Friday, November 19, 2010

China demonstrating use of key method in modern Jubilee - raising reserve requirements

The modern Jubilee method is for the government to pay off all debts using electronic checks. Inflation due to oversupply of money would be prevented by raising banking reserve requirements. Thus, all debts would be cancelled, without violating any contracts or causing inflation.

This week, China is demonstrating the technique of raising the reserve requirements to stem inflation. Most Americans are not familiar with this technique, because the Fed uses open market operations and interest rate adjustments to attempt to manipuate the money supply. These Fed methods are indirect methods, and used mainly because they involve huge financial transactions which enrich the Federal Reserve member banks who conduct those operations.

The Chinese method is direct, and doesn't enrich anyone. The Chinese government is not controlled by the bankers, but rather, the government controls the bankers, so they use the superior method for controlling inflation, not the superior method for enriching the bankers.

Wednesday, October 6, 2010

Off-shoring Jobs is Official Federal Policy

It is really almost beyond belief. But, nonetheless true. Even in the midsts of a horrible economic depression, it is still the official U.S. governmental policy to reward companies for off-shoring jobs.

Not just be neutral about it. But to REWARD them.

"...a bill that would have ended certain tax credits and deferrals to companies expanding or moving overseas was voted down in the Senate last week." (from the LA Times, here, the very last sentence in the article)

This is the danger of handing government over to the money powers. The money powers then use government to advance their own interests, over those of the people.

It also speaks to the dangers of the handing the voice of the media over to the money powers. They will not bring these issues up to the public consciousness, and will, in fact, suppress any discussion of them.

Read the whole Times article. The pace of off-shoring, even in the midst of this depression, continues to increase. It is an economic truism that without a job, you have nothing to trade; i.e., productive jobs are the foundation of economic activity.

Thus, on the immediate horizon: long stagflation, meaning rising inflation along with shrinking wages and fewer jobs. In other words, we continue to get poorer and poorer.

And this is the official governmental policy.

That is all.

Monday, August 30, 2010

David Knox Barker Recommends Jubilee Cycle

Boxer has a nice consideration of the macro-economic effects of Jubilee (here). He correctly points out that a regular Jubilee cycle would eliminate the long wave Depression cycle, by preventing a toxic build up of debt. As he puts it:

"The Jubilee law was actually crafted astutely to prevent the buildup of excessive debt levels in the economy, and not primarily to justify its cancellation. Debts were only forgiven if banks violated the Jubilee law that prevented the buildup of excessive debt. The Jubilee was not a bank bailout or stick taxpayers with others bad debts. Consider the passage from Leviticus 25: 8-19. This ancient text provides remarkable insight into the current global financial crisis, which is at its heart a global debt crisis."

Barker rightly condemns any attempt to transfer the debts of some, such as mortgage owners, onto the public purse, as some form of dishonest debt forgiveness program.

A Jubilee Year, correctly done today by the federal government, would not violate any contracts, because it would pay all debts in full. The federal government would simply write checks on behalf of private citizens to pay off their debts.

The creditors would be paid, the contracts would be honored, and the end result would be the cancellation of all debt, the resetting of the financial system, and the freeing of the productive economy. As Barker describes the renewal process: "The only way to address a debt problem is to reduce the amount of outstanding debt and create conditions for a booming economy and new long wave spring season..."

Friday, August 27, 2010

How Hyperinflation Happens

Excellent article written by Gonzalo Lira, here, about how hyperinflation happens. His key point: hyperinflation is not to be confused with inflation, although most people think hyperinflation is just a case of normal inflation on steroids.

--Normal inflation happens because of growing demand, and growing credit, driving prices up.
--Hyperinflation happens because the currency is collapsing.

People commonly confuse the cause with the effect in economic events.

Like a) the common idea of blaming the Great Depression on protectionism. In fact, protectionism was a response to the Great Depression.

Or like b) blaming the German printing press for causing their hyperinflation of the early 1920s. In fact, the German money was collapsing in value, which led the government to print more money to help people cope with having less wealth. The political impetus to follow this line of action is almost irresistable, and we shouldn't be surprised to see our own government do the same thing.

In short, hyperinflation happens because money-holders start selling dollars to buy other commodities. The result is that the dollar collapses in value, while the cost of all goods shoots up quickly.

