My fellow Americans --
Okay, let’s get something straight. The law of cause and effect operates as perfectly, as justly, and as inexorably in the realm of human affairs as it does everywhere else. People get what they deserve – no more and no less. Nothing happens by chance, right?
So, if American legislators are impatient, intractable and infantile – which they definitely are – what do we suppose is the reason for it?
Do you think – just maybe – we need to look at ourselves?
Here's my scorecard:
• We Americans are arrogant. We hypnotize ourselves with the myth of “American Exceptionalism” but, in reality, the most exceptional thing I can see is how quickly we’ve seen our empire fall. I think historians would be hard pressed to find another that declined further in half a century.
• We’re ignorant – of our history, of our politics, of our economics, and of ourselves. We refuse to accept responsibility for our circumstances, and are quick to blame others for problems we have caused ourselves. We blame the politicians for bad government, Hollywood for bad movies and teachers for bad schools – even thoughit is we who elect the politicians, we who go to the movies and we who raise the kids who act out and fail to learn in the schools.
• We’re impatient. When we want something, we want it now. If we don’t have the money to pay for it, we whip out a credit card and run up a bill.
• We lack self discipline. If we have indigestion, we don’t stop eating the greasy, spicy, devitalized food that caused it . We take a pill.
• We’re selfish. We want bridges and parks and pensions and highways, but we don’t want to tax ourselves to pay the cost.
• We’re soft and self-indulgent. We think we’re entitled to go through life unchallenged, unflustered and unharmed. We say we hate the lawyers, but if anything happens, we immediately want to sue.
• We’re lazy – physically, emotionally, intellectually and spiritually. Whatever it is, we want it now, and we want it free.
So, my fellow Americans, here’s a suggestion. When tempted to complain about the “mess in Washington”, let’s first resolve to do something about the mess within ourselves.
Thursday, July 28, 2011
Friday, June 10, 2011
IT'S COMPLICATED ....
The world is a complicated place.
When I was growing up, there was Pepsi and Coke. Now, it’s hard to even keep track of the different kinds of Coke. New Coke, Coke Classic, Decaf Coke, Diet Coke, Coke Zero, Vanilla Coke, Cherry Coke, Coke with Lemon, Coke with Lime, Black Cherry Vanilla Coke. Versions appear and disappear like sub-atomic particles in a bubble chamber. On its website, the Coca Cola Company boasts a “portfolio” of no less than 3500 beverage brands. And that’s just Coca Cola!
When I was a kid, the choice for breakfast was Wheaties, Corn Flakes, Rice Krispies or Cheerios – wheat, corn, rice or oats. Now, entire aisles are devoted to cereal. (An article in Wikipedia lists no less than 452 different kinds of the stuff!)
When I was growing up, there was Pepsi and Coke. Now, it’s hard to even keep track of the different kinds of Coke. New Coke, Coke Classic, Decaf Coke, Diet Coke, Coke Zero, Vanilla Coke, Cherry Coke, Coke with Lemon, Coke with Lime, Black Cherry Vanilla Coke. Versions appear and disappear like sub-atomic particles in a bubble chamber. On its website, the Coca Cola Company boasts a “portfolio” of no less than 3500 beverage brands. And that’s just Coca Cola!
 |
| The Cereal Aisle |
There used to be three TV channels – NBC, ABC, and CBS. Now there are hundreds. And you know what? They all suck.
The hardware store has become the Home Depot; the grocery store has become the megamarket; and the department store has become the mall.
But what have the people become?
Savings accounts and checking accounts weren't enough. We needed credit cards, debit cards, online trading accounts, electronic statements and automatic billpay with overdraft protection. We can discover our exact financial status and credit score at any hour of the day or night.
But are we in any way enriched by this?
Technology was supposed to simplify our lives. That's what the futurists said. Technology would relieve mankind from the drudgery of tedious and repetitive tasks, freeing him to concentrate on the finer things in life.
