Comment: Two suggestions...

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Two suggestions...

Think or imagine or find an old video of any American City 1912. It busy, its bustling activity, free trade is happening. Now think, or imagine or find an current video of the same American City in 2012. Its not busy, its not bustling with activity, and only heavily regulated/licensed trade is slowly happening.

Next, try opening up a day care business, try opening up a shoe manufacturing plant, try opening up a new cookie-cracker company. REGULATIONS. The barriers to entry will be very high.

I agree with you that private property rights must be better protected, that fraud and tort law must be in place, or there is no Free Trade... but what we have is far far beyond just that.

Here is the best example that I have. It requires your imagination. Perhaps if you are good at graphics, you can make it one day. Ok bare with my description of the US economy. Get a Pencil and Paper.

At the top of the Paper draw a rectangle box, call it the govt.

At the bottom of the Paper draw lots of people stick figures, you know a circle for a head and stick arms and legs. Now draw a long rectangle around the people, call the box THE FREE MARKET

So, we have THE GOVT on top and THE FREE MARKET on the bottom.

Next, start on the lower right side of the FREE MARKET box and draw a semi circle line that curves or bellies out and then goes up to THE GOVT box. Put an arrow sign pointing to that direction of THE GOVT. Now label that line, "TAXES". So taxes flows up to govt.

Now, from THE GOVT box, draw a semi circle down to THE FREE MARKET Box and put an arrow pointing to it. Label that "Services" so that services flow from govt to people in The Free Market.

There. THERE IT IS. Keep that simple but correct MODEL of the Economy always and firmly in your head. When you watch shows like this and listen to Peter Schiff, it is this model that is inside his head.

Hence, when the govt takes more in taxes, Peter is saying that yes, services do increase to the People in the Free Market, but it 'distorts' the economy and its a aggregate loss of wealth as a whole. a) The people loosing tax money may not be the ones getting the spending, though often it is, and most of all b) for every 0ne hundred dollars in tax taken out of the free market, the govt spends only $20 dollars of it in Services; the govt feeds on the $80 dollars and grows bigger.

Now, lets add to this MODEL some deficit financing. In the middle, draw two lines going up and down between THE GOVT box and THE FREE MARKET BOX. Put an arrow pointing up and one pointing down. Hence, something flows up one one line to the Govt, and something flows down to the FREE MARKET.

Label the line flowing up from THE FREE MARKET to the GOVT as $$Cash.

Label the line flowing down from the GOVT to the Free Market as T-Bills/T-Bonds.

So lets recap; now we have $100 in taxes going up to the Govt, yet from the Govt to the Free Market we have only $20 in Services. Yet we know that the government actually spends MORE than it takes in in taxes. So how does it do that? Answer, people send in cash for T-Bills and T-Bonds. So besides taxes taking cash out of the Free Market, still more Cash is taken out. And people give it up for T-Bills/T-Bonds because they are an easy trade-able item that pays an interest rate. (why not give the govt your $100,000 and earn 6% for example, rather than RISK your money building a new shoe factory and earn MAYBE 9%??) So you avoid the complications and risk of building a shoe factory, or cracker-cookie company or day care chain because its easier to just take the T-Bill rate. Risk and innovation and "new jobs" are thus drained out of the economy as Govt needs more Deficit Financing. Govt's borrowing 'crowds out' private sector investments.

We could continue adding to this basic Model. We can add yet another box on top or above the GOVT rectangle box. Call this new box, THE FED. It buys Govt debt and hands the govt new money to pay its operations.

That is enough for now. I hope you do take the time to draw this out. Its a very simple but helpful MODEL of the economy.


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