Although he doesn't talk about it in his article, I would point out that America is especially vulnerable to this type of inflation because we don't make any of our own goods anymore. Because all of our consumer goods are made in foreign countries, a sell-off on the dollar means that not just commodities, but also all consumer goods, will shoot up in price.

Note that this event would not necessarily be drawn out with dramatic scenes of barrels of paper money being exchanged for bread. That would only happen if the federal government attempts to alleviate our suffering by printing and distributing paper cash. If the government starts doing that, then the hyperinflation can be dragged on, and money can gradually shoot towards infinity.

Most likely, our government will not resort to printing out piles of cash. In that case, our hyperinflation would be short and sharp. Everything would rise 300-1000% in price, and we would also be tremendously poorer, but then things would stabilize. The new normal would us simply being much poorer with a greatly devalued dollar. The world would have to find a different country to be buyer of last resort, and the dollar would lose its status as reserve currency.

Tuesday, August 10, 2010

Does the Fed Create Money? A Clarification

Excellent comment by Ralph Sampson, over on Ellen Brown's blog, explaining exactly what is meant by the Fed creating money.

"From my perspective Ellen explains the monetary system well but she periodically injects points of confusion. Here is an example: she says the Fed prints federal resereve notes and lends them to the banks at interest and the banks in turn lend them to us. This is sort of true but not really.

The Fed creates some paper currencey (Federal Resereve Notes) but that is a small part of the money created by the banking system. (Even that is not true. The Fed orders the notes from the mint, more specifically the Burea of Printing and Ingraving, who creates them and charges the Fed for the service.)

The main concept is that the Fed authorizes, and sometimes creates, reserves that the member banks then use as an insurance pool to back the bookentry loans (making money out of thin air) they in turn make to legal entities which are made up of individuals and non flesh-and blood-legal entities.

To just casually say the Fed prints federal reserve notes which it lends is the principal paradigm of the monetary system is, again, just not true and confuses the readers trying to understand that system.

Most of the circulating money is credit, not currency and coin, where credit is the term for purchasing power in the form of entries in a financial journal that, these days, takes the form of computer bits in a digital memory somewhere."

Thursday, July 8, 2010

Steve Keen Calls for Debt Cancellation, or Does He???

Steve recognizes the solution to our debt-deflation-depression is to cancel debt. However, he seems to dispair that the politicians lack the will to do it.

Darn it, Steve, grow a backbone! Instead of fatalistically resigning yourself to defeat, ADVOCATE FOR CHANGE. Use your prestige and popularity to initiate the process of systematic debt cancellation.

This apathy is soul-death, it disgusts me. If even the man who has identified and quantified the problem, who has built up a world-wide following pointing out that DEBT IS THE PROBLEM, simply lowers his head and licks his own balls rather than speaking out for the positive solution, good lord, what hope is there.

It is clearly not a failure of intelligence on Keen's part. It is nothing short than a failure of COURAGE. The choice is plain: Be a ball-licking dog dragging your head in the dirt, whipped and whining... or stand up to our banking overlords and DEMAND FREEDOM from their debt enslavement trap. Which is it, Steve???

From the latest article over at Steve's blog,

The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.

Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.

Its final stage emphasises a message that Michael Hudson, one of the very few others to see this crisis coming, puts very simply: “Debts that can’t be repaid, won’t be repaid”. As Americans now seem to be realising, the financial crisis has not gone away, because the debt that caused it is still there.

Having got ourselves into a debt-induced economic crisis, the only permanent way out is to reduce the debt–either directly by abolishing large slabs of it, or indirectly by inflating it away. I have very little confidence in the ability of the Federal Reserve to do the latter, while the former will take a level of political fortitude that is far beyond our current politicians.

Tuesday, June 1, 2010

Preserving our Way of Life with a New Economic Policy

Jim brings up a great question over at his Great Depression blog. In the international race to the bottom in wages, can we do anything, or are we doomed to economic collapse as cheap-labor countries wipe us out? Here my thoughts on a rational economic policy in our globalized world.

Part of our high pay rate is definitely our social net. From environmental protections to health care costs to retirement benefits, our entire government-based social services safety net, in fact our entire quality of life, is build on the bedrock of our wages.

Because our entire quality of life, and the government itself is build on it, clearly, gov't policy should be to preserve our high wage jobs. But how to do so in a world of global capital flows and international communication as the basis of the information economy? We are no longer in the 1930's, so tarriff walls against imported products, while an important step, will not be sufficient

We need a new concept: call it a "foreign labor tarriff". Meaning, a company's percentage of foreign workers would determine its tax treatment. It is no longer enough to worry about imported goods. We also have to combat outsourincing in "knowledge work" service field, such as medicine, information technology, accounting, and education.

