Exclusive Interviews
Terry Coxon on the Trouble With the US Economy and its Two Major Causes
By Anthony Wile - February 14, 2010

Introduction: Terry Coxon is the author of Keep What You Earn and was for many years a close collaborator with and editor for the late Harry Browne. He currently is a regular contributor to The Casey Report. Mr. Coxon has a distinguished history as an architect of innovative financial planning arrangements, including the Permanent Portfolio Fund, the United States Gold Trust (the first gold ETF), the Passport Financial Offshore Trust and the Open Opportunity IRA.

Daily Bell: Thank you for sitting down with us for the interview.

Coxon: I've been looking forward to it. I enjoy The Daily Bell, and now it's a pleasure to be part of it from an interview standpoint.

Daily Bell: The U.S. economy had so many factors working in its favor for so long − an abundance of physical and human capital, technological leadership, a relatively free market and widespread respect for property. And the whole world thought of the U.S. dollar as its own reserve currency. With so many strengths, how did the American economy find its way into its present dire straits? Is it all Alan Greenspan's fault?

Coxon: No, it's not just Mr. Greenspan's doing, although he does seem to have been the right man to keep the process going.

The problems that have come into public view since the latter part of 2008 − the housing melt-down, the credit crisis, the fatalities and near-death experiences on Wall Street and the deep recession − weren't born recently. They were a long time in coming. They grew out of two strains of government activity, each of which was trouble-rich by itself. Together they made poison.

Daily Bell: Give them to us one at a time.

Coxon: The first strain was government encouragement of debt, through one legislative invention after another.

It began in 1913, with the advent of the income tax. Even back then, interest expense was deductible, but at the time the effect was negligible. Tax rates were low (a 6% top rate). And interest rates also were low, thanks to the gold standard. So the tax advantage of borrowing money was microscopic − but it would grow.

The first strong encouragement for indebtedness came during the Great Depression of the 1930s. The newly hatched Federal Housing Administration began providing subsidies for mortgages. Thanks to FHA, millions of Americans who otherwise would have continued to be tenants became homeowners − and debtors. At the same time, by promising a source of retirement income, the new "Social Security" program undercut one of the primary motives for saving.

Daily Bell: What came next that made people want to go into debt?

Coxon: In the following decade, the high tax rates imposed for World War II meant that a $1 deduction for interest had become valuable − more valuable than $1 of income. If you were in a 70% tax bracket, for example, it was as though the government was rebating 70% of your interest payments. Why not borrow and collect the rebates? High tax rates gave corporations a similar incentive. Since interest was deductible but dividend payments weren't, it made good tax sense for a corporation to issue bonds rather than stock whenever it needed to raise capital. So corporations became more leveraged.

The government drumbeat for debt just wouldn't stop. After WWII, additional mortgage subsidies taught returning military veterans how to become debtors. Eventually the government invented and subsidized Fannie Mae and Freddie Mac, so that non-combatants could become debtors too.

Daily Bell: But none of that set off a wild housing boom. That didn't happen until much later.

Coxon: Going into the 1970s, real estate was firmly established as a tax shelter. Then excess money printing by the Federal Reserve led to general price inflation and turned real estate into an inflation shelter as well as a tax shelter. The demand for real estate as an asset that couldn't be printed away pushed real estate prices up faster than prices in general.

The run-ahead inflation of housing prices in the 1970s seemed to tell everyone he was a fool not to go into debt to buy a house. And most people were getting the same message from their tax accountant. The high interest rates that came with high inflation meant an even bigger tax savings from being a debtor.

Daily Bell: Yes, but in the 1980s inflation rates starting coming down. What kept the housing boom going?

Coxon: In the 1980s, a series of tax law changes made most tax shelter strategies unworkable, but the new rules left real estate largely untouched. This focused the tax incentive for debt even more tightly on real estate, which gave housing prices a further kick and reinforced the sense that it's good to be in debt.

That's 70 or so years of accumulating incentives for borrowing in general and for mortgage borrowing in particular. The relentless piling up of incentives had a psychological effect as well as a financial one. By the end of the last century, very few people had any adult experience with a serious decline in real estate prices. Almost everyone who had gone into debt to buy a house was glad he'd done so. Almost everyone who hadn't gone into debt to buy a house wished that he had.

