In the previous posting in this series we learned that the Keynesian dogma that new capital formation can only be financed by cutting consumption, saving, then investing is false. Even more dangerous than that assumption, however, is the idea that money and production should not be directly linked. This gives us the more damaging of Keynes' dogmas:
Keynesian Dogma Number 2: Money can be created for consumption and government spending without the necessity of first cutting consumption and saving, but not for investment in new capital.
Dr. Moulton's Finding: The periods of increased consumption that, in each and every case preceded periods of intensive capital formation in the United States from 1830 to 1930 meant that savings were necessarily depleted to finance the increases in consumption. The financing for new capital formation did not, as many economists still presume, come from England and the Continent. The financing came from the extension of credit by commercial banks.
Analysis: The belief that the financing for America's industrial, commercial, and agricultural expansion came from Europe is easily refuted. European economies needed all the financing they could get to develop their own growing industrial, agricultural, and commercial bases, in many cases pillaging their respective colonial empires to provide the necessary capital — the justification for the colonies in the first place. They had nothing to spare for investment in the United States, a competitor, the returns from which would necessarily be lower than what could be realized from colonies. The perceived need for sources of external financing is one of the ultimate causes of the "Seven Weeks War" between Prussia and Austria-Hungary in 1866, the Franco-Prussian War of 1870, and the otherwise unaccountable sudden acquisition of a colonial empire by the Second Reich once Bismarck consolidated German unification under Prussia.
The only possible source of financing for America's enormous expansion during the 19th century was extension of bank credit under the "Real Bills" doctrine. Rather than being inflationary, as Keynesians claim, the 19th century was a period in which productive capacity exceeded money creation at so tremendous a rate due to technological advances, that deflation (insufficient money supply) and falling prices, not inflation, were the chief problems. Contrary to Keynes' assertion in The Economic Consequences of the Peace (1919) that industrial, commercial, and agricultural development could only have proceeded at so great a rate when wealth and ownership of the means of production are concentrated, the United States outstripped all of Europe in the rate at which the country developed economically, and did so in a country in which, until the late 19th century, ownership of the means of production was relatively widespread.
Had ownership of the means of production in the United States been even more equitably distributed, the general lowering of prices throughout the 19th century would have been a great boon to everyone as their money became worth more. Instead, it was a curse to farmers and ranchers and anyone else (such as wage workers with no ownership stake) who owned no share in the industrial and commercial advancement as the industrial and commercial sectors of the economy became increasingly important and outstripped the agricultural sector.
The ownership of land was more or less widely distributed, but, as Judge Peter Stenger Grosscup was to note in a series of articles from 1905 to 1914, ownership of industry and commerce was becoming increasingly concentrated. This meant that the owners of vastly productive industrial and commercial capital could not possibly consume all of their income. This led to the situation Keynes attempted to fix by making it worse, trying to increase effective demand by redistribution and inflation, concentrating ownership further, and disconnecting the financial sector from the productive sector of the economy.
THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.
Thursday, February 19, 2009
Wednesday, February 18, 2009
The Just Third Way and Capital Homesteading in Ireland
In early February, CESJ sent copies of Capital Homesteading for Every Citizen to a number of party leaders and other politicians in Ireland. (The Capital Homesteading "flyer," designed for ordinary people is also useful, as is the Capital Homestead "Summary," intended as a guide for policymakers.) Yesterday we received an acknowledgment and thank-you from the Hon. Enda Kenny, leader of the Fine Gael party, Ireland's second largest political party, which describes itself as being in the "progressive center." Mr. Kenny's note was brief but substantive, as befits an Irish politician (or any politician, for that matter) in these times of crisis when more immediate matters take precedence — such as saving his country from financial meltdown.
Fine Gael's platform appears consistent with the Just Third Way in many respects, or expresses goals that can be met efficiently and effectively by implementing Capital Homesteading and other Just Third Way programs. This would not only allow Fine Gael to work more effectively with its traditional partner in government, the Irish Labor Party, but also Fine Fail, the Irish Republican Party, Ireland's largest political party and the one currently in power. Fine Gael's focus on law and order, enterprise and reward, and fiscal responsibility, along with its advocacy of limited State involvement in the economy, can easily fit into a Capital Homesteading program based on the four pillars of a just economy:
Such improvements would be repaid not out of taxes collected by the State, but out of revenue generated by user fees such as tolls for roads and bridges, and service charges for sewage, water, and similar utilities. Overcharges would be returned to the citizens in the form of dividends that would be tax-deductible at the corporate level, and all new infrastructure financed not by bond issues or increased taxes, but through the extension of commercial bank credit discounted at the central bank. This would enhance the value of the currency by backing it with existing hard assets or assets in construction instead of the less-certain future tax collections as is currently the case in most countries. If the central bank were to be owned by every citizen of a country in the same way that every citizen in a region would own a CIC, any excess revenue could also be returned to the citizens in the form of dividends — and the fiscal and monetary system would be more directly accountable to the citizens.
The bottom line is that the Just Third Way has a great deal to offer Mr. Kenny and Fine Gael, to say nothing of every other party in the Republic. His response gives some promise that Capital Homesteading will, indeed, begin to receive serious consideration at the highest levels of government in Ireland.
Fine Gael's platform appears consistent with the Just Third Way in many respects, or expresses goals that can be met efficiently and effectively by implementing Capital Homesteading and other Just Third Way programs. This would not only allow Fine Gael to work more effectively with its traditional partner in government, the Irish Labor Party, but also Fine Fail, the Irish Republican Party, Ireland's largest political party and the one currently in power. Fine Gael's focus on law and order, enterprise and reward, and fiscal responsibility, along with its advocacy of limited State involvement in the economy, can easily fit into a Capital Homesteading program based on the four pillars of a just economy:
• Limited economic role for the State,Even Fine Gael's position that the State has a necessary role in financing and owning infrastructure can be modified without violating any of the party's basic principles through the use of Community Investment Corporations, or "CICs." A CIC would enable citizens in a region to own the land and infrastructure directly by issuing each one a single no cost, non-transferable, fully voting, fully participating share in the CIC, which would hold legal title. Infrastructure could then be financed by no-interest capital credit loans extended by commercial banks to the CIC and discounted at the central bank. (N.B. — "No-interest" does not mean "free." Both commercial banks and central banks must still charge service fees to cover expenses and, in the case of commercial banks, meet the "risk premium" for capital credit insurance and generate a just profit for their shareholders.)
• Free and open markets for maximizing incentives and choice in determining just prices, just wages, and just profits,
• Restoration of traditional rights of private property, and
• The lifting of barriers that inhibit or prevent universal access to direct ownership of the means of production.
Such improvements would be repaid not out of taxes collected by the State, but out of revenue generated by user fees such as tolls for roads and bridges, and service charges for sewage, water, and similar utilities. Overcharges would be returned to the citizens in the form of dividends that would be tax-deductible at the corporate level, and all new infrastructure financed not by bond issues or increased taxes, but through the extension of commercial bank credit discounted at the central bank. This would enhance the value of the currency by backing it with existing hard assets or assets in construction instead of the less-certain future tax collections as is currently the case in most countries. If the central bank were to be owned by every citizen of a country in the same way that every citizen in a region would own a CIC, any excess revenue could also be returned to the citizens in the form of dividends — and the fiscal and monetary system would be more directly accountable to the citizens.
The bottom line is that the Just Third Way has a great deal to offer Mr. Kenny and Fine Gael, to say nothing of every other party in the Republic. His response gives some promise that Capital Homesteading will, indeed, begin to receive serious consideration at the highest levels of government in Ireland.
Tuesday, February 17, 2009
Stimulus, Part VI: Does the "Real Bills" Doctrine Work?
As we saw in the previous posting in this series, in theory money can be created as needed if both parties to the creation of the money — the producer of future wealth and the present financial institution — keep their promises. Because the amount of money created matches the value — wealth — to be created, there will be no inflation if everyone keeps the promises made.
