From the other thread, here is my post to show the numbers we are dealing with. All figures are projected 2011 numbers.
Paul, that's a difficult question. The numbers are:
US total revenue - $4.46 Trillion
US annual Interest payment - $415.5 Billion
If we reduce Spending enough to actually be able to pay down the national debt, then we would probably get out of the recession pretty quickly. As you can see, the debt is over three times as high as all Federal Revenue. So getting rid of the debt will take a long time unless we keep our current tax levels and eliminate ALL entitlements (social Security, Medicaid, Medicare, etc. ~$2.8Trillion/yr). If we did that, we could pay down the debt in about 7 years. If we cut those Federal programs, we would also likely see an increase in Federal Revenue from the decreased regulation and expense of managing those services. If we don't reduce spending, there is no way to increase taxes enough to get us out of debt.
Here's the first of 2 posts originally on the main Contitutional Study Group wall, in response to Trudy's question(s). The 2nd one will appear above, I guess. Both are pretty long. Still, I think they're OK since this is a subject that can be "subject" to a lot of confusion. My first two posts on this topic are general -- introductions in a way. Intended to provide some food for thought, and some perspectives on certain topics that will open your mind to other than the usual conservative and even free-market view. We've been so overwhelmed with propaganda from those who benefit from the paper money system we have that many grievous flaws in economic theories have just imbedded themselves so deeply in the culture that even many conservatives and libertarians don't stop to question them. I am a 100% pro-capitalism, pro-individualism, pro-Constitutional, pro-free market guy, and I have been a Wall St professional for most of my career. Economics interested me in my early teens, believe it or not, and by the time I entered college I probably already knew more than most people with bachelor's degrees in economics just from my own reading. I majored in science and worked in science for several years, then decided to switch to economics, making it my vocation instead of my avocation. I consider myself lucky to be self-educated in it because it's almost impossible to find an economics dept at any institution in the world where you can learn anything but garbage. Not impossible, but almost. I'm an adherent of Austrian Economic theory -- it leaves every other choice in the dust. As a commodities analyst and trader, for almost 40 years I was putting my money where my mouth was in order to survive, and if I did a mediocre job I did NOT get a mediocre income but negative income. What I learned about markets integrated with Austrian economics gave me a huge edge in understanding things. I had a reputation for being a "maverick" because I saw so many events way ahead of time which were record breaking precedents, which made most professionals in my field think I was crazy until they came true. I took a couple of elective courses in economics as an undergraduate, and my lecturer was none other than the Keynesian Saint Paul Samuelson, with whom I was able to disagree on many topics even though I was in an "econ 101" type of course -- because of my self education and familiarity with the Austrian economists, and with the various refutations of Keynesian thought. My path crossed Prof Samuelson's a bit later in life when I learned that he was on the Board of Directors of a commodity speculating firm where I was an analyst and trader of the firm's funds. That was Commodities Corporation in Princeton, NJ, which in the world of commodities was regarded as the premiere speculating firm in the world for many years. Prof. Samuelson, who taught and professed to believe that markets were "efficient," (another of those self-contradictory concepts of Keynesianism which his disciples seem to swallow whole without objection), nevertheless had invested his own funds with Commodities Corporation -- contradicting his own teachings that speculative profits are impossible to achieve and occur only as a matter of random statistical luck. I guess it's kinda tough for someone to be a Keynesian and an intellectually honest thinker at the same time. I also enjoyed, for some years, the personal friendship of Dr George Reisman, who had actually attended the seminars given at NYU by Ludwig Von Mises, the crowning intellect of the Austrian school of economics. It was lonely in those days when probably not one person in 1,000 (probably not much more than 1 in 1,000 economists) had even heard the name Von Mises. But, truth will out, and it's very satisfying to see the strides Austrian theory has made in acquiring recognition and respect. Von Mises, in my opinion, was unquestionably the greatest intellect in the entire history of economic thought. Well, this little digression will, I hope, serve as an intro for those who haven't any acquaintance with or knowledge of Austrian economic theory -- you'll know that whenever you see a post from me, if there's economic theory behind it, it's Austrian theory. I have probably also just proven to you my strong tendency toward long-windedness, so I hope that will prepare you for the two posts I stayed up all night to complete, because knew if I set them aside I'd never get back to them. Apologies for the length and some degree of repetitiveness, but if you have any interest in economics I think you may find one or two or hopefully more observations somewhat interesting and a little different from what you hear elsewhere. I'll try to be more awake and more concise in my future posts. ...........................OK!! End of prelude. Below is a copy of my first post aimed at Trudy's topics/questions, and when I post the 2nd one in a couple minutes, I guess it will appear just above this posting. Then I'm going to excuse myself for a while and try to get a couple hours sleep.
I agree w/Publius Huldah, and will follow up this comment with a very long one that attempts to give Trudy and others who share her views a kind of "flavor" of the messes our dishonest money & banking system creates, and also to disabuse her of a couple of common misconceptions she shares with many people. But for now, here's my story:
The constitution does not permit the government to get into the banking business or regulate banks. By the 10th amendment, that's reserved to the states, if they want to do it. In fact, the states had done that before the Constitution, and in many cases to the detriment of their respective economies. The problems, however, were localized within states and sometimes affected an entire state. It was these irresponsible banks who printed up more paper notes than they could redeem which led to the booms and busts their locales experienced. Later, the solution we were offered was the FED, which simply extends the irresponsibility to the entire nation and consolidates it, so the schemes which used to be localized and easily repaired would be postponed for very long periods, allowing hte problems to grow enormously and engulf the entire nation. When some states decided to regulate banking, there was hell to pay -- but only in those states. Now we have the federal gov't doing to the country what the more irresponsible states did to their own citizenry. We are being given as a cure the very thing that poisoned those states, only we're now being given it in far more massive doses, and it's been made ALMOST impossible for any bank to be run on a sound basis. Instead of localized, temporary downturns we get massive all-encompassing crises that last for long periods.
