Thursday, November 27, 2008

National Default a Topic of Discussion

Leave it to conservative pillar Pat Buchanan to be the first one to discuss the inevitability of national default in his newest commentary. His logic is unimpeachable. As this blog has also pointed out, there are no other options.

If we cancel our debt now, at least our economy will still have a chance, and we can avert a Greater Depression.

If we put it off, we will be driven ever more inexorably towards the necessary fact of total default, but we will be living in an economic hellhole by then, when a default might actually be destructive.

Defaulting now, while the dollar is still the world reserve currency, while our military might is still unchallenged, before our demographic collapse occurs, while our economy can still recover, NOW IS THE TIME!

Waiting until there is widespread social unrest, when the dollar is worthless, when the economy is in shambles, when our enemies are ever stronger, that is not the time. But unless we use some common sense, that is when we will end up doing it.

Let us declare our Jubilee Year now!

See Buchanan's insightful article on our economic predicament here.

Monday, November 24, 2008

Save our economy: Cancel Our Debt

Our whole economy is jammed up because we have fictional debts that are tied to assets that are no longer worth their book values. In reality, we are as wealthy as we were last month, last summer, or last year, but our economy is no longer functioning because of accounting rules that declare the debts greater than the assets, and thereby prevent banks from fulfilling their function of lending money. The still-collapsing housing prices continue to wreak havoc on the financial industry, by introducing a general deflation into the economy. This deflation is sending everyone's balance sheets further upside-down, since those balance sheets are based on debt that is tied to an inflated asset price.

Everyone sees that we are in a short circuit, an ever-widening crash, but no one can grasp how to break the cycle. The original idea of the bailout was to use government money to buy distressed assets. Then the idea has morphed to wholesale cash injections into troubled companies and industries. Now the Fed is buying and backing debt securities, basically saying to the banks, yes, we know the debt is bad, but we'll cover all your losses. Congress and the new President are floating new rounds of economic stimulus packages, cash gifts to the population, based on government IOUs.

But none of these measures can work. We have already crossed over the event horizon into a deflation, and that deflation is still picking up steam. There is no going back to the artificial boosts of inflationary spending. Extra money put into the system now is unable to bridge the gap between deflated asset value and the debt book value. The banks themselves are unable to release the extra money, because their asset levels are continually falling and they need the extra money to shore up their reserve requirements. Extra money given to consumers in an economic downturn only gets hoarded, not spent, thus preventing any stimulus from happening. Further, because most of our productive economy is based overseas, it is not clear how much the American economy would benefit much from the increased spending, as the stimulus would mainly benefit some foreign country's productive output. And, as we have seen, government redistribution does not increase real wealth anyway, so how does that help? If not redistributing wealth, the government has to rely on more debt spending, which is the source of the problem to begin with!

There is only one way to end the financial short circuit, to get us out of the destructive black-hole void of debt. The solution to our current crisis is quite simple really: cancel the debt itself. All debt, credit cards, car notes, mortgages, the national debt, all of it. Hit the reset button on the financial system. We have reached the blue screen of death, the system is totally locked up. The negative effects of the financial melt down are now negatively affecting the real productive economy. We have already entered a worldwide recession, this is getting really serious.

By releasing all debt, people will get a fresh slate, and can start saving again. Banks, whose only assets are completely fiction -- they call debt an asset -- would take a big hit, but so what? Banks don't contribute to national wealth anyway. Their only utility is to enable real productivity, and in that basic function, they have completely failed, and are in fact, counter-productive right now.

Despite having most of their assets (our debts) completely liquidated, the banking system would quickly recover anyway, because we could use our incomes to start saving again. The productive economy would be truly stimulated and bank accounts would fill up quickly, because all the money we currently use to pay off debt would go into savings, investment, and consumption. Imagine not having to pay all that money every month to your mortgage or car payment. All that money is going to go somewhere, either spent or saved. Given that financing life through credit would no longer be an option, people would begin saving in earnest again.

In short, everyone is given clear title to all their assets that banks currently have liens on. Instead of having to spend thousands of dollars on their mortgages and car payment and credit cards every month, the families of America would be able to save and spend that money. The people who lost their jobs in the financial industry would be able to find new employment quickly in the productive economy.

The American economy resets, the banks reset, we start from scratch, with all of our wealth freed from the fictional burden of debt. From this point forward, people, businesses, and governments are forced to spend only out of their savings, leading to the always-rising standard of living that America experienced for its first 150 years.

Today's problem solved, Great Depression 2 averted.

Spread this idea to everyone you know. Talk about it with your family until you can understand it and explain it. Take it to your Representative and Senator and begin introducing them to the idea, because they are going to have to be the ones who pass the law to make it happen.

Let's get it done now, before it is too late.

Sunday, November 23, 2008

Fed Chairman's Address on Deflation, in 2002

You can read Bernanke's confident speech below. The hubris of this man is quite remarkable. Basically, he believes that any deflation can be defeated by massive cash injections into the economy. His policy boils down to inflation of the money supply, by whatever degree proves necessary, and by a host of methods that he lists.

Assuming the government enables this policy, which seems to be what they are doing now, in the near future, within a year, we can look forward to a massive inflation, or rather, a massive devaluation of the dollar, which amounts to the same thing. So, figure you may have a year of deflationary prices to take advantage of, before the inflation/devaluation kicks in full force. How our economy will recover in such monetary chaos is predictable: not at all.

His speech, redacted:

As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.

At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero. The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.

Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

Some recent academic literature has warned of the possibility of an "uncontrolled deflationary spiral," in which deflation feeds on itself and becomes inevitably more severe. To the best of my knowledge, none of these analyses consider feasible policies of the type that I have described today. I have argued here that these policies would eliminate the possibility of uncontrollable deflation.