In actuality, however, 1) capital typically continues to produce long after the financing of the capital has been repaid, 2) bankers tend to lend based on a low estimate of future production, and 3) producers tend to produce as much as they can over and above the low estimate on which they obtained financing. Thus, money typically buys more than before if all money creation is restricted to financing new capital formation or in exchange for existing inventories. There is not only no inflation, but an actual appreciation of the currency. The amount of goods and services available for sale increases at a greater rate than the creation of new money. This is the opposite of the classic definition of inflation, in which money is created at a greater rate than goods and services are produced.
We do not, however, need to rely on what some people might regard as a bit of esoteric reasoning to prove that the "Real Bills" doctrine works. We have hard data to substantiate the claim — data that Keynes completely ignored. In 1935, Dr. Harold G. Moulton, then-president of the Brookings Institution, published findings that contradicted the Keynesian New Deal that was then in the process of being implemented in the United States. Dr. Moulton's little book, The Formation of Capital, began by examining cycles of consumption and investment covering the period from 1830 to 1930. He then analyzed the results of his examination and determined that what he found directly contradicted the entire justification of the Keynesian New Deal. We can understand the significance of Dr. Moulton's findings by giving two standard Keynesian dogmas (one in this posting, another in the next), showing what Dr. Moulton discovered, and analyzing Dr. Moulton's finding.
Keynesian Dogma Number 1: New capital formation can only be financed by first cutting consumption, saving, then investing.
Dr. Moulton's Finding: From 1830 to 1930, during which the United States experienced periods of the greatest industrial, agricultural, and commercial expansion in history, periods of intensive new capital formation were preceded not by decreases in consumption as Keynes declared was absolutely necessary, but great increases in consumption.
Analysis: Dr. Moulton drew two conclusions from this observation. 1) Effective demand (i.e., consumption) does not derive from an increase in the quantity of goods and services available (i.e., from increased investment). On the contrary, a rational businessman or investor will only invest in new capital formation, or even replace existing worn-out capital, if effective demand for his good or service already exists. The demand for capital goods is derived from consumer demand, not the other way around as Keynes believed.
In any event, given (as Keynes believed as an absolute) that savings necessarily equals investment, it is impossible to finance new capital formation out of existing pools of savings. Why? They don't exist. Banks do not let savers accumulate idle cash in their accounts. On the contrary, every dollar sitting idle in a savings account is a dollar not making money. The function of a "bank of deposit" or savings bank is to aggregate the accumulations of savers, and lend the money to borrowers. An accumulation of savings is already invested. Remember Jimmy Stewart's speech in It's a Wonderful Life? If everyone who had a savings account at a bank of deposit demanded his or her savings in full, in cash, in order to finance new capital formation, the bank would be forced to call in all its loans. This, in turn, would force borrowers to liquidate (sell) their investments — holdings of capital — in order to repay the loans immediately. All new capital investment would be matched by an equal and opposite disinvestment in existing capital, a zero-sum effort. Under Keynes' assumption that saving must precede investment, there could never be any economic development, merely a continuous transfer of existing capital back and forth, an endless game of redistribution.
While Keynesian monetary and fiscal policy is predicated on the necessity of redistributing existing wealth, and is designed to do just that, the real use of existing savings (and thus existing investment) is to insure that bank loans extended to finance new capital formation (and thereby create money) can be paid back, whether or not the new capital formation is successful. The existing savings/investment function as "collateral," so that the bank's shareholders and account holders do not lose too much money if something goes wrong. Consistent with the old saw that you need money to make money, existing savings/investment does not itself provide the financing for new capital formation. It makes new capital formation possible by insuring the lender against unexpected loss.
As we see in the subtitle to the second book by Louis Kelso and Mortimer Adler, The New Capitalists (1961), this use of savings as collateral instead of as the direct source of financing suggests not only that something other than existing pools of savings are used for new investment ... but that something other than accumulated wealth can be used for collateral. If, after all, collateral is a form of self insurance, why not use actual insurance, "capital credit insurance," in the place of savings? Thus the subtitle of Kelso and Adler's second book, "How to Free Economic Growth From the Slavery of Savings," not only makes perfect sense, but frees us from the slavery of reliance on the dogmas of the world's premier defunct economist: John Maynard Keynes.
In actuality, however, 1) capital typically continues to produce long after the financing of the capital has been repaid, 2) bankers tend to lend based on a low estimate of future production, and 3) producers tend to produce as much as they can over and above the low estimate on which they obtained financing. Thus, money typically buys more than before if all money creation is restricted to financing new capital formation or in exchange for existing inventories. There is not only no inflation, but an actual appreciation of the currency. The amount of goods and services available for sale increases at a greater rate than the creation of new money. This is the opposite of the classic definition of inflation, in which money is created at a greater rate than goods and services are produced.
We do not, however, need to rely on what some people might regard as a bit of esoteric reasoning to prove that the "Real Bills" doctrine works. We have hard data to substantiate the claim — data that Keynes completely ignored. In 1935, Dr. Harold G. Moulton, then-president of the Brookings Institution, published findings that contradicted the Keynesian New Deal that was then in the process of being implemented in the United States. Dr. Moulton's little book, The Formation of Capital, began by examining cycles of consumption and investment covering the period from 1830 to 1930. He then analyzed the results of his examination and determined that what he found directly contradicted the entire justification of the Keynesian New Deal. We can understand the significance of Dr. Moulton's findings by giving two standard Keynesian dogmas (one in this posting, another in the next), showing what Dr. Moulton discovered, and analyzing Dr. Moulton's finding.
Keynesian Dogma Number 1: New capital formation can only be financed by first cutting consumption, saving, then investing.
Dr. Moulton's Finding: From 1830 to 1930, during which the United States experienced periods of the greatest industrial, agricultural, and commercial expansion in history, periods of intensive new capital formation were preceded not by decreases in consumption as Keynes declared was absolutely necessary, but great increases in consumption.
Analysis: Dr. Moulton drew two conclusions from this observation. 1) Effective demand (i.e., consumption) does not derive from an increase in the quantity of goods and services available (i.e., from increased investment). On the contrary, a rational businessman or investor will only invest in new capital formation, or even replace existing worn-out capital, if effective demand for his good or service already exists. The demand for capital goods is derived from consumer demand, not the other way around as Keynes believed.
In any event, given (as Keynes believed as an absolute) that savings necessarily equals investment, it is impossible to finance new capital formation out of existing pools of savings. Why? They don't exist. Banks do not let savers accumulate idle cash in their accounts. On the contrary, every dollar sitting idle in a savings account is a dollar not making money. The function of a "bank of deposit" or savings bank is to aggregate the accumulations of savers, and lend the money to borrowers. An accumulation of savings is already invested. Remember Jimmy Stewart's speech in It's a Wonderful Life? If everyone who had a savings account at a bank of deposit demanded his or her savings in full, in cash, in order to finance new capital formation, the bank would be forced to call in all its loans. This, in turn, would force borrowers to liquidate (sell) their investments — holdings of capital — in order to repay the loans immediately. All new capital investment would be matched by an equal and opposite disinvestment in existing capital, a zero-sum effort. Under Keynes' assumption that saving must precede investment, there could never be any economic development, merely a continuous transfer of existing capital back and forth, an endless game of redistribution.
While Keynesian monetary and fiscal policy is predicated on the necessity of redistributing existing wealth, and is designed to do just that, the real use of existing savings (and thus existing investment) is to insure that bank loans extended to finance new capital formation (and thereby create money) can be paid back, whether or not the new capital formation is successful. The existing savings/investment function as "collateral," so that the bank's shareholders and account holders do not lose too much money if something goes wrong. Consistent with the old saw that you need money to make money, existing savings/investment does not itself provide the financing for new capital formation. It makes new capital formation possible by insuring the lender against unexpected loss.