Companies whose path to larger profit lines is along the road of wage arbitrage need to be stimied. Wage arbitrage by global companies has one end result: greater concentration of profits for the parasitic global investment class, at the expense of the deteriorating American quality of life and impoverished American working class.

It is a basic economic law: you have to be a producer before you can enter the market as a consumer. If you aren't producing something, you have no basis of wealth to enter into an economic transaction. In short, JOBS HAVE TO COME FIRST.

This is common sense. Who exactly is distributing the crazy pills? Until our gov't forumates an economic policy that is based on preserving our quality of life, we will continue to get poorer and poorer.

Friday, May 28, 2010

Damon Vrabel on Nationalizing the Federal Reserve

Some excellent analysis from Mr. Vrabel, who perfectly understands what is going on, and what needs to be done. It was refreshing to read his erudite perspective on the need for Constitutional control of the Banking Branch just a day after I published my own views on the subject. From his latest article (here

"The fact is we are in the mist of a global chess game being played above the heads of national governments in which debt and leverage are used to restructure the world under a new global money and banking system. I suggest Bernanke’s sole purpose is to hide the real role the Federal Reserve has played in this game while also helping to keep Congress from asserting its power.

The media likes to claim that voicing opposition to the Fed is lower class populism. But of course the media doesn’t think. It just promotes left or right groupthink for the few corporate powers that own the media. They don’t want you thinking about the question of a central bank. If they did, we might better understand the pros and cons.

The first con of the Fed’s form of central banking—it puts currency control in private hands. Rather than the Fed having power over the banks, its structure actually gives the primary dealer banks (mega firms like JP Morgan Chase, Goldman Sachs, and many foreign banks) significant power to tell it what to do. Entrenched powers behind these firms working together in cartel groups like the New York Fed and CFR have far more leverage than the president, i.e. an individual with no financial experience who rotates into office for a short period of time completely surrounded by bankers and their allies. The entire purpose of the Constitution and having a republic, despite its flaws, was to put power in the hands of the public vs. a concentrated private oligarchy. But the Fed system creates such an oligarchy, as many Americans now see since the crash of 2008.

Oligarchic monetary systems tend toward a 2-tiered society, money pushing rulers vs. money using servants who scramble to pay the rulers back plus interest. The ruling financial class eventually takes over the productive economy and then parasitically destroys the host upon which it lives as gambling and speculation replace savings and production as the engine of growth. Such is the power of a monetary system based on nothing but debt.

A debt-based monetary system enshrines usury, i.e. living off the backs of others by doing nothing but subjugating a population to systemic interest-bearing debt. So the foundation of our monetary system under the Federal Reserve is built upon immorality.

An oligarchic monetary system forces the great mass of the population into servitude. It effectively creates a predator/prey structure in society. In a system based purely on debt, the banking powers are able to super-inflate the system to drive up asset prices, and then deflate the system sucking value and assets up the pyramid to consolidate power. We saw this over the last 10 years. This is the biggest and brightest example of why Jefferson said “banking institutions are more dangerous than standing armies.” It’s also the best example of why the Constitution demands that government regulate the currency.

So how can we get the one pro of a central monetary authority regulating the value of the currency without any of the cons above? Do precisely what Ben says we shouldn’t do—reestablish the republic by putting currency regulation in the hands of public officials as the Constitutions says. If a country doesn’t have a sovereign currency, it doesn’t have a sovereign government. We are learning that painful lesson now as we see Greece being attacked and taken over by financial institutions. The same thing has happened to many countries in the past and it will happen in the future if governments don’t take charge. At that point everyone will know the truth—governments are held hostage by private financial interests. But more and more Americans are realizing the truth now and pushing for change.