See the whole speech:

www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

FHA Mortgage Meltdown Coming

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening — or incapable of stopping it. They're giving mortgage firms licenses to dole out 100 percent-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."

During the subprime boom, the FHA atrophied as borrowers migrated to the too-good-to-be-true deals that featured terms such as extremely low introductory interest rates that later jumped skyward. But since the subprime market vaporized in 2007, FHA-backed loans have become all that's available for many borrowers. By fall 2008, FHA loans accounted for 26 percent of all new mortgages being issued nationwide, up from only 4 percent a year earlier. As of Sept. 30, the most recent date for which data are publicly available, the FHA had 4.4 million single-family mortgages under guarantee, worth a total of $475 billion.

Congress and the Bush Administration are strongly encouraging lenders to apply for FHA approval and tap into the government's loan-guarantee reservoir. In September, the agency guaranteed 140,000 new loans, up from 60,000 in January. In October, as Congress and the White House scrambled to respond to the spreading financial disaster, the FHA began to extend $300 billion in additional loan guarantees under the banner of a new program called HOPE for Homeowners. The limit on the amount buyers may borrow will rise in January to $625,000 from $362,790 in 2007.

Some current and former federal housing officials say the agency isn't anywhere close to being equipped to deal with the onslaught of lenders seeking to cash in. Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007. FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for HUD. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.

Goldman's dealings suggest another reason FHA-insured lending is booming: The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors. This is happening as the securitization of subprime and conventional mortgages has largely ceased.

Wednesday, November 19, 2008

Why this Depression Will be Worse, Much Worse

A Depression occurs when a recession is combined with a deflation. The economy cycles downward out of control in a black hole of dying economic activity leading to lower and lower prices and levels of employment. The bottom of the Depression is reached when all unproductive jobs, bad loans, and excess inventories are liquidated. A Depression economy also sheds itself of all extraneous activities, stripping itself down to the production of bare essentials for living, the demand for which cannot fall any further (except through mass death or something that actually decreases population levels). Prices and wages fall to that floor, then can get rebuilt, as new loans become safe and new production can resume.

We are facing a number of factors that today will prevent this cycle from functioning properly. Our society is burdened with so many artificial constraints, barriers, weaknesses, and institutional problems, that it lacks the organic flexibility to respond to these Depression conditions in functional way.

For one, we are now burdened by poor governmental policy, like minimum wage laws, regulations, and government bail-outs. In a deflationary environment, profits for producers are falling because of falling prices. In order to survive, the producer must decrease costs to adjust to lower revenues. But minimum wage laws will prevent producers from decreasing costs past a certain level. When revenue falls below the minimum fixed cost of labor, economic activity simply dies. Our governmental policy is now far more active also, throwing bail-out after bail-out of mass cash injections into the economy in order to prevent the downturn. Our leaders seek to battle the deflation with the weapon of debt-based inflation, which is exactly what got us into this situation. The leaders in the 1930s, while keeping the money supply too tight, at least had the good sense to let the bankruptcy cycle proceed, which is like an economic circle-of-life, allowing bad assets and debt to be eliminated and recycled.

A second factor facing our current economy is our high debt level. A deflation is a death sentence for business in an environment of high debt. Deflation lowers revenue, which makes it difficult if not impossible to pay off the high debts accrued before the inflation. This effect is visible to all in the housing meltdown going on now. Housing prices are deflating, putting people upside-down on their mortgage loans, resulting in mass defaults, which feeds further housing deflation. Banks are devastated by the mass defaults and have to curtail operations, not only because they have less money to loan out, but also because new loans are likely to get sucked up by the deflation. Making loans in a deflation is a formula for guaranteed failure, because future prices will not support current loans, a fact which of course leads banks to stop loan activity. Their failure to offer loans then stifles real business activity, leading to more unemployment and a decrease in real wealth, feeding the deflation and Depression. The more loans outstanding at the beginning of the deflation, the greater the economic catastrophe. With our country leveraged to astronomical heights at all levels of society -- personal, commercial, and governmental -- the financial and economic conflagration will be total.

The third factor that will exacerbate the coming Depression is the productive basis of our current economy. During the Great Depression of the 1930s, America was an agricultural, industrial, and manufacturing nation. Almost half of the country still lived on rural farms. City dwellers were engaged in productive wealth-creating business, all domestically based, such as oil, mining, steel, manufacturing, and skilled trades. Thus, the fall to bare-essentials level was not catastrophic, since we could absorb a 25% unemployment level on the back of our wealth-producing activities and vast agricultural lands, which could absorb lots of marginal labor. Our domestic industries had to scale back and downsize, but they were still there, they still existed to support our population.

Today's situation is vastly different. We are no longer an industrial economy. Agriculture supports only a tiny fraction of our population, and it is largely mechanized, not able to absorb marginal laborers. The vast majority of our population lives in cities now, engaged in jobs that do not create real wealth. Most employment today is in activities that will be shed in the dive to an "essentials only" economic floor of a Depression. Nonessential services -- like entertainment, sports, restaurants, and retail -- these aspects of our economy are already being devastated and will continue to shrivel as the Depression deepens in cycles of layoffs and deflation. Education, health-care, criminal justice, government, paper-pushing knowledge work of all kind -- these are all not wealth producing activities. Only those support services that are closely related to the core wealth-creating activities will survive. Unfortunately, we have few core wealth-creating industries available to support our population, thanks to a generation of outsourcing and offshoring, a forced globalization based on free trade ideology.