The Constitution gave the Federal gov't the power to coin money, which means to MAKE COINS. It did not prohibit any private mint from doing the same, and could not prevent any foreign private or gov't mints from doing the same. There is NO "legal tender" law in the Constitution that applies to any coins that the Federal Gov't might mint. There is, though, a provision that the states may not make anything legal tender but specie (ie, gold and/or silver).
The federal gov't's coining of money and "regulating the value" of specie does NOT mean the gov't intended to control the nation's money -- in fact it meant just the opposite. Where would the federal gov't get the gold and silver to make coins? Well, it might have a little bit in the Treasury that it would use to pay its expenses and its employees with. But with such a small federal gov't, how was this money expected to be anything significant in the economy? It wasn't!! It might or might not have been -- depending on what the people chose to do about it. The gov't was NOT seen as a source or overseer of our money system. It "regulated" the value of specie in EXACTLY the same sense that the Bureau of Weights and Measures regulated weights and measures. To "regulate" meant to "make regular" -- ie, to provide a uniform and consistent basis for measuring things. An inch and an ounce were defined, and a new unit of weight called the dollar was as well, and because the dollar was to be the name of our national currency, the defining unit or measure of it, and because it was a measure of a MONEY, it was defined in terms of gold. A dollar was 1/20.67 of an ounce of gold -- a bit less than 1/20th of an ounce of gold. We'll omit the details of why this seemingly odd amount was chosen.
WAY before, during, and WAY after the period encompassing the Revolutionary War and the adoption of the Constitution, MANY DIFFERENT COINS WERE USED AS MONEY in the colonies and, later, in the states. Spanish, English, French, Mexican, and other nation's coins were commonly used as money. So were the coins made by many private mints. A coin is only a weight of gold. The design or shape is of FAR less than secondary concern. Money is used in trade, and an honest trade involves the exchange of value for value. Gold has a value, and it (and silver too) was in common use as money.
Everyone knew from his everyday experience the different weights of the various coins, but without one single numerical system with a "common denominator," this was a slight obstacle to trade sometimes. With a British gold sovereign having 0.2354 oz of gold content, a French 20-Franc coin having 0.1867 oz of gold, a Mexican 5 peso piece having 0.0602 oz of gold, it could be difficult to make change at times. So the Framers thought it would be a very good idea to help facilitate commerce in the fledgling nation if the money system were clearly defined by an independent, unbiased authority whose interests were the interests of the citizens, and who had the legal authority to enforce fairness. Since a dollar was defined as 1/20.67 of an oz of gold, you could easily calculate how many dollars worth of gold were in each of the various foreign coin -- it was like saying there are 3 feet in a yard, or 16 oz in a pound. If the federal gov't merely produced a list of the dollar value of foreign coins, then that would enable all such coins to be measured in dollars and accounted in dollars, and thereby simplify commerce and facilitate it. This is essentially the power given to the Federal Gov't by the constitution. To be the legal authority on the dollar value of foreign coins, so there would be no arguments or mistakes or unnecessary complications. Just as people sold milk by the cup here and by the jar there and by the jug elsewhere, once the units of ounces and quarts and pints were defined, things tended to become more uniform, and this is why it is an advantage to "regulate" the money as well.
Furthermore, the states are prohibited from making anything but specie legal tender. This is intimately related to the foregoing. What if one state said that a British Sovereign is worth 1.5 French 20-Franc pieces, and another state said it was worth only 1.4 of them? With so many different coins in circulation, you can see what kinds of troubles and confusion and inequities this could lead to in the civil courts, especially in suits involving parties from different states. We were ONE NATION, and we had ONE OFFICIAL LANGUAGE, and ONE NATIONAL GOVERNMENT, and ONE set of official weights and measures (the British system rather than the metric) and ONE constitution as a contract for all the states with the federal gov't., and none of these facts involved violating anyone's rights, they were just conventions that were necessary or beneficial to the functioning of the nation. So too would be ONE clearly defined money-measuring system, a way to ensure that honesty could be easily affirmed or checked, and a way to make sure that we had one "language" in our commercial dealings as well as in our communicating.
The federal gov't thus was given the power to "regulate the value" of coinage from other nations. None of the states objected to this -- they all understood that it was a minor point in the constitution, that it violated no one's rights and benefitted everyone who was interested in making commerce easier to engage in (ie everyone).
Suppose a civil case judged that Mr A had to pay Mr B $20. That would be almost an ounce of gold ($20.67 would make a full ounce). But suppose Mr A had handy only 1 British sovereign, a couple of Mexican coins and a few French coins. Instead of having to do painstaking and boring and error prone arithmetic each time, all they’d have to do is look at the Federal Gov’t’s list and see that a Soveriegn had a bit over $4 of gold in it (the exact number out to a few decimal places), and how many dollars worth of gold there were in each of the other coins. All this was, was a one-time calculation made by the federal gov’t as a service to the nation’s courts and commercial interests, so that there would be the same standards used everywhere, determined by the same trusted and accepted authority. You can see how much easier it would then be for A to pay B the correct amount, or as close to it as possible, and then they could make up any small difference with a few silver coins in one direction or the other.
This is all that “regulating the value” of coinage is intended to mean.
These “powers” granted by the Consstitution had NOTHING to do with banking. They were more of a “bureau of standards” type of authority than of a monetary authority. The federal gov’t could not declare the values of coins at its whim. It was just going to play the role of the ultimate authority on the true relative value of various common coins used as money in nationwide commerce. Just as no state can sell 3 quarts of milk as a gallon, or 15 oz of peas as a pound, no state can say that a British Sovereign is worth more or less in terms of dollars or French or Mexican coins than their relative gold content specifies, and that relative amount will be right there in black and white, calculated once and forever by the Federal Gov’t, consistent and unchangeable, so that it never need be re-calculated again, and certainly not each time a transaction occurs.