However, the change is not as simple as ending the Fed. Without a transition plan, that would cause a disaster since it is the basis for the money supply. The key is to nationalize the Fed, and possibly its primary dealers during the transition phase, to keep them from holding us hostage with the threat of collapse. Then with honest public officials in Treasury and other agencies that don’t represent Goldman Sachs and the rest of the financial cartel—people like William Black, Brooksley Born, Janet Tavakoli, Michael Hudson, Eliot Spitzer, Harry Markopolos—it will be possible to restructure the monetary system. Other components of the solution involve the US Treasury printing sovereign US notes, state banking systems like North Dakota to restore state power, etc. (see details at Freedom’s Vision)

Wednesday, May 26, 2010

Central Banks as a Branch of Government

As we learn from an early age, our Founding Fathers designed a system of checks and balances designed to safeguard liberty. From our contemporary vantage point, we can pinpoint a number of weaknesses and outright failures of their system.

One major failure was their failure to anticipate the rise of the supremacy of the judicial branch. The Founders were heir to a centuries-long political and military struggle that firmly established the Supremacy of the Commons, meaning the ultimate authority of the representative body of the common people. Today, the unelected, unaccountable, and permanently seated judges routinely throw out laws, as well as directly supervising legislatures and executives with various judicial orders. Were a new Constitution written today, the friends of liberty would need to reign in judicial power to prevent our current situation of Judicial Supremacy.

A good analogy for the power of the contemporary Judicial Branch is the medieval power of the House of Lords. The Lords were unelected and immune from popular censure, yet all laws had to be approved by them before they could be implemented. The commoners were simply petitioners to the Lords, they could do nothing without their approval. Such is our status vis a vis the judges today.

The other major failure of the Founders was their failure to anticipate the rise of the power of the banking class. Although the Founders failed to adequately limit the power of the judiciary, at least it was conceived as a branch of government that needed to be balanced. As we can see today, the Banking Branch is a real wing of power, exemplified in the Federal Reserve Banking system.

Unfortunately, their failure to limit its power has allowed the Banking Branch to grow into a "shadow government" that essentially controls the outlines of the entire political process, but without any checks or balances on its power. Central Banking policies are set and implimented with almost complete autonomy from oversight, even indirect oversight. They operate in almost total secrecy, with total immunity to any policy input or control.

Perhaps a good analogy for the power of the contemporary Banking Branch is the medieval power of the Church. The Church stood as a nominally separate power, yet was a repository of tremendous wealth and power. The siphoned a regular percentage of the people's money to themselves, enabling them to live in luxury as parasites on the working class. They had their own parallel power structure and hierarchy, which was internationalist in perspective, though they often interfered in the affairs of state. They invariably sided with the nobility and kings to preserve the status quo against commoner attempts at reform and empowerment.

Just as medieval commoners were forced to contribute their tithe to the church through forced taxation, we are forced to contribute our wealth to the Branking Branch through interest payments on perpetually floating debts. Popular government is an expression of the people's will, how could it possibly require "extra" financing? The concept is abhorrent, as well as abberant to a free-thinking mind that hasn't been brainwashed by the Banking Powers.

Creation of money and credit is a sovereign power, as has been recognized since the founding of the first central banks. As that renown scholar of banking history George Selgin demonstrates (, central banks have one purpose: the nationalization of credit and money creation for the advantage of the central government. Long gone, destoyed by the inauguration of central banks, is that superstitious era when men believed national wealth was measured by its stock of precious metal.

When used for the public welfare, such monetary power is a great blessing. When used to enrich the private interests of the Banching Class, such power is a curse, nothing short of a yoke of perpetual servitude chained around the common neck. The power to create and extinguish money is perhaps the greatest of all governmental powers, providing government almost unlimited power and influence.

If we were to design a Constitution again today, we would certainly need to specify and limit in greater detail the powers of the Banking Branch. Reformers now and in the future will find this a more daunting task, as their powers have been allowed to grow some pervasive and entrenched.

Tuesday, May 25, 2010

Would Government Banks Be a Good Thing?

Ellen Brown makes a persuasive case for state government banks, in an article published over at Seeking Alpha.

Her essential point: the state has billions of dollars in savings, which are deposited in private banks. Why not charter a state government bank and deposit state funds there instead?

In our current system, public money is deposited with private banks, and private bank owners pocket the profits. If that same money is deposited with a government bank, the profit would be used to balance the budget or lower taxes.

The main question she is answering is "Who shall benefit?" Right now, private banks get all the profit. We have no say in their policy, nor do we receive any advantage from it.

Why should the parasitic banking class receive all the benefit from the fractional reserve money power?

If a governmental body ran a bank, the people would have some influence on policy and receive some advantage from the interest income. The state, meaning the people, would gain the power and advantages of fractional reserve credit.

