The $100 Trillion Problem: Can America Learn From Chile Before It's Too Late?

Tyler Durden's picture

Jose Pinera provides an Entitlement State 101 lecture, in which Chile's former Labor and Social Security Minister demystifies the U.S.'s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile's entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly "backward" South American country succeeded? 

Some insight from Pinera:

"$100 trillion is the present value of what Americans will have one way or another to pay, unless they default on their obligation to their citizens. And that is the future, and I am extremely worried because you are like passengers in the Titanic. You see the Titanic is going toward the iceberg of aging populations but populations the feel entitled to all these huge benefits that the politicans have promised the people, but they have not funded the benefits for the future. So how are you going to pay them? That is the big issue, the big domestic problem facing America."

And this:

The problem is the entitlement state. The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax. And because the entitlement state is based on promises for the future, you don't have to pay it today, this is growing, because to win elections politicians offer benefits to people that would be paid to people in the future. So this big hole is not only a problem in America, it's exactly the same problem in Greece today, in Southern Europen, in France, in Germany. The west will go bankrupt unless you reform deeply the entitlement state. You are all prisoners of the Bismark unfunded entitlement system...With the aging of population, the extended life, you have been accumulating these huge liabilities that eventually will bankrupt the government. A huge fiscal crisis is coming to the west unless you face it and confront it directly...You either will have to raise taxes big time in America, or you will have to cut benefits. But it is extremely difficult to do that, in a system in which you have people entitled to all this things.

America's failed fiscal policy, its corrupt government, its kleptocratic financiers, its unsustainable deficits have all become the butt of jokes of the former developing world. And here we stand, with the market trading up or down 1%, based on which rumor is leaked on any given day about Greece's upcoming €5 billion auction. In this context why even worry about $100 trillion. That amount, as Feynman would appreciate, is not even digestable in Bernanke (the 21st centuiry equivalent of economic, f/k/a scientific) numbers (just yet). Why indeed, when, as Pinera says, the problem is not contained in some building in downtown Washington, it's in all of us. And those are precisely the problems that, at least so far in America, have never gotten any resolution.

 

h/t Mark

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Nihilarian's picture

"You will either have to raise taxes in America big time, or you will have to cut benefits."

Raising taxes is no panacea. There's  the law of diminishing marginal returns, or in the case of the Laffer curve, those returns will eventually turn negative. Raise taxes all you want, the problem will only compound.

Edit: ECH, for all you savvy investors.

MsCreant's picture

If I trusted them with the money, I might, in a parallel universe, be okay with taxes.

Not here, not now. Lobby lap dogs and whores, that's what we have. Sweep that mess outta our house. Get on now. Beat it!

Notice how so many of them are saying they are not going for another term?

deadhead's picture

Notice how so many of them are saying they are not going for another term?

I think this is a very significant factor that has not been discussed very much.

I think it's more than the matter of some pols being fed up themselves i.e. there may be likely the fear factor if the US sees an increase in violence, unrest, etcetera.

 


Anonymous's picture

Trust me when I tell you- They all KNOW that civil unrest is coming. In fact, most of them are shocked that they have pulled so much over on the taxpayers with so little resistance so far.

The looting will continue until the people collectively decide that it won't.

Sweetness's picture

As you say, fear may be a factor.

But how many of these "fed up" pols will become lobbyists, increase their incomes by a factor of 10 or more, and kick back and laugh?

 

lizzy36's picture

Sweep "that mess out" and then what?  New whores take their place?

A fundamental reset is needed.  One that imagines a longer timeline than this quarter and the next election cycle.  One where people have the courage to demand the truth and our willingly to put in as much time educating themselves about the state of their country as they do about whether brad and angelina are still shtupping one another.

Entitlement without responsibility is the undercurrent of the whole U.S. political/economic system.  Moreover it is the undercurrent of the whole U.S population.

I fear that not until hunger hits, and rolling brown outs occur, will people actually understand exactly what they are entitled too. 

Tyler, to answer the question in the headline:no.

 

MsCreant's picture

I agree that we are the problem. I think we need to give the constitution a go. We haven't done that yet. So change the system, no. Make lobbying illegal, hey now, there is a start. Meanwhile we will be doing this in a situation very much like the one you describe, I fear.