BTW . . . IT IS VERY IMPORTANT TO NOTICE that there is nothing in the Constitution which says that UNITED STATES COINAGE would have any special status as legal tender. THIS CANNOT BE OVER-EMPHASIZED if you are to understand why so many of the opinions on legal tender, etc., which are commonly accepted are WRONG. The Constitution says that the federal gov’t can make some gold and silver coins if it wishes, and also that NOTHING BUT GOLD AND SILVER may be made legal tender by the states. It DOES NOT connect the two. In fact, THAT IS THE VERY REASON WHY THE CONSTITUTION ALSO GRANTS THE FEDERAL GOV’T THE POWER TO “REGULATE THE VALUE” OF ANY AND ALL NON-US COINAGE. Obviously, the Framers accepted the then-current situation of MANY DIFFERENT coins being used as currency. Clearly, it is the metal content that is relevant, NOT the picture or language placed on the metal. The Framers in essence YIELDED TO THE AUTHORITY AND POWER OF THE PEOPLE, and their right to determine which money they chose to use. These provisions in the Constitution regarding specie and coinage are interpreted more often with emphasis on their inessentials than on their essentials. When you really take all of them together, they show that the intent of the Framers was to RATIFY the people’s choices, whatever they might be, and for the federal gov’t to adopt the role ONLY of making life easier for the people regardless of their choices. The role of the federal gov’t in money matters was more passive than active, though these provisions are often “spun” – unintentionally – to denote the Federal Gov’t’s active involvement in the monetary system. IT’S THE EXACT REVERSE!! The Constititution ACQUIESCES IN THE MONETARY STATUS QUO, accepts that many different FORMS of gold and silver are circulating as money by the people’s choice, and then (a) reserves for itself the right to offer still one more form or shape or size of coin as an addition to the existing mix WITHOUT giving its coins any special status,and WITHOUT forcing anyone to accept its coinage, and (b) steps in actually to ASSIST with the continuance of the people’s choice by facilitiating their use of their chosen money or monies, by adopting the role of objective calculator of standards for the various coins the people had already chosen to use, in order to make their use simpler and easier. IE, the gov't was acting as the people's servant, seeking to help them and make their lives easier. Further, the framers knew that you have to have a “common denominator” in the court system for payment of monetary judgments. You can’t have someone offer to pay in pigs for the apple trees he accidentally burned down. Or have someone offer to pay his debt with 1,000 gallons of fresh milk that will spoil the next day. There has to be a “legal tender” in terms of which the courts would settle disputes over monetary damages. So… the Constitution specifies only specie, ie gold and silver. You can’t try to pay off your court-ordered debt in shoelaces or combs – that might well lead to yet another suit. By specifying specie as the only “legal tender” for this purpose, the Constitution relegates the gov’t’s power to make coins to no more special status than any private mint’s or any foreign gov’t’s. This is not only NOT a mandate for interference in the monetary system, but rather it is a very unusual national HUMILITY regarding the stature even of the pieces of metal it might choose to put its stamp on.
Thus, NOT ONLY does the Constitution give the gov’t NO powers over the banking system, it really gives the gov’t no powers over the monetary system either. Coining money and regulating the value of other coined money does NOT give the gov’t any power at all over the money. To think otherwise is like thinking that by regulating the number of ounces in a pound, the government has acquired the right to control any business where things are sold by weight.
Returning now to the Banking system, over which the government has NO constitutional authority, here are some interesting facts:
Centrally controlled fractional reserve banking was INVENTED BY A PIRATE, who brought his idea to the King of England, who adopted it by creating the Bank of England in 1694. A popular war was becoming less popular with the people as they were becoming more and more harassed by the King’s tax collectors to pay for the war. Wm. Patterson, a pirate, pointed out to the King that when a bank issues notes redeemable in specie, most of the notes circulate as notes, never being redeemed. Only a tiny fraction were ever redeemed under usual circumstances. So. . . he suggested that the King’s Bank issue notes in amounts many times the gold available to back them. Then the King could use those notes to buy war materiel and to pay his armies and navy.
This was the birth of fractional reserve banking, instigated by a Pirate, and whose first use was as a means to fleece the public of their savings in order to finance a war they didn’t want to finance.
The current Federal Reserve Bank is our nation’s 3rd official “national” bank. There were 2 attempts at a national bank back in the early 1800s. Both failed miserably and incurred the people’s wrath. Neither had its initial charter renewed. In fact, “Stonewall” Jackson was elected President on the issue of the nation’s second bank. His major campaign theme was “Jackson and no bank, or the bank and no Jackson” The American public was very fed up with the Bank, and elected Jackson.
It then took 3 generations before the banker types were able to get another bank put over on the people. Virtually everyone who had lived during the time of the 2nd bank had died. And STILL it took massive subterfuge and legislative legerdemain for the bankers to get the FED established. They succeeded though, and thus began the most enormous financial scam in the history of the human race.
You have no idea how many details I've omitted. The history of banking regulation by the states is a history of the worst outrages and the most disastrous economic consequ3ences. There is no need for the gov't to regulate the banks -- the laws against fraud should be sufficient to protect the public from crimes by teh bankers, and free market, unhampered competition should protect the public from irresponsible banks
OK, Publius, you asked for it. Apologies for the wordiness. Here's the 2nd of the 2 posts I placed on the Constitutional Study Group's wall last night -- the one I didn't finish writing til after 8am. The first of the two should be just below this one, so you might want to read it first, but the order isn't really very important.
Trudy’s comments reflect a few misconceptions which are very common, and are artifacts of our flawed economic theories, our dishonest monetary system, and the massive mis-information and mis-education and propaganda which has supported them for many decades. The topic is WAY too big to cover thoroughly in this comment, so I will give you what I think will be interesting food for thought, and show you by illustrative examples and brief comment that you are operating under assumptions which are false and need a lot of re-examination.
I’ll show you why (1) derivatives are not bad, and that (2) the same is true for debt. Then (3) I’ll make a few comments about our banking and monetary system. This will be a relatively long posting, but it will barely touch the surface, and I’ll look forward to commenting further if the thread of this topic persists.
The first thing you should do if you’re going to discuss something is to know what it is you’re talking about. What IS a “derivative?” It’s a financial instrument which has no inherent value of its own, but which does have a value in the marketplace which it DERIVES from some OTHER asset or instrument. That other asset or instrument is the value “underlying” the instrument we call a “derivative,” and is what that “derivative” DERIVES its value from. A couple of examples with comment follow.