Do you think they were referring to the Fruit Ninja, or Angry Birds?
Far from fostering a sense of well being or connection, mobile devices have fueled an insatiable demand for ever-increasing sensory stimulation, turning us into a bunch of fidgeting, twittering, text messaging … jerks. The average American today has an attention span equal to the length of the average shot in an action film, and his thoughts are about as deep as the flat panel TV he bought to watch it on.
How could the futurists have been so far off – assuming technology would bring a utopia where the fruits of creativity were actually put to productive use? They really must have been dreamers! If they'd given it a little thought, they would have realized that technology is nothing but a tool. People will use it for whatever their fears and desires drive them to use it for. So the question, isn’t, “Why hasn't technology improved the quality of life," but “Why have people chosen it use it the way they have?”
I don't know why God made the world complicated (which he did), but I do know why mankind makes it more complicated. We do it because we aren't satisfied with life the way it is. We think it's too hard, too hard, too dangerous, too boring. We don't like the fact that we get tired, or that we get sick, or that we get old. We don't like that our hair turns gray, or that our breasts sag, or that we lose our virility. We don't like the fact that sex causes babies; or that drugs cause hangovers; or that spicy food gives us stomach aches. We don't like work. We don't like the fact that life is repetitive; or that it requires patience, and endurance. And beyond all that, we are incapable of admitting – even though it's as plain as the nose on our face – that the only real faults in the world are the ones within ourselves. We would change the whole world rather than change even the slightest flaw within own character.
But we don't want to confront these facts, so we distract ourselves. That's exactly what we're doing – our entire society. We're distracting ourselves with complexity because there is something – call it the invisible 800 pound gorilla in the room – that all of us are desperately trying to ignore. And what is that?
Sorry to say, it's our potential – the sum total of all we can be if we have the courage to confront the boring, annoying and scary things life presents to us from moment to moment – which are nothing but the consequences of our past actions, which we are trying assiduously to avoid.
In other words, we're distracting ourselves from our responsibility to suck it up and act like adults.
So, I propose an experiment. Let's take a day, one day, in which we watch ourselves, unremittingly, from moment to moment, without reaction, mental comment or judgment. And for that 24 hours, let's pay special attention when we reach for a cell phone, a gaming console, or TV remote. And let's see if we can identify the thought or feeling we had right before we had the impulse to distract ourselves. My suggestion is, that if we will do this, we'll begin to reconnect with our selves, our lives, and who we really are.
Tuesday, March 8, 2011
CAPTAIN MIDNIGHT AND THE SECRET DECODER
On a mountaintop, high above a large city, stands the headquarters of a man devoted to the cause of freedom and justice... a war hero who has never stopped fighting against his country's enemies... a private citizen who is dedicating his life to the struggle against evil men everywhere... CAPTAIN MIDNIGHT!
Thus ran the overheated lead-in to one of my favorite TV shows when I was growing up as a kid in suburban Philadelphia. (The show's appeal no doubt had something to do with the fact that there were no mountaintops high above suburban Philadelphia. Nor were there any private citizens dedicating their lives to the struggle against evil men everywhere -- at least not as far as I knew.)The premise of the show was that a guy named Jim Albright – a crack ex-fighter pilot – headed up something called the Secret Squadron under the code name, Captain Midnight. The Secret Squadron was a private cabal of freelance crime-fighters who took on assorted bad guys in the interest of truth, justice, and the American Way. The principal Squadron members, in addition to the Captain, were his comedy sidekick, Icabod (“Ikky”) Mudd, and his resident scientist, Aristotle (“Tutt”) Jones, who consulted on technical matters. While Captain Midnight took on a variety of villains in his brief TV lifespan of 39 episodes – a clear majority of them had ties to Communist espionage of one kind or another. This was, after all, the 1950s.
In those days, every show had a single, definable sponsor, and in the case of Captain Midnight, it was delicious, chocolaty flavored Ovaltine, a milk additive shamelessly hawked by the Captain in long-winded, face-on commercials of the kind common in the days when lax regulation and cheap ad rates went hand in hand.