At that point, the idea that houses are always a good investment was one that few Americans could argue with. It's an idea that defies the most elementary economic reasoning, but it's part of human nature that experience trumps logic, and the experience had been a long one.

Daily Bell: You said there were two sources of the economy's present troubles. What's the other one?

Coxon: The second strain of government policy that brought the U.S. economy to where it is today was a pattern of rescue inflation. In 1971, cutting the dollar's last tie to the gold standard freed the Federal Reserve to try out all the recession-avoiding and recession-curing ideas that economic theory had produced. The economy became a science experiment.

From 1971 on, whenever the economy faltered, the Federal Reserve would resort to a new round of money creation. Again and again, investors, speculators and lenders were rescued from bad decisions. The public was taught and trained to regard risk unseriously. By the end of the century, the only risk that most market participants saw was the possibility of having to ride out a few rough months of waiting for the Fed to provide the next dose of rescue inflation. Leverage could be inconvenient at times, but it was rarely lethal.

Either strain − the encouragement of indebtedness or the policy of rescue inflation − guaranteed serious trouble sooner or later. But the two follies were sympathetic. Even when there are tax or other incentives for borrowing, caution should put a limit on how deep into debt people will choose to go. But 35 years of rescue inflation, which trained almost everyone to believe that risk was a mere detail, removed that limit. It disarmed caution. The result was the catastrophic final blow-off in real estate prices that ended in 2007.

Daily Bell: Thank you, Mr. Coxon.

Coxon: An enjoyable conversation.

After Thoughts

Mr. Coxon has identified two main strands of power elite control as regards the American economy. (We don't know if he would characterize them this way, but we will.) In fact, taxes and central banking have created a country that is much different than the nation that existed in the 1800s. What initially changed the country from a manifestation of a true republic into something else – a regulatory democracy in fact – was the Civil War. The war and Abraham Lincoln's determination to maintain what he called a perfect union was the proximate cause of the end of American exceptionalism from the standpoint of freedom, free-banking and free money.

Of course, money and its issuance and availability is an integral part of a free society, and once the Civil War had determined that no state or states could secede, there was no doubt, from our perspective, that the imposition of a new monetary regime could be pursued and eventually implemented. This is one of the reasons that the Daily Bell has no hesitation in claiming that there is an active and intergenerational power elite that plots societal control, not just for America but throughout the West.

Analyze the steps taken in order and it is difficult to conclude otherwise. From almost the very beginning of the American republic, there were efforts by certain agents of the realm to impose private/public central banking – with all its attendant ramifications. Alexander Hamilton was an integral player in these attempts and tried in many ways and endlessly to recreate the European banking system in America. In his path stood the greatest of American patriots, Thomas Jefferson.

It was Thomas Jefferson, by virtue of his erudition and understanding of socio-polity, who most influenced the beginnings of the republic and shaped it as a free-market rather than as a European top-down financial and banking regime. Jefferson's vision of free-banking and a private gold and silver standard won out over competing visions – especially Hamilton's – and was (in our estimation) in large part responsible for the tremendous explosion of American pre-Civil War wealth and industry.

Fortunately, the free-market culture that had actually taken root long before Jefferson was not to vanish after the Civil War, though it was vitiated by the increasing control exercised by the federal government. Even today, the free-market spirit permeates a portion of America and, in conjunction with the information about economics and markets on the Internet, has undergone a tremendous Renaissance. What is also true is that the European-style model that has been imposed on America since the Civil War remains a pestilent and malevolent paradigm.

Many American ills (though not outright slavery, it's true) were initiated after the Civil War. It is no coincidence from our point of view that municipal corruption soared once states were forbidden from leaving the union. The federal government, too, immediately experienced more obvious corruption with the eruption of the Black Friday and Whiskey Ring scandals, etc. The late 1800s, after the Civil War, also started to see the emergence of the modern stock market, with all its attendant ills and concentration of capital in fewer and fewer hands.

