Tuesday, June 7, 2016

A Reaction to Resilience, III: How to Make the System Resilient

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.
"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.
"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.
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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