Private bankers do it, and profits go in their parasitic pockets. If states do it, profits go to reduce government spending and budgets. What is wrong with that?

The hyperinflation argument is a distraction, a red herring, not a real objection. The macro economic effect of a state bank would be no different than a private bank. The money is already being leveraged somewhere, the only question is "Who benefits?"

Monday, May 24, 2010

Food Prices Spiking

Hmm, the beginnings of the inflation tsunami everyone has been expecting? Delivered in the usual high style of the inesteemable Mogambo Guru:

“US food prices jumped by 2.4 percent in March 2010 in the largest monthly leap in more than 26 years, and the sixth consecutive monthly increase.” Yikes! A 2.4% monthly leap! That’s a 28% annualized increase in the price of food! In One Freaking Year (OFY)! Yikes!

So I say to her, as I am sweeping by her on my way to the MBOPS and trying to keep a tone of incredulousness out of my voice, “Do you realize that the National Inflation Association says that fresh and dry vegetables are up 56.1% in price in the last year? How about that fresh fruits and melons are up 28.8% in price in that selfsame last year? How about eggs ‘for fresh use’ being up 33.6%, or beef and veal up 10.7%, or dairy products being up 9.7%? Does any of this inflationary horror mean anything to you?”

Necessary Regulations, Now and Forever

Here is a great summary of financial regular we need, What we are getting, of course, is just about the opposite. Great article overall, read it all by following the link.

If Congress really wanted reform, they would
--reinstate Glass-Steagall,
--regulate the OTC derivatives market,
--thoroughly audit and terminate the Fed while transferring its powers to the Treasury Department,
--terminate and disband the PPT,
--implement the "Volcker rule" against proprietary trading by banks,
--require that the FASB (Financial Accounting Standards Board) enforce mark to market rules for financial reporting,
--stop all black box front-running trading activities,
--fire and investigate for fraud and obstruction of justice virtually all of the regulatory heads who fiddled and watched porn while Rome burned,
--expand the funding and manpower available to all regulatory authorities,
--encourage the state regulatory agencies to intervene wherever and whenever they desire,
--insist on thorough policing of the system with full accountability for regulatory failure,
--thoroughly investigate and punish all past financial crimes, with plenty of jail time and humongous fines to be doled out to provide a deterrent against future criminality.
--And most of all, require full accountability for losses without so much as another dime going to bail out financial criminal fraudsters.

Thursday, May 20, 2010

The New Command Economy: a Challenge to Libertarian Economists

Great progress in economics and monetary theory has been made in the last half century. However, precious few economic theorists today have accurately grasped the implications of our new monetary system.

Unfortunately, most of the few theorists who are popularizing the new monetarism are leftists, and are no friends of liberty or decentralization. Most of the right-wing monetary theorists who are concerned with liberty are stuck in the past, dreaming of a return to the gold standard. If the friends of liberty want to be effect positive changes for freedom in the 21st century, they need to update their theories.

Is it possible for paleo-libertarians to move beyond their hallowed canon? Probably not. Perhaps this is just The Way Thing Are, that progressives continually out-innovate conservatives. Encountering libertarian economists today is like being transported back to the year 1600AD, listening to traditional horse-mounted, heavily-armored, lance-carrying noblemen denounce the use of mass armies, polearms, and muskets. Sure, the noblemen had Honor, Right, and Good on their side, but the more they clung to those traditional standards of warfare, the more antiquated and irrelevant they made themselves, and the more they guaranteed their own defeat.

Such is the condition of libertarian economic theory today. Unless their update their arsenal to cope with today's economic weapons and tactics, they are simply irrelevant. Facts: Money is paper, money is credit, the money power looms as larger than ever, unleashing monetary weapons of mass destruction upon the body politic.

In the 20th century, the Soviet command economy simply told everyone what to do, and required their acquiescense. Today, the American command economy relies on the money power to get everyone to do what they want. The American command economy is, however, far more insidious than the Soviet version, because it is cloaked in the illustion of freedom and capitalism.

In fact, the power to print money gives the American economic elites almost unlimited power over the American and world economy. They don't have to force people to do their bidding, like the Soviets; they can just pay them to do it. There is no limit to their power to do so.

Worse off, there is no Second World to show such fraud for what it is. The Soviet system collapsed not because of its own failure, in fact, it was spectacularly successful. It failed because of its relative status versus the Free World. This power to co-opt free markets through monetary creation is leading to our own impoverishment, no less so than the Soviet command system. However, unlike them, we don't have an external comparison that will demonstrate our own failure.