The fourth, and ultimately the worst factor that will exacerbate our coming Depression, probably launching it into a full-scale social collapse, is the quality of our human capital. Ever see those pictures of the Great Depression, of the men lined up around the block, in their suits and hats? Those days are long gone. Our current population is spoiled, lazy, fat, and dependent. They are lacking respect for themselves or for authority, even though a high percentage of them are dependent on government support for their survival. Our social fabric has been torn by a generation of culture wars, and few people even know their neighbors, let alone feel a sense of community with them. Racial animosity and resentment are at an all time high, along with the populations of minorities who feel that resentment, not getting along with each other or with the dwindling white majority . The family has been disintegrating for a couple generations, as stable marriages and parental guidance has become a thing of the past for the majority. We also face a huge population and economic contraction based on the aging of the massive Baby Boom generation, as they retire from their jobs, drawing down their wealth in leisure, and bankrupting the nation with their health care costs.

Sounds pretty bleak, doesn't it? It is emotionally difficult to even contemplate the depths of the negative possibilities inherent in our current breakdown.

It is not too late to prevent the coming Depression. With a Jubilee Year, the radical wiping away of all American debt, our economy could be reborn. If that does not happen, and it probably won't, prepare for the worst. The run on guns is a rational response, and it would be wise to begin preparation to store food, although not necessary to stockpile yet. If you can switch to a wealth-producing industry, that would be good. And if you are unemployed, seek employment only in those industries. What to do with your money? There really is no good place for it, but only in no-risk bonds if you must put it anywhere. You may want to consider using your money to acquire survival tools now, like solar panels. generators, and the gardening supplies necessary to grow your own food, if needs be. Get on the largest piece of real property you can.

Most importantly, network. Make emergency plans with family and trusted friends. Make new friends with people who are also preparing for the worst. If we had adequate human capital, even an economic collapse would not lead to catastrophe, and enriching yourself with a high-capital network will be invaluable in the coming crisis. Get involved in your local block watch and formulate plans of action in the event of breakdown of civil authority. Prepare, prepare, prepare, and you will be more ready to deal with the process of social upheaval that we will undergo. Your network of sane, clear-headed, and well-prepared citizens will also form the nucleus of the new social and governmental order that will emerge from the chaos.

Always remember, united we stand, divided we fall. Get your own spiritual foundation strengthened,and you will have the strength to be a healer, uniter, and peace-maker. As we have been promised, it is the meek who shall inherit the earth.


Deflation Begins, Feds Ignore It

LARGEST PRICE DROP EVER

Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount. The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decline analysts expected. Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century.

The big drop in inflation reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Food costs rose 0.3 percent in October, just half the increase of September, as dairy products and fruit showed declines. There were price declines for clothing, new and used cars, and airline fares.

Excluding food and energy, consumer prices fell by 0.1 percent, the first decline in core prices since a similar drop in December 1982 as the country was battling the effects of a severe recession.

RECORD ENERGY DROP

For October, energy prices fell by a record 8.6 percent, led by a record 14.2 percent drop in gasoline prices. Since prices at the pump have continued to fall this month, analysts are looking for a big decline in energy costs in November as well. The nationwide average for regular gasoline now stands at $2.07, down 33 cents since the start of the month, according to the Energy Information Agency, and well below record-highs above $4 per gallon this summer.

RECORD HOUSING SLUMP

In other economic news, the Commerce Department reported that construction of new homes and apartments fell by 4.5 percent in October to an annual rate of 791,000 units. That was the slowest construction pace on records going back to 1959 and underscored that housing remains caught in a severe slump.

WORLDWIDE RECESSION

Many analysts believe the current downturn will be the worst recession since the 1981-82 slump.

The big retreat in consumer prices represented a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control. Food prices are still 6.1 percent above where they were a year ago, reflecting big increases in past months as grocery stores hiked costs to reflect the higher cost of transportation. Since that time, the economy has been jolted by the most serious financial crisis in seven decades with all the turbulence expected to push the country into a severe and prolonged recession.

The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities.

FIRST DEFLATION SINCE GREAT DEPRESSION

Analysts predicted further declines in the months ahead as retailers struggle to attract consumers who are being battered by rising unemployment and the weak economy. "This report clearly reflects the crunch in discretionary consumers' spending which is likely to persist for the foreseeable future," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

While some are worried that the price retreat could raise the prospect of a deflation, a prolonged bout of falling prices, most economists believe that current conditions are not likely to set the stage for such a development, which last occurred in the U.S. during the Great Depression. Over the past 12 months, consumer prices have risen by 3.7 percent. That is substantially below the 17-year high of a 12-month price increase of 5.6 percent set this summer. Core prices are up 2.2 percent over the past 12 months.

This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 percent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 percent funds rate ties the record low for the past half century.

INCOMES FALLING TOO

The big drop in inflation meant workers got a break in their discretionary incomes although average weekly earnings, after adjusting for inflation, were still down by 0.9 percent from a year ago. However, that was smaller than the 2.5 percent decrease seen in the prior two months.

http://news.yahoo.com/s/ap/20081119/ap_on_bi_go_ec_fi/economy

Monday, November 17, 2008

The Jubilee Declaration

In the Bible, it is called the Year of Jubilee, the year when all debts are forgiven and all slaves set free

Unfortunately, that is what we have become: slaves, slaves to debt. However, the time has come for our people to be set free. We have been born with the yoke of debt slavery on our necks, but no man can be sold into slavery by another. Though we have been sold into slavery, to remain in slavery requires our consent.

With this Jubilee Declaration, we declare our freedom! We will no longer cooperate with the system that enslaves us. It is our moral right to be free of the debts that have been foisted upon us, without our consent.

We have been forced to support a system of perpetual debt servitude, but we will be forced no longer. The Year of Jubilee is upon us! Join the Freedom Parade, and join the exodus to liberation.

The first step is to spread the good news, to herald the inauguration of the Jubilee Year. As our voices grow stronger, and our Freedom Parade grows longer, our slave masters will strike back.