Anonymous's picture

Lobbying is a symptom of the problem, not the problem itself.

And the problem is that we have ancient geezers sitting in congress for decades. The best that the man in the street hopes for out of his senator/rep is that they'll at least throw pork towards their own district... but that requires power, and power requires 30 years of sitting in D.C. gaining seniority to get on the right committees. You have to keep voting the sleazebags in time and again, though, to gain them that seniority, and THEN hope they don't turn out to be worthless... people don't want to vote them out, lest they have to start over with a new congress person.

Term limits. We need term limits, robust and effective recall opportunities, and constitutional prohibitions on unfunded liabilities. That would be a start.

MsCreant's picture

+much! Good points.

dbulkley's picture

Low turnover in elected office is just another symptom as well - California's term limits have gained them NOTHING.  The rise of corporate power is indeed at the root of the problem: they wield too much money to further their own ends, which is to benefit the shareholders.  They will do this at the expense of the citizenry, the democracy, and the public good.  Corporations DO NOT deserve 1st amendment rights.  Let shareholders vote with their money then, you say? I agree - only let individual shareholders participate in the political process.  If I own Dow Chemical, and I want the EPA to bury a report on carcinogens, let me send money to my senator directly.  The point is I wouldn't do that - because I have a conscience, and corporations do not.

We as a nation should correct this flaw through a constitutional convention.

Abraham Snake's picture

I've long had a problem with legal entities like corporations having vast legal upsides similar to a physically living citizen but without important legal downsides such as being subject to imprisonment. For instance, the shareholders of Dow Chemical enjoy huge profits when costly pollution and safety controls are relaxed yet these shareholders are not physically liable for jail time. I don't think we would see another Bhopal disaster if the Dow Chemical shareholders at that time were required to spend as little as one day in jail. Risk to shareholder value is insufficient deterrent in preventing hideous wrongdoing. The current corporate incentive structure rewards wrongdoing. We need shareholder mandatory minimum prison sentences to return corporate entities back into the public good.

Anonymous's picture

The real problem is the legacy of FDR's New Deal. FDR was initially met with resistance from the Supreme Court in his attempts to institute the new deal programs. The Supreme Court held that many of his programs violated the 10th Amendment to the Constitution ("The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.").

Since FDR had such a large majority in both houses, he essentially told the court that unless they stopped finding his New Deal programs unconstitutional he was going to appoint additional members of the court (the constitution doesn't specify the maximum number of members the court can have) until he had a majority. So the court, wary of loosing all control, bowed and found subsequent programs constitutional under the federal governments power to "regulate interstate commerce" (BTW originally intended to prevent states from putting up intrastate restrictions on trade).

So basically most all of the crap we have accumulated since the early 30s (including the regulation) has come about as a result of FDRs constitutional power grab from the supreme court and frankly mostly unconstitutional laws passed since then.

While I think eventual default is in the cards, I dont think that default is imminent.

My guess at the way this eventually works out is that some states (the largely western (Not CA though) ones with remaining sense of self reliance) will challenge the federal government on its encroachment beyond the scope of the 10th amendment. If the federal government tells these states to go pound sand and the Supreme Court backs the federal government, it is possible (although a remote possibility) that a new secession movement could begin. If that actually takes hold then default will be the least of our worries.

BTW, I think the only way we get back to constitutionality (eg the respect of the 10th Amendment) is for a president to be elected who basically says that he wont enforce any law that violates the pre-FDR view of the 10th Amendment and wont spend any money from any program that violates the same NOTWITHSTANDING THE FACT THAT IT HAS ALREADY BEEN ALLOCATED BY THE CONGRESS. If (and its a HUGE if) someone like that gets elected and manages to avoid being impeached, then you may have a shot at going cold turkey. Otherwise forget it and move your money off-shore.