Here is the theoretical problem: money is not a thing, and there is no constraint on its supply. By issuing its own money, government can co-opt whatever resources and labor it desires. Yet, we are compelled by the force of law to use nothing but this federal money. In short, we are kept unwilling slaves to the federal leviathan.

Here is the practical problem: because it is under no budgetary contraints, and can freely print it own money, the government can outbid any other market participant, for anything. As with traditional command economies, huge inefficiencies enter the system, and overall wealth levels constantly decline, a long slow death spiral.

The tax collection and budgetting routine is just a sham, a puppet show for the ignorant masses. The government could tommorrow cancel all tax collection and simply pay its budget by creating new credit money.

The more money it creates, the more it can outbid the free economy for labor and resources. There is no natural limit to the number of people who can work directly for the government or be dependent on government funding, since there is no limit to the government created money supply.

The money creation power is the ultimate power in existence. With it, there is no limit to the power or scope of government influence.

With every government job, we as a society get poorer, but who can realize it? Government can offer higher paying jobs, and jobs where no others exist, so all market participants are forced to take the poison bait. Government makes them wealthier than they were otherwise, but meanwhile decreases the wealth in the whole system.

We are trapped. Who shall point the way out?

Wednesday, May 19, 2010

Analysis of potential Idaho Silver Currency

Fascinating happenings in Idaho related to currency reform and local currency. A bill was killed in Senate committee that would have created a silver coin for Idaho that could trade as money. The currency was potentially the real deal in alternative currencies, and met all the requirements that trade tokens require to be considered legitimate and widely used as money.

As I have detailed before, the most important thing about a local currency is that its use should be tied to the health of the local economy, a fact explicitly recognized by the crafters of this money, as the silver mining to create the coins would help the Idaho economy.

The coins have been christened Idaho Gems. Interestingly, the bill will also allow the state treasurer to hedge its silver position in the financial markets. It also defines all state and local taxes as payable in this coin.

According to the bill, the state will sell the one ounce coins at the daily spot price for the one ounce American Eagle. The treasurer will also accept the coins for payment at the daily spot price. The bill guards against too much state loss by allowing the treasurer to suspend acquisition if the daily market price falls below the cost of minting. According to the bill, the state will issue silver as payment to any vendor who requests it.

Unfortunately, the bill appears to have died in a Senate committee:

Alternative money needs to have a buyer of last resort, to guarantee its acceptance as general currency. The problem facing alternative currencies in general is, nobody wants to hold a currency if it is a burden to find someone who accepts it. However, if the state of Idaho accepts the medalions as payment for taxes, that would exactly fit the requirement as a surefire buyer of last resort.

The monetary value of the issue of the coins, at least at first, would be limited by the size of the Idaho budget. Anything beyond that would run the risk of non-redeemability. Especially in the early stages of an alternative currency, it is important to create the expectation of full redeemability, so that people become confident using the new coins. If redeemability became an issue, people would be hesitant to accept the coinage, and it would become little more than a gimmick or collector's item.

After a general confidence in the redeemability of the coins has been established, under the condition of wide circulation and usage in general commerce, the state could produce a excess of coins beyond the limit of the state's financial budget.

The state also faces the potential problem of seasonal deflation, as coins are removed from circulation to pay taxes. Encouraging general circulation and usage in non-tax-related commerce, would allow the state to mint enough coins so that the seasonal redemption would be less noticable.

The ultimate way for the state to overcome the issue of seasonality and limited usage would be for the state to not only take the coins as payment, but also distribute the coins as income, starting with its own state workers and welfare recipients. Afterall, the state's tax receipts exactly match the states outgoing payments. If the state agrees to receive the coins in payment, it has to have a method for redistributing them. Without a regular channel of distribution, the coins again fall into the gimmick/collector item category.

From the wording of the bill, the focus seems to be on silver money as a store of wealth.

And, as always with a commodity-based money, the state would have to be concerned with the value of the underlying commodity. If silver, as a metal, rises in price relative to the US dollar, the silver coins would be hoarded if they are fixed against the dollar.

So, the legislature is in a bit of a bind. In order to issue the money to its own workers, the coins would have to be exchangable for US dollars. If that exchange rate is fixed, hoarding could quickly become a problem. Especially given the problem of the rapidly inflating US dollar, the value of silver can be reasonably expected to rise, dragging the value of the coins up with it.