Those wicked men will not give up their debt slaves without a fight. Expect every lie and dirty trick to be used against us, as they struggle to maintain their evil system of exploitation.

But all that is right and good is on our side, and freedom is our birthright. In the spirit of peace and truth, we will prevail.

Spread the Jubilee Declaration, join the Freedom Parade. Wait no longer, the yoke of debt slavery grows heavier every day. Our time is now, and we cannot delay.

The Effect of Mortgage Default

The cancellation of all mortgage debt would disconnect the destructive short circuit in the larger economy caused by the deflation of the housing market. Housing prices could fall to their natural level without destroying other sectors of the economy. The real productive economy would be supercharged as people could devote their income to the real economy rather than paying debt.

At first, the banking industry would be devastated, as the fictional basis of their assets -- our debts -- disappear into the imaginary world from which they came. Banks would still exist, but would be forced to return to the real world of reserve assets based on customer deposits. Banks would quickly grow on this positive and sane basis, as deposits streamed in because of the growth of the productive economy. Think of all the money you pour into your mortgage or rent every month. If that debt was suddenly lifted, what would you do with that money? You would suddenly be cash rich, not having to piss away all your money paying off debt. How much extra would you have to spend or save every month -- $500, $1000, $5000? No imagine that same question being answered by hundreds of millions of your fellow Americans. Trillions of dollars would suddenly flow into the productive economy. Much of the money would be saved for future use, thus allowing banks to quickly rebuild their asset bases. People who lose their jobs in the parasitical banking industry could quickly find other employment in a productive sector.

Banks should also be subject to new rules, limiting their profits and executive salaries. This sounds like a bad thing, like a betrayal of capitalistic principles, but remember, banks are not like other industries like car companies or oil companies, because banks do not produce wealth. Banks are a parasite on the productive economy. Bank profit means a loss in the productive economy. The only economic utility of a bank is based on how well they match saved capital with the needs of potential producers. Banks are serving a vital public function, yet have the potential to cause tremendous damage, as we now see in our current economic collapse.

The Federal Reserve system was created to prevent bank panics and smooth out the monetary system, but this is the second time in the last 80 years that it has presided over a massive and sustained financial and economic disaster. In fact the disasters under the FedReserve system are far, far worse than those that occurred without it.

While pondering the downfall of most of the banking industry, keep in mind that if all the money in the country disappeared today, we would still be as wealthy as yesterday, because MONEY IS NOT WEALTH. It is only a convenient means of conducting commerce. Our money system is now doing the opposite: strangling commerce and destroying productive activity.

By cancelling all debt, the economy would suddenly be transformed, with a flip of the switch, from a debt basis to a savings basis. The price of land and housing would fall to sane and affordable levels, as they were no longer subsidized by bank debt. Rents would fall accordingly. The boom and bust process of economic bubbles would stop as inflationary dollars no longer distorted economic activity and investment. Real savings, the basis for national investment and growth, would become the norm.

Cancel our doubt now, before the economic problems become too great.

Spread the word to your family, friends, and coworkers, forward an email to all your contacts, put up flyers in your community and school, donate some money to this website so we can pay for some advertising, call your lawmakers and begin the lobbying process. Do something productive, and never forget: Yes, we can!

Inflation: the Cause and the Fix

How inflation caused our current breakdown, and how to solve it

Inflation is an artificial stimulation for an economy. It is a gimmick using money to get producers to produce more. An inflationary environment mimics the effects of rising wealth, without a real increase in wealth.

In a sane and functional economy, expansion is based on greater productivity, greater efficiency, and a rising standard of living, all of which combine to the effect of more available money. An analogy is to be found in your own personal budget. Say you invent a new tool, or find a shortcut method, that allows you to produce more in your workday. You just contributed to a rise in wealth in your nation's economy, since more is now being produced in the same time. You are therefore wealthier on an individual level, and you will be able to purchase or invest more as a consequence. Others in your economy will be able to produce more because you are able to afford more. This is a rise in real wealth, and a greater standard of living. If there is a constant amount of money in the economy, with more being produced, the general effect will be a gradual fall in prices as everyone is able to buy more with the same income (not to be confused with deflation).

However, in an inflationary economy, expansion is not based on a real rise in wealth, but on an expansion of the money supply. The extra money sends the signal that there is a rise in wealth, but it is a false signal. The individual producer cannot know it is a false signal, though, he simply responds to the signal, ramping up production. After all, people are coming to him with full wallets, ready to purchase. No one realizes that there is really no increase in total wealth. There is just more money chasing the same amount of goods. People are then able to bid up the cost of everything, driving up prices.

Of course, this driving up of prices does not occur across the board. People looking for a good deal focus on areas where there is a greater return on investment. Then supply and demand takes over, as more money pours into that area, prices rise further. Production gets ramped up in that area in response to the false signal of greater demand. The end result is what we call a bubble. At some point, key players realize the inflated prices are no longer supported by the real demand conditions on the ground. The price bubble then bursts and prices collapse, leaving a much greater supply than demand.

Because of our highly inflated money supply recently, we have undergone a series of bubbles, most famously in housing and oil. The aftermath of a price bubble is always the same, collapse of prices, which, if it occurs in the wide enough circle, turns into an economy-wide deflation, as productive workers are laid off, business activity slows to a crawl, and excess inventory liquidated at bargain prices.

The deflation in housing prices is the black hole that is sucking in the rest of the finance system, the root of the problem, and a still collapsing effect to be dealt with.

The most obvious, effective, and economically productive solution is simply to cancel all mortgage debt. All of it, all at once, in one fell swoop, leaving everyone in full ownership of their own properties.

The deflation in housing prices would stop immediately, as foreclosures would end. People would be free to invest their mortgage money somewhere else, in consumption, saving, or investment, pumping trillions of dollars into the productive economy.

