commerce Department, Department of Redundancy Department, … you get the picture.

I’ll keep the Department of Defense, a few cops and some judges.

And wait ‘til you see the garage sale I’m goin’ to have – it’l blow your socks off!

As a famous American once said, “it takes a village.”  Well, when I get done with Washington, there will only be a village left.  A small one.

There.  That’s it.  If you want more, vote for someone else.

As a business consultant, what would I advise?

In the case of a private business, I would advise reorganization under bankruptcy laws.  That would allow recognization of reality, and allow the business to restructure its balance sheet with obligations that could realistically be met in the future.

In the case of governments, that is not so easy to do, as the write-down of government obligations would be expected to create a domino effect as banks holding those obligations would become instantly insolvent.

That brings me to option number 2:  Exchange debt for equity.

Equity in what?  Well, one of the reasons national governments get themselves in financial difficulty is that they try competing with the private sector by taking ownership in businesses and other assets that should be left in the private sector.  Governments own enormous quantities of assets, like land, buildings, parks, businesses, etc.  These assets could have enormous value, especially in the hands of the private sector, where they would have to be properly managed.

These assets could be packaged into newly-created private companies.  Stock could be issued in those companies.  That stock could then be exchanged for government debt, thereby drastically reducing the obligations, and debt service requirements, of the government.  The new stockholders could elect a board of directors.  The board would hire executives to oversee the new businesses, and try to realize maximum value from the assets they own.

Banks could keep the stock on their books at the same value as the relinquished government bonds, giving them time to spread out losses, or even realize profits.

Socialist-leaning members of the population would scream, as their objective is for government to own all means of production, and to care for the population from cradle to grave.  However, the present debt crisis is evidence that that will not work, even if everyone wanted it to.

The alternatives are:

1)  Experience extended periods of high unemployment and declining standards of living, as governments attempt to meet debt service obligations and/or “kick the can down the road,” or

2)  Reorganize the country so that government is restricted to what it must do, and allow the private sector to revive the economy, creating unbridled wealth for all.

The underlying reasons appear less convincing.  Farming is a cyclical business.  Exceptional profit margins may be followed by years of poor crops or prices below production costs.  Those long-term fixed costs of production, such as land, machinery and buildings, must be supported by long-term average profit margins.  Those who assume today’s profit margins will extend indefinitely into the future are allowing their euphoric emotional reactions to trump logic.

I believe in farmland as a long term, inter-generational investment.  I just don’t believe now is the right time to buy.

I think my “Most Likely Scenario” was very close to what actually occurred during 2011 in the U.S. economy.  My forecast for GDP growth, inflation, unemployment and interest rates were close.  However, my expectation that interest rates would be trending up by year end were not met.

My expectations that the dollar would remain fairly constant relative to other currencies, with the exception of those currencies that were experiencing their own problems, was close, although the dollar did fluctuate more than I had anticipated.

My forecast for precious metal pricing was close with regard to gold, but too high with regard to silver, at least with respect to valuation at year end.  I did not anticipate the volatility of both gold and silver during the year.

My expectation with respect to both Federal Reserve actions and Federal Government fiscal policies were accurate.

My “Less Likely Scenario” did not materialize – fortunately.

Now, how about 2012?

Nothing that occurred during 2011 solved any of the underlying problems of the U.S. or world economy.  That just means we moved a little closer to the cliff during 2011, leaving us a little more vulnerable to catastrophe.

However, I continue to believe that catastrophe will be averted in the U.S. in 2012, though the risk is probably a little higher than it was during 2011.

My specific forecast:

GDP:  3% to 3 1/2% growth rate for the year, as reported by the government.  Starting the year lower, but accelerating toward the third and fourth quarters.

Inflation:  declining during the first half of the year, but then picking up during the second half, as the Federal Reserve becomes more accommodating about mid-year.  Reported CPI for the year a little above 3%, but the public will experience much more, and Shadow Stats will report 7% plus for the year.

Unemployment.  Slowly trending downward during the year, ending the year at 7.6%, per government statistics.