A simple example would be your contract to buy a home for $100,000, which you and the seller agreed upon and signed on January 1. The settlement date or closing is scheduled for March 1, at which time the contracted transaction will occur: you will give the current owner $100,000 as you contractually agreed to do, and he will turn over ownership of the home to you, as he contracted to do. In the meanwhile, he still owns the home, and you still have your money, and both of you have copies of the contract.
Now, suppose that housing prices soar during the month of January and $150,000 is now the market value of the home you purchased (NO!! COMMON BUT WRONG TERMINOLOGY. IT’S THE VALUE OF THE HOME YOU AGREED, ON JANUARY 1, TO PURCHASE ON MARCH 1, AND FOR WHICH YOU HAVE A PURCHASE AGREEMENT OR CONTRACT. BUT YOU HAVE NOT YET PURCHASED IT!!! YOU HAVE HOWEVER, ACQUIRED THE LEGAL RIGHT TO PURCHASE IT ON MARCH 1.) Well, you were apparently wise to enter into the contract you made, and the seller was seemingly not so wise. You have a contract which legally entitles you to buy that home for $50,000 less than its current market value. That contract is now worth $50,000 to you. But if I walked into your living room and saw it lying on your dining room table it would be only a few sheets of typewritten paper to me. In and of itself, the physical contract has virtually no value – maybe a few cents worth of value as tinder for starting a wood fire. You, however, can turn it into $50,000 cash in the marketplace if you want to. How? By offering the home for sale, finding a buyer at the current market price of $150,000, setting a closing date of March 2, then taking ownership and paying over the $100,000 contracted price to the current owner, getting a good night’s rest, and the next day signing ownership over to the buyer you’d found for the contracted $150,000 – thereby REALIZING (ie, MAKING REAL) the actual monetary value of those 5 sheets of paper which I had seen lying on your dining room table. That contract was IN REALITY worth $50,000 dollars. Nothing bad happened. No chicanery. Indeed, we might have saved some time, effort and closing costs by asking the original seller to agree to sell to the new buyer and to cancel his current contract with the original buyer. The seller would get his contractually agreed upon $100,000 from the new buyer, and the new buyer would pay the original buyer $50,000, and everyone would be happy. The savings by having only one closing might be divided up amongst the 3 of you. And … notice that from the original buyer’s perspective, essentially HE SOLD HIS RIGHTS TO BUY, IE HE SOLD HIS THE LEGAL RIGHTS HIS CONTRACT ENTITLED HIM TO, to the second buyer, and received $50,000 from that person.
That contract was a derivative. It was worth $50,000 because it derived that value from the underlying asset, the REAL estate it entitled you to buy. When that asset rose in value, the contract’s value rose. Simple. Not a problem. Normal. No big deal, no menace to society, nor is it a boon to society. It’s just a couple of buy/sell transactions separated in time, and bound by contractual agreement.
Here’s a better one:
We used to have silver certificates. You could redeem them for silver on demand. With $129 silver certificates in your wallet, you could demand 100 oz of silver from the US Treasury, and get it. The reason you could get 2 five dollar bills for a ten was that you could exchange the ten for twice as much silver. Our money amounted to the equivalent of “hat check receipts” – bits of paper signifying that the bearer owned something real which he could come and pick up any time he felt like it. Our paper money was itself a derivative because it derived its value from an underlying asset, which it gave its possessor the right to demand at any time, namely the silver you were paid for your labor or whatever, and the seller then gave you the "hat check" or dollar bills and told you to go give them to the treasury where they're holding your silver, and claim it.. That silver-backed money was one of these EVIL DERIVATIVES which Trudy talks about. And there were TONS of ‘em around, everywhere you went!! People’s wallets were full of them, cash registers everywhere were loaded with ‘em, it was just horrible wasn’t it? Some parents even foisted these nefarious derivatives on their own children, disguising its evil nature by giving it the euphemistic name of “weekly allowance.” HORRORS!!
Isn’t it wonderful that our great leaders have done away with those terrible derivatives we used to use for our money? Now we have unbacked paper and a dollar is no longer a weight of silver or gold, but just a word with no connection to anything else, and no definition. There exists NO underlying value from which our paper money can "derive" a value for itself. All we have now is a DESCRIPTION of what a dollar is, not a definition: it's not a weight of silver -- your "dollar" is just the name of the paper used as currency in the USA, PERIOD!! And it appears on the notes of the Federal Reserve Bank. And for some reason two of these notes with $5 printed on them will exchange for a single note with $10 printed on it, even though all three of the notes involved in the transaction have the same REAL value in terms of their paper and ink, AND NO OTHER VALUE, DERIVED OR OTHERWISE. They might serve a practical purpose as tinder for a wood fire. Back in the bad old days of derivatives, when our currency (which is NOT a synonym for our money) was backed by real silver, people would unhesitatingly swap 2 fives for 1 ten, because the ten would get them twice as much silver as each of the fives. Now, we still do it just on inertia, even though there’s no real value difference between a five and a ten dollar bill. We have “honest” money now, it is just straight, simple, unabashed and proud and pretty paper, and makes no attempt to derive its value from some other source or asset. The currency is now Federal Reserve Notes, not Treasury silver certificates. If people seem to like the $10 bills twice as much as the $5s, that’s their right, that’s their problem (it soon will be, and a very big one!!). Imagine what fun it would be if the Federal Reserve Bank printed a note with $1 Trillion on it!! If a ten is worth 2 fives, if a twenty is worth 4 fives, if a fifty dollar bill is worth 10 fives, then hey, why not print up some Trillion Dollar bills and make us all rich? Obviously, the only thing that makes a fifty worth ten times a five is the way the ink is printed on it, saying “$50” instead of “$5.” IE, value comes into being because the Federal Reserve says so. It can take the same piece of paper and make it worth whatever the Fed wants it to be worth just by printing that amount on it, and presto, it’s worth a heckuva lot more than the piece of paper they printed 5 minutes previously because they printed a different number on it.
Trudy, sorry for belaboring the point, but you can see that derivatives are not necessarily bad, and that being more straightforward and simple does not make a financial or money instrument more solid and reliable. I’ll move on to debt now and that should help give a clue to what really matters.