Many banks would obviously be wiped out, as what they call their assets, which is really our debts, are discharged. But in our current environment, that is exactly what is necessary. Banks do not generate wealth. Their only economic function is to facilitate transfers of wealth. A banking system that is more concerned with its own existence than its economic function is a destructive parasite on the real economy.

If the banking system and paper money were to disappear totally, we would not be any less wealthy as a society. The only reason money exists is to facilitate exchange, and when the banking system is causing all the problems, it is the banking system that needs to go down, not the real economy.

Sunday, November 16, 2008

The Trade Deficit and its Financial Effects

Foreign countries, like China and Japan, have run a massive trade deficit with the US for a number of decades. On the face of it, a trade deficit is not a bad thing. Foreign countries drop off real goods in America, and take paper money dollars in return. In the natural course of events, the trade balance has to eventually reverse, usually accompanied by a relative devaluation of the money. That is, either the dollars will come back to America in equal trade, or the value of the dollar will drop because of excess supply. The lower dollar would then equalize the trade balance.

However, what happens when they continue to accumulate those dollars year after year, never allowing the dollar to drop because they are a Communist country and pegged their currency to the dollar at an absolute level? That is exactly what we are seeing now.

For years, China has flooded America with their cheap goods, not allowing their currency to rise against ours, but instead hoarding dollars, investing them in Federal bonds, financing the federal budget deficit. This has enabled our Federal government to spend more than their bring in, based on artificial debt-based imbalanced budgets. More than 25% of our federal debt is owned by foreigners, dwarfed only by the debt held by the Federal Reserve itself at over 52%.

It has also allowed the Chinese to pump up their manufacturing economy, as their labor has been held at artificially low levels. In effect, Chinese workers are exploited to finance our budget deficit. The Chinese Communist government views it as a necessary step to build up their own national power. Labor protest are simply illegal, and brutally suppressed by the Communist government, so they can do it. American multinational companies love it because it allows them to fatten their bottom line by accessing cheap foreign labor. American skilled labor is screwed over as their skilled jobs are outsources.

However, thankfully for the good common people of both countries, the game is just about up. After decades of being gutted by so-called free trade outsourcing and off-shoring, the American economy no longer has the wealth-generating ability to earn its way out of a recession. The government is promising to throw money into the deflationary pit, but they do not have the money to throw! These stimulus and bail-out funds are coming with deficit spending, based on MORE BORROWING!

It is almost insane, as they attempt to borrow their way out of the current crisis, when the cause of the crisis is too much debt. The only solution is to end the debt itself, which has grown too big to ever be paid off. Just paying the interest on the national debt consumes almost 10% of our total federal budget.

This has to end, and we need to face the fact that there is only one way for it to end: default on the debt.

No man can sell his children into slavery! The child born into slavery has no obligation to accept his chains, simply because his father's contract put him there.

The debt chains placed on our necks are not our doing, and we do not have to accept them! Cancel the debt now! Save the economy and our way of life before it is too late.

Understanding and Defeating Deflation

Oil falls below $56 a barrel today, but as we continue to rejoice over increasingly cheap gas, now is a good time to understand deflation. When the average person hears about deflation, the idea of generally falling prices, he tends to think of it as a good thing. After all, cheaper prices is a good thing, right? No, not really.

In fact, in our debt-saddled condition, deflation is just about the worst imaginable possibility. Public policy makers have not even begun to think about how to solve the deflationary cycle we are now in, as the recommendations from the G-20 group today indicated. Among other inadequate ideas, all related to an expansion of government power, the G-20 pledged to "take whatever steps are necessary" to stabilize the financial system, which means pumping more money out by the Federal Reserve and other central banks into the commercial banks, as well as stimulating consumer demand.

In other words, they plan to counter deflation with inflation. Wow, sheer genius, eh?

Deflation might seem good from a consumer's perspective, but it is a total disaster for business. The basic problem is that falling prices mean businesses are not able to make money, so they have to shut down. As they go out of business, their assets go up for sale on the cheap, further driving down prices and stressing the ability of existing business to make money, leading to further business closures, feeding the negative feedback loop.

Deflation is particularly devastating when combined with high debt load. The collateral for debt is an inflated asset price. Therefore when the asset price falls, the debt becomes impossible to pay back.

We see this in spades in our current deflationary housing market, which is the root cause of the financial crisis. Housing prices fall, getting people upside down on their mortgage, so people default on their mortgage. The house is foreclosed on, leading to a further drop in home prices, leading to more people going upside down on their mortage and defaulting, leading to more foreclosures in an ever widening cycle.

In short, deflation of housing prices is systematically wiping out the banking system. Asset prices are rapidly falling further and further away from the loan value built on top of them.

Banks are then forced to hoard money to cover their own asses, making sure their reserve levels are large enough to keep them from being shut down.

There is no amount of money that can bridge that widening gap between the high fixed loan values and the falling asset prices. We have entered a deflationary black hole. Money gets sucked into the banks to keep them alive, and never makes it into circulation.

The only solution is to eliminate the debt itself. Rather than attempt an infinite inflation to defeat the deflation, the best solution is a massive American credit default.

The banks, who created this whole mess, are the only ones who should suffer. But instead they are bringing down the real economy. Enough!

Cancel our debt now, hit the reset button on the financial system, and let our economy grow again.

More Bad News

Reading the Sunday paper this morning, we learn:

Japan has officially entered a recession.

Small businesses are being crippled because banks have shut off new loans and lines of credit.

This decade is shaping up to be the worst decade ever for American stocks, lower than they were 10 years ago. The year over year return is actually worse than it was even from '29-'39.

"Manufacturing helps cushion against crash", and "Retool our economy now, experts say". Regions like Arizona are more prone to extremes of boom and bust, because of its industries related to population growth, and lack of manufacturing. Obviously, that can be said for the whole US economy as well.