Anonymous's picture

i am an advocate of low taxes and low marginal
tax rates but that only works with
limited government....

this is the point david stockman made during
the reagan years and what many others have said:
if you want big government you must have big
taxes....

people like you are unwilling to accept limits...
you squeal - rightfully so - about high taxes
but you are totally unwilling to give up your
subsidized this and subsidized that; your free
lunches, government handouts, tax deductions,
etc etc etc....

all you have done is forced your junkie habit
from the taxpayer to the bond holder and then
you wonder why the banksters own the government....

i don't mean to be mean but those holding to
such logic are absolute fucktards and the cause
of the financial ruin and collapse unfolding today
in amerika....

Anonymous's picture

"but you are totally unwilling to give up your
subsidized this and subsidized that; your free
lunches, government handouts, tax deductions,
etc etc etc...."

You don't know him, and we don't know you. Your soapbox has termites.

Anonymous's picture

We can blame government food subsidies for the high cost of food these days. Did you know that the federal government pays some farmers NOT to farm their land?? My cousin owns a farm and gets $80k a year for not farming it.. Thats what keeps food prices high. Thats same kind of crap they pulled back in the 30's... That kind of crap needs to go away..

Mark Beck's picture

Yes, I have talked about the new "economy" Laffer effects many times on ZH. I feel there is a much more complex, yet measurable, Laffer effect in progress due to debt de-leveraging and unemployment. Basically, hyper sensitivity to tax increases, producing no significant increase in revenue.

Well you cannot fund all of these unfunded future liabilities, so at some point you will have to cut benefits, or just pass along the costs, which amounts to the same thing. If you cannot pay the premiums you are essentually off the Medicare program. For Social Security, they will just cut. But, will call it a program funding flow adjustment, or some other justifyable BS. But, essentually it will be a cut. No choice cut, cut, and cut.

I do not think there is a disconnect between what the people want to pay in tax and what the Government spends. Fiscal and monetary policy must be centralized in order to protect the currency and enact achievable long term goals. What we have now are the worst of both worlds, an out of control executive/legislative Fiscal disaster and a wall street banker controlled FED. The voice of the people is ignored and our trust violated. The arguments voiced are always, well it could be much worse. Utter unmeasurable nonsense. Especially when you are proposing to buy 1.25 Trillion in unbacked MBS securities.

Why would anyone buy long term US Treasury debt? When, in order to pay our commitments, we have no choice but to destory the last remnants of real USD worth. It would be better to hold, anything else. Gold, Silver, own a Farm or a dairy, anything that at least has a chance at maintaining real worth.

We can't go bankrupt as a sovereign nation with a fiat base. I feel that long before we reach a point of dealing effectively with the situation we will see a currency crisis. It will start with an inability to generate positive cash flow by selling debt, and the subsequent escallation of FED QE T buys. This will then produce a general flee from the dollar, probably in cyclic waves of some sort, augmented by increasing capital out flows from dollar denominated assets.

Mark Beck

Mark Beck's picture

Yes, I have talked about the new "economy" Laffer effects many times on ZH. I feel there is a much more complex, yet measurable, Laffer effect in progress due to debt de-leveraging and unemployment. Basically, hyper sensitivity to tax increases, producing no significant increase in revenue.

Well you cannot fund all of these unfunded future liabilities, so at some point you will have to cut benefits, or just pass along the costs, which amounts to the same thing. If you cannot pay the premiums you are essentually off the Medicare program. For Social Security, they will just cut. But, will call it a program funding flow adjustment, or some other justifyable BS. But, essentually it will be a cut. No choice cut, cut, and cut.

I do not think there is a disconnect between what the people want to pay in tax and what the Government spends. Fiscal and monetary policy must be centralized in order to protect the currency and enact achievable long term goals. What we have now are the worst of both worlds, an out of control executive/legislative Fiscal disaster and a wall street banker controlled FED. The voice of the people is ignored and our trust violated. The arguments voiced are always, well it could be much worse. Utter unmeasurable nonsense. Especially when you are proposing to buy 1.25 Trillion in unbacked MBS securities.

Why would anyone buy long term US Treasury debt? When, in order to pay our commitments, we have no choice but to destory the last remnants of real USD worth. It would be better to hold, anything else. Gold, Silver, own a Farm or a dairy, anything that at least has a chance at maintaining real worth.

