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.
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Tuesday, June 1, 2010
Wednesday, July 15, 2009
The Theory and Practice of Credit Exchanges and Alternative Money
Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
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.
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.
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.
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.
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.
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
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.
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.
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