Indeed, manufacturing is the root of most economic wealth. We need to re-industrialize America, the sooner the better, providing tax incentives for domestic companies, and excise penalties for imports.

Job growth in wealth creating industries (construction, manufacturing, trade, transportation/utilities) is negative. The only job growth is in non-wealth producing jobs: education and health services, leisure and hospitality, and government. This is the profile of a dying economy.

Protectionism gets a bad name from wealthy class, who stand to make money by undercutting American jobs and wages. But now the chickens have come home to roost. American wealth and productive capacity has been gutted by internationalists for the last 20 years at least, and now we are all paying for it.

We must never let this happen again.

Saturday, November 15, 2008

How to Solve our Current Crisis: Cancel All Debt

Our whole economy is jammed up because we have fictional debts that are tied to assets that are no longer worth their book values. In reality, we are as wealthy as we were last month, last summer, or last year, but our economy is no longer functioning because of accounting rules that declare the debts greater than the assets, and thereby prevent banks from fulfilling their function of lending money. The still-collapsing housing prices continue to wreak havoc on the financial industry, by introducing a general deflation into the economy. This deflation is sending everyone's balance sheets further upside-down, since those balance sheets are based on debt that is tied to an inflated asset price.

Everyone sees that we are in a short circuit, an ever-widening crash, but no one can grasp how to break the cycle. The original idea of the bailout was to use government money to buy distressed assets. Now the idea has morphed to wholesale cash injections into troubled companies and industries. Congress is also floating the idea of a new economic stimulus package.

But none of these measures can work. We have already crossed over the event horizon into a deflation, and that deflation is still picking up steam. There is no going back to the artificial boosts of inflationary spending. Extra money put into the system now is unable to bridge the gap between deflated asset value and the debt book value. The banks themselves are unable to release the extra money, because their asset levels are continually falling and they need the extra money to shore up their reserve requirements. Extra money given to consumers in an economic downturn only gets hoarded, not spent, thus preventing any stimulus from happening. Further, because most of our productive economy is based overseas, it is not clear how much the American economy would benefit much from the increased spending, as the stimulus would mainly benefit some foreign country's productive output. And, as we have seen, government redistribution does not increase real wealth anyway, so how does that help? If not redistributing wealth, the government has to rely on more debt spending, which is the source of the problem to begin with!

There is only one way to end the financial short circuit, to get us out of the destructive black-hole void of debt. The solution to our current crisis is quite simple really: cancel the debt itself. All debt, credit cards, car notes, mortgages, the national debt, all of it. Hit the reset button on the financial system. We have reached the blue screen of death, the system is totally locked up. The negative effects of the financial melt down are now negatively affecting the real productive economy. We have already entered a worldwide recession, this is getting really serious.

By releasing all debt, people will get a fresh slate, and can start saving again. Banks, whose only assets are completely fiction -- they call debt an asset -- would take a big hit, but so what? Banks don't contribute to national wealth anyway. Their only utility is to enable real productivity, and in that basic function, they have completely failed, and are in fact, counter-productive right now.

Despite having most of their assets (our debts) completely liquidated, the banking system would quickly recover anyway, because we could use our incomes to start saving again. The productive economy would be truly stimulated and bank accounts would fill up quickly, because all the money we currently use to pay off debt would go into savings, investment, and consumption. Imagine not having to pay all that money every month to your mortgage or car payment. All that money is going to go somewhere, either spent or saved. Given that financing life through credit would no longer be an option, people would begin saving in earnest again.

In short, everyone is given clear title to all their assets that banks currently have liens on. Instead of having to spend thousands of dollars on their mortgages and car payment and credit cards every month, the families of America would be able to save and spend that money. The people who lost their jobs in the financial industry would be able to find new employment quickly in the productive economy.

The American economy resets, the banks reset, we start from scratch, with all of our wealth freed from the fictional burden of debt. From this point forward, people, businesses, and governments are forced to spend only out of their savings, leading to the always-rising standard of living that America experienced for its first 150 years.

Today's problem solved, Great Depression 2 averted.

Spread this idea to everyone you know. Talk about it with your family until you can understand it and explain it. Take it to your Representative and Senator and begin introducing them to the idea, because they are going to have to be the ones who pass the law to make it happen.

Let's get it done now, before it is too late.

Economics: the Origin of Current Crisis

For the past generation, government has used inflation and debt to artificially stimulate the economy, because excess money leads producers to ramp up production. The Social Security Trust Fund, the excess money brought in by FICA taxes over what is paid out in SS benefits, was converted to debt. The federal budget was never balanced, but financed totally by borrowing. Common citizens have run up massive personal consumer debts.

The camel that finally broke the camel's back was the recent run up in mortgage debt. Home values shot through the roof based on a massive expansion of credit combined with an artificial expansion of population due to immigration, especially illegal immigration, ramped up even further through widespread speculation in the housing market. When home values peaked, short term mortgage rates could no longer be refinanced, starting a tsunami of foreclosures. The increased foreclosures undermined existing home prices, leading to a further fall in home prices, which then forced more people into foreclosure, since they could not sell their house at a price that would cover their mortgage, which then further undermined home prices, in an ever-widening housing death spiral.

Banks were put against the wall because so much of their book value was tied to the value of those home loans. Because they were heavily leveraged with outstanding debt, they could not afford to write down the value of the homes or resell them at lower market values because to do so would put the bank's asset level below their required capital reserve. Thus homes would sit unlived in, as the banks could not afford to sell them, which would realize a huge loss, potentially destroying the bank itself.

