Here’s the secret to keeping calm amidst all the panic on
Wall Street yesterday. All you have to
do is keep on thing in mind: like the preacher’s watch on the pulpit during the
sermon, “It don’t mean a damn’ thing.”
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| Nothing new under the sun ... the Panic of 1873. |
That’s right. Wall
Street is a “secondary market.” That
means it’s a secondhand shop for used corporate debt and equity. For example, do you know how much money a company gets
when its shares go from $10 to $1,000 on the market and it has 1,000,000 shares
outstanding?
Nothing. Zip. Zero.
The company doesn’t get one cent of an increase in the price of its
publicly traded shares. The company got
its money when the issue was floated, and not one cent after that.
Frankly, even if your entire fortune is in equity and debt,
you didn’t lose or make one single cent yesterday . . . unless you bought or
sold. It’s all on paper. A gain or a loss means absolutely nothing
until and unless you “liquidate,” i.e.,
sell it.
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| Well, bust my buttons, a horse of a different color. . . |
That being said, however, what do we do to fix it? That’s a horse of a different color. . . .
One of the most fundamental principles in Keynesian
economics, if not the most fundamental, is the idea that there are no
fundamental principles. Obviously this
is contradictory, but no more so than the pundit who proclaims that there are
absolutely no absolutes.
We hate to repeat ourselves, but it is necessary at this
point to quote what has to be the most damaging passage in all the writings of
John Maynard Keynes. It’s from the
opening pages of the work intended to be his magnum opus, The Treatise on Money (1930).
As Keynes declared,
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| "Now, children, Unca' Keynes will read his financial fantasy..." |
“It is a peculiar characteristic of money contracts that it is the
State or Community not only which
enforces delivery, but also which decides what it is that must be delivered as
a lawful or customary discharge of a contract which has been concluded in
terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which
enforces the payment of the thing which corresponds to the name or description
in the contract. But it comes in doubly
when, in addition, it claims the right to determine and declare what thing corresponds to the name, and
to vary its declaration from time to time — when, that is to say, it claims the
right to re-edit the dictionary. This
right is claimed by all modern States and has been so claimed for some four
thousand years at least. It is when this stage in the evolution of money has been reached that Knapp’s
Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized.”
To put this in simple English, according to Keynes, the
State has the right to change the value of the currency, the value of the
standard of the currency, and even the standard itself at will. The bottom line is that Keynesian economics
is built on a solid foundation of the assumption that there is no such thing as
a foundation, solid or otherwise. The
State tells you what something is, and that’s what it is until the State tells
you otherwise.
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| The logical end of Keynesian economics. |
The Keynesian system is thus productive of total chaos, into
which society dissolves whenever people realize that there are no absolutes —
no standards — and that nothing has any meaning except what someone with a
bigger club than you have insists is the case . . . until it isn’t. Fortunately, however, restoring sanity (and
standards) is relatively simple, although far from easy, given the political,
financial, and academic inertia prevalent these days. The following steps will institute an
elastic, asset-backed reserve currency for the United States beginning
immediately, eventually retiring all currency backed by government debt
(“elastic” means the currency expands and contracts with the needs of the
economy without inflation or deflation):
Step One: Immediately
define the reserve currency in terms of a fixed and uniform standard. We recommend that the U.S. Dollar be defined
as having the value of ten Standard Kilowatt Hours, meaning the value of a
Kilowatt Hour delivered. Congress has
the power to do this under Article I, § 8 of the Constitution. This will “fix” the price of a Kilowatt Hour
and thus the value of a dollar within a narrow range, but energy is regulated
anyway, and this doesn’t really change anything there. Obviously, based on the local market, the
actual delivered price of a Kilowatt Hour will vary from the standard, but not
very much. When gold was the standard in
the late 19th and early 20th century the local price of
gold, especially in local markets, often varied from the $20.63 official price,
although not by much. We described this
in Flexible
Standards, IV: Selecting a Standard.
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| Rep. Carter Glass, Lynchburg, VA. |
Step Two: Immediately reinstitute Glass-Steagall,
except with much stronger provisions.
Within 90 days there must be a complete separation between investment
banking, commercial banking, insurance, and all other discrete forms of banking
and financial services. Commercial banks
may temporarily continue to offer consumer banking services, but these must be
phased out or spun off from the commercial banking function within three to
five years. Credit unions, savings and
loans, and similar institutions were designed to handle consumer banking
services, and specialization in financial services is one of the keys to good
internal control.
Step Three:
Immediately open the Federal Reserve Discount Window to rediscount “qualified
agricultural, commercial, and industrial paper” from commercial banks. This, again, is what the Federal Reserve was
designed to do. Make certain, however,
that “qualified” is defined as including a provision that expands ownership of
newly formed capital, and is limited to financially feasible capital projects
adequately collateralized, and “acceptable collateral” is defined as capital
credit insurance. Extend the term of
qualified paper to up to ten or fifteen years, as was done in part in the 1930s
in an effort to provide funding for new capital (it didn’t work very well
because otherwise qualified borrowers lacked collateral in the form of capital
credit insurance to be able to take advantage of the program). Short-term paper (90 day or less) may qualify
without the expanded capital ownership provision, unless renewed past 360 days. (This will institute 100% reserves for all
loans rediscounted at the Federal Reserve.)
All of this is either currently in the law, or could be added without
legislation with regulations. Also, begin phasing out open market operations in government debt paper, with the goal of retiring the debt completely and backing the money supply 100% with private sector assets.
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| A more just tax system...couldn't be worse than what we have. |
Step Four: Reform
the tax code, simplifying it by treating all personal income from whatever
source exactly the same for tax purposes.
Exempt from taxation $20,000 for dependents, $30,000 for non-dependents,
eliminate all other deductions and credits at the personal level, and give a
lifetime deferral of $1 million on the current value of capital in a Capital
Homestead Account. Tax all personal
income above the exemption and deferral at the same rate for everybody. Increase the corporate tax, but make
dividends tax deductible at the corporate level, and treated as regular income
at the personal level, unless used to acquire dividend-paying assets in a
Capital Homestead account. A corporation
or other business that pays out all profits and finances growth with new equity
issues would thereby avoid all corporate income taxes.
Step Five: Enact
a Capital Homestead Act that enables every child, woman, and man to borrow
newly created money to purchase a pro
rata share of the capital “growth ring” added to the economy each year, to
be repaid with future dividends received on the shares purchased.
This, in bare outline, is the way to establish and maintain
a fixed and uniform standard for the reserve currency — the currency into which
all other forms of money can be converted, and which thereby serves as the
standard of value. The world economy has
for too long been shackled by governments and politicians that manipulate the
value of the currency to achieve political ends — which is why the United
States has more than $18 trillion in government debt, Greece is bankrupt, and
the global market is in a turmoil.
And yet it can be fixed very easily.
#30#