As we see in the subtitle to the second book by Louis Kelso and Mortimer Adler, The New Capitalists (1961), this use of savings as collateral instead of as the direct source of financing suggests not only that something other than existing pools of savings are used for new investment ... but that something other than accumulated wealth can be used for collateral. If, after all, collateral is a form of self insurance, why not use actual insurance, "capital credit insurance," in the place of savings? Thus the subtitle of Kelso and Adler's second book, "How to Free Economic Growth From the Slavery of Savings," not only makes perfect sense, but frees us from the slavery of reliance on the dogmas of the world's premier defunct economist: John Maynard Keynes.
Monday, February 16, 2009
What's Wrong With This Picture?
According to an Associated Press report, Tzipi Livni, who hopes to be appointed the new prime minister, has declared that Israel can achieve peace with the Palestinians by surrendering approximately half of Israel's territory, thereby securing the safety and continuance of a Jewish State.
It's difficult knowing where to begin.
On a practical note, the most common demand from the surrounding Muslim States and the Palestinians is not that Israel surrender territory, but that Israel surrender its existence. Aside from the fact that territorial appeasement has never worked (the surrender of the Sudetenland before the Second World War merely whetted Hitler's appetite for the rest of Europe), it would likely be taken as a tacit acknowledgement that Israel's possession of any territory at all is illegitimate — exactly as radical Muslims have been claiming since the late 1940s. One can almost hear the rhetoric following such a surrender: "Israel has finally admitted it has no right to exist. We demand that these half measures stop, and the Jews have the good sense to leave or be killed."
Then there's the whole idea of a religious State, whether Jewish, Muslim, or Christian (or Tibetan Lamaism, for that matter). Shouldn't a State have a religion? Not in the sense that we understand "religious State." Citizens should have a religion (and must, in order to be human, if we believe Aristotle), but so far as the State itself is concerned, what religion a citizen follows is a matter of personal choice, as long as the practice of that religion does not harm other individuals, groups, or the common good.
Does that mean that the State must necessarily be indifferent or even hostile to religion? That may be an even bigger mistake than having a religious State. A religious State at least acknowledges that religion plays an important role in society. A State that ignores religion or is overtly hostile, however, is refusing to acknowledge reality. Whether or not you believe that God or gods exist(s), religion's role in the civil order is to teach essential principles of morality and natural law. This is a necessary role, for no State can decide issues of right and wrong on its own authority, or it ends up, essentially, making up its own standards against which to measure its own actions.
Whether you call the natural law the general consensus of all mankind rooted in human nature as to what constitutes "the good," or you believe that human nature is a reflection of a divine nature, and thus constitutes "the good," the natural law is as close as humanity is going to get to an objective standard of morality, and thus "right" and "wrong." A State that rejects a sound understanding of the natural law, or even the concept of natural law itself on the grounds that it is derived, ultimately (as is the case with all law) from religious belief, makes a serious mistake, and undermines the basis of and justification for its own existence.
Where does this leave Israel? Is there no hope at all for peace?
There is a great deal of hope for peace, if those involved in the process can learn to think beyond the parameters that have been imposed on the discussions. The Abraham Federation represents a well-thought-out solution to the situation in the Middle East, and warrants serious consideration by people interested in a "win-win" proposal instead of the usual "win-lose" scenarios that end up a loss for all concerned.
It's difficult knowing where to begin.
On a practical note, the most common demand from the surrounding Muslim States and the Palestinians is not that Israel surrender territory, but that Israel surrender its existence. Aside from the fact that territorial appeasement has never worked (the surrender of the Sudetenland before the Second World War merely whetted Hitler's appetite for the rest of Europe), it would likely be taken as a tacit acknowledgement that Israel's possession of any territory at all is illegitimate — exactly as radical Muslims have been claiming since the late 1940s. One can almost hear the rhetoric following such a surrender: "Israel has finally admitted it has no right to exist. We demand that these half measures stop, and the Jews have the good sense to leave or be killed."
Then there's the whole idea of a religious State, whether Jewish, Muslim, or Christian (or Tibetan Lamaism, for that matter). Shouldn't a State have a religion? Not in the sense that we understand "religious State." Citizens should have a religion (and must, in order to be human, if we believe Aristotle), but so far as the State itself is concerned, what religion a citizen follows is a matter of personal choice, as long as the practice of that religion does not harm other individuals, groups, or the common good.
Does that mean that the State must necessarily be indifferent or even hostile to religion? That may be an even bigger mistake than having a religious State. A religious State at least acknowledges that religion plays an important role in society. A State that ignores religion or is overtly hostile, however, is refusing to acknowledge reality. Whether or not you believe that God or gods exist(s), religion's role in the civil order is to teach essential principles of morality and natural law. This is a necessary role, for no State can decide issues of right and wrong on its own authority, or it ends up, essentially, making up its own standards against which to measure its own actions.
Whether you call the natural law the general consensus of all mankind rooted in human nature as to what constitutes "the good," or you believe that human nature is a reflection of a divine nature, and thus constitutes "the good," the natural law is as close as humanity is going to get to an objective standard of morality, and thus "right" and "wrong." A State that rejects a sound understanding of the natural law, or even the concept of natural law itself on the grounds that it is derived, ultimately (as is the case with all law) from religious belief, makes a serious mistake, and undermines the basis of and justification for its own existence.
Where does this leave Israel? Is there no hope at all for peace?
There is a great deal of hope for peace, if those involved in the process can learn to think beyond the parameters that have been imposed on the discussions. The Abraham Federation represents a well-thought-out solution to the situation in the Middle East, and warrants serious consideration by people interested in a "win-win" proposal instead of the usual "win-lose" scenarios that end up a loss for all concerned.
Friday, February 13, 2009
News from the Network, Vol. 2, No. 7
Much of the news this past week centered on the stimulus package, which (depending on your source) had a spread of $750 billion to $3 trillion, with the "final" price tag as of this morning being $790 billion. As is common in Keynesian programs, there doesn't appear to be any clear idea exactly how and to what extent the economy will be stimulated, and how the effect is to be sustained once the money is gone. Of course, this happened before, in the "mini-depression" of 1936-37, when the stimulus of the New Deal began petering out and the increased real demand due to the Second World War had not yet kick started the economy. Nevertheless, there are some non-vague events that have taken place this past week, suggesting that something more is possible than a fuzzy stimulus package with a very real — and colossal — price tag that doesn't seem directed at benefiting ordinary people.
• Norman Kurland made a trip to East St. Louis on Monday of this week, returning late Tuesday. After a series of important meetings Norm visited some impressive facilities housed inside a geodesic dome and obtained photos that the primary author of this blog lacks the technical competence to display. After meeting with Mayor Alvin Parks, it was decided to focus efforts on getting a meeting with the area's Representative in Congress and his staff to gain the Congressman's support for the East St. Louis project.Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
• Dr. Max Weismann of the Center for the Study of the Great Ideas in Chicago gave a mutual letter of introduction to Norman Kurland and Winston Elliott III of the Center for the American Idea. Dr. Weismann commented, "Please examine each other's websites and I think all three of us should share links — we're on the same team."
• Michael D. Greaney sent a report of the efforts of CESJ and the Colonel John Fitzgerald Division of the Ancient Order of Hibernians ("AOH") in Arlington, Virginia, to reach a common ground in promoting economic and social justice in Ireland and the United States to the National Hibernian Digest, the official journal of the AOH, for its important March/April issue. CESJ and the Colonel John Fitzgerald Division are exploring the possibility of collaborating on social justice projects (especially education) within the Catholic Diocese of Arlington.
• CESJ's two most recent publications, Michael D. Greaney's In Defense of Human Dignity and William Cobbett's The Emigrant's Guide, have now sold enough copies to cover the initial costs of publication. Wholesale orders in quantities of ten or more of either title can be obtained from CESJ, P. O. Box 40711, Washington, DC 20016 for $16.00 per copy plus $1.50 per copy shipping. Copies of Capital Homesteading for Every Citizen can be included in the order, for $14.00 per copy and $1.50 per copy for shipping. You may combine different titles in a single order as long as the total number of books is 10 or more. Additional discounts may apply for orders of 25 or more copies shipped to a single address. Please include a street address for shipping, as UPS does not deliver to P. O. Boxes. Individual copies of any of these titles can be ordered on the internet from Amazon or Barnes and Noble, as well as by special order from many bookstores.