(2) There is nothing wrong with debt either. Debt is never a problem. It’s only when the collateral underlying it evaporates or is destroyed, or when for some other reason the ability to repay it is hampered or weakened, that debt becomes a problem. Borrow $5, lend it to your friend, who lends it to his friend who. . . etc 1,000 times. Presto, $5,000 of debt comes into existence. If everyone in the “chain” is able to pay, the debt will be retired as easily as it was created. Problems arise NOT because of the EXISTENCE of debt, REGARDLESS OF THE AMOUNT, but when the debtors are unable to pay it. IE, when credit is extended to a person or entity who or which cannot be relied on to repay it. One default in the chain MAY (or may not) cause the rest of the chain of $5 debts to default, depending on how well heeled the rest of the links in the chain are, how solvent they are.
If that original $5 were based on something real, there’d be no problem. If I sold you my pen for $5 and said “pay me next week” then I have lent you the $5 purchase price for a week. If you fail to pay it, there is a real asset, the pen, which I can take back and all is well. Should you then sell the pen to your friend on the same terms, and he to his, so that a thousand people have bought the same pen on credit, racking up a total of $5,000 in debts, then should the last fellow renege and be forced to return the pen, it can just travel its original route in reverse and all the debt will disappear as fast as it had materialized. We’d be back to square one, with nothing lost or gained. As long as there is solid collateral underlying the debt, debt is not a problem.
It becomes a problem when it is created out of thin air with nothing behind it, or when you have a monetary system which distorts free-market prices – ie the nominal monetary value of things – and stimulates MALinvestment in assets which TEMPORARILY gives the illusion of a falsely high nominal value for many things which are then used as collateral for debt in amounts far greater than that collateral’s true free market worth – it is when you have a dishonest monetary system such as the centrally controlled money and credit system we have built up over the course of the past century – it is then that debt becomes both the fuel for false prosperity and paper “growth,” as well as the vehicle for economic busts. Credit – ie debt -- created out of thin air is what creates our Alice in Wonderland economic booms, fictions and mirages which virtually all modern schools of economics see as reality and believe in the way everyone believed in the naked Emperor’s clothes. And it is when reality has been stretched too far beyond its limits that this same debt is then seen as evil for revealing its own sham nature, erasing the illusion of wealth that never existed in the first place, and making us feel we’ve lost something that we never had in the first place. Of course it’s a little more complicated than this. The inefficiency and the wealth transfers that occur cause net destruction of wealth, and there are people and industries which end up gaining from the gyrations, and people (primarily the middle class and wage earners) who ending up losing – losing more in total than the winners gain. The subprime crisis which sparked our economic woes occurred because credit was given to BAD credit risks. Had such loans been restricted to good credit risks, and had the value of the real estate NOT been over inflated by the artificial creation of demand from people who would never have had the money to buy it otherwise, then there would NEVER have been a subprime crisis.
In our magical world of creating unlimited "value" by throwing the switch of a printing press at the US Mint, recessions really are NOT bad – they are good things. They are necessary evils, necessitated by the evil of a manipulated, artificial boom which precedes them. They are painful or “evil” the way an operation is painful or evil for a cancer patient. They are actually the curative process that stops all the wasteful, useless economic activity of the prior boom and calls a halt to the ongoing destruction of wealth, and then moves the economy back toward the solid ground from where we can build a solid, real, reliable growth and progress. However, our system doesn’t permit that process to go to completion. Our central planners turn back to their magic value-creation-via-paper-and-ink before the markets can complete the task of cleaning up the prior mess, and we are forced by our central controllers into moving “forward” again into our next, and almost always bigger, mess, from which an almost always larger recession will be needed to rescue us, but which will be in turn also frustrated from completing its work by the instigation of yet another false boom. Until. . . until . . . until . . . we finally get to the kind of super crisis situation we find ourselves in today.
Believe it or not, there were people who predicted (in essence, not in all its precise details of course) our current crisis back in the 1970s when Pres Nixon took us off the last remnant of the gold standard, and when we then replaced the system of international currency trading with a "floating rate" system. Those who understood correct economic theory knew that we were in for many years of a wild money and credit expansion worldwide
Contrary to popular misconception, recessions do not destroy wealth and value. They merely reveal the true (much lower) values that were being falsely presented to us as high during the preceding boom; they reveal the ABSENCE in reality of the progress and wealth creation we’d been led to believe was going on during the boom. Recessions in our current monetary system are GOOD. They may be painful, like the cancer operation, but they dismantle and destroy the cancer. It is ironic that on paper, the stats show growth during a boom, when REAL wealth is being destroyed. In a recession, we see statistics of slowdown, when in fact what's being slowed toward a halt is the WASTE AND DESTRUCTION OF REAL WEALTH. Yes unemployment rises during a recession, and that too is a good thing. It means all the labor which had been seduced into Herculean efforts to create worthless white elephants is now in the process of finding REAL jobs, where they will become engaged in hte CREATION of real wealth. Temporarily, they are out of work. But wouldn't you judge it to be beneficial to throw out of work the fellow who is hard at work hacking your home to bits with an axe for no good reason, until you can get back from the hardware store with some shingles, at which time you can set him to work putting a new roof on the garage? Yes, even the unemployment during a recession is an indisputably positive thing. The extent of the unemployment is a measure of the damage of the PRECEDING BOOM, when destruction and mayhem and internal rot was being created, and papered over with pretty cartoons and ribbons which would keep you fooled until the recession comes along and rips that disguise off.
Trudy, it’s a big subject. All of the above merely gives the roughest superficial acquaintance with the essence in the hope that you’ll ask more specific questions which can be answered with facts and real-world examples and historical records and statistics. When your hard earned REAL wealth is diverted into building houses of cards during a boom, you cannot blame the breeze of a so-called recession for their collapse. It was the misdirected false boom that led you into the false belief that real wealth was increasing when in fact that was only on paper, and not in reality. It is painful to see that house of cards collapse, and for all the card shufflers and dealers and printers out of work and seeking gainful employment in the activity of actually creating values that people need and want. But a wise man will actually be grateful for the recession’s having come before too much more real wealth could be destroyed, before too many more shoddy houses of cards with pretty paint jobs could be built by means of our squandered and wasted labor and wealth and time. A wise man will regret that the recession did not come sooner, and grateful that it did not come later.
