The latest media circus is of course the Enron story. Complete with its good guys and bad guys, greed and criminal activity, suicide and its thousands of financial victims, will any good come out of the Enron saga?

That is what I would like to discuss. What is the Enron story telling us? What lessons can we learn from this story and others like it, so as to lessen the likelihood of this happening again?

The Generation of Risk

The baby boom generation will go down in history as the generation that took big risks - and lost. We are watching this process unfold now. Billions of dollars of savings have been thrown at the stock markets in the last 20 years, most of it in the 5 years ending in 2000. What is the result? The total profits of all the NASDAQ companies for the last 5 years are a BIG, FAT ZERO. The "blue chip" companies of the S&P 500 are seeing the worst profit downfall since the crash of 1929 as profits have fallen 50%.

But in the face of this, investors continue to have hope. They continue to believe that the Maestro, Alan Greenspan, and his rate cuts and money creation from thin air will make a difference. We have been listening to guru after guru tells us the economy will turn soon. We have been hearing this mantra for over a year and still the economic plight of millions of unsuspecting investors continues to deteriorate.

The stock markets will reach a bottom when the last baby-boomer throws in the towel and swears to never buy another stock again. This moment is still some time off. One-by-one, companies like Enron, Kmart, Global Crossing bite the dust, with tens or maybe hundreds lined up behind them like rubes waiting to hit a Bob Gibson fastball. One by one they will go down with their bat on the shoulder frozen in the batter's box as the ball go by them but not before making sure that trillions of dollars disappears into someone else's personal offshore entity.

Americans have been living beyond their means for over 20 years. The federal deficit is almost $6 Trillion. Corporation debt levels are at record highs. Consumer debt levels are at record highs. The manufacturing sector has been gutted as more and more of our wealth-generating capacity is sent to other lands. We have been living for the present without concern for the future.

When all is said and done, the Generation of Risk will look at their brokerage account statements and see that there is nothing left. Those dreams of a happy retirement will be gone. Loaded up with debt, maybe out of a job, the Generation of Risk will do what has become the norm now; they will ask the government to "do something."

More Enron's

In 1994 Americans received their first major warning about derivatives when Orange County, CA, the second or third wealthiest county in the country, declared bankruptcy. In 1998 we were warned again of the effect of derivatives on the financial markets. Unregulated financial paper instruments were blossoming like spring flowers all over the landscape. LTCM, Long Term Capital Management, was supposed to be so big that it almost took down the global financial system. They needed a bailout from the lender of last resort the US federal reserve, a private central bank. Of course, we were not shown any evidence that the global financial system was in jeopardy, we were told to trust the private central bankers.

This should have been a wake up call to the American populace. But even the threat of global financial meltdown was not enough to break the spell that Wall Street had cast on the hypnotized investor. More and more life savings continued to pour into paper financial assets until one day in early 2001 something gave and the NASDAQ bubble burst. Investors rode this all the way down still using the "buy on the dips" mentality acting like they were Pavlov's dog.

Recently some of us who follow financial markets have been watching another potential Enron in the making very closely. This is none other than the House of Morgan and Rockefeller, JPMorganChase. The 2^nd largest bank in the US has derivatives on its books of over $29 Trillion.

$29,000,000,000,000.00

Lots of zeros. JPM has taken its lumps this last year: Enron, Argentina, Global Crossing and Kmart all carry JPM's stamp of approval.

JPM is currently leveraged over 700 to 1, $700 dollars of derivative exposure for every $1 in assets. At its peak, LTCM was leveraged about 400 to 1.

What is even more interesting is that recently, according to the Office of the Controller of the Currency's Q3 2001 report, JPM managed to eliminate a large amount of derivatives in the gold market (the notional value was OVER $30 Trillion earlier in 2001) at exactly the same time as Enron was crashing. JPM was a MAJOR advisor to Enron. Did JPM shift some of their derivative exposure to Enron? You can connect the dots.

A lot of people think we can fix this with more regulations. We already have thousands, maybe millions of regulations in the Code of Federal Regulations (CFR). This did not prevent LTCM or Enron from disintegrating and it has not stopped JPM from building its time bomb.

Meanwhile the heads of these companies seem to find ways to line their bank accounts nicely while the investors come up short. What we are witnessing is the largest transfer of wealth in history with the middle class as the loser.

The Biggest Enron

Even with the $29 Trillion notional value of derivatives on the books at JPM, in my opinion this is not the biggest "Enron" in America. The biggest "Enron" is easily the US Government itself. Let me explain.

I am told by a dear friend that "confiscatory taxes are an absolute necessity" and that "Entitlements should not be extended to those who really don't need them, but it's preferable to see some waste rather than see unpaved roads, lack of libraries, and even children dying from inadequate medical care. "

So lets examine where there confiscatory taxes are actually spent to see if we are getting our money's worth.