• Last week's shipment of copies of Capital Homesteading to a number of politicians in Ireland may have come at the right time. According to the Irish Independent, Finance Minister Brian Lenihan, a recipient of one of the copies, is facing a crisis and calls for his resignation due to allegations that he mishandled the recent bank bailout. Immediate study of the Capital Homesteading proposal will not only give Mr. Lenihan a solution to the overall crisis, but provide a way to correct his missteps in the most effective and cost-efficient manner. The Minister's mistakes and damaging admissions may very well provide the necessary incentive to start promoting serious consideration of Capital Homesteading.
• We received word from Reverend William Christensen, S.M., Ph.D., a missionary in Bangladesh, that Dr. Muhiuddin Khan Alamgir, an Islamic moderate, has prepared a book, Prison Notes from Bangladesh, detailing his experiences as a political prisoner for nearly two years under the former military-controlled government in that country. Due to the sensitive nature of the book, Dr. Alamgir is seeking a publisher in the United States. CESJ has agreed to take a look at the manuscript for possible publication under its "Economic Justice Media" imprint, if the book proves suitable.
• As of this morning, we have had visitors from 35 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 148% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Brazil, and Ireland rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, goes to Croatia at more than twice the average time of any other country, followed by Venezuela, Mexico, the Netherlands Antilles, and Jordan, in that order. (After Croatia, however, with nearly a quarter of an hour for the average visit, there are only a few seconds' difference between, e.g., the United States of Mexico and the United States of America.) Our most popular posting, with 25% more hits than the next most popular, is the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 3 are "News from the Network" postings, 5 examine Keynesian economics, 2 are on the stimulus package, and 1 addresses the financial crisis in Ireland (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). The bottom line, of course, is that the slavish adherence to Keynes is wrecking the world's economies, and the sooner people begin to look at the situation in terms of Kelso and Adler's binary economics, the better off everyone will be.
Thursday, February 12, 2009
The Homestead Act: Abraham Lincoln's Greatest Legacy
Most of what you read today, the 200th anniversary of the birth of Abraham Lincoln, will justifiably focus on "the Great Emancipator's" achievements in freeing the slaves and saving the Union. Unfortunately forgotten in the well-deserved plaudits for our 16th president is what some insightful commentators believe deserves to be ranked with those two triumphs: the Homestead Act of 1862.
Throughout the rest of the world it was expected that a small minority would own or control the means of production. When land was the predominant form of capital, with few exceptions land was held in colossal latifundia or great feudal estates. Lincoln knew that if he couldn't come up with a democratic means of divesting the federal government of its vast western land holdings, the historic pattern would simply be repeated in the United States, and a rigid class structure imposed on America's government of the people, by the people, and for the people.
Lincoln therefore devised a plan whereby any U.S. citizen, or anyone who declared the intention of becoming a citizen, and was over the age of 21 could acquire a quarter section — 160 acres — of federal land in the "Great American Desert." After developing the land and living on it for five years (the "quid pro quo"; the land wasn't truly "free"), the homesteader was granted clear title.
The Homestead Act opened up the west to rapid development. The amazing productivity of the west from agriculture, ranching, and mining supplied the east with needed raw materials as well as a market for the manufactured goods of the east. The fact of ownership ensured that the homesteaders enjoyed the full stream of income from their newly-acquired capital, which could then be used to purchase eastern goods. This in turn ensured that America's nascent industrial sector had an opportunity to grow with equal rapidity at a time when European markets were closing off to American manufactured goods.
Unfortunately, while Lincoln's vision ensured rapid economic development and growth in the United States in the latter half of the 19th century, the Homestead Act addressed only one type of capital: land. Industry and commerce were growing in importance, however, and would soon result in a type of industrial feudalism, in which the small shopkeeper and artisan was forced out of business in competition with large concerns. The new trusts and corporations were owned by a very few people, and the great mass of people had no ownership stake in the company for which they worked.
There are hints in some of Lincoln's writings that he might have been thinking of applying the Homestead Act concept to the rising industrial and commercial enterprises, but we cannot be certain. Lincoln was killed before he was able to put the Civil War behind him and get to work on the task of rebuilding the country. Consequently, the tremendous incomes generated by the new technologies and the great commercial enterprises went not to consumption, but were reinvested, causing ownership of the means of production to become increasingly concentrated over time, and spurring ever-greater swings in the business cycle as production and consumption became disjoined, apparently in response to a seemingly iron law of economics.
This "iron law," however, was the result of a demonstrably false premise: that capital formation could only be financed by cutting consumption, saving, then investing. On the contrary, as Dr. Harold Moulton discovered in the early 1930s, in the United States from 1830 to 1930, which (as we saw above) covered periods of immense capital expansion and economic development, every period of great capital expansion was preceded not by decreases in consumption, but by increases in consumption! Savings were not being accumulated, but depleted! Banks did not lend existing pools of savings to finance capital formation, but created new money by extending credit for capital projects that were expected to pay for themselves out of profits to be made in the future.
We thus come to the conclusion that Lincoln might have, had he lived. Just as "free" land provided the opportunity for thousands of people to become owners of one type of capital, "newly-created" money tied to specific capital investments could provide the opportunity for millions — even billions — of people in the United States and throughout the world to become part owners of the companies for which they now work as wage slaves.
"Capital Homesteading" is a proposal to open up democratic access to capital credit so that every American has the ability and the means to acquire and possess a reasonable capital ownership stake. On this bicentennial of the birth of Abraham Lincoln there could not be a better way to honor his memory than to work to extend his vision to every citizen.
Throughout the rest of the world it was expected that a small minority would own or control the means of production. When land was the predominant form of capital, with few exceptions land was held in colossal latifundia or great feudal estates. Lincoln knew that if he couldn't come up with a democratic means of divesting the federal government of its vast western land holdings, the historic pattern would simply be repeated in the United States, and a rigid class structure imposed on America's government of the people, by the people, and for the people.
Lincoln therefore devised a plan whereby any U.S. citizen, or anyone who declared the intention of becoming a citizen, and was over the age of 21 could acquire a quarter section — 160 acres — of federal land in the "Great American Desert." After developing the land and living on it for five years (the "quid pro quo"; the land wasn't truly "free"), the homesteader was granted clear title.
The Homestead Act opened up the west to rapid development. The amazing productivity of the west from agriculture, ranching, and mining supplied the east with needed raw materials as well as a market for the manufactured goods of the east. The fact of ownership ensured that the homesteaders enjoyed the full stream of income from their newly-acquired capital, which could then be used to purchase eastern goods. This in turn ensured that America's nascent industrial sector had an opportunity to grow with equal rapidity at a time when European markets were closing off to American manufactured goods.
Unfortunately, while Lincoln's vision ensured rapid economic development and growth in the United States in the latter half of the 19th century, the Homestead Act addressed only one type of capital: land. Industry and commerce were growing in importance, however, and would soon result in a type of industrial feudalism, in which the small shopkeeper and artisan was forced out of business in competition with large concerns. The new trusts and corporations were owned by a very few people, and the great mass of people had no ownership stake in the company for which they worked.
There are hints in some of Lincoln's writings that he might have been thinking of applying the Homestead Act concept to the rising industrial and commercial enterprises, but we cannot be certain. Lincoln was killed before he was able to put the Civil War behind him and get to work on the task of rebuilding the country. Consequently, the tremendous incomes generated by the new technologies and the great commercial enterprises went not to consumption, but were reinvested, causing ownership of the means of production to become increasingly concentrated over time, and spurring ever-greater swings in the business cycle as production and consumption became disjoined, apparently in response to a seemingly iron law of economics.
