THE DEVIL'S BARGAIN

Let's start with a few quotes:



Thomas Jefferson

I sincerely believe that banking establishments are more dangerous than standing armies.” -- Thomas Jefferson





James Madison



"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments .....”  -- James Madison



Abraham Lincoln

 “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.”   -- Abraham Lincoln

Henry Ford



“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” --  Henry Ford



Franklin Roosevelt



“The real truth of the matter is … that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson.”  -- Franklin D. Roosevelt

These gentlemen didn't share the same politics.  But there's one thing they agree on.  Banks and bankers have always been dangerous.  The question is, why?   It would also be nice to know how it got that way, and if there's anything that can be done about it.


The Short Answer

Why are the bankers dangerous to democracy?  The short answer is that debtors are inevitably beholden to their creditors.  When the debtors are democracies, this means elected officials -- indeed, entire governments, are beholden to unelected individuals and organizations.  It's as simple as that - not exactly rocket science.  The more interesting question is, how does this come to happen?  Only when we understand that, can we figure out what, if anything, can be done about it.

Wars Cost Money ....

Historically, the story starts with a war.  It could start other ways –  such as excessive public spending on welfare benefits or celebrations or public monuments, but it generally doesn’t.  Because while there are many ways to squander resources, only when we fight wars do we use resources to destroy other resources, which virtually guarantees there won't be enough resources to go around.


Guns, bullets, artillery, tanks, aircraft, warships, smart bombs – are manufactured not only to kill and maim, but also to destroy infrastructure –  blow up bridges, burn crops, level factories. Even if the winner engages in plunder, exacts reparations, or steals natural resources, the booty rarely reimburses its cost for the war –particularly if we include the loss of trade and agricultural production.

The consequences are far worse for the loser. Along with destruction come disgrace, dishonor, and the sure and certain downfall of every political leader even remotely associated with the conflict.  Although nobody wants to lose a war, the aversion is probably greatest among the rulers and politicians.

History teaches that the biggest and best-equipped armies generally wind up winning. Given the enormous cost of arms and armies, there is never enough in the national treasury, and taxes can never be raised fast enough in the face of looming hostilities. So in the run up to a war, the prospective combatants tend to compete strenuously in a preliminary battle ... to borrow money.

Who lends this money?  Why do they lend it?  And how?

In early times, the motives for lending were as clear as those for borrowing: patriotism (mingled with an aversion to being enslaved or murdered), and the protection of property. As to the identity of the lenders, they were generally those who stood to lose the most if the war was lost; or, in other words, the richest members of society.

The important thing to note about these arrangements is that the wars were, in essence, being financed out of SAVINGS. Since the sovereign didn't have sufficient savings, it borrowed from the savings of private citizens.

But about 500 years or so ago, a new wrinkle was introduced. Wars began to be financed through intermediaries using various types of legal instruments evidencing government indebtedness. The motive of these intermediaries was neither patriotic nor personal. They did it in hopes of realizing a profit from an activity that would have been illegal in the absence of government complicity.

Other People's Money ....

The use of gold as a store of value allowed for the accumulation of wealth beyond the perishables you could store in a granary or warehouse.   But gold involved problems of transit and storage.  In ancient Egypt and Mesopotamia, gold was stored in temples under the auspices of priests -- presumably on the theory no one would steal from a house of God.  In Greece and Rome, private entrepreneurs began offering additional services.  Not only did they accept deposits, they also financed trade by arranging credit in distant cities, so physical coins didn’t have to be transported.

With the fall of Rome, trade declined.  Throughout Mediaeval times, wealth was land, the ownership of which was concentrated in the feudal nobility.  Still, finance was necessary for war – especially the Crusades. Since the Church took a dim view of money-lending, the need for finance was met largely by Jews (a favor returned in modern times by born-again Christians who help finance the State of Israel).

With the rise of the Italian city states, lending to finance trade again came to the fore. This came to be concentrated in Florence, particularly in the hands of the Bardi and Peruzzi, who also dabbled in the financing of wars. This could be profitable, but it was risky.  The Bardi discovered this in 1354, when Edward III of England defaulted on his loans during the Hundred Years War, sending the family into bankruptcy.  But another Florentine family quickly took their place, mixing commerce, finance and politics – the Medici.