Lets say the coins are issued on par with dollars. The following year, the dollar inflates by 10%, but the silver coins remain stable. 100 coins originally bought the same as 100 dollars, but now 100 dollars only buys 90 coins. Which would you rather be paid in?

The coins! Think of the converse side: 100 coins now buy 110 dollars. Holding or being paid in coins means you are getting richer in dollars. This would actually increase the value of the coins, exactly as the Idaho legislature hoped, spurring their demand and thereby stimulating the Idaho silver economy. In order to meet the demad, and discourage hoarding, the state could prudently issue more coins.

In short, against the background of an inflating dollar, doing business in Idaho silver gems would naturally increase your own wealth. But this would only work if the silver coin was not fixed versus the dollar. If the Idaho legislature had the discipline to not inflate their supply, the demand would remain strong for their silver coins.

Notice that under these conditions, people would stop paying their taxes in silver coins, preferring to pay them in depreciating dollars.

Of course, if the price of silver fell, the conditions would reverse, and the state would see its monetary position wiped out. Under conditions of falling silver, people would flee the silver coins, as they'd be worth less and less relative to dollars. Citizens would pay their taxes only in the increasingly worthless silver.

The state, as a governmental agency, is thus put in a double bind. No matter which way the currency is going, by giving the citizens a choice in payment, the state will always be paid in the worse currency.

This is the whole point of legal tender laws and capital control laws. Without those expedients, the citizens will always work to make the state the loser in currency arbitrage. With legal tender and capital controls, the state can foist the currency costs off on its beholden citizens.

With only one state representative dissenting, the Idaho House State Affairs committee voted on Monday to endorse HB 633, a bill that would allow Idaho citizens to pay their state taxes with an official state silver medallion.

The news comes just a month after a South Carolina legislator introduced a bill seeking to ban Federal currency altogether, and replace the upstart greenback with gold or silver coins. A half-dozen other states have considered similar legislation, reports the Tenth Amendment Center. But there's a key difference between the Idaho plan and the bills proposed in other states, most of which fall somewhere on a spectrum ranging from Tea Party rage to Ron Paul goldbug-ism. (The South Carolina bill, for example, claims that "the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State.")

In contrast, the sponsor of the Idaho bill, Republican Phil Hart, seems to be marshalling wide support by crafting legislation that is straight out industrial policy aimed at boosting Idaho's silver industry. The text of the bill is quite clear.

The intent of this act is to use the abundant silver resources of the state of Idaho to create a means whereby the people of Idaho can pay their taxes to the state using silver mined from the ground of Idaho, processed in Idaho and finally minted into a medallion in Idaho. It is the intent of the Legislature to create mining jobs in Idaho while giving the people of Idaho a means to store their wealth in a precious metal that is immune from the effects of inflation while complying with the mandates of our federal Constitution.

The Idaho bill therefore incorporates tax incentives for silver processors located in Idaho.

From The Idaho Reporter:

That, Hart believes, could bring hundreds, if not thousands of jobs to the state. In conjunction with the creation of the medallion, Hart's bill would also try to lure silver processing companies to Idaho, and in particular, north Idaho, which, according to Hart, was once called "the silver capital of the world." The bill would give companies that come to Idaho to process silver for the medallion a 10-year exemption from income taxes, as well as property taxes. The exemption would be open for 20 years and would sunset after that period of time.

Hart believes one of the advantages of silver is that it would resist inflationary pressure better than paper money. But since states aren't allowed to mint their own money, the value of the silver medallion will have to fluctuate according to market forces. In just the last ten years, the value of an ounce of silver has zig-zagged between four and twenty dollars.

Friday, May 7, 2010

Gold, the Dollar, and the Hidden Inflation Right Before Your Eyes

So, gold popped above USD1200 today, the first time in quite awhile. The last time it did so, it was seesawing with a falling dollar, sliding to 77 at that time.

Today, amazingly, dollar is holding strong, rising in the 84 range, and gold is rising anyway.

Basically, we are witnessing the drop of all currencies together, relative to gold, in other words, worldwide inflation.

The USD/FRN is rising relative to the crashing Euro, but it is still falling in an absolute sense.