What are the areas of the largest outlays in the latest $2.13 Trillion US federal budget?¹

1. Social Security Administration - 23.9% or $510 Billion
2. Health and Human Services (Medicare, Medicaid) - 23% or $489 Billion
3. Treasury Dept (Includes interest on the national debt) - 18.7% or $398 Billion
4. Military (40% of the WORLD total) - 16.9% or $361 Billion

As you can see, the bulk of the US federal budget DOES NOT go to roads, libraries or unattended children. Over 46% of the US budget are dedicated wealth transfer items. Add in the military and interest on the debt and you already account for 82.5% of the federal budget.

What about the roads? The Transportation Dept has a budget of $58.8 Billion. This is 2.8% of the budget. The Agriculture Dept, which pays farmers to NOT grow food, has a budget of $74.4 Billion.

If we look at the federal debt estimates in the budget, things get even scarier. The federal debt at the end of fiscal year 2001 is $5.743 Trillion. It is estimated to be $7.780 Trillion in fiscal year 2007. So in 6 years the debt is estimated to increase by $2.037 Trillion. This is a 35.5% increase. This year's budget is only $2.13 Trillion. The entire federal budget for this year will be added to the federal debt in just 6 years.

The US taxpayer pays 15% of his earning in payroll taxes to support Social Security and Medicare. These programs, after having the "cut" taken from the bureaucrats, are used to subsidize our parents. Now I do not mind helping out my mother, but I think that I could do it better and less expensively without giving the bureaucracy a cut. A person making $80,000 a year pays $12,000 in the generational wealth transfer scheme.

What makes this even worse is that our senior citizen population, taken as a whole, owns the MOST WEALTH of any age group in the country. This should not surprise anyone, as over time the elders will accumulate more wealth.

Now the federal government claims to have a "Social Security Trust Fund" where the overpayments of the past few years are stored for safe keeping. But we are also told that our Congress has taken these funds and replaced with non-negotiable IOUs. The US federal government is not concerned with the truth.

What are our parents doing to us? Why isn't the AARP standing up and screaming "We don't want the money. We don't want to bury our children and grandchildren in debt."?

The US federal government has promised each and every one of us that there will be something in Social Security when we reach age 65. Currently President Bush has appointed a commission top study Social Security reforms. The last commission to do this, appointed by former President Reagan and headed by former Senator Bob Dole in the early 80s could only come up with one recommendation: raise the payroll tax.

It is too late to save the US Government "Enron" schemes. We have known this for over 20 years! By their own design they are doomed to fail. Everyone that I have ever talked to admit that they know these schemes will fail. But our parents do not seem to mind this.

Part of the problem is that some seniors think that they are getting just what they paid in. This is not true as it is taking more and more workers to support each senior at the current level of benefits. Others may be so naïve as to think the government can just create the money. This also is not true. They only way for the federal government to do this is to sell debt instruments, bonds, which further buries futures generations, or raise taxes.

Government cannot give anything to anyone without first taking from someone else.

US Government Off-Balance Sheet Items

Off-balance sheet has become a well-known phrase in the US very quickly. As during the Monica circus when everyone became educated (at least a little) on certain aspects of the US Constitution, the masses are getting a quick and painful lesson in accounting.

Does the US government engage in off-balance sheet accounting? They call it "off-budget." Think about this. Either you have a budget or you do not have a budget. How would you like to receive your electric bill and say, "I'll pay Edison off-budget."?

From page 387 of the budget report we see this:

The unified budget of the Federal Government is divided by law between on-budget and off-budget entities. The off-budget Federal entities conduct programs that result in the same kind of spending and receipts as on-budget entities. Despite their off-budget classification, these programs channel economic resources toward particular uses in the same way as on-budget spending. They are discussed in the following section on off-budget Federal entities.

Later on page 388 it reads:

The off-budget Federal entities currently consist of the two Social Security trust funds, old-age and survivors insurance and disability insurance, and the Postal Service fund. Social Security was removed from the budget as of 1986 and the Postal Service fund in 1989. A number of other entities were off-budget at different times before 1986 but were moved onto the budget by law in 1985 or earlier.

And then we get to the meat of the off-budget items:

The off-budget entities are a significant part of total spending and receipts. In 2003, the off-budget receipts are an estimated 27 percent of total receipts, and the off-budget outlays are a moderately smaller percentage of the total. The unified budget deficit in that year is $80 billion-a $259 billion on-budget deficit partly offset by a $179 billion off-budget surplus. The off-budget surplus is virtually the same as the Social Security surplus. Social Security had a deficit in the latter 1970s and early 1980s, but since the middle 1980s it has had a large and growing surplus. This surplus is expected to continue to grow by large amounts throughout the projection period. While the on-budget deficit is estimated to be larger than the off-budget surplus in 2002 and 2003 due to the recession and the response to the terrorist attacks, the unified budget for the Government as a whole is estimated to return to surplus in 2004 or 2005.