“A single mug of hot, chocolaty Ovaltine builds muscles 12 ways; increases IQ; provides 100 percent of the minimum daily requirement of 27 essential vitamins and minerals.”
It didn’t matter what the Captain said about the product. What mattered was that he endorsed it. That was enough. I wanted Ovaltine. I believed in the essential indispensibility of Ovaltine.
And that was before the Captain announced that each and every one of us could become members of the Secret Squadron by obtaining our very own Secret Decoder Pin. How? Simple. Just write your name and address on a piece of paper, put it in a stamped envelope – along with the inside wax paper seal from the top of a jar of Ovaltine – and send it to:
Captain MidnightBox PChicago 77, Illinois
Needless to say, if there had ever been any doubt about the necessity of getting a jar of delicious, chocolaty Ovaltine, this erased it completely.
The way it worked, each week, in a special segment of the show, Captain Midnight gave the Secret Squadron members out there in television land a secret code, consisting of a series of numbers. Those fortunate enough to possess a Secret Decoder Pin could then, by spinning a dial on the Decoder, translate the numbers into letters, thereby deciphering the secret message. To a Captain Midnight fan like myself, this made Ovaltine a no-brainer.
Except for one small problem. Ovaltine – a mixture of sugar, malt, cocoa and whey – was just the sort of non-essential luxury food item my final markdown Mom would never dream of buying, or even allowing in the house – unless there was a coupon entitling her to obtain at least double her money back from the manufacturer. Not only that, but my Mom was a precocious skeptic when it came to nutritional claims.
“The vitamins and minerals are in the milk,” she would say, “The flavoring adds nothing but sugar and fat and, from what I've read, those don't have minimum daily requirements.”
So, faced with these realities, how on earth was I going to get a seal from the top off a jar of Ovaltine?
I could nag, of course. But nagging in our family was tricky. Too little and you didn't get what you wanted, but but too much, and you ran the risk of "upsetting your mother", which brought down the sure and awesome wrath of our father.
Being "a good boy" was a theoretical possibility, of course. But while being good might bring occasional praise, it never seemed to accomplish much of a material nature. Finagling from a friend at school was also possible, but experience had demonstrated that it would ultimately prove demeaning. I considered trading for it. But trade what? I never collected baseball cards. Toys were scarce at my house. Cap guns were forbidden; fireworks were illegal. Realistically, there was only one course of action open to me.
So, the next time I went to the supermarket with my Mom, I took a penknife acquired during a short stint in the Cub Scouts. When she wasn’t looking, I cadged a jar of Ovaltine from the shelf and hid it in the cart. Then, the next time she wasn’t looking, I managed to unscrew the cap, cut the circular seal from the top, screw the cap back on the jar, and put the seal in my pocket.
When we got to the checkout counter, my Mom picked up the Ovaltine. “What’s this?”
“Delicious, chocolaty Ovaltine,” I answered. “It gives you a hundred per cent of your minimum daily requirements of vitamins and minerals.”
She glanced at the ingredients, then at me. “So does a balanced diet.”
I sighed. "Put it back?"
She nodded. "Put it back."
Then, on a Monday, just about eight weeks after I sent away for it, the Decoder Pin appeared in the mail in a plain, Kraft paper envelope. It was small, maybe an inch and a half in diameter, made of tin, with a jet plane on one side and, on the other side, a dial with letters printed on it, and around the dial, a circle of numbers, which were embossed. For a moment, I looked at the pin, feeling a momentary sickness at how cheaply my integrity had been bought. Then, I dropped the pin in the pocket of my flannel shirt and quickly forgot.
The announcer said to allow six to eight weeks for delivery, but frankly, I couldn’t see why it should take that long. After all, Chicago wasn't all that far from Pennsylvania. So, two days after I mailed away for the Secret Decoder Pin, I began checking the mail.