There is no need for this cycle of artificial booms followed by busts. It is an artifact of our dishonest monetary and banking system system. We’d have been better off NOT bailing out the banks and letting the failures fail, no matter how big they were. Did you know that there was a stock market crash in the very early 1920s that was promptly followed by an economic slowdown, and that it was very similar to both the crash of ’29 and the economic conditions which promptly followed it? Most people alive today don’t know that, nor do they know that the gov’t did virtually nothing about it. That’s probably why it hasn’t been written up with emphasis in the history books: because it cured itself so quickly as growth resumed after about a year and a half. After the ’29 Crash, the government DID interfere, and the recession turned into a depression lasting over a decade. In fact, it lasted right through WWII and was only ended AFTER that war, when much of the New Deal depression-era legislation was repealed or judged unconstitutional, and many of its programs ended. It was the end of the new deal, and after a decade and a half of New Deal imposed resd, the economy sprang back practically over night..
The LAST thing we need is gov't involvement in the economy, Trudy. The facts of history prove it over and over again. It's spin and propaganda by either knaves or fools which are responsible for the persistent teaching otherwise. Find me a counter-example where gov't intervention in the economy had positive results, and I'll bet I can show you that those positive results were a mirage, or a scam..
As I initiated this topic, I'll copy my original remarks and questions, plus the insights of my well-informed friend.
I must point out that I am a firm Constitutionalist and do not believe that principle should be compromised. I will, however, stipulate that we are not yet FREE to act from pure Constitutionality in the current disaster we are facing. There will need to be some actions taken ASAP to forestall collapse. With that in mind, the dreadful morass of current procedure may need adjustments, just to stem the tide. THIS IS MY POINT! Act in the current scene (as best we can) and move rapidly thereafter to reinstate full original Constitutional sound money and legitimate free-market capitalism (credit-based not debt-based).
Here are my first remarks... with comments by PH interspersed:
August 15, 2011
Comment by Trudy Stamps August 15
PH, may I ask what you know about a recent banking bill [HR 1489]? The disastrous economic straits were are in (plus the horror of the so-called Super Congress) make me fear for our economy -- in the most serious way! I've read that HR 1489 offers to return the controls that were lost with the demise of Glass-Steagall -- when the Gramm-Leach-Bliley Act unwisely completely ended this important financial regulation in 1999.
Since that time, derivatives (and multiple types of paper gambling devices, concocted by devious banking enterprises) have left the world in catastrophic debt! We really DO NOT OWE the debts of gamblers who have squandered OUR tax dollars in phony paper instruments. There might be some sort of restoration of sanity with HR 1489 (or something like it). These are dangerous times. Do you have any Constitutional insights on the matter?
Here's a link: http://www.govtrack.us/congress/bill.xpd?bill=h112-1489
Comment by Publius Huldah August 15
Trudy, the federal government shouldn't be involved in the banking business - as "banking" is not one of the enumerated powers of any branch of the federal government. Congress has the power to "coin Money, regulate the Value thereof, and of foreign Coin" (Art. I, Sec. 8, clause 5); and no State shall make any Thing but gold and silver Coin a Tender in Payments of Debts (Art. I, Sec. 10, clause 1). THAT is the extent of the federal government's lawful authority over "money". The federal government has no authority over "banks and banking".
But I am not an expert on monetary theory. And I never litigated in this area. I'll look for someone who can address this in the Context of the Constitution. We never really had a "constitutional money system" in this Country, I am sorry to say.
Comment by Trudy Stamps August 15
I recognize the unconstitutionality of bills regarding finances, such as HR 1489 (or any legislation regarding the false central bank -- known as the Federal Reserve). However, I don't agree that we should dismiss the issue so cavalierly. We are in deep trouble with derivatives, the products of an on-going deception in banking -- revealing a lack of principle that is destroying the world economy.
We as tax-payers deserve to have our interests protected. We don't ignore a legal situation that is killing us! It may be "bad" regulation that we have suffered from, but we cannot let ourselves be destroyed out of some unwillingness to get into the fray! A bill to tackle injustice is a bill we might (in the present situation) consider as a stop-gap to treachery. I am of the opinion that we cannot let banks continue on the path they are on.
If we again divide the deposit banks from the speculative monetary houses (which Glass-Steagall did), we have a chance to stabilize the United States economy. We (citizen-tax-payers) do NOT owe gambling debts concocted by (diabolical) financial wizards. We STOP people who are committing the crime -- we don't have abstract arguments about the philosophy of sponsoring bills.
I say we get behind HR 1489 and reinforce our rapidly fragmenting financial system, before there is a total collapse. We cannot stay in the abstract when the house is falling down around us. Let's get back to the Constitution, sound money and honest dealing. But DO NOT pretend that we can keep ourselves out of the battle for survival in this toxic financial mess!
Comment by Trudy Stamps August 16
Trudy, here we focus on the genuine meaning of Our Constitution. I trust you are not taking the position that if you deem a bill to be "pragmatic", then whether the bill is constitutional is not so important.
I am looking for someone who is knowledgeable about monetary theory & policy to address what Our Constitution says about a constitutional money system.
I am most certainly NOT considering "pragmatism" as a substitute for Constitutionality! However, when the dam has broken, we must quell the flood! I am stating that we must take action by halting our losses. If there IS a way to rescind a false law, I'm all for it.
However, there is a gaping hole in the banking structure that needs to be closed. Our funds are draining into a bottomless pit of derivative debt. If we can stanch (for now) the hemorrhaging of our savings, I say take a temporary move to do that. THEN we can begin to get rid of the damage that has been done. Our banks are failing. We can't save and reinstate our Constitution if we have shut down our economy. Sound money must be reinstated immediately, in parallel with the repair of our damaged system.
