Monday, April 2, 2012

Show Me the Money!

The other day we were asked a "complex question." We don't mean that the question was difficult to answer, however. A "complex question" in logic is one that assumes the answer. The most (in)famous complex question is, "Are you still beating your wife?" Try answering that "yes" or "no" and see what happens.

Anyway, the question was, "The House [of Representatives] has rejected the budget for not including enough cuts in spending. Is this the start of sane reductions and a return to much smaller budgets?"

The "complex" part of the question is the assumption that current levels of spending are insane. We happen to agree, but the question could have been phrased better.

Anyway, the problem is that no one in power is proposing a viable alternative to government spending. As long as people assume as a given that either the government provides basic needs or we do without, there is no way out of the situation. One side is chastised for being heartless fiends who want everyone to die for want of a crust of bread or a bandage, while the other side is lambasted as brainless spendthrifts who want to take care of everyone without it costing anyone.

The fact is that government was never intended to try and take care of people's individual wants and needs, but to provide and protect the environment within which people can take care of themselves. In an emergency, of course, it's perfectly legitimate for the government to step in and redistribute enough wealth to keep people going until they can get back on their feet, but we seem now to live in a permanent state of emergency.

At the heart of the problem is the belief that only the rich or the State can own capital, and everybody else must work only for wages or receive welfare. This is because most people think that the only way to finance new capital formation is to cut consumption and save, not monetize the present value of future marketable goods and services and let the new capital finance itself. This means that only the rich who can afford to cut consumption, or the State that can simply confiscate wealth, have the ability to finance new capital.

Once we realize, however, that we can turn the present value of future marketable goods and services into money — which is what commercial and central banks were invented to do, not finance non-productive government spending — we see the way out. People who currently own no capital can become owners of the capital that is displacing them from their jobs by buying capital on credit, and paying for it with the profits received from the capital in the future.

Most new capital is financed this way, anyway, but only by people who have collateral. Replacing traditional collateral with capital credit insurance and reinsurance solves that problem. Corporations don't need to finance growth by accumulating cash. They can pay out all earnings as tax-deductible dividends (fully taxable as ordinary income to the recipient), and issue new equity to finance growth.

Once most people become capital owners by purchasing the new equity (paid for using the full stream of dividends they receive, then when the shares are paid for, using the dividends for consumption), the government need no longer provide for individual needs, including Social Security and other entitlements — that make up two-thirds of the federal budget. As more people become capital owners, entitlements can be phased out, and the savings applied to paying down the national debt.

Without a replacement for entitlements, however, all the cost-cutting and tax increases (imposed on a deteriorating tax base as jobs disappear) in the world will not help. Leaving the present system intact and fiddling with the numbers can't work. Run the numbers — without a way to finance new capital without using cuts in consumption, the economy will continue to spiral downwards, ironically just as the inflationary policies result in "gains" in the stock market.

CESJ's proposal to replace entitlements, "Capital Homesteading," has the potential to turn this situation around, but none of the candidates or incumbents is considering it.

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