Five days passed, six days, a week. Eight days, nine days. Time passed by at an agonizing pace. It seemed there was nothing in my life but the daily wait for the mailman.
I began to think maybe I had forgotten to put a stamp on my envelope to Chicago 77, Illinois. I wondered if I had written my own address correctly on the slip of paper I enclosed. When three weeks had passed, I began to consider the possibility that I was jinxing things through the very act of expectation. Maybe if I were more detached, more nonchalant, I would open the door for the Secret Decoder Pin to come to me. Sadly, detachment was not yet for me. The more I tried not to think about the Secret Decoder Pin, the more I thought about the Secret Decoder Pin. As the days and weeks went by, rather than getting easier, the daily wait for the mailman grew more and more intolerable.
After a month, my impatience turned to anger. Anger at Captain Midnight, anger at the Secret Squadron, anger at the Secret Decoder Pin itself, and anger at the makers of Ovaltine. I began to turn off the show when the Captain got ready to announce the secret code. I told myself I didn’t want the Secret Decoder; and I didn’t care about the secret code.
After six weeks, I had convinced myself that the promotion was a hoax, a cynical swindle perpetrated by the makers of Ovaltine to sell more of their wretched product to unsuspecting idiots like myself. I told myself I didn't care whether the lousy Decoder Pin came or not; that I had been a fool ever to get involved with it; and that never, ever in my life again would I allow myself to be hoodwinked like this.
Of course, in a way, I hadn't actually been hoodwinked, because I hadn't actually purchased the product. At first this made me feel better – because, at least the makers of delicious, chocolaty Ovaltine hadn't gotten their hands in my pockets. But then, it dawned on me that maybe they had gotten their hands in something worse. I remembered my heart racing as I unscrewed the Ovaltine; cutting out the waxed paper seal. I remembered my little act, pretending to be a good boy, reluctantly returning the Ovaltine to the shelf. And the more I thought about it – stealing a little round piece of wax paper, scamming my Mom – the more I felt, well ... pathetic.
Then, on a Monday, just about eight weeks after I sent away for it, the Decoder Pin appeared in the mail in a plain, Kraft paper envelope. It was small, maybe an inch and a half in diameter, made of tin, with a jet plane on one side and, on the other side, a dial with letters printed on it, and around the dial, a circle of numbers, which were embossed. For a moment, I looked at the pin, feeling a momentary sickness at how cheaply my integrity had been bought. Then, I dropped the pin in the pocket of my flannel shirt and quickly forgot.I’m told the secret messages Captain Midnight delivered to the Secret Squadron each week generally had to do with drinking delicious, chocolaty Ovaltine, or sometimes getting your Mom to buy more. I don’t know that for a fact, though. Because a few days after the Decoder came in the mail, my Mom washed my flannel shirt with the Decoder in it, and all the letters came off.
I suppose it was time to move on.
* * *
Tuesday, December 21, 2010
THE DEVIL'S BARGAIN
Let's start with a few quotes:
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:
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.
Is this the face of democracy? Until we stop borrowing money and fighting wars, I'm sorry to say, the answer is, yes.
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
“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
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 |
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 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
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
Tuesday, December 14, 2010
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.
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.
Friday, November 19, 2010
THE BIG LIE II - GROWTH THROUGH BORROWING
I’d like to continue my Big Lie series with an even bigger lie than the one I talked about last time. This lie – generally (and unfairly) attributed to John Maynard Keynes – is the one that says a nation can stimulate economic growth through borrowing.
I need to be unequivocal on this. The notion that a nation can increase its standard of living by borrowing is completely and categorically false. It is not supported by history or logic.
First, let's be fair to Lord Keynes. Although his name is almost always mentioned in connection with deficit spending, he didn’t advocate it. What he said was that a nation can smooth out the effects of the business cycle by acting counter-cyclically. In other words, the ups and downs of the cycle can be mitigated if a government borrows and spends when times are bad and pays the money back (i.e., runs surpluses) when times are good.