We can't go bankrupt as a sovereign nation with a fiat base. I feel that long before we reach a point of dealing effectively with the situation we will see a currency crisis. It will start with an inability to generate positive cash flow by selling debt, and the subsequent escallation of FED QE T buys. This will then produce a general flee from the dollar, probably in cyclic waves of some sort, augmented by increasing capital out flows from dollar denominated assets.

Mark Beck

Whizbang's picture

This is a joke, america is not going bankrupt. If you thought the collapse of lehman screwed things up, wait until the u.s. goes down. Half of the worlds money supply is based on us bonds that other countries hold as bank "reserves". Without those, the whole game ends. America will be granted an infinite number of chances to get it's house in order here. The alternative is unthinkable.

IveBeenHad's picture

i dunno the main difference that he is ignoring is 30 yrs ago they were shut out of the credit markets effecting that change in policy. for america the faucet of credit may not be turned off for years if not decades to come.  

IBelieveInMagic's picture

You have hit the head on the nail! With USD as the reserve currency our pols are able to spend recklessly on entitlements and defense without much fear of inflation (as long as foreigners continue to supply real assets in exchange for paper with green ink that they then lend to the US; the day foreigners demand real assets in exchange, the game is over) or fear of external credit default (can always print to pay debts).

As long as Saudi and the other energy/commodity providers and the transformers such as China play along with USD reserve status, we are OK.

 

mrhonkytonk1948's picture

To answer your headline question:  in a word, "no."

Anonymous's picture

Too sad to be untrue ...

illyia's picture

Watch the exodus of patriotic Americans chanting: "I won't pay it!"

This is a recipe for the "R" word.

And, I do not mean recession.

geopol's picture

HOOOOOOOOO That's scary................

Anonymous's picture

Bottom line: Cuts will be necessary beginning with underfunded federal, state and municipal pension obligations. Look at CA, the future is now.

Anonymous's picture

"The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax."
The other face of the problem, for the part that doesn't rely on "entitlement assets" , is that there is also a giant disconnect between the return rentiers/retired peopleexpects on their assets and what the real economy can achieve.

Keynes rightfully identified the rentier class as having interest opposite to all the other classes. His solution was to get rid of the rentier class. Instead, the politicos in developped world (I include Asia in there) chose to make everybody a rentier. As a consequence, we live in a schizophrenic world ! This contradiction will be solve only when expectations of entitlement AND expectations of returns, both sides of the same coin, will have been lowered significantly.

Budd Fox's picture

Just a detail: when this man privatized Chile pension system, he did it on the poits of Pinochet bayonets.

He did NOT asked for consensus.

Before America does it, they will have to instate their Pinochet....suspend Civil rights and declare Martial Law.

On the points of the bayonets you can reform what you want, no one is going to dare to ask you anything.

Dirtt's picture

We do have elections in November.  America is not Chile (that used to be a good thing) so there is a chance it can be done peacefully.

Otherwise thankfully the Chileans make good wine.  Maybe they will make room for one or two Americans who value a work ethic worth importing.

Anonymous's picture

Chileans also have great produce. They must have some great soil there...

Anonymous's picture

really? Chile with its massive, mono-resource exports and dependence on America, Japan and China as the major markets is lecturing America? Really?

Anonymous's picture

This makes no sense.

We have increased "benefits" steadily since 1776... they have never been "funded".

Why is this a problem now?

We are wealthy.

Tipo anónimo's picture

Having lived in one of Chile's backwards neighbors, I can tell you that people down there don't mess with Chile.  They have their stuff together - they are behind one of hte greatest land barriers in the world with modern armaments, so unless they make someone with nukes upset, they should continue to be a regionally important force.

 

No comment on Pinochet's civil rights record, but he knew how to make a 1st class economy!

 

http://tinyurl.com/ychau5a - wiki on Piñera

http://en.wikipedia.org/wiki/Augusto_Pinochet

Budd Fox's picture

No questions on the outcome....I just said that to get there, you must be willing to pay the price.

And the price of this reform was Pinochet, the thousands of desaparecidos,and all the annexes.It may be a price well worth to pay...retrospectively, depends to what part of the population you belong...