This "iron law," however, was the result of a demonstrably false premise: that capital formation could only be financed by cutting consumption, saving, then investing. On the contrary, as Dr. Harold Moulton discovered in the early 1930s, in the United States from 1830 to 1930, which (as we saw above) covered periods of immense capital expansion and economic development, every period of great capital expansion was preceded not by decreases in consumption, but by increases in consumption! Savings were not being accumulated, but depleted! Banks did not lend existing pools of savings to finance capital formation, but created new money by extending credit for capital projects that were expected to pay for themselves out of profits to be made in the future.
We thus come to the conclusion that Lincoln might have, had he lived. Just as "free" land provided the opportunity for thousands of people to become owners of one type of capital, "newly-created" money tied to specific capital investments could provide the opportunity for millions — even billions — of people in the United States and throughout the world to become part owners of the companies for which they now work as wage slaves.
"Capital Homesteading" is a proposal to open up democratic access to capital credit so that every American has the ability and the means to acquire and possess a reasonable capital ownership stake. On this bicentennial of the birth of Abraham Lincoln there could not be a better way to honor his memory than to work to extend his vision to every citizen.
Wednesday, February 11, 2009
Doubling Down in Washington
We wish that our 200th posting could be a little happier.
In the ultra high stakes political games played in Washington, DC, $1 million is the lowest chip. The amount on the table at risk is usually measured in billions. According to the headline in today's Washington Post, however, Mr. Obama has raised the stakes in his game of Big Buddy Bailout to more than $1.5 trillion, just as we predicted in this blog last week. This is more than double the original wager of $750 billion.
Mr. Obama appears to be "doubling down." Doubling down is a technique in Blackjack in which you double your bet after receiving your first two cards. The difference, however, between straightforward gambling and what Mr. Obama is doing is that the president hasn't been dealt any cards. All he has is a blind faith that failed and disproved Keynesian economics will, despite decades of evidence to the contrary, finally pay off and allow the American economy to break even.
The problem, as we've been pointing out for several weeks, is that you can't create money in any amount without expecting inflation, unless you are careful always to link creation of new money to new production (not unsold past production), or to the financing of a project that will generate new production. Creating additional purchasing power for existing inventories simply makes each unit of currency worth less than before, redistributing existing wealth from current holders of financial assets to those receiving government payments.
This form of money creation can lead directly to hyperinflation, the surreal condition in which the price level rises faster than money can be created. Ordinarily, of course, the price level rises in response to the creation of additional purchasing power for existing inventories. When carried out on the massive scale that Mr. Obama is now demanding, however, the amount is genuinely beyond the power of the ordinary human mind to grasp.
The response of any producer or retailer to such a gargantuan influx of essentially worthless money will be to raise prices as fast as possible to make up for an anticipated inflationary loss that cannot, in human terms, be quantified — how do you visualize $1.5 trillion? The State then gets into the position that the Reichsbank faced in the early 1920s at the height of the hyperinflation.
The German central bank simply could not create money fast enough to meet daily transactions demand for currency, much less keep up with the inferno of the rising price level. Producers stopped producing, for there was no assurance that they could trade what they produced for anything of value. Farmers refused to sell their produce in exchange for crates of worthless currency, and there was virtually no industrial production generating anything that could be used for barter. The validity of Say's Law — that we can only purchase to the extent that we produce — was proved in the most vivid and devastating manner possible.
The German and Austro-Hungarian economies faced the paradox that unfettered money creation caused prices to rise so fast that there wasn't enough money in circulation to purchase what little was for sale. This was at a time when one U.S. dollar was "worth" 4.2 trillion Reichsmarks at the official exchange rate, and nearly 16 trillion on the black market. There were mountains of paper money in circulation, but it was worth more as waste paper and fuel than as currency. A famous photograph shows two little girls holding an American dollar, and in the background a colossal pile of German currency that, on that day, equaled that dollar.
Hyperinflation is a logical and expected outcome of Mr. Obama's proposal. Germany was ultimately saved because they gave a monetary and fiscal genius, Dr. Hjalmar Schacht — the "Old Wizard," a man with the unusual middle name of "Horace Greeley" — full power to do anything necessary to stop the hyperinflation. This he did by demonetizing all the old currency, creating an asset-backed non-legal tender but fully convertible parallel currency (the Rentenmark), and absolutely forbidding any new issuances in excess of the value of the asset backing.
The situation was stabilized, but the fear inspired by the hyperinflation was so great that the German, Austrian, and Hungarian peoples demanded absolute guarantees of future stability, as well as victims to blame for the virtual apocalypse of the war and the subsequent financial meltdown.
Adolph Hitler provided both.
In the ultra high stakes political games played in Washington, DC, $1 million is the lowest chip. The amount on the table at risk is usually measured in billions. According to the headline in today's Washington Post, however, Mr. Obama has raised the stakes in his game of Big Buddy Bailout to more than $1.5 trillion, just as we predicted in this blog last week. This is more than double the original wager of $750 billion.
Mr. Obama appears to be "doubling down." Doubling down is a technique in Blackjack in which you double your bet after receiving your first two cards. The difference, however, between straightforward gambling and what Mr. Obama is doing is that the president hasn't been dealt any cards. All he has is a blind faith that failed and disproved Keynesian economics will, despite decades of evidence to the contrary, finally pay off and allow the American economy to break even.
The problem, as we've been pointing out for several weeks, is that you can't create money in any amount without expecting inflation, unless you are careful always to link creation of new money to new production (not unsold past production), or to the financing of a project that will generate new production. Creating additional purchasing power for existing inventories simply makes each unit of currency worth less than before, redistributing existing wealth from current holders of financial assets to those receiving government payments.
This form of money creation can lead directly to hyperinflation, the surreal condition in which the price level rises faster than money can be created. Ordinarily, of course, the price level rises in response to the creation of additional purchasing power for existing inventories. When carried out on the massive scale that Mr. Obama is now demanding, however, the amount is genuinely beyond the power of the ordinary human mind to grasp.
The response of any producer or retailer to such a gargantuan influx of essentially worthless money will be to raise prices as fast as possible to make up for an anticipated inflationary loss that cannot, in human terms, be quantified — how do you visualize $1.5 trillion? The State then gets into the position that the Reichsbank faced in the early 1920s at the height of the hyperinflation.
The German central bank simply could not create money fast enough to meet daily transactions demand for currency, much less keep up with the inferno of the rising price level. Producers stopped producing, for there was no assurance that they could trade what they produced for anything of value. Farmers refused to sell their produce in exchange for crates of worthless currency, and there was virtually no industrial production generating anything that could be used for barter. The validity of Say's Law — that we can only purchase to the extent that we produce — was proved in the most vivid and devastating manner possible.
The German and Austro-Hungarian economies faced the paradox that unfettered money creation caused prices to rise so fast that there wasn't enough money in circulation to purchase what little was for sale. This was at a time when one U.S. dollar was "worth" 4.2 trillion Reichsmarks at the official exchange rate, and nearly 16 trillion on the black market. There were mountains of paper money in circulation, but it was worth more as waste paper and fuel than as currency. A famous photograph shows two little girls holding an American dollar, and in the background a colossal pile of German currency that, on that day, equaled that dollar.
Hyperinflation is a logical and expected outcome of Mr. Obama's proposal. Germany was ultimately saved because they gave a monetary and fiscal genius, Dr. Hjalmar Schacht — the "Old Wizard," a man with the unusual middle name of "Horace Greeley" — full power to do anything necessary to stop the hyperinflation. This he did by demonetizing all the old currency, creating an asset-backed non-legal tender but fully convertible parallel currency (the Rentenmark), and absolutely forbidding any new issuances in excess of the value of the asset backing.
The situation was stabilized, but the fear inspired by the hyperinflation was so great that the German, Austrian, and Hungarian peoples demanded absolute guarantees of future stability, as well as victims to blame for the virtual apocalypse of the war and the subsequent financial meltdown.