And this is right. I agree. Governments can lessen the impact of a down cycle by spending. In that sense, I am a total Keynesian. But have you ever heard anyone quote Keynes to argue in favor of running surpluses? I haven’t. And my guess is, you haven't either.
But enough of Keynes. God knows, he’s received enough scholarly analysis already. What I want to talk about is the dynamics of borrowing, what it is, what it does to human beings, and what it does to the economy. First of all, we need to ask the fundamental question, what is borrowing?
Borrowing means using something I don’t own, right? I borrow your saw to cut some lumber. I borrow your shovel to get the snow off my driveway. I borrow a cup of sugar to bake a cake. No harm, no foul. Nothing wrong with that. As long as I get your permission to use the saw or the shovel or the sugar, and as long as I give it back.
Okay, so we know what borrowing is. The next question is, when I borrow something, where am I borrowing it from? I don’t mean this in the sense of “Bob’s garage” or “Emily’s kitchen”. I mean it in the sense of, “from what source or store of value”?
One answer might be, I am borrowing from someone else’s savings. At some time in the past, the person who bought the saw or the shovel or the sugar deferred the possibility of present consumption in order to “invest” in the things I am borrowing, and I am borrowing from those savings.
Another answer, equally correct, is, I am borrowing from my future consumption. In other words, by borrowing, I am incurring an obligation that will have to be repaid from resources that I am going to have to save, rather than consume, some time in the future.
Now, you may object that not all borrowing has this characteristic. For example, if I borrow a saw from you, I haven’t necessarily taken anything away from my future consumption. This may be true in some cases, but in general, the fact remains that if I borrow the saw, I have an obligation to return it in more or less the same condition. If I break the saw or damage it or wear it out –which I eventually will do if I keep borrowing it – I’ll have to replace the saw, and this will have to come out resources that could have been devoted to future consumption. (Admittedly, the point becomes clearer if I borrow the sugar or, say, a hundred dollars or two.)
So, in general, it’s fair to say that borrowing involves a shifting from future to present consumption or, in other words, a higher standard of living now, at the expense of a lower standard of living later.
Don’t get me wrong. There’s no value judgment implied in this. It’s a statement of fact. It may be entirely rational for me to borrow in order to meet a present need. But the idea that borrowing can increase my standard of living in the long run is preposterous. While my standard of living may apparently increase when I am in debt, it will decrease when I pay the debt back. In the long run, my standard of living will remain the same. In itself (i.e., ignoring the cost of interest) borrowing is standard-of-living neutral.
What’s true of me, is also true of a nation. In the long run, borrowing affects only the timing of consumption, not its quantity. It has no effect on the long term standard of living … ignoring the impact of interest.
But how can we do that? How can we ignore the impact of interest? The answer is, we can't.
If you read the Bible (especially the Old Testament), you will see that the ancient Israelites took a very dim view of lending anything out at interest. The reason is never really stated, but a distinction is clearly made between lending as an act of generosity or kindness, which is considered good, and lending at interest, which is considered bad.
So, what’s the difference?
Again, the Bible doesn’t really say, but here’s my guess: The world is an uncertain place. Things don’t always go according to plan. Despite our best intentions, it’s sometimes impossible for us to meet our obligations. And the problem is, the debtor- creditor relationship doesn’t take this into account. If I borrow from you, end of story, I have to pay you back. If you’re my neighbor, I may have reason to hope you’ll make allowances. But if you’re my banker? If you’re my banker ... let's just say, at the first sign of trouble, you're gone. The friendly loan officer who was delighted to welcome me as a valued customer, extend me a line of credit and take me to lunch, is nowhere to be found. In his place is a “workout specialist” who calls me, my wife, my boss, my kids and anyone else he can think of to make my life a living hell.
Obviously, this situation does nothing for me psychologically. It raises my stress level. It damages my self esteem. It in no way helps me to relate harmoniously to my wife and family, to perform my work or, for that matter, to repay the loan. But as bad as it is for me, it’s probably even worse for the workout guy, who somehow has to find a way to deal with the guilt he feels, day in and day out, for the despicable things he has to do.