Inflation is all around us. On the radio just two days ago I heard how airfare is over 30% higher than a year ago. Some for the price of gold, and the price of gas. If obvious measures like gold, gas, and airfare are up over 30-40% in one year, how do they expect us to believe inflation is flat. And the price of food such as bread lately? Good lord.

As I have endeavored to show in articles on this blog, economics is really common sense, and you should never be afraid to believe your own eyes.

Tuesday, April 27, 2010

The History of Free Banking and Alternative Currencies

The academic study of the history of free banking and the contemporary practice of alternative currencies are strongly related. It seems clear to me that the contemporary monetary reform movement should be based upon lessons of monetary history, but such a connection rarely seems to take place. Perhaps because monetary history is so obscure, and monetary theory so confusing?

A wonderful interview was recently published by the Daily Bell (, with an academic expert on the history of free banking, George Selgin.

One important takeaway: Dr. Selgin drives another nail in the coffin of the "100% non-fractional gold reserve" argument. He appears to conclusively demonstrate through the historical record that free market conditions will not result in a 100% gold standard. As I have argued before, we have moved onward, never to return to a gold standard, because our monetary theory has simply advanced to far. The idea of non-fractional gold as the only legitimate form of money is excessively retrograde, IMHO.

Another important takeaway is the limitations of viewing pre-Civil War America as a true example of free banking. In that era, bank charters often contained onerous provisions related to capital requirements. As I have detailed elsewhere, any asset can be monetized, which is to say, used as collateral to create a money supply. In the Wildcat Banking Era (as in most eras), land and government debt were the primary collateral monetized by regional banks.

In Dr. Selgin's view, as I interpret it, it was the instability of land speculation in that boom-bust pioneer era which caused the instability of those banks, not anything inherent in the institution of free banking itself. In effect, our most popular idea of why Free Banks were a failure, is simply wrong.

A third important takeaway is the history of free banking in early modern Scotland. Monetary reform advocates have over a century of history to plumb in their search for workable alternative monetary solutions. I look forward to researching more into this era myself, particularly with an eye towards how the Scottish Free Banking system was related to the real bills system and the gold standard system of the same era.

Tuesday, March 16, 2010

Social Security, Debt, Federal IOUs, Inflation

I wrote about this issue a couple months ago, and now it has been confirmed: Social Security is now bankrupt. Right now, not some 20 or 30 years from now, as you will sometimes hear repeated.

We, as the unwashed sheeple of America, are supposed to buy into the idea that the federal government is issuing IOUs for previous Social Security payments.

Here is the facts when boiled down to monetary reality: the Social Security tax no longer covers Social Security expenditures, so the government is going to print new money to make up the difference. These are the so-called IOUs, but the reality is the same: new money is being printed to cover the deficit.

For decades, the Social Security tax brought in more revenue than was needed for Social Security programs. The extra money went into the general fund all those years and was spent. An IOU was created (an accounting ledger entry, really, nothing more), meaning they general budget was saying to the Social Security fund: "Hey, thanks for the money, I'll pay you back later".

The money came in, it was spent, it is gone. In this time of exploding budget deficits, where is the government going to get the money to pay off these IOUs?

Obviously, printing up all this money to cover the deficit is highly inflationary. It is an axiom of economics that needs to be more highly publicized and well-known: a federal budget deficit is inherently inflationary. I haven't seen the mathematical studies, but I am willing to bet that the percentage rate of inflation is highly correlated to the percentage size of the deficit. Given that we are experiencing double digit percentage deficits since last year, I would expect inflation to rise into the double digits this year as well.

Tuesday, January 12, 2010

Using Reserve Requirements to Decrease Liquidity

Raising reserve requirements is a key component of the modern Jubilee plan. The idea of directly using reserve requirements does not occur to most Americans, simply because the Federal Reserve uses only open market operations to change liquidity levels.

But this week, China demonstrates the utility of reserve requirements as a tool to fight inflation (read more here).

In fact, China is demonstrating the real-world success of the Jubilee plan. After flooding the country with stimulus in the past year, the government is now counter-acting potential inflation by requiring banks to stockpile more money.

The Jubilee plan is slightly different, in that it would not randomly disburse stimulus. Rather, would unleash stimulus across the board by direct payoff of debt, simultaneously requiring banks to soak up the extra money by raising reserve requirements.

The total amount of money (currency and credit) in circulation would remain the same, but all debt payments would be eliminated, allowing the economy to restart itself without central government control.