Adolph Hitler provided both.
Tuesday, February 10, 2009
Stimulus, Part V: Future Wealth and Money Creation
As we saw in the previous posting in this series, there is a source of financing apart from existing pools of savings, "savings" being construed as unconsumed wealth. This additional source of financing consists of wealth that has not yet been created, as opposed to wealth that has been created and remains unsold or unconsumed.
Obviously wealth to be created in the future does not exist in the present. If, however, we assume that the individual or business will produce the wealth at some point, we can measure that assumption and quantify it in terms of money. Our assumption rests entirely on how trustworthy we believe that individual or business to be, and our assessment of the individual's or business' ability to make good on the promise that he or it will, in fact, produce wealth in the future. Remember (and this is important, and the basis for refuting Keynes' basic assumptions) — nothing exists in the present except our trust in the promise of that individual or business. Will the individual carry out the necessary tasks to produce the wealth? Will the business exist to do the same? This is the most important question that must be answered before we can place a present value on what is to be produced in the future.
Of course, Keynes also relies on trust, but a much less acceptable kind. Keynesian economics rests on the unspoken assumption that the State will continue to exist, and that it will continue to have the power to print money at will, and be able to coerce future generations of taxpayers into paying for present consumption. This means that future taxpayers must necessarily be empowered with the means to produce so that they have the wealth to repay the debt incurred by today's consumers.
Since future taxpayers will, consistent with Keynesian economics, be in the same position as today's consumers, it is highly unlikely that the debt can ever be paid. In all likelihood, it must be passed on forever to future generations until the State goes bankrupt. The United States is still suffering under the burden of debt incurred to finance the Keynes-designed New Deal two generations ago, while the bankruptcy of Social Security, the largest surviving New Deal program, is predicted within the current generation.
In any event, the "Real Bills" doctrine allows us to take a promise to produce wealth in the future (as opposed to the Keynesian promise to spend wealth at present) to a commercial bank. The bank makes a conservative determination as to the present value of promise, and creates that amount of money. In exchange, the bank takes a lien on the future production to that amount, plus an amount to compensate the bank for whatever risk is assessed, and a just profit for providing the service. These last are considered part of the cost of the project, and are taken into account when determining the present value of the promise so that there is no question of a banking taking back and destroying more money than was created.
Thus, under the "Real Bills" doctrine, we can create money "out of nothing" . . . if by "nothing" we mean the present value of wealth that we reasonably expect to be created in the future out of the productive potential of the individual or business to which we loan the money. Given that, there is no excuse for employing the bizarre Keynesian techniques that, in effect, try to get something for nothing, when we have the power to engage in production and provide for everyone's wants and needs simply by exchanging promises quantified in terms of money and making good on them.
Obviously wealth to be created in the future does not exist in the present. If, however, we assume that the individual or business will produce the wealth at some point, we can measure that assumption and quantify it in terms of money. Our assumption rests entirely on how trustworthy we believe that individual or business to be, and our assessment of the individual's or business' ability to make good on the promise that he or it will, in fact, produce wealth in the future. Remember (and this is important, and the basis for refuting Keynes' basic assumptions) — nothing exists in the present except our trust in the promise of that individual or business. Will the individual carry out the necessary tasks to produce the wealth? Will the business exist to do the same? This is the most important question that must be answered before we can place a present value on what is to be produced in the future.
Of course, Keynes also relies on trust, but a much less acceptable kind. Keynesian economics rests on the unspoken assumption that the State will continue to exist, and that it will continue to have the power to print money at will, and be able to coerce future generations of taxpayers into paying for present consumption. This means that future taxpayers must necessarily be empowered with the means to produce so that they have the wealth to repay the debt incurred by today's consumers.
Since future taxpayers will, consistent with Keynesian economics, be in the same position as today's consumers, it is highly unlikely that the debt can ever be paid. In all likelihood, it must be passed on forever to future generations until the State goes bankrupt. The United States is still suffering under the burden of debt incurred to finance the Keynes-designed New Deal two generations ago, while the bankruptcy of Social Security, the largest surviving New Deal program, is predicted within the current generation.
In any event, the "Real Bills" doctrine allows us to take a promise to produce wealth in the future (as opposed to the Keynesian promise to spend wealth at present) to a commercial bank. The bank makes a conservative determination as to the present value of promise, and creates that amount of money. In exchange, the bank takes a lien on the future production to that amount, plus an amount to compensate the bank for whatever risk is assessed, and a just profit for providing the service. These last are considered part of the cost of the project, and are taken into account when determining the present value of the promise so that there is no question of a banking taking back and destroying more money than was created.
Thus, under the "Real Bills" doctrine, we can create money "out of nothing" . . . if by "nothing" we mean the present value of wealth that we reasonably expect to be created in the future out of the productive potential of the individual or business to which we loan the money. Given that, there is no excuse for employing the bizarre Keynesian techniques that, in effect, try to get something for nothing, when we have the power to engage in production and provide for everyone's wants and needs simply by exchanging promises quantified in terms of money and making good on them.
Monday, February 9, 2009
Stimulus, Part IV: Creating Money for New Capital Formation
In the previous posting in this series, we observed that Keynes' basic assumptions, that new capital formation can only take place once consumption has been reduced, and that production does not equal income, violate not only common sense, but Generally Accepted Accounting Principles, or "GAAP." GAAP, contrary to what some people appear to believe, do not force individuals or businesses to conform to arbitrary rules and incomprehensible practices, but try to describe what actually happens in the microeconomic universe of a business entity and develop a set of uniform rules for the application of the principles of reality. If the people running the business are rational, they attempt to conform their internal institutions (that is, their practices and rules that dictate how business is carried out) as closely as possible to reality, that is, to GAAP.
Thus, in accordance with GAAP (and reality) a business only receives money when something the business has produced is sold, and can only participate in the creation of new money when it has something of value on which a bank or other financial institution can take a lien and issue generalized purchasing power — money — by means of which the bank and the business collaborate in transforming the specific wealth held by the business, into a generalized claim on wealth held by the bank so that what is produced can be sold, and "production" turned into "income."
Individuals and businesses can also create money between them and other individuals and businesses by direct barter exchange of commodities, goods, or services. This is how most international trade is carried on. This process is also consistent with the "Real Bills" doctrine, but we won't consider it in this discussion because we are concentrating on the role of the commercial banks and other financial institutions.
Keynesians have a problem, however, with the logical outcome of the "Real Bills" doctrine, and by far the more important part of it. Factoring inventory as described above simply makes exchanges easier by turning specific goods and services into generalized purchasing power, symbols of wealth to replace the actual wealth, which are eventually redeemed when the actual wealth is purchased and consumed, with the purchase price — revenue — used to provide the money to redeem the lien, pay the service fee, and provide income for the producer.
There is something else besides inventories that individuals and businesses have that is of value, and the value of this "something else" can be quantified and measured more or less precisely. Further, this "something else" is by far the most valuable thing that an individual or business possesses as a producer of wealth. Without it, the economic value of the individual or business is either greatly reduced or disappears altogether. In accounting, this "something else" is reflected in the "ongoing entity assumption." In financial or economic terms, this "something else" is the potential that an individual or business has to produce goods and services — wealth — in the future.
Thus, in accordance with GAAP (and reality) a business only receives money when something the business has produced is sold, and can only participate in the creation of new money when it has something of value on which a bank or other financial institution can take a lien and issue generalized purchasing power — money — by means of which the bank and the business collaborate in transforming the specific wealth held by the business, into a generalized claim on wealth held by the bank so that what is produced can be sold, and "production" turned into "income."
Individuals and businesses can also create money between them and other individuals and businesses by direct barter exchange of commodities, goods, or services. This is how most international trade is carried on. This process is also consistent with the "Real Bills" doctrine, but we won't consider it in this discussion because we are concentrating on the role of the commercial banks and other financial institutions.