So there are very real psychological and spiritual costs to the institutionalization of debt that economists don’t consider in computing standard of living. But there are also important economic consequences that they do take into account.
The first – and obvious – consequence is that when debt is institutionalized and the debtor has to pay interest, the interest tends to make borrowing a worse deal than it would have been without the interest. And all governments – even governments like ours, with central banks that can print money to buy the debt and force down the interest rates – still have to pay interest when they borrow money. The negative impact of interest is exacerbated when nations borrow money from foreign sources, because the interest cost directly reduces the long term domestic standard of living. This is present the case in the U.S.
The second – and less obvious – consequence of interest is that its existence tends to increase the concentration of wealth; first, because the existence of interest increases the incentive for those with excess resources to hold onto them rather than spend them; and second, because it increases the amount of future consumption those with resource deficits (i.e., borrowers) have to give up when they repay the money.
Concentration of wealth has its own negative consequences, which are beyond the scope of this post. Perhaps we’ll deal with that in another installment of the Big Lie series.
But I think the next post will have to deal with inflation.
I need to be unequivocal on this. The notion that a nation can increase its standard of living by borrowing is completely and categorically false. It is not supported by history or logic.
First, let's be fair to Lord Keynes. Although his name is almost always mentioned in connection with deficit spending, he didn’t advocate it. What he said was that a nation can smooth out the effects of the business cycle by acting counter-cyclically. In other words, the ups and downs of the cycle can be mitigated if a government borrows and spends when times are bad and pays the money back (i.e., runs surpluses) when times are good.
And this is right. I agree. Governments can lessen the impact of a down cycle by spending. In that sense, I am a total Keynesian. But have you ever heard anyone quote Keynes to argue in favor of running surpluses? I haven’t. And my guess is, you haven't either.
But enough of Keynes. God knows, he’s received enough scholarly analysis already. What I want to talk about is the dynamics of borrowing, what it is, what it does to human beings, and what it does to the economy. First of all, we need to ask the fundamental question, what is borrowing?
Borrowing means using something I don’t own, right? I borrow your saw to cut some lumber. I borrow your shovel to get the snow off my driveway. I borrow a cup of sugar to bake a cake. No harm, no foul. Nothing wrong with that. As long as I get your permission to use the saw or the shovel or the sugar, and as long as I give it back.
Okay, so we know what borrowing is. The next question is, when I borrow something, where am I borrowing it from? I don’t mean this in the sense of “Bob’s garage” or “Emily’s kitchen”. I mean it in the sense of, “from what source or store of value”?
One answer might be, I am borrowing from someone else’s savings. At some time in the past, the person who bought the saw or the shovel or the sugar deferred the possibility of present consumption in order to “invest” in the things I am borrowing, and I am borrowing from those savings.
Another answer, equally correct, is, I am borrowing from my future consumption. In other words, by borrowing, I am incurring an obligation that will have to be repaid from resources that I am going to have to save, rather than consume, some time in the future.
Now, you may object that not all borrowing has this characteristic. For example, if I borrow a saw from you, I haven’t necessarily taken anything away from my future consumption. This may be true in some cases, but in general, the fact remains that if I borrow the saw, I have an obligation to return it in more or less the same condition. If I break the saw or damage it or wear it out –which I eventually will do if I keep borrowing it – I’ll have to replace the saw, and this will have to come out resources that could have been devoted to future consumption. (Admittedly, the point becomes clearer if I borrow the sugar or, say, a hundred dollars or two.)
So, in general, it’s fair to say that borrowing involves a shifting from future to present consumption or, in other words, a higher standard of living now, at the expense of a lower standard of living later.