The point remain you do NOT achieve those results with debate in a democracy and balancing reforms.

You need a social equivalent of a Minsky moment...be it a coup of the militaryy or a Revolution of the people...your choice.

Tipo anónimo's picture

I think there was a debate.  It just ended Pinochet 1, communist baastuds 0 :)  I never here anyone here, or there, arguing that the disappeared were NOT part of the hard left being financed by the Soviet bloc.

 

Bolivia had a similar experience with Banzer.  The native people weren't happy with the speed of the results that he offered after being 'elected' president, and yet you'll find very few of them that argue that any aspect of their lives, families, or personal economy are better off now after the turmoil of Pres. Evo Morales' rise to power.

Anonymous's picture

+1000 - my Mom watches PBS specials on the poor SA mothers who march with pictures of their missing sons, and sympathizes. I don't have the patience to explain to her how many of those poor mothers are the equivalent of "poor Mrs. Guevara".

Anonymous's picture

I'm not Chilean and I'm sure things were crappy (not the word I wanted to use but..) there during the Pinochet era, but lets think about the alternative.

Everybody (ahem liberals) bitches about "right wing" atrocities, but conveniently forget about there communist / socialist equivalents. Go read the Black Book of Communism (its really long for a reason) and ask yourself on a comparative basis which ideology has been responsible for more deaths in the last 150ish years (BTW: the Nazi party was in fact socialist (Nazi = National Socialist) so don't even try the Hitler comparison).

So if you are Pinochet and you're staring down the possibility of the consequences of an Allende administration (a avowed Marxist), what is the lesser of the evils? Also, remember that Pinochet GAVE POWER BACK when he thought the threat had passed (probably not as soon as he could have but...) to an administration that eventually tried to imprison him. What do you think the odds are of Allende or his successors allowing free elections?

Anonymous's picture

Explain to me exactly what a non-socialist government would look like to you. National Socialism = Socialism? You're saying there is no difference between Norway and Nazi Germany?

You my friend, are an idiot.

By your definition any government that taxes and spends on anything is socialist.

Anonymous's picture

hello, I am chilean.
" Chile swallowed the bitter pill 30 years ago". That´s right, in 1980, under the umbrella of -in that time- all mighty Pinochet regime (call it dictatorship, tirany, etc., your choice) that redefined the rol of the state in every aspect, not only in that of social security. Those conditions are impossible to reproduce in Europe much less in US.

Good Luck.

Missing_Link's picture

That´s right, in 1980, under the umbrella of -in that time- all mighty Pinochet regime (call it dictatorship, tirany, etc., your choice) that redefined the rol of the state in every aspect, not only in that of social security. Those conditions are impossible to reproduce in Europe much less in US.

Don't be so sure  ...  People said dictatorship was impossible in Germany in the 1930s, too.  When things get bad enough, people reach for desperate solutions.

Jerome Lester Horwitz's picture

"The problem is the entitlement state. The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax."

The problem is our forebearers forced upon us to be born into an entitlement state. I never asked for this! Social Security was forced upon me at birth. I never agreed to that. It was decided for me. How bizarre is it that you can be beholden to an agreement that was made for you when you were a baby and there is no way to opt out.

I have worked since I was sixteen and would gladly forego all that I am entitled to from Social Security if I could opt out and not pay any more in to it.

The problem as I see it is the forced servitude known as Social Security masquerading as an entitlement program that I involuntarily became involved in. I don't want the government to pay anything for my health and Social Security can in no way be viewed as a pension by anyone with a brain! I want the government to leave me alone so I can provide for these things on my own!

Anonymous's picture

RIGHT! And don't forget about how we have to pay for a military that's more expensive than all the other militaries in the world combined, AND larger than all the other Federal government programs combined. Also, don't forget about how we have to pay "interest" to foreigners who own "our" central bank, every time they "coin" another dollar, despite the fact that the Constitution says that Congress shall coin our dollars, which, if it did, we wouldn't have to pay a penny of interest. Also, don't forget about how we have to pay for all those stupid government programs that never have and never will accomplish anything (like the "War" on Drugs, for example) but which provide fat contracts for "businessmen" who are buddies of "our" Congressmen, Senators, Newspaper, Radio, and TV owners, and etc. As a matter of fact, after you actually add up all this stuff, Social Security becomes a drop in the bucket by comparison. But of course Wall Street wants that too. Wall Street thinks Americans should work till they die, like Haitians.

wake the roach's picture

Although Pinera's obviously correct about how this ends, I will not buy the popular, taxpayer wants "something for nothing" lie...