Interest rates: Kept artificially low by the Federal Reserve throughout the year, with the Federal Funds target rate kept unchanged at 0% to 1/4%.

The dollar: More volatility relative to other currencies.  As problems in Europe and Asia surface, flight to the dollar will continue, making the dollar surprisingly strong at times.

Precious metals: Both gold and silver to exhibit less volatility during 2012 than during 2011.  The attractiveness of both as hedges against inflation will decline during the year.  Gold will end the year at about $1,600 per ounce.  Silver will end the year at about $19 per ounce.

Federal Reserve: Quietly printing, especially during the second half of the year.  No announcement of QE, but helping to paper over debt problems throughout the globe, as discretely as possible.

Federal Government.  There will be no change in the intended role of the U.S. Government in economic affairs as long as this administration remains in power.  Both out-of-control spending and extensive intervention in the private sector will persist.  This will continue to stifle economic growth and crowd out private lending.

The election: The 2012 election will result in Republican control of both the house and senate.  The presidency remains in Democratic control.

How confident am I of the above?  Not very.  We are in very uncertain times.  An unforeseen event could cause civilization to unravel.  However, I do believe those in political power throughout the world are very creative and capable of protecting their own interests and remaining in power.  That is why I expect catastrophe can be averted for another year.

If you have followed my posts for a while you know I have been very critical of government policies that support consumption at the expense of production – that I have been very critical of stimulus policies – that I have been very critical of government spending, borrowing, taxing, regulating…..

Well, I have been giving this a lot of thought.  The Obama administration is being advised by Nobel laureate economists.  Surely, they know better than I what makes sense in the real world.  So I have decided to throw in the towel.  From now on, I am on their side.  Rather than continue my obstructionist ways, I will now attempt to support the administration and their economic policies.

In fact, in keeping with my new attitude, I have a couple of ideas to help stimulate the economy.

Last weekend, we went off daylight savings time and back to regular time.  It got me to thinking – why do we have daylight savings time?  Isn’t it to regulate behavior, so people have more free time to spend in the daylight, so they can spend more money and stimulate the economy?  So, why not have daylight savings time adjusted two hours instead of one.  That way, people will sleep less, be awake more, and spend more.  After all, you can’t spend money while you sleep.

Another idea: Have you noticed how many people attend college football games in the fall?  College towns are crowded with people attending home games and spending money.  On days when the team is out of town, the town is dead, and businesses receive a lot less income.  Why not pass a law requiring all college football games to be home games?  Just think of the extra economic stimulus!

Well, as you can see, this is the new me.  I hope this encourages others as well, to cease your obstructionist behavior.  Let’s be supportive of this administration.  Let’s help them demonstrate that their economic policies really work.

Does this make sense?

Some day, historians will look back at this period in history and describe at as the era of debt – a time when debt was accepted as a conservative investment – a time when all types of entities, from individuals to governments utilized debt as a way of spending more than their revenues would support – a time when debt, itself, became accepted as “money.”

Those same historians will characterize debt as a massive bubble.  They will wonder how it came about that billions of people simultaneously believed that debt instruments totaling many times the value of all of the assets on the planet could be accepted at face value.  They will wonder how people came to believe that the debt obligations of bankrupt entities could be accepted as “safe” investments.

Now, it may very well be that U.S. Government debt will retain its value for some time.  However, it can never be paid back, and at some point that will become recognized.  At that point, everyone will try to exit Treasuries at once, and the value will sink to zero.

As you seek safety in your investments, don’t abandon common sense.  Don’t, in effect, lend money to the insolvent.  If you own bonds, income mutual funds, or even money market funds, you are at risk.

A flight to quality should involve investments in precious metals, real estate, or other assets with real value and no counter-party risk.

Why? Because the standard of measurement you are using, when you measure performance in dollar terms, is flawed. The IRS would like you to measure performance that way, because they do just fine. But you might not be doing so well.

“Money” performs three basic functions. It is a medium of exchange, a standard of value, and a store of value. As a medium of exchange, the U.S. dollar has done well for many years (up to now). However, as a measurement of value, and as a store of value, it is failing badly. Because of that, I suggest that you shouldn’t use the U.S. dollar as your “money.” It distorts your investment performance.