Don’t get me wrong. There’s no value judgment implied in this. It’s a statement of fact. It may be entirely rational for me to borrow in order to meet a present need. But the idea that borrowing can increase my standard of living in the long run is preposterous. While my standard of living may apparently increase when I am in debt, it will decrease when I pay the debt back. In the long run, my standard of living will remain the same. In itself (i.e., ignoring the cost of interest) borrowing is standard-of-living neutral.
What’s true of me, is also true of a nation. In the long run, borrowing affects only the timing of consumption, not its quantity. It has no effect on the long term standard of living … ignoring the impact of interest.
But how can we do that? How can we ignore the impact of interest? The answer is, we can't.
If you read the Bible (especially the Old Testament), you will see that the ancient Israelites took a very dim view of lending anything out at interest. The reason is never really stated, but a distinction is clearly made between lending as an act of generosity or kindness, which is considered good, and lending at interest, which is considered bad.
So, what’s the difference?
Again, the Bible doesn’t really say, but here’s my guess: The world is an uncertain place. Things don’t always go according to plan. Despite our best intentions, it’s sometimes impossible for us to meet our obligations. And the problem is, the debtor- creditor relationship doesn’t take this into account. If I borrow from you, end of story, I have to pay you back. If you’re my neighbor, I may have reason to hope you’ll make allowances. But if you’re my banker? If you’re my banker ... let's just say, at the first sign of trouble, you're gone. The friendly loan officer who was delighted to welcome me as a valued customer, extend me a line of credit and take me to lunch, is nowhere to be found. In his place is a “workout specialist” who calls me, my wife, my boss, my kids and anyone else he can think of to make my life a living hell.
Obviously, this situation does nothing for me psychologically. It raises my stress level. It damages my self esteem. It in no way helps me to relate harmoniously to my wife and family, to perform my work or, for that matter, to repay the loan. But as bad as it is for me, it’s probably even worse for the workout guy, who somehow has to find a way to deal with the guilt he feels, day in and day out, for the despicable things he has to do.
So there are very real psychological and spiritual costs to the institutionalization of debt that economists don’t consider in computing standard of living. But there are also important economic consequences that they do take into account.
The first – and obvious – consequence is that when debt is institutionalized and the debtor has to pay interest, the interest tends to make borrowing a worse deal than it would have been without the interest. And all governments – even governments like ours, with central banks that can print money to buy the debt and force down the interest rates – still have to pay interest when they borrow money. The negative impact of interest is exacerbated when nations borrow money from foreign sources, because the interest cost directly reduces the long term domestic standard of living. This is present the case in the U.S.
The second – and less obvious – consequence of interest is that its existence tends to increase the concentration of wealth; first, because the existence of interest increases the incentive for those with excess resources to hold onto them rather than spend them; and second, because it increases the amount of future consumption those with resource deficits (i.e., borrowers) have to give up when they repay the money.
Concentration of wealth has its own negative consequences, which are beyond the scope of this post. Perhaps we’ll deal with that in another installment of the Big Lie series.
But I think the next post will have to deal with inflation.
Thursday, November 18, 2010
THE BIG LIE I - WORLD TRADE
There are a lot of big lies out there, but the one I want to talk about today is the lie that says a country can increase its standard of living by buying cheap stuff from places where the standard of living is lower. This lie is usually defended under the banner of “free trade”-- the benefits of which are taken to be well established and proven. Actually, this defense is bogus. Trade among nations with different standards of living ultimately has a leveling effect. The lower standard of living goes up, and the higher standard of living goes down.
The classical notion of free trade is that nations can benefit by concentrating on the production of goods with respect to which they have “comparative advantages”. The classic example -- given by David Ricardo -- is trade between England and Portugal. Since the cool, damp weather of England is hospitable to sheep, and the warm, dry weather of Portugal is hospitable to grapes, both England and Portugal will benefit if England produces wool and Portugal produces wine, compared with the situation in which both countries try to produce both commodities themselves.
In situations where nations have true “comparative advantages” – such as location, climate, or natural resources – this is no doubt true. Both can benefit from expanding production of the product with respect wo which they have a comparative advantage (forgetting, for the moment, the cost of transportation).