With the rise of the Habsburgs, the center of power -- and finance -- shifted to Bavaria.  The Fugger dynasty rose to prominence making loans to Archduke Sigismund and Emperor Maximilian I. With the assistance of a brother in Rome, they handled remittances to the papal court of proceeds from the sale of indulgences. However, in addition to this low-risk enterprise, they leant heavily to Philip II of Spain, who wound up defaulting four times in the second half of the sixteenth century when cash flow from the New World proved insufficient to finance his various wars in Europe.

Two hundred years later, a Frankfurt coin dealer by the name of Mayer Amschel Rothschild rose to power by assisting William IX, wealthy ruler of the German state of Hesse-Kappel, with his banking  needs.  Eventually, with William’s blessing, Mayer and his sons gained entrée into other royal courts of Europe. When the Napoleonic wars broke out, the Rothschilds gambled heavily on the eventual defeat of Napoleon by arranging loans to his enemies.  In this case, the bankers bet right.  By the end of the war the family had built a network of financial connections that placed it at the heart of government finance across Europe, a position it has never really lost.

Which leads to a single historic truth:

The rise and fall of bankers has always been inextricably linked to the rise and fall of governments.

Have you ever asked yourself why that is?   Why would a bank finance a war?  At present, in the aftermath of a historic housing crash, the overall delinquency rate on residential mortages in the United States is about 8%.  Yet in a war, 50% of the participants generally wind up losing. And the losers generally don't pay back their loans.  So why take the risk?


Why Banks Finance Wars
 
To understand the link between banks and governments, you need to go back to the nature of banking.  Recall that it began with dealers storing other people's gold. When the owner of the gold made a deposit, the dealer issued a receipt. Over time, people came to realize that so long as the gold was held in secure storage, it made no difference if the physical gold was transferred, or merely the receipt for it.  And since it was easier to transfer the receipts, they came to be traded like the gold they represented. In other words, they became money.

Knowing that the gold dealers had gold, people came to them seeking loans and, naturally, these potential borrowers were willing to pay interest. The easiest way for the dealers to make the loans was to issue gold receipts that the borrowers could use in trade and, since there was no way to know how much gold a dealer held for his own account or how many receipts he had issued against it, there was a clear temptation for the dealers to issue receipts – and earn interest – on gold they didn’t really own. So long as they had enough gold on hand to satisfy periodic demands for physical delivery, no one would ever know the difference.

In the beginning, gold dealers imposed a charge on gold owners for storage.  But the practice of money lending quickly became so profitable that the gold dealers began offering to pay interest on deposited gold, instead. At this point, the legal relationship between gold dealers and gold depositors was subtly transformed from one of safekeeping, in which the dealer was providing a storage facility, to a form of loan, in which the gold depositor lent gold to the dealer and the dealer became indebted to the depositor for return of gold in an amount equal to the amount deposited, plus interest.

Over time, gold dealers realized that they could create gold receipts in an amount far in excess of the amount of physical gold they actually held on deposit. In fact, they could issue receipts in an amount that was limited only by the degree of confidence their depositors had in their ability to return the metal when it was needed.

This was the beginning of so-called fractional reserve banking, which exists to this day, and there are two critical points to understand about it.

The first is, that what the gold dealers did when they issued gold receipts in excess of the amount of gold they had on deposit was to create money out of thin air.  Before that time, money (gold) had to dug out of the ground by the sweat of a man’s brow. When gold receipts came to be accepted in lieu of physical gold, money could be created with the stroke of a pen, and in unlimited amounts.

The second point is that what the gold dealers did was a form of fraud (defined, in the California Civil Code, for example, as "the suggestion, as a fact, of that which is not true, by one who does not believe it to be true" or "the suppression of that which is true, by one having knowledge or belief of the fact"). By lending gold, the dealers were making an implied representation that they owned the gold which, of course, they didn't.  In fact, when they lent gold in an amount greater than the reserves they had on hand, they actually purported to lend something that didn't exist. This certainly seems to constitute fraud by any reasonable definition.