According to the Martin Weiss Safe Money Report for January 2002:

"If you or I kept two sets of books, with entirely different earnings statements, they could throw us in jail. But when the US Government pull similar shenanigans, with potentially devastating consequences to hundreds of millions of people, they get away with it scot-free.

"What's most egregious is the fact that the GAP between the two accounting methods is HUGE:

"This is wild, The Administration and Congress have been baosting about huge surpluses, while all along the real deficits have been astronomical. In 2001, for instance, the last official estimate we've seen is a surplus of $281 billion. But the real numbers show a deficit, running at an alarming rate of $480 billion per year in the first three calendar quarters of 2001.

"Hard to believe? Check it out for yourself. On the Web, just go to http://www.federalreserve.gov/releases/Z1/Current/zlr-3.pdf , and then scroll down to Table F4.

"Or if you don't have access to the Web, call the Federal Reserve at (202) 452-3482 and request that they mail you their Z1-Flow of Funds Accounts. The above information is in Table F4, on page 11."

As you can see, the US Government has been engaged in the same accounting trickery that Enron was caught in. How long can this go on? Not very long in my opinion.

Can We Solve the Problem?

We can never completely eliminate crime from our society. For some reason, some people have a need to take from others without returning something in kind. We will never have utopia in my lifetime.

But we can take some steps to lessen the blow from business failures and bankruptcies and protect our wealth at the same time. It will be very painful and require large changes to our current system. But without these changes, the system will collapse of its own weight anyway. When that happens no one can say, but a study of history shows that every monetary system built on a credit-based currency cannot stand the test of time. The US dollar will be no different.

Here is my list of ideas to insure our children and grandchildren can live a free and prosperous life:

1. Eliminate the Political Class. Americans must realize that they have created a monster, a political class made up of both Democrats and Republicans, which has grasped the reigns of control from the people. This elected class of people, as we can see from the scattering of campaign money from both Enron and Andersen, have set themselves up as Lords and Ladies while they line their pockets with taxpayers money. How do you eliminate the political class? I would recommend you vote for Libertarians. Give someone else a chance. The Republican/Democrat "axis of evil" has had their chance for too long and the country is no better for it. I have read all the third party platforms. The Reform party is just the Republicans in drag and the Green Party is pure socialism.
2. Eliminate the Federal Reserve. Most people, based on my conversations, are not aware that the US was founded 215 years ago without a central bank. In fact, including the Revolutionary War, the federal reserve is the 4th attempt at a central bank in the US. The federal reserve has turned the once "good as gold" US dollar into nothing more than a worthless piece of paper with ink on it. The US dollar has lost 95% of its purchasing power since the federal reserve was founded by the Federal Reserve Act in 1913. The Libertarians openly desire to eliminate the private bank, which control the money supply.
3. By following number 2, we can eliminate fractional reserve banking, which serves to devalue the currency while enriching the bankers and eliminate the federal debt, which is not needed anyway. We can get back to a gold/silver bimetallic sound money standard that has worked for millenniums. Think what it would be like to have saved a dollar in 1980 and have that dollar be of equal value today or in 2020 when you retire. This would eliminate the need for the middle class to chase the phony dreams of Wall Street. In Europe, an ounce of gold in 1800 had the same value as an ounce of gold in 1900.
4. Eliminate 90% of the US government. As you can see from the list above, most of what the US government does is manage wealth transfer. Recently Secretary of Defense Rumsfeld admitted that the Department of Defense couldn't account for $2.3 Trillion that it has spent in the past.² This year's federal budget is now estimated to be $2.1 Trillion. So the DOD has "lost" more than one year's government outlays and the US citizen is asked to trust the government. So the military expenditures are just another form of wealth transfer from the middle class. To any clear thinking individual, this trust is surely misplaced. Secretary of State Colin Powell is a multimillionaire. How does a lifetime army guy become a multimillionaire?
5. By eliminating 90% of the US government, we can eliminate 90% of the oppressive taxes that the middle class pays. We will still have enough left over for the roads, hospitals and libraries. The last time I looked at the roads and bridges in the US they were in need of a major overhaul. I think this will be part of the federal government's jobs program if the economy continues in the downward direction, as it was in the 1930s.
6. Phase out Social Security and Medicare now. We can take care of our elderly without throwing people out onto the street. Americans are the most giving and caring people on the planet. Why can we not trust ourselves to take care of our elderly?
7. Eliminate IRAs, 401Ks and other government sponsored retirement programs and let people control their own money. By donating to these plans people are giving up control of their future to the government. How many times in the last 20 years has the federal government changed the rules on these plans? Too many. This will continue to happen as the baby boomers get older and it will not be to the benefit of the baby boomers. In Japan and Argentina these types of retirement programs have been confiscated to pay the debts owed to international bankers or to prop up financial markets. The same will happen in the US if radical change is not made soon.