Given a choice between high taxes and recieving entitlements or saving for ones own retirement/rainy days, most people would choose the latter... So why don't people save? Oh, because they spend more on useless stuff right?

Well funny thing is that people spend less on clothing, food, whitegoods etc. etc. than they did in eg. 1970. They spend more on insurance premiums, realestate, tax's and add the second household income earner into the equation, more on transport, childcare etc etc all the while real incomes have fallen... 

All this has been accepted by a population in the knowledge  that their taxes are being skillfully invested and set aside to fund their retirements (entitlements is such a dirty word for something you payed for), and that they are slaving to pay a mortgage because the home will only increase in value, right? "seen it on 60 minutes"...

Now I accept that ignorance is not an excuse but these lies have been pushed upon the middle class majority... People the politicians and their elite overlords know all to well, live paycheck to payckeck and so, are generally financial and economic illiterates...

Its like your older sibling giving you that big handful of shiny change in return for a worthless paper $20 note as a child... The workers have been swindled by people they trusted with their entire future...

When Joe 6-pack (stack) realises this, there will be hell to pay. But not for the politicians of course, when the time is right they will direct the public rage towards, illegal latinos,  sneaky asians, greedy jews, same old shit...

jdrose1985's picture

When Joe 6-pack (stack) realises this, there will be hell to pay. But not for the politicians of course, when the time is right they will direct the public rage towards, illegal latinos,  sneaky asians, greedy jews, same old shit...

 

+1

So true. No one is better at pulling the race card than...Hollywood

 

With the exception of the first family, of course.

 

 

Unscarred's picture

I agree with how your comment ends, but wholeheartedly disagree with your statement about the taxpayer wanting something for nothing being a lie.

As (real) food costs have continued to fall over the past several decades, the amount of conspicuous consumption has grown by figures far exceeding any break even point.

I'm friends with numerous doctors at the trauma units of several hospitals, all of whom tell me regular stories of patients with BlackBerrys and iPhones, Gucci handbags, $40K cars, and NO HEALTH INSURANCE.  These aren't people who can't afford insurance.  These are people who have no interest in being responsible.

In addition, notice that household debt to GDP has doubled from 1985 to today.  It's not a coincidence that Nike, A&F, Gap, and other ancillary retailers have experience exponential growth over that same period.  (Not everyone can afford $120 sneakers, but stores can't keep them in stock for very long.)

As Malthus taught us, any given society will take on the characteristics of its fastest growing segment.  The fastest growing segment of the American population is definitely not the upper class, nor the upper-middle or even middle class.

Of course, the real victim in all of this (as a percentage of household earnings) is the middle class family who actually does things 'right'- they pay their bills, live within their means, and save for a rainy day.  But no one can overlook that while the 'haves' rape the system, the 'have nots' are leeching every last drop of blood that they can, while they can.

But I agree with you 100 percent- the finger pointing at the end will be no different than what we've seen throughout history.

Anonymous's picture

I agree with that completely. I try to save every dime I make.
However, it never seems like its enough. I dont drive a fancy car or have a McMansion. I own a motorcycle and my wife has a small suv, we live in a reasonably priced condo. But between homeowners insurance, car insurance, health insurance, property taxes, income taxes, sales taxes, mortgage payments, food, electricity, and small bit of spending money for me and my wife to enjoy the smaller things in life(notice i didnt say finer), we are left with practically nothing. It seems almost impossible to get ahead here without throwing yourself into an abyss of debt. I dont recall the last time I bought myself a decent pair of shoes, or a nice suit.

Commander Cody's picture

So, how does it feel to be a serf to the overlords?  Not so good, huh?  I agree.

Starve the beast is the way to kill it.  Only the sheeple will continue to believe the lie until its too late.  Sad.  Statist fail.