Keynesians have a problem, however, with the logical outcome of the "Real Bills" doctrine, and by far the more important part of it. Factoring inventory as described above simply makes exchanges easier by turning specific goods and services into generalized purchasing power, symbols of wealth to replace the actual wealth, which are eventually redeemed when the actual wealth is purchased and consumed, with the purchase price — revenue — used to provide the money to redeem the lien, pay the service fee, and provide income for the producer.
There is something else besides inventories that individuals and businesses have that is of value, and the value of this "something else" can be quantified and measured more or less precisely. Further, this "something else" is by far the most valuable thing that an individual or business possesses as a producer of wealth. Without it, the economic value of the individual or business is either greatly reduced or disappears altogether. In accounting, this "something else" is reflected in the "ongoing entity assumption." In financial or economic terms, this "something else" is the potential that an individual or business has to produce goods and services — wealth — in the future.
Friday, February 6, 2009
Funding the Stimulus Package
Kemp Harshman, Esq., Guest Blogger
The government stimulus package (a Keynesian remedy) could (and probably will) exacerbate the current credit crisis, just as the government interventions during the Great Depression had a limited impact. It was the start of WW II that actually turned the economy around.
Even without the stimulus, the government will have to raise over $1 trillion to fund the current level of spending for federal programs. With the stimulus, it will now have to raise a total of $2 trillion in new funding. Who will continue to buy the debt when our currency is being inflated and the interest rates are suppressed to artificially low levels?
If the government cannot raise tax rates (during the recession) and foreign borrowers (like China) refuse to continue their funding, the Federal Reserve will have to rely on monetary expansion (printing more dollars so the Treasury can buy its own notes). Fed Reserve Chairman Bernanke once stated that he would drop dollars from helicopters if needed to prevent an economy from sliding into a depression. Will that really work? This article from CESJ and this article from "Money Morning" address this question.
The result of the "stimulus" could be to suppress the private sector (since credit for businesses will dry up) and delay the recovery of the economy, saddle future generations with enormous tax burdens, and undercut the value of the dollar leading to high rates of inflation. If that isn't enough, the current foreign bondholders could take their money when their notes mature and buy up assets at bargain prices in the United States, instead of holding inflated dollars. We could end up living in a country that we do not own!
It is painful to watch the American economy implode because of the greed of the fat cats and the incompetence of the bureaucrats. We are far from the end of this "global credit crisis." Let us hope that, with the promise given by Capital Homesteading and similar proposals, the free market will re-emerge, and that the American people will find better solutions to their economic problems.
The government stimulus package (a Keynesian remedy) could (and probably will) exacerbate the current credit crisis, just as the government interventions during the Great Depression had a limited impact. It was the start of WW II that actually turned the economy around.
Even without the stimulus, the government will have to raise over $1 trillion to fund the current level of spending for federal programs. With the stimulus, it will now have to raise a total of $2 trillion in new funding. Who will continue to buy the debt when our currency is being inflated and the interest rates are suppressed to artificially low levels?
If the government cannot raise tax rates (during the recession) and foreign borrowers (like China) refuse to continue their funding, the Federal Reserve will have to rely on monetary expansion (printing more dollars so the Treasury can buy its own notes). Fed Reserve Chairman Bernanke once stated that he would drop dollars from helicopters if needed to prevent an economy from sliding into a depression. Will that really work? This article from CESJ and this article from "Money Morning" address this question.
The result of the "stimulus" could be to suppress the private sector (since credit for businesses will dry up) and delay the recovery of the economy, saddle future generations with enormous tax burdens, and undercut the value of the dollar leading to high rates of inflation. If that isn't enough, the current foreign bondholders could take their money when their notes mature and buy up assets at bargain prices in the United States, instead of holding inflated dollars. We could end up living in a country that we do not own!
It is painful to watch the American economy implode because of the greed of the fat cats and the incompetence of the bureaucrats. We are far from the end of this "global credit crisis." Let us hope that, with the promise given by Capital Homesteading and similar proposals, the free market will re-emerge, and that the American people will find better solutions to their economic problems.
News from the Network, Vol. 2, No. 6
Every time we turn around, it seems as if President Obama wants more money that doesn't exist to spend on something that won't work. The projected bill is now up to over $900 billion, apparently on the theory that if $800 billion was unpalatable, increase it to $850 billion, then $900 billion. A few hundred billion here, a few hundred billion there . . . pretty soon Mr. Obama might be talking about real money, instead of whatever inflationary purchasing power he can persuade the Federal Reserve to print . . . to the point where now even Fidel Castro, who formerly praised the new president as "intelligent and noble," is raising his eyebrows. There are, however, a few bright spots that give signs that something might start penetrating even into the hallowed halls of the U.S. Capitol (and capital).
• We sent a mass e-mailing to every member of the Althing, the Icelandic parliament, this week regarding Capital Homesteading. So far we have not received any responses, but the responses to the previous mass e-mailing to the Irish legislature didn't spark immediate responses, either, and we eventually heard from fifteen members of the Dáil and one member of the Seanad. Since the e-mail was necessarily in English (our Icelandic language skills being sorely deficient), it may be taking them time to translate and read the letter, assuming that a secretary or assistant didn't simply automatically discard anything in a foreign language. If you're a citizen of Iceland, or even reasonably fluent in Icelandic, you might want to send an e-mail or letter to the new prime minister, Ms. Jóhanna Sigurðardóttir, suggesting that she give serious consideration to Capital Homesteading as a possible solution to the economic crisis. Her e-mail is johanna@althingi.is. The e-mails of all members of the Althing can be found here in English, and here in Icelandic. Since even a few dozen e-mails on a subject to a senator or representative in the United States are taken as a sign that the public is interested, the same should hold true in Iceland.Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
• Similarly, early this week we sent copies of Capital Homesteading for Every Citizen to Ireland to the Taoiseach (the Prime Minister) and selected members of the Dáil Éireann and some other public individuals. If you want to send your own e-mails to members of the Dáil urging them to give consideration to Capital Homesteading, e-mail addresses are listed here. (This is the list as of November 2008, and appears to be the latest available.) You might also want to send a note to Mr. Gerry Adams, leader of Sinn Fein, info@sinnfein.org, who recently sought the help of Irish throughout the world in working toward a peaceful and united Ireland, for which a sound economy is a necessary first step. According to latest reports in the Irish Independent, the Irish unemployment rolls are growing at the rate of 1,500 per day. Mr. Brian Cowen, the Taoiseach, has expressed great alarm, and has predicted that unemployment will reach 400,000 by the end of the year, which amounts to between 12% to 20% of the total workforce, depending on whose figures you use. Mr. Cowen's e-mail on this matter is economicpolicy@taoiseach.gov.ie.
• On Tuesday, due to information published in The Wanderer, we received our first bulk order (10 copies) for our annotated edition of The Emigrant's Guide by William Cobbett (1763-1835), revered by G. K. Chesterton and Hilaire Belloc as "the Apostle of Distributism." A refreshing pro-American look at economic conditions in the early 19th century and a sharp contrast to current "stimulus" proposals, individual copies of The Emigrant's Guide can be ordered from Amazon or Barnes and Noble. If your club, school, church group, or other organization wants copies in bulk (minimum of ten copies per order) at the wholesale price (or if you just want to have a lot of copies yourself), and you live in the 48 contiguous U.S. states, they can be ordered directly from CESJ. The price is $16.00 per book, plus $1.50 per copy shipping. If you're ordering 25 or more copies, send us an e-mail before ordering so we can tell you what the total will be for shipping. (Also send an e-mail to enquire about bulk orders to Alaska and Hawaii, and Canada and Mexico.) Send payment with the order to CESJ, P. O. Box 40711, Washington, DC 20016. Be sure to include your street address, because UPS will not deliver to a P. O. Box. The same terms apply to In Defense of Human Dignity: bulk orders of a minimum of ten copies can be ordered from CESJ, single copies from Amazon and Barnes and Noble.
