Yesterday we
promised to take a look at how the financial system might be restructured to
make it resilient. Believe it or not,
this is a very simple thing to do, although you don’t want to confuse “simple”
and “easy.”
The financial
system is simple to fix because it was originally designed to be
resilient. That means you only have to
return institutions — the social tools — to their proper functioning.
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| "Anyone can be like us, with enough guts, gumption ... and Daddy's money..." |
The financial
system is not easy to fix, however, because virtually all academics and
politicians, along with the current financial élite — anyone, in short, who has benefited from the current system
— are going to resist, if only because the way the system currently operates is
“obviously” the way it is supposed to run and, in fact, the only way the system
can run. It worked for them, didn’t it? And if it’s
not working for you, you must be a malcontent, a whiner, or a loser who doesn’t
have the guts and gumption to get a job and become rich.
Enough with the
politically incorrect commercials, already.
How do we fix the system?
The short answer
is, implement and maintain a Capital Homesteading
program immediately. If that’s too
simple, here are a few of the essential highpoints of Capital Homesteading, at
least as they relate to financial resilience:
·
Pass enabling legislation giving every U.S. citizen and legal resident
the right to obtain an equal share of the annual new capital “growth ring” of
the U.S. economy by purchasing on credit newly issued equity shares that carry
the vote and pay out all earnings attributable to those shares. The private sector loan contracts,
collateralized with capital credit insurance and reinsurance and backed by the
value of the new capital to be purchased, will themselves back the new money
created to purchase the shares. This
will institute an elastic (resilient), stable, asset-backed currency that will
gradually replace the current money supply backed by government debt as the
restored tax base begins generating sufficient revenue to start retiring the
national debt.
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| "I am exhausted with all my guts and gumption." |
·
All dividends will be tax deductible at the
corporate level, but treated as regular taxable income at the personal level. Taxes will be deferred on all income used to
make debt service payments on newly acquired equity shares until such time as
the shares are sold or the shareholder dies, at which time the recipient of an
inheritance will be taxed, not the estate.
The amount of assets that can be acquired on a tax deferred basis will
be limited by the amount of assets needed to generate a level of income
sufficient to meet ordinary needs.
·
All Capital Homesteading loans will immediately
be rediscounted at the Federal Reserve, thereby providing 100% reserves of
asset-backed currency sufficient to meet even the most extravagant demands for
redemption of commercial bank obligations.
This will make runs and bankruptcies of commercial banks impossible in
all foreseeable (and virtually all unforeseeable) circumstances. (We’d say “in any and all circumstances,” but
“unforeseen” means just that, e.g.,
an invasion from outer space or something.)
·
Except to retire current outstanding government
debt and phase out additional new issues of government debt consisting of bills
of credit instead of borrowing from existing savings, confine open market
operations to monetizing financial instruments representing existing marketable
goods and services. This — the original
purpose of open market operations — ensures that there is always enough
currency in the system to purchase existing inventories at market prices. There would no longer be the possibility of a
“money famine” such as occurred during the Great Depression of 1893-1898 due to
the inelastic, debt-backed National Bank Note currency becoming insufficient
for the daily needs of the economy — most people didn’t use checks, and credit
cards hadn’t been invented.
·
Institute income tax reform so that a single
rate sufficient to cover all projected government expenditures and start paying
down debt is levied on ALL (yes, ALL) income above a
meaningful exemption level sufficient to cover reasonable living expenses. (We estimate that will be at current price
levels $30,000 for a non-dependent and $20,000 for a dependent.) With all new capital formation financed using
“future savings” by monetizing bills of exchange issued to purchase new
capital, and collateralized with capital credit insurance, there will be no
need for a corporation to retain earnings . . . which belong to the
shareholders, anyway.
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| The bare bones plan to financial resilience. |
That’s the bare
bones, of course, and covers only the financial area. As can be seen, however, financial resilience
— a money supply that meets the needs of the economy (instead of an economy where
the needs of the economy are forced to take available financing into
consideration) — is automatic in such an arrangement of society. There would no longer be any need to try and
guess how much money is needed in the economy and then issue government debt to
that amount.
No, the economy
itself determines how much money is created simply by the number of
transactions, the price level, and the velocity of money. The “core” money supply would consist of
money issued to finance new capital formation.
If this is not enough to do that and carry out transactions involving
existing inventories, then “merchants” and “trade” acceptances (“B2B” —
business-to-business bills and notes) will take up the slack.
If merchants and
trade acceptances aren’t enough, then the Federal Reserve creates new money to
purchase qualified securities on the open market. Open market operations should always be used very cautiously, especially these days
when most people have options other than currency to carry out daily
transactions. This is because open
market operations are the only part of this system that relies on guesswork, i.e., “How much more money doe we think
the economy needs?”
In addition, open
market operations must be short term,
no longer than 90 days. Any securities
purchased for more than 90 days indicate the possibility of a serious
disruption in the financial system. This
is because the “seasonal” business cycle is no longer than 90 days, as consumer
demand typically varies according to the four seasons (you knew there was some
reason for that 90-day time period you learned in finance class).
Ultimately, if a
financial system isn’t self-regulating in this fashion, no amount of government
tinkering is going to make it work right or be able to force desired results.
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