But what does any of this have to do with the modern world. In particular, what does it have to do with China?
China is located nowhere near its primary export markets. Its climate is highly variable, and not particularly suited to the production of one thing or another. What’s more, China is notoriously poor in energy and many other natural resources. So what does it have going for it?
Well, despite several decades of Communist pretense, China does have a centuries-old tradition of trade. Just travel around Asia and you’ll see what I mean. Everywhere you go, there are Chinese (and Indian) traders descended from long lines of Chinese (and Indian) traders. Second, China has a command economy that can allocate capital quickly to take advantage or perceived opportunities. Third, China has an enormous pool of unemployed and underemployed workers who are used to an abysmally low standard of living.
All of these factors are necessary in explaining China’s recent economic ascent; none is sufficient standing alone. But it also needs to be pointed out that none of these factors – least of all a large pool of impoverished workers – can be called a “comparative advantage” in the classical sense. A “comparative advantage” in the classical sense is not diminished by its exploitation. England does not get less rainy by producing wool. Portugal does not get less sunny by producing wine. But a pool of impoverished workers? Over time, it will be diminished as people are put to work. As their standard of living rises, the “comparative advantage” of their poverty will be lost.
And what about the trading partners that have benefitted from that poverty? Even assuming all else is equal -- that they have traded goods and services -- whether in raw materials, technology, or agricultural commodities -- of equal value, their benefit will be lost. But to the extent these countries have run trade deficits with China, their export has been debt.
Debt is a promise to suffer a lower standard of living tomorrow in exchange for enjoying a higher standard of living now.
This is the trade the United States has been, and still is, engaging in.
The classical notion of free trade is that nations can benefit by concentrating on the production of goods with respect to which they have “comparative advantages”. The classic example -- given by David Ricardo -- is trade between England and Portugal. Since the cool, damp weather of England is hospitable to sheep, and the warm, dry weather of Portugal is hospitable to grapes, both England and Portugal will benefit if England produces wool and Portugal produces wine, compared with the situation in which both countries try to produce both commodities themselves.
In situations where nations have true “comparative advantages” – such as location, climate, or natural resources – this is no doubt true. Both can benefit from expanding production of the product with respect wo which they have a comparative advantage (forgetting, for the moment, the cost of transportation).
But what does any of this have to do with the modern world. In particular, what does it have to do with China?
China is located nowhere near its primary export markets. Its climate is highly variable, and not particularly suited to the production of one thing or another. What’s more, China is notoriously poor in energy and many other natural resources. So what does it have going for it?
Well, despite several decades of Communist pretense, China does have a centuries-old tradition of trade. Just travel around Asia and you’ll see what I mean. Everywhere you go, there are Chinese (and Indian) traders descended from long lines of Chinese (and Indian) traders. Second, China has a command economy that can allocate capital quickly to take advantage or perceived opportunities. Third, China has an enormous pool of unemployed and underemployed workers who are used to an abysmally low standard of living.
All of these factors are necessary in explaining China’s recent economic ascent; none is sufficient standing alone. But it also needs to be pointed out that none of these factors – least of all a large pool of impoverished workers – can be called a “comparative advantage” in the classical sense. A “comparative advantage” in the classical sense is not diminished by its exploitation. England does not get less rainy by producing wool. Portugal does not get less sunny by producing wine. But a pool of impoverished workers? Over time, it will be diminished as people are put to work. As their standard of living rises, the “comparative advantage” of their poverty will be lost.
And what about the trading partners that have benefitted from that poverty? Even assuming all else is equal -- that they have traded goods and services -- whether in raw materials, technology, or agricultural commodities -- of equal value, their benefit will be lost. But to the extent these countries have run trade deficits with China, their export has been debt.
Debt is a promise to suffer a lower standard of living tomorrow in exchange for enjoying a higher standard of living now.
This is the trade the United States has been, and still is, engaging in.
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