The American media itself changed and became subject to conglomerate ownership, especially after the late 1800s Supreme Court decision that recognized corporations as individuals. Additionally, America became far more militarized – participating in more overseas conflicts including the Spanish-American War. Presidents became more active and were celebrated by the media and lauded for non-existent leadership qualities. Eventually, direct elections were mandated for the Senate, versus indirect ones, which also allowed for concentration of power as those with increased wealth could influence such elections more easily than legislative ones.

Eventually, in the early 1900s came the two main legislative decisions that changed the very fabric of the American republican experiment. Central banking and income tax provided the final pillars in the erection of an American construct mimicking a European style regulated democracy.

There is no question that post-Civil War the essential elements of the American experiment have grown ever-more repressive and focused on concentration of power within the purview of the federal government (and those that stand behind it) which today disburses an incredible US$3 trillion on an annual basis. One would in our opinion have to deny reality not to see that post-Civil War major decisions undertaken by the court system, the legislature or the executive branch have gradually nudged America toward the fuller centralization of an increasingly authoritarian regime.

If this is a conspiratorial reading of American history, so be it. The evidence – available these days all over the Internet – seems fairly incontrovertible. One need only look at the whitewashed histories produced in the 20th century by mainstream academics to ascertain what has been left out and why. The conclusions for any thinking human being (without a predetermined agenda) cannot be otherwise than pre-Internet American histories were indeed "written by the victor" and massively traduced in terms of factual accuracy and truthful interpretation.

Yes, indeed, the arc of American authoritarianism has actually increased as it approaches the present day. The celebration of the president as the nation's chief "decider" and the truly obscene use of executive orders as a legislative function have only added to the trend. And since 9/11, of course, the economic authoritarianism inculcated over the past century has been supplemented by increasingly overt shows of civil and military policing throughout America.

Into this maelstrom of authoritarian centralization, the Internet has thrust itself – a massive misjudgment of the power elite and a truth-telling instrument of tremendous importance. Not since the Gutenberg press has there been anything like the Internet, a mechanism of mass communication that is also capable of the most exquisite calibration of endlessly detailed information.

As a result of the Internet, in our opinion, the painstakingly calculated dominant social themes of the monetary elite, and its attempt to subvert American republicanism have begun to crash down. It is most interesting to us that at this time when the power elite has begun to reel from the onslaught of the nation's newfound Internet reality that "national security" has suddenly become one of the elite's dominant memes.

In American mainstream media these days it is all national security all the time. This is because, in our opinion, national security is more easily manipulated than other power elite thematic elements. Global warming, peak oil, even central banking are fairly easily disprovable these days (and are being disproven by the ever-increasing application of free-market thinking) but a threat from a mysterious and shadowy Al Qaeda is not.

National security and the ability to whip up war fever based on misinformation and manipulation are the ultimate, last ditch tools of the power elite. The way to extend and expand authoritarianism when no other fear-based promotion is working (thanks to the Internet) is to play on people's fears about the "other" – and use the mainstream media to paint a bestial portrait of those that would do the West harm.

War is a racket, General Smedley Butler wrote. In other articles, we have been at pains to point out how military conflicts (in most cases) and national security specifically, are memes of the elite, created not to defend the state from its enemies but to manipulate a restive native populace that increasingly refuses to recognize any redeeming qualities in its governmental authorities.

There may be emergencies and military actions that are necessary for a state to take. But America's "endless war for endless peace" is not among them. Mr. Coxon's perspective that America's parlous circumstances were generated in large part by the income tax and central banking is certainly true. But as opposition to these fundamental elements of modern society grows – especially in America – we see clearly the rise of military "national emergencies" being trotted out by the power elite as a palliative.

Unfortunately for the power elite, this last-gasp militarism is bound to fail just as its other dominant social themes are failing. It is too late to convince the populace that – having begun to understand the intellectual bankruptcy of the rest of the power elite's promotions – national security remains apart and aloof. It does not. It is no less a promotion than any other fear-based initiative.

We close this after-thought with a final point – that the national security meme is not just being promoted by the mainstream American media. It is an active part of many major Alternative web sites. And where it is prominently featured you ought to look very carefully at those who promote it. You may well be surprised by what you find.

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