I want the Constitution to be our prime directive in all governing process. But we need to hold our heads above water; and in this case, we need to halt the banking collapse.
By the way, I very much approve of Dr. Vieira's work and I totally support sound, Constitutional monetary policy. Yet we must not remain unalert to the urgency of the devastation of our economy.
Publius, I inquired of a friend who is deeply wise on both the Constitution and financial positions. Here are her comments:
It is not Glass-Steagall alone, but Glass-Steagall would stop the hemorrhaging. First, any doctor worth his skills, knows that. In the "eye" tumor example, if there is hemorrhaging -- and there is, with a TUMOR many times -- he would stop the bleeding FIRST, else lose the patient. He could perhaps then go on and remove the tumor, but doubtful with a dead patient he would do so. In addition Glass-Steagall would negate the infamous 1980 Monetary Control Act and then essentially repeal the Financial Services Modernization Act of '99.
Credits and investment must be kept separate and Glass-Steagall did just that. Glass-Steagall worked perfectly well, but Bretton Woods infected it, the 1980 Monetary Control Act damaged it further and in 1999, the final nail was put in with the Financial Services Modernization Act. Glass-Steagall would place a type of firewall between us and foreign banks, so that we could not be as vulnerable as we are now. We have created an elephant. You have to eat him one bite at a time.
THEN, then, U.S. Treasury Banks, along with state banks would follow a "credit" system rather than the disruptive and always doomed "debt system." Banks would be a service to the public charging nominal fees -- no interest and NO fractional banking. Issuance of paper would be backed by silver and gold and the full faith and credit of the United States or the American people and its resources, rather than an IOU, a paper note, not an emitting of bills. It is the usury system that has brought down all nations throughout history and the Founding Fathers knew that.
We have had problems with a monetary system since the Constitution was ratified. This isn't new. Nor is it new that USURY corrupts and has for thousands upon thousands of years. A credit system does not do that.
USURY is a "debt" system. If you right now sucked all the paper currencies out of the world, you would STILL owe interest because that is a debt system. If you put ten cats in a bag you will never draw out eleven. The "eleventh" is INTEREST. In a debt system, someone would have to "loan" you a cat, an eleventh cat and when only the Federal Reserve prints the money or raises cats, guess who will loan you the cat? You STILL will always owe a cat, so next time you pay back eleven cats, you will need a twelfth cat and so on.
I asked Morry to start this Discussion b/c the Constitution addresses Money - Art. I, Sec. 8, cl. 5 & Art. I, Sec. 10, cl. 1. The question is what would a constitutional money system look like? How would it work?
Our Constitution does not grant authority to Congress to make laws about or to regulate banks, investments banks, etc. Any such regulation etc. is unconstitutional as outside the scope of authority granted to Congress by Our Constitution.
In this paper, I mention & link to McCulloch v. Maryland, which is the case where the supreme Court wrongly decided that Congress has power to charter a national bank. http://publiushuldah.wordpress.com/2011/04/17/nullification-smackin...
Your other questions are probably outside the scope of this Study Group - since it is not on economics - but I will see if I can get Morry to give a BRIEF answer!
There are some other things we could do too.
We could sell off most of the federally owned land, and we could privatize a lot of government services. We could close down a lot of businesses that government is engaged in, like subsidizing trips abroad for businessmen to help them get customers abroad, courtesy of the taxpayer. We could abolish the EPA, the two DOEs (depts of education and energy). We could probably sell the post office for a positive amount of money to a private agency to whom its many under-used assets would be of value along with its network of delivery routes already set up, its vehicles and real estate, etc, because I'm pretty sure someone like a FedEx or UPS would feel confident they could turn those assets into profit-making ones, and that would be worth some money to them -- thus a bit of revenue for the gov't and the end of a huge subsidy to the PO. We could not merely freeze pay and benefits for gov't employees, but lower pay scales, perhaps gradually over time, say by 5 or 10% annually for several years in a row, until gov't workers' net compensation drops from its current level averaging MORE THAN DOUBLE the remuneration received in the private sector for the same work, all the way down to where it used to be, namely well UNDER the compensation for the same job in the private sector. This would reverse the current incentive for low and semi-skilled workers to seek govt jobs instead of private sector jobs and lead to a "natural" attrition of the gov't payroll rather than the current strong incentives for its payrolls to grow steadily.
Sometime soon I'll explain the idea Dr Reisman had for solving a situation like this. It's "out of the box" thinking, and I've seen nothing remotely like it offered or mentioned from any source. It is based on 2 facts:
1. As a practical matter, we will never be able to pay off our debt in real terms without inflicting undeserved punishment on future generations who did not enjoy the fruit of consuming what was purchased with that borrowed money. We have to acknowledge this fact, and decide that "a long disease is a certain death," ie that rather than draw things out for years or decades and default on our debt slowly and dishonestly by inflating it away over time, we should bite the bullet and do the reneging on our debt "boldly." Our creditors know they are bound to get back less than they're owed in real terms anyway, so we'll have to tell them that we're forced to do that, an effective bankruptcy, and we'll pay them X cents on the dollar over a shorter period, defaulting on part of our debt, but openly and "honestly" thereby putting ourselves back on a firm, debt-free footing all hte sooner, which will be a suitable foundation for solid, sound growth. We may mention to our creditors -- with no guarantees -- that we will never forget the portion of the debt we were forced to renege on, and that one day in the future, when we are riding high in the saddle again, we may opt voluntarily to offer partial or full repayment of that portion of the debt to them which we had reneged on. Meanwhile, we "owe them one" and will be cognizant of that in our dealings with them, and treat them in a friendly and receptive a manner as circumstances permit.