Now, clearly this situation was known to the kings and princes who did business with the banks – or, anyway, to their finance ministers. So why didn’t they just send the gold dealers to prison.

The simple answer is this: The governments needed more money than there was gold, and the only way they could get that money was to let the banks create it.

Wars destroy resources, as mentioned above.  And they’re unimaginably expensive. They always cost more than the sovereign has on hand at the outbreak of hostilities. So in the fervor to raise the necessary funds for war, a bargain is struck, between the bankers and the governments.  The bankers are allowed to create money, so long as it is created for the benefit of the government.

Of course, there are problems. Once the government is indebted to the bankers, it loses its ability to regulate the bankers. It has to tread lightly, covering up their peccadilloes and blunders.  It has to go easy in establishing reserve requirements.   It has to institute a system of insurance to make sure depositors keep depositing.  If the system stumbles the government has to prop it up. (After all, government is the biggest borrower.)  It has to establish a central bank to bail the bankers out when depositors run for the doors. Eventually, it becomes complicit in the fraud.

Those guys at the beginning of the post -- Jefferson and Madison and Lincoln, FDR and Henry Ford?  That’s what they were talking about.

To finance wars, nations spend money they don’t have. And to get that money, they make a deal with the bankers to create it out of thin air.

A Devil’s Bargain.

You were wondering why the banks are too big to fail?  Because if they fail, they take the governments down with them. 

Let’s end with another quote.



“Give me control of a nation's money and I care not who makes it’s laws.”

 --  Mayer Amschel Rothschild

Is this the face of democracy?  Until we stop borrowing money and fighting wars, I'm sorry to say, the answer is, yes.

THE BIG LIE III - INFLATION

There are enough lies about inflation that if you tried to deal with them all, you’d wind up writing a textbook. But we have to start somewhere, so ....

Let’s start with the definition. Most people – journalists and economists included – think inflation means “a general increase in prices.” But defining inflation as an increase in prices is like defining war as an increase in casualties. It tells you nothing useful about what caused it. So, for the record, inflation is not an increase in prices.  It's an increase in the supply of money (or credit). When the supply of money (or credit) increases faster than the supply of things you can buy with the money (or credit), prices go up.  No "demand pull"; no "cost push".  Inflation has nothing to do with labor union contracts or monopoly pricing power.  It has to do with one thing and one thing only: credit.

But no one wants to admit the problem is credit because the institutions that create the credit (i.e., banks) make money by creating credit. And the institution that allows them to make money creating credit (i.e. the government) is the world’s biggest user of credit (in other words, the world's biggest debtor).

Not only is the U.S. government the world’s biggest debtor, but it reports to a bunch of ill informed,  irresponsible adolescents (i.e. voters) who refuse to cut back on the stuff they get from the government or to tax themselves enough to pay for it.

As a result, it’s impossible for the government to cover costs on a current basis, let alone pay back what it owes from its past exhuberances.

So, faced with this impossible situation, what does the government do? 

First, it obfuscates.

So for example, on November 10, 2005, the Federal Reserve issued a press release stating that it as of March, 2006, the statistical monetary measure known as M3 would no longer be reported.  According to the Fed, the reason for this was that "M3 does not appear to convey any additional information" and the Fed "judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."  This was, of course, complete nonsense. M3 was the broadest and most useful measure of money in the economy, including not only checking account balances but time deposits, money market funds and repurchase agreements as well (repurchase agreements being the Fed's favorite mechanism for injecting liquidity into the monetary system). The reason the Fed stopped reporting M3 wasn't that it was not a useful number; it was because it was too useful and showed the money supply growing far faster than the underlying economy.

The second thing the Government does is, of course, lie. 

The first lie is about the amount of borrowing.  The government uses accounting practices that make it look like it’s borrowing less than it's actually borrowing. So, for example for fiscal 2009, the government reported a deficit of about $1.2 trillion. But if the deficit had been calculated in accordance with the "generally accepted accounting principles" that businesses use, the deficit would have been $1.4 trillion – or $200 billion greater.