The trend of the 20^th century is easy to see. Stocks and bonds have gone up and down but government continues to grow, continues to take more and more from its citizens. How much more can we squeeze the citizens? That is the $64,000,000 (inflation) question.

When the income tax was instituted in 1913 (no coincidence here) the original tax had rates from 1% on income up to $20,000 and 7% on incomes over $500,000.³ $20,000 in 1913 would be worth approximately $190,000 today. Instead of 1% as in 1913, you would pay about 35% on this $190,000 today. So the federal government is taking 35 times more money that it was 89 years ago. Add in the state, local, sales and payroll taxes and the government is your "majority partner" for life.

Are you getting your money's worth?

Summary

So what is Enron really? In my opinion, it is a mirror image of our society at this point in time. The people who headed Enron were obviously not concerned with the truth, not concerned with their investors money, not concerned with their integrity, not concerned with the long term future of the company, they were only concerned with making sure they cashed out before the bottom fell out. They lobbied Congress, bought favors, spread money all over the globe, paid themselves handsomely and lied throughout the whole thing. But as long as the boys and the girls at the top got theirs, who cares?

The same thing can be said of the auditors and the federal government gatekeepers like the SEC and the CFTC. These entities failed and they will fail again. Rewarding them with more money and more power is not the answer. Again look at the DOD. $2.3 Trillion "missing." Combine this with HUD and other agencies and the total "missing" dollars in the past decade is well over $3 Trillion. This is one-half of the current federal debt! It is easy to see, for me anyway, that the US government is being looted. The politicians and bureaucrats are taking the money out before the collapse, the same thing that the bigshots at Enron did. The same thing that Bill Gates and Paul Allen have done at Microsoft and Larry Ellison at Oracle.

Our senior citizens continue to take from their children with no concern for the long-term effect. Social Security is a big lie. The unfunded liabilities of Social Security and Medicare are $20 Trillion. To fund them over the next 30 years would cost the government at least $1.3 trillion per year, depending on interest rates over the next 30 years. The AARP lobbies hard to make sure the seniors keep getting paid. The senior citizens are not concerned with their "investors", today's taxpayers. They are not concerned with the long-term future of their "company." They are taking their money out before the collapse. As long as they get theirs, who cares?

And what about today's middle class? Our children and grandchildren? What do they get?

The get THE BILL.

At some point in time, the bill must be paid in full. Who is going to pay this? Who is going to pay for the Social Security and Medicare when my generation retires?

No one, that's who. But the seniors will be gone, George W. Bush will be gone, Alan Greenspan will be gone. What do they care?

The parallels are ominous. The derivative blowups and stock market bubble have given plenty of warning to investors but still people throw their hard-earned savings at these worthless companies in the hope of striking gold. They are still throwing money at stocks in the hopes of a brighter future. But it is not until a company completely blows up that Americans actually realize that something is wrong and even then they continue to believe it is an isolated event. These are not isolated events. The are part of a pattern based on fundamental flaws in our economy and in our government programs.

Are Americans going to wait for Social Security and Medicare to blow up before they do something? Are they going to wait for the US dollar to completely lose all of its value before they do something? It sure looks that way to me.

No one waved a flag before LTCM collapsed. No one waved a flag before the NASDAQ bubble collapsed. No one waved a flag before Enron collapsed. No one will wave a flag before JPM collapses. And no one will wave a flag before Social Security and Medicare collapses.

The time to do something is NOW. BEFORE THESE SCHEMES COLLAPSE. LET'S BE PROACTIVE FOR A CHANGE.

Go out and vote and vote Libertarian. It is time for edictal change. It is time for Americans to take their medicine.

It's your last hope. Time is running out.

David Champeau
champeaudavid@yahoo.com

February 13, 2002

1 - Budget of the United States Government, Analytical Perspectives, Fiscal Year 2003, Page 388
http://www.whitehouse.gov/omb/budget/fy2003/pdf/spec.pdf

2 - The War On Waste - Defense Department Cannot Account For 25% Of Funds - $2.3 Trillion
http://www.cbsnews.com/now/story/0,1597,325985-412,00.shtml

3 - History of Federal Individual Income Tax Rates
http://www.taxplanet.com/library/oldtaxrates/oldtaxrates.html