In the above example, if you invested $10,000 and received $20,000, the IRS will tax you on $10,000 of income. That is OK, if both transactions occurred on the same day. However, if it occurred as little as one year apart, you did not receive a $10,000 gain. If, as some will point out, the U.S. dollar is losing purchasing power at a rate in excess of 10% per year, that $20,000 you received back at the end of one year is now only worth 90% of $20,000 (or $18,000) in terms of comparable purchasing power to what dollars were worth at the time the original $10,000 was invested. In other words, you are paying income tax on a $10,000 “profit,” when you only profited in the amount of $8,000.

What if you had held this investment for several years? At 10% annual inflation, you would only be breaking even if you received $20,000 back on a $10,000 investment in about 6 ½ years. In this case, you paid income tax on a $10,000 “profit,” but had no profit at all!

When you invest in stocks, bonds, bank CDs, real estate, precious metals, etc., and measure your performance against dollars you may be receiving fictitious profits. So, how do you measure your performance? Against real money – against gold and silver.

Everyone complains about the cost of gasoline today. Do you realize that gasoline, as measured against silver, is cheaper today than it was 50 years ago? I remember when it cost about three silver dimes to buy a gallon of gasoline. Those three silver dimes today will buy a lot more than a gallon of gas.

Several states are contemplating making gold and silver legal tender, and disallowing the taxation of gains on “investments” in gold and silver coins, as those gains are not profits, but merely the depreciation of the value of the dollars against which those coins are measured.

We are experiencing persistent deflation in the U.S. today. That means that the true value of many things is going down, as the massive debt expansion of recent decades is unwound. Some of that deflation, such as in the value of single family homes, is being recognized. However, as more and more dollars are created, backed by nothing other than empty promises of the issuer, the true decline in value of many asset classes is being camouflaged.

At the same time we are experiencing asset deflation, we are experiencing currency inflation. That is how the deflation is being masked. Everyone measures the value of his assets in dollar terms. As those dollars become more plentiful, and worth less and less, their purchasing power declines and distorts investment performance.

So, how should you measure your investment performance? How do you value your assets? I suggest you use traditional money – gold and/or silver. How many ounces of gold or silver did it take to acquire this asset in the past? How many today? Continue to use that criteria in the future, as you monitor your investment progress.

However, you may want to use this measuring device with one caveat. As the public continues to recognize that fiat currencies are becoming worthless, there will be a flight out of currencies and into precious metals. As this occurs at an accelerating pace, you might expect the demand for, and relative “price” of gold and silver coins to accelerate.

In other words, currencies are currently overvalued. Gold and silver are undervalued.

So, what should you be holding in your investment portfolio?

A member of that visiting contingent of former pupils asked the teacher, “In all of your years as a teacher, who was your best student?”

Without hesitation, the teacher named the student she considered to be the best – the one who had stood out from the rest in her long experience of teaching multiple generations of students.

Taken aback by her quick and decisive response, the visitors endeavored to determine exactly what it was that differentiated this student from all the rest.  Had it been a photographic memory?  An ability to excel at tests?  Oratorical skills?  A speed reader?  A mathematical whiz?  An ability to quickly grasp and retain information?

No, none of those, the teacher replied.  This student stood out because of the thought-provoking questions – questions the teacher could not always answer – questions the teacher had not always thought of herself.  This student stood out because of a desire to know why, the desire to understand in depth, beyond the facts, beyond the information presented.  This student stood out because of a desire to know more.

This teacher understood that though the skills and information she was disseminating to her students would prove valuable in their lives, success would be determined by a continued habit of delving deeper to learn more, of becoming a lifetime student.

Most investors today seek “the answer.”  Whether investing in the stock market, bond market, futures market, mutual funds, real estate, precious metals, etc., everyone seeks some simplified formula or “system” to tell them the path to riches.  Well, there ain’t none!

Investment success is totally dependent upon you, the investor.  As an investor, you must have that desire to know more – to get beyond the superficial, to ask those thought-provoking questions, to understand.