By refusing to sell at loss in foreclosure or restructure the loan with the original borrower, the banks temporary clung to life, an they began to hoard money to prop up their reserves to be able to withstand the inevitable write-offs. The solvency of the banking system itself came into question, as banks hoarded reserves to cover further losses, and refused to even lend to each other. Thus, banks abdicated their foundational economic purpose, which is to transfer wealth. By hoarding money to preserve their own institutional existence, banks are actually devastating the real productive economy, the exact opposite of what they are supposed to do.

Keep in mind, the banking problem is all an accounting mirage. The true wealth of the country was unaffected by the dollar-counted book value that sat on the account ledgers of the banks. Every bank in the whole country could close, and the true wealth of the country would be totally unaffected. However, our entire economy was now based on accounting illusions, propped up by debt, leveraged to the hilt because of the fractional reserve system and fictional financial instruments.

In a functional economy, spending proceeds from savings. Savings represents a real accumulation of wealth, based on an excess of production over consumption. In a dysfunctional economy, spending proceeds from debt. Debt spending represents a trick based on money, not a real source of wealth, a gimmick to get producers to create more. The gimmick can work as long as the money keeps flowing, although the downside is a chronic inflation of the money supply. The chronic inflation of the money supply discourages savings while at the same time subsidizing debt, as old money is always worth less and less. Thus savings, which represents a real accumulation of wealth, continued to decrease, while debt continued to increase.

In a major buzz kill for everybody, banking system liquidity dried up under the onslaught of the housing price collapse. Massive job losses in the financial industry ensued in the first phase of the system-wide collapse, as banks shed costs with massive layoffs. Paradoxically, we should keep in mind, these layoffs did not affect the overall wealth of the country, as financial services workers do not create wealth.

Bankers, and all variety of paper-pushing money managers, do not themselves create wealth. Their only economic utility comes from facilitating wealth-producing activity by others. In a functional economic system, excess wealth in the form of saving goes towards helping the up-and-coming producers, through the medium of the bank. Productive work is done elsewhere. If another way could be found for savings to meet productive need, banks would be obsolete. If another way for storing and transferring wealth could be found, money itself would be obsolete.

The financial balance of America in early 2008 is called a negative savings rate, meaning we had more debt than savings. The false idea of a negative savings rate is that we have a negative net worth, because debt is greater than assets. But remember, debt is fiction. Savings represent real wealth. Negative net worth is only a book value, a fiction based on money.

For example, think of a house. A house is a tangible asset, a real piece of wealth. The wealth value of that house exists whether or not a dollar value is associated with it. The money value of the house is determined by market forces like supply and demand, but even if every money dollar in the country disappeared, the house would still have wealth value. The house is real wealth, the money is just a means for exchanging the house on the market. The house is real wealth. The debt is fiction.

A Sane Criminal Justice System

The US economy is burdened with massive health care, military, and criminal justice expenditures. This is a problem that needs to be addressed through public policy measures, involving the downsizing of our military and criminal justice system, meaning the deterrence of crime through harsher punishments including the expansion of the death sentence for repeat offenders.

In the ideal penal system, crime is met with harsh, but brief, punishment for minor crimes, habituating the young to avoid crime altogether, while providing the minimal burden for society. Long term jail sentences are to be avoided at all costs.Their long term drain on the economy is huge, as well as failing as deterrent or as a rehabilitation experience, most often providing an increased standard of living for the lower class criminal and functioning as a graduate school for their criminal knowledge, skills, and network.

When I talk about short and harsh punishments, instead of a year-long sentence in a prison with food, clothes, education, exercise, entertainment, and health care provided, I am talking about one week spent in a small dark box, with only bread and water, released only once a day for 10 minutes to receive a flogging. A week of total immobilization, sensory deprivation, and physical beatings is worth years in our country club prisons, as far as deterrence is concerned, and about infinitely cheaper. Combine that with a new "three strikes" policy, meaning if you come back a third time, you are left in the box, without food and water, until you die.

Why should our prisons be full to the brim, bankrupting our public budgets, with municipal police budgets rising every year, with private security a must for every business, many neighborhoods, and most homes, and we STILL live with the constant environment of fear of violence and theft?

Our current system is broken, totally and completely broken. Nothing could be worse than our current system, which combines unbearably high cost with total ineffectiveness.

Economics, part 2: the role of government

So, what about the role of government in the economy? What can government do to fix things? Ok, back to our island.

Let's say our island society, population 13, meets in solemn assembly and elects a Ruler. What can that august Ruler do to effect the economy? Well, for one, by becoming Ruler, he just hurt the economy, as the island economy just lost one producer. Let's say our Ruler's mandate is to provide Equality, and he decides to spread the wealth. He comes to your house, grabs a box of your coconuts, and gives them out to everyone else on the island.

As you can see, you personally have relatively less wealth, the others have marginally more wealth, but the island economy as a whole remains exactly the same. Has our Ruler "stimulated the economy"? Plainly not, as the economy is in exactly the same state of total wealth. The only difference is that, through his redistribution, some have gained and some have lost. They have more wealth, you have less, net effect on economy: zero.

The only thing a Ruler could do to "stimulate the economy" is force people to work who weren't working. Let's say 3 of our islanders are doing nothing productive, just lounging on the beach. If the Ruler carries his whip down to the beach and cracks it on their backs until they start working, THEN the economy would be stimulated, as 3 more people are now producing. If our Ruler takes wealth from you and the other 9 producers, and distributes that wealth to the 3 who are doing nothing, the economy has not been stimulated, as the total amount of wealth remains the same, just having changed hands. The potential economy is actually hurt, as he has thus encouraged their sloth, a day having passed with their doing nothing, when it could have seen their productive work.

Thus, we see another law of economics: more productive time worked is good for the economy. Imagine your 13 islanders work every single day, never taking a day off, while the 13 people on the neighboring island take every other day off. Even if both groups are equally productive on the days they work, your island will be twice as wealthy, because you produce twice as much wealth, working twice the time they do. A Ruler can only increase total wealth by encouraging more productive work. Nothing else helps wealth, everything else is a political gimmick.