2. One way to do this is to create an almost overnight, one-shot inflation which reduces the real value of the debt. There is a way to do this which would result in minimal economic pain and disruption -- that's the "out of the box" part that Dr Reisman thought of. It involves a gradual but NOT very slow return to a gold standard, and it could be done WITHOUT risk of a serious economic downturn in real terms. The reason this is a solution not readily occuring to most people, even free market economists, is that they forget the nature of the distinction between finance and economics. They can be connected, but they are not the same thing. Debt is largely a financial problem, and while it CAN become a serious economic one, it doesn't have to. The way such problems are usually solved guarantees that the financial problem WILL be translated into an economic one. But there is NO necessity for that. Yes there will be some serious but brief economic pain for many people, but that is better than a long drawn out sequence of small pains which end up summing to the same large amount or even more. IE, it involves recognizing and accepting the reality that water has flowed over the dam which cannot be retrieved, and we have to face that FULLY, and PROMPTLY rather than resort to slow, gradual, stopgap measures which may reduce the pain level during any particular period, but which grant the disease its own semi-permanent "lease on life." I hope to discuss this solution in detail in a future post.
Thank you so very much for taking time to share your experience, insight, and wisdom on the critical issues of Constitutional currency and economics. I have read and re-read your posts so as not to miss a single morsel of wisdom. I especially admire your profound statement that financial crisis does not need to become an economic crisis. That single acknowledgement is as POWERFUL as it is ENLIGHTENING. I am delighted and privileged to have access to your thoughts and insights and look forward to your future explanations.
My friend who has extensive knowledge of our original Constitution and of banking practices, has this to share:
Derivatives are a natural outgrowth of the repeal of Glass-Steagall. Investment banks acting like banks became "hotbeds" of birthing derivatives. Derivatives are BETS pure and simple. The ultimate bet. Those bets, though now worthless, are still listed as "assets" on the books of our large banks. They bet and they lost!
Derivatives came out of nothing and can go back to nothing. But no, we had to have a bailout and KEEP the derivatives. During the era when Glass-Steagall was strong we had stability. Things were not zooming up and down. They were STABLE. People could PLAN their businesses far into the future. Not so in the last twelve years for sure.
Here's some reading matter regarding the "derivatives" market -- which has passed under the radar of many:
The carnage is becoming increasingly more visible in the daily lives of our citizens, as the effects of demise of the securities market "debt machine" wipes out the credit most Americans had come to depend upon, in their households and workplaces. Banks are cutting back on credit-card limits and other consumer loans; mortgages are harder to come by, cash-out refinancings and home equity lines of credit are drying up as home prices fall; and businesses are finding it harder and harder to sell new debt in the bond, commercial paper and other corporate debt markets. For an economy which is dependent upon debt, and already in hock up to its eyeballs, these are ominous developments. The fabric of society is breaking down, and the blood in the streets is spreading.
The chief financial factor in this carnage is the world's largest casino, the derivatives market. The derivatives market is far larger than the world's stock and bond markets combined, with bets in the quadrillions of dollars compared to the trillions of stocks and bonds. While it is impossible to put an exact number to the size of the overall derivatives market, given its unregulated operations and the way most derivatives deals are privately negotiated, it is possible to put a number to the value of the derivatives bets outstanding, and number is zero.
Derivatives were the great financial innovation of the Greenspan era, a form of sleight of hand designed to hide the bankruptcy of the financial system after the stock market crash of 1987, the collapse of the savings and loan sector, the bankruptcy of the banking system as a whole, and the collapse of the junk-bond bubble. The derivatives market was a fraud from its inception, a virtual market where the big banks and other speculators could bet on the movements of currencies, bonds, stocks and the indices associated with them. Because the derivatives did not require the ownership of the instruments upon which they were nominally based, the level of bets soon outstripped the levels of the underlying instruments, with, for example, far more derivatives bets on bonds than there were actual bonds.
The derivatives market also employed high degrees of leverage, placing bets with borrowed money. Using leverage, the speculators could place far larger bets than they could were they limited to their own money. This leverage was highly profitable--at least virtually--as long as the game was expanding, but turned deadly when the music stopped. The, reverse leverage set in, and the players began losing not only their bets but the money they borrowed to place those bets. This reverse leverage made it possible for the gamblers to lose multiples of the money they put in, before the loans.
Another innovation that was highly "profitable" before it blew up was the market for credit derivatives (a.k.a., credit default swaps, or CDS), a form of insurance policy for bonds and derivatives bets. While the derivatives market was in full swing, banks, insurance companies and other financial firms sold trillions of dollars of credit derivatives to guarantee the value of a wide range of securities. The credit derivatives were a fig leaf, a necessary part of the derivatives scam. The derivatives sellers, for example, routinely created triple-A rated mortgage-backed securities and collateralized debt obligations out of pools of subprime debt, and through the use of credit derivatives, were able to sell such triple-A rated junk to pension funds and other buyers who had a fiduciary obligation to buy only high-quality securities. Without the fig leaf of credit derivatives, this scam would not have been possible, nor would all the losses which followed.
The obvious point is that, in any widespread securities crisis, the credit derivatives sellers would never be able to cover the insurance they wrote. A.I.G., for example, wrote hundreds of billions of dollars of credit derivatives, including a substantial amount based upon securities issued by Lehman Brothers. When Lehman failed, so did A.I.G., which has now received some $120 billion in emergency loans from the Fed.
The settlement date for credit derivatives written on Lehman securities was Oct. 10, at which point the Lehman securities were valued, optimistically, at just 8.6-cents per dollar of face value. This will be the largest payout ever for the credit derivatives market, assuming the sellers can afford the payments.
Shut It Down
The attempt to save the fictitious "values" and "profits" of the derivatives market is one of the prime drivers of the largest bailout attempt in history. We stress attempt, because the bailout is not working, and can not work--there isn't enough money in the world to cover all these funny-money bets, and the efforts by the central banks to print that money, is fueling a hyperinflationary bomb which will wipe out not only the remnants of financial system, but also the governments, national economies and the means of existence for most of the world's population.
It is therefore essential that the bailout of the derivatives bubble be stopped, immediately. All derivatives trades should be declared null and void, and wiped off the books of the speculators. Any financial instrument containing a derivative should also be declared null and void, and wiped off the books. This unregulated, insanely leveraged casino should be shut down, and all claims arising from derivatives bets nullified, as if the bets had never occurred.
There can be no compromise on this. Shut it down, and shut it down now. Your life, and the nation, depends upon it.
(from "Shut Down The Derivatives Markets To Save Civilization" By John Hoefle)