On a balance sheet basis, at this writing, the "national debt"  as officially reported by the U.S. government, is about $13.85 trillion, or $125,400 per taxpayer.  But this "official number" leaves out unfunded liabilities for Social Security, Medicare and prescription drug benefits of $111.7 trillion, or a staggering $1 million per taxpayer. In other words, most of the debt is hidden. 

(These numbers don't include state and local debt or personal debt of $16 trillion.)

The next thing the government lies about is the extent to which prices are rising.

First, the government pretends that increases in the prices of certain things somehow shouldn’t be counted. For example, asset prices (stocks, bonds, real estate, precious metals) are excluded from the Consumer Price Index (CPI) on the theory that they aren’t “consumed”. Okay, they’re not consumed, but why should a price index be limited to goods that are consumed?  To the extent that inflationary government policies disproportionately benefit the rich (as they have done in America over the past 35 years or so), it’s logical to assume that most of the price impacts will be reflected in asset prices because rich people save more than poor people and asset investments are made from savings.  

Second, the Bureau of Labor Statistics excludes certain prices from the CPI because they’re supposedly too hard to measure. Interestingly, the excluded items go up faster in price than many of the items that are included. Among these excluded items are health care costs and the costs of higher education.

Another exclusion is reflected in the Federal Reserve’s concept of “core inflation” which it reportedly likes to consider in setting monetary policy. As we are repeatedly told in the financial press, core inflation excludes "volatile food and energy prices”. Food and energy prices are volatile alright, but their volatility seems to be primarily in an upward direction.

Creative and entertaining lies are reflected in several "adjustments" that have been built into the Consumer Price Index over the years to reduce the rate of price increases as publicly reported.  Among these are “geometric weighting” which automatically reduces the weight of a product in the index to the extent that its price increases.  The theory here is that consumers will buy less of a product if its price has risen.  Of course they will buy less, but reducing the weight of expensive items results in an index that no longer measures a constant standard of living.  As the CPI is presently calculated, it measures an ever-declining standard of living.   A second categroy of lies are called “hedonic price adjustments” which automatically reduce the dollar price actually paid by consumers within the index to account for supposed increases in product quality or function.  The problem is, no adjustments are ever made to increase the prices of items to account for reductions in product quality, or the availability of customer service.

(A complete catalog of the chicanery engaged in by the Bureau of Labor Statistics is beyond the scope of this post, but if you’d like to educate yourself further, you can go here:  http://www.shadowstats.com/article/consumer_price_index)

To be sure, there are a lot of lies told about inflation. But behind those lies is a bigger lie – a mega-lie, if you will, that we, the American people, like to tell ourselves and each other.

That lie is that the infrastructure and the services we expect from our government – from interstate highways to public education to national defense to Medicare to Social Security – somehow belong to us as a matter of right and should be delivered to us by a beneficent government without the necessity of our paying taxes. This lie is not a new one – Americans have believed they shouldn’t pay taxes since before the Revolutionary War. (Come to think of it, that’s why there was a Revolutionary War.)  But over the years, the list of services we expect has expanded considerably.

Since we won’t tax ourselves to pay for the things we want from the government, and won't even elect people who are willing to tell us the truth about our need to pay for them, the only alternative is lies.  Lying about the amount we owe, lying about the value of our dollars, lying about our ability to repay this debt, and now lying about the printing of money by the Federal Reserve (so-called "quantitative easing") in order to buy government debt that no one else is willing to buy anymore. 

But as they used to say when I was a kid, you can't get something for nothing.  This explosion of debt has caused – and will continue to cause – prices to rise, resulting in an invisible tax paid by us all.

This is also not a new phenomenon.

Before there was a United States, there was a confederation of colonies that met expenses by printing a paper currency called the Continental. These things wound up being worth so little that debtors chased their creditors up and down the streets trying to pay them back with Continentals.  In the 1790s, after the U.S. Constitution was ratified, Continentals could be exchanged  for treasury bonds at 1% of face value.

This could easily happen again in the United States.  Only this time with something called the dollar.
In fact, unless Americans find the will to pay their expenses on a current basis, it will happen again.

But I have no doubt that when it happens, we will probably find a way to lie about it.