In the old days, governments would often rely on forced-work measures to increase productivity. In fact, the historical basis of government is usually conquest and subjugation, one tribe enslaving another for their own economic benefit.

In contemporary times, government has relied on the device of money to increase productivity. As we have already seen, money cannot increase wealth in itself, but it CAN trick people into working more. On our island of 13, a ruler handing out paper with numbers on it is not going to fool anybody. The paper itself is worthless, unless you need to start a fire or wipe your ass. Our islanders, being directly connected to the source of their wealth, would see right through such gimmicks.

But in large societies that use paper certificates of wealth as a medium of exchange, people are no longer immediately knowledgeable about the total amount of wealth in society. On the personal level, paper money represents the ability to increase individual wealth, so individuals are prone to think an increase in money is an increase in wealth.

Governments increase the amount of money in two ways: both the obvious printing of more paper money, and the issuance of more debt. Flooding an economy with paper money or debt has no real effect on wealth. However, it can trick people into working more! Namely, the producers. Producers will ramp up production if they expect people to buy their goods. Since creative production is the basis of wealth, an increase in production actually does increase wealth. Thus, our Rulers have engineered a constant inflation most of this century, which, until recently, appeared to have been working quite well.

Next: what went wrong

Economics Lesson 1: the Basics

Economics are poorly taught and poorly understood in general, and are the subject of political battles. However, every citizen needs to understand the basics of economics, to be able to wisely analyze the various proposals our governmental leaders propose. We are currently undergoing an economic crisis of historic proportions, so it is vital that people understand what is going on. Most economics are actually simple and comprehensible, as you will see.

First, you have to understand the difference between wealth, jobs, and money. In short, money is not wealth, and all jobs do not create wealth. Consider: government could multiply the money supply tomorrow by 100, but it would not bring us any more tangible goods. We would just have more money.

On a personal level, money can bring us wealth, but on the economic level, money is just a means of exchange. The amount of money in society does not create wealth, it merely allows for wealth to be exchanged. Wealth is a combination of goods and services that people can make or provide.

Wealth is totally dependent on the creative effort of the people. The more creative people around you, the more wealth available to you. By creative, I don't mean artistic, I mean creating things, and creating services.

Let's say you live on an island with 10 people. Let's say those ten people do nothing all day but lie around on the sand. Even if you are busy creating wealth, like harvesting coconuts or something, they will have nothing to give you. You could define money however you wanted, imagining say a huge treasure chest of gold coins, or suitcases full of 1000 dollar bills, but the fact is, you are still as poor as ever. Everyone depends on your coconut industry, and beyond that, you all have nothing of tangible benefit.

Now let's say those 10 people are not lazy good for nothings. Let's say they all spend their days in creative activity. One is busy fishing the lagoon, one is busy harvesting wood from the island's trees, one is collecting roots from the forest floor, one is hunting small animals, one is weaving vines, one is fashioning clothes to wear, and so on. Suddenly, you have a great deal of tangible wealth available. It doesn't matter if you have any money at all, as you can see, wealth does not depend on money, it depends on the stuff you have available to improve your life. Money by itself does not improve an economy, only creative activity does.

The wealth of a nation of a million people is measured the same way. If your society of 1 million has only 1000 people doing creative activity, it will be poorer than a society with 100,000 creative people, and it will be poorer than a society of 1,000,000 creative people.

Let's go back to our island of 10 example, humming along at maximum productivity, all 10 people working. Let's say one of them then gets injured. Now only 9 people are working. But then one person has to provide care for the injured one. So really, only 8 are being productive. The one providing health care is not really doing anything productive. Caring for the sick and injured, as necessary as it is, is not a creative activity, and does not help the economy. It is a job, it is an activity that takes up the day, but it does not create wealth. So, sick people are bad for an economy, not only because they remove themselves from the productive economy, but also because they require health care, which removes other people from the productive economy.

Back to our island. Let's say that injured person dies. Now, there are only 9 people on the island. Total productivity just went down, and your island became poorer. A population fall makes you poorer, if it removes productive people. However, the health care worker is now relieved of that burden, so they can rejoin the productive economy. Thus, while you are poorer than when you had 10 productive workers, at least you are better than when you only had 8 working. The death of the injured one was actually a blessing for you.

Let's say a group of 4 people then washes up upon your shore. You population now rises to 13. If they start working, contributing to your island with creative activity, you overall island wealth goes up. This is a general rule of economics: population expansion is good for the economy, if the new population is productive. This makes perfect sense, as more people equals more produced.

But what if one the newcomers becomes a trouble maker, committing crimes against the others on the island? Your productive workers now falls by one and your economy suffers. And, you have to respond by appointing one of you as police officer, to bring the criminal to justice and administer punishment. Your productive workforce falls again, as another person stops producing. This is another law of economics: the police function, as necessary as it may be, is bad for the economy. Just like with sick people, criminals are bad for an economy, not only because they remove themselves from the productive economy, but also because they require police, which removes other people from the productive economy.

War is similarly bad for the economy, as I have discussed elsewhere. Imagine using your island resources to attack another island. You would be made poorer just by having to send your people and your resources off to some other island to attack them. How much worse would it be for your economy if they came to your island, killing your people and destroying your things. War is bad for the economy even on the offensive, but especially on the defensive. War may be necessary for you, as being poor is better than becoming enslaved or dead, but it is always bad for the economy.

Think of these basic laws the next time you hear about the growth and opportunities available in the health care or criminal justice industry. The contemporary and future growth of those industries are a very bad sign for our economy as a whole. The ideal situation for the economy involves conditions of peace and health.