• Norman Kurland has been having an extremely interesting e-mail exchange with Dr. Max Weismann, head of the Center for the Study of the Great Ideas in Chicago. Co-founded by Dr. Weismann and the late Dr. Mortimer J. Adler, considered the premier American Aristotelian of the 20th century, the Center is concerned with the decay of moral philosophy in today's world, and thus has a certain congruency with CESJ's mission to advance the Just Third Way. The most recent exchanges have dealt with perceived differences in the approaches taken by Dr. Adler and Father William Ferree, S.M., Ph.D. (referred to at his death in 1985 as "America's greatest social philosopher") to the concept of "social justice." The discussion is a little esoteric for a blog, but we'll try to summarize it briefly . . . if possible. As a classic Aristotelian, Dr. Adler rejected the idea of a specific virtue called "social justice." Social justice, to him, was simply a redundant term for what Aristotle called "legal justice," legal justice describing the indirect effect that our personal acts of virtue have on the common good. Basing his analysis on the work of Pope Pius XI, Father Ferree disagreed. Social justice is a specific virtue, distinct from legal justice. Social justice acts directly, not indirectly, on the common good when individuals organize to restructure our institutions. To understand more of the discussion from CESJ's orientation, download the free copy of Father Ferree's Introduction to Social Justice, or you can wait for the new combined edition of Introduction to Social Justice and the transcript of Father Ferree's talks on social charity from 1966 that we expect to have ready in the next two to three months, or sooner, to be followed as soon as possible by The Act of Social Justice.
• As of this morning, we have had visitors from 26 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 178% increase in total readership, according to the statistics counter of "Google Analytics."
Thursday, February 5, 2009
How Would YOU Spend $925 Billion (and Rising)?
As the amount of Mr. Obama's "stimulus" (newspeak, evidently, for "pork") continues to escalate from incredible, to unbelievable, to beyond human comprehension, we thought we'd ask ourselves a simple question: "How would we spend what will soon amount to over $1 trillion in light of Just Third Way principles?"
This is a question that can only be answered in stages. The first stage is to realize that, in a justly structured economy, there would never be a question of the State deciding how to spend a pot of money, and then putting an unconscionable burden of debt on future generations to pay for it. No, because certain proposals under the Just Third Way are, in part, predicated on the validity of Say's Law of Markets and the Real Bills doctrine, we realize that you can't spend what you don't have. Production equals income . . . and you can't just go out and create money (additional purchasing power) that is not tied to an equivalent value of new production.
It doesn't matter how much you have piled up unsold in warehouses, how many "toxic assets" a bank holds, or even how many homes are foreclosed. The money already exists to purchase these things. Creating more money inflates the currency — and creating what will soon amount to more than $1 trillion of purchasing power tied to existing goods and services could very easily ignite hyperinflation.
The "proper" response (actually, "barely rational response") when faced with the current situation is not to create new purchasing power for existing goods and services and redistribute wealth indirectly through the extremely risky method of inflation. When faced with such a colossal mess and an inability to think of anything better, the "right" thing to do is redistribute wealth directly by raising taxes to the point where all wealth that someone is not consuming is taken and redistributed among people who will use it for consumption — or at least tax the haves enough to provide the have-nots with enough to keep them alive and well until they can get back on their feet.
Thus, stage one is to keep people alive and well by taking care of them temporarily. This is going to cost some money, but it's money that's already out there. Tax the rich enough to meet these emergency needs, then lift the tax once the emergency is over.
This leads to stage two. The haves will immediately protest that if you tax away their unconsumed wealth, they won't be able to finance new capital formation, new jobs will not be created, and the economy will decline even more rapidly.
Answer: every reader of this blog knows that the commercial banking system combined with the Federal Reserve has the power to create money. It's where Mr. Obama plans on getting the bulk of the $1 trillion pork pie he's requesting. If you can create money for consumption, you can create money for investment. You don't need the haves to finance capital formation out of their unconsumed wealth. You just need access to capital credit.
Thus, stage two is to shut off the money spigot from the Federal Reserve to the government, consumers, and speculators, and turn it on for people who will use it to finance investment in new capital. This is all the stimulus anybody needs — and it won't cost the taxpayer one cent.
For stage three, things actually get easy. We need to identify our first investment, ideally one to which every single American currently has access . . . but is unable to finance due to lack of capital (not consumer) credit — that credit coming from opening up the Federal Reserve capital credit spigot for ordinary Americans.
What is most people's single largest investment? Their house. The problem is that it's not really an investment. Housing is a consumption item . . . unless . . .
Unless you're a landlord purchasing property to rent out to a tenant. Then what would ordinarily be a consumption item for you turns into an investment (capital) for you, and a consumption item for your tenant.
That being the case, what's wrong with being both landlord and tenant? The rent you pay as tenant then becomes the means by which you as landlord pay for your investment. This is the financial technique of purchasing only investments that pay for themselves within a reasonable period of time out of the income that the assets themselves generate, that is, "self liquidating" assets. The purchase of existing facilities, including rentable space, by creating new money to do so is as sound as financing future construction — better, in fact, because you have a "track record" of established tenancy or production to provide a solid indication of the present value of the future income stream.
An added bonus (and it's a big one) is that many analysts believe housing is the primary "leading economic indicator." Save the housing market, and (so many analysts believe) you will have saved the entire economy. (You could say something similar for food and clothing, but you must live where you live — meaning you can't live where you are not — while you don't have to grow your own food or make your own clothing right there.)
Stage three is thus to save the housing market, and do it in a way that turns a consumption item into an investment so that you can create the money to save the market in a non-inflationary way. We haven't mentioned it lately on this blog, but there is a proposal to do just that, the "Homeowners' Equity Corporation," or "HEC."
A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.
The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.
Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of increasing mountains of government debt. Let the free market decide what happens to those institutions deemed "too big to fail." If they truly are "too big too fail," then they won't. Otherwise, they clearly weren't "too big to fail" at all.
This is a question that can only be answered in stages. The first stage is to realize that, in a justly structured economy, there would never be a question of the State deciding how to spend a pot of money, and then putting an unconscionable burden of debt on future generations to pay for it. No, because certain proposals under the Just Third Way are, in part, predicated on the validity of Say's Law of Markets and the Real Bills doctrine, we realize that you can't spend what you don't have. Production equals income . . . and you can't just go out and create money (additional purchasing power) that is not tied to an equivalent value of new production.
It doesn't matter how much you have piled up unsold in warehouses, how many "toxic assets" a bank holds, or even how many homes are foreclosed. The money already exists to purchase these things. Creating more money inflates the currency — and creating what will soon amount to more than $1 trillion of purchasing power tied to existing goods and services could very easily ignite hyperinflation.
The "proper" response (actually, "barely rational response") when faced with the current situation is not to create new purchasing power for existing goods and services and redistribute wealth indirectly through the extremely risky method of inflation. When faced with such a colossal mess and an inability to think of anything better, the "right" thing to do is redistribute wealth directly by raising taxes to the point where all wealth that someone is not consuming is taken and redistributed among people who will use it for consumption — or at least tax the haves enough to provide the have-nots with enough to keep them alive and well until they can get back on their feet.
Thus, stage one is to keep people alive and well by taking care of them temporarily. This is going to cost some money, but it's money that's already out there. Tax the rich enough to meet these emergency needs, then lift the tax once the emergency is over.
This leads to stage two. The haves will immediately protest that if you tax away their unconsumed wealth, they won't be able to finance new capital formation, new jobs will not be created, and the economy will decline even more rapidly.
Answer: every reader of this blog knows that the commercial banking system combined with the Federal Reserve has the power to create money. It's where Mr. Obama plans on getting the bulk of the $1 trillion pork pie he's requesting. If you can create money for consumption, you can create money for investment. You don't need the haves to finance capital formation out of their unconsumed wealth. You just need access to capital credit.
Thus, stage two is to shut off the money spigot from the Federal Reserve to the government, consumers, and speculators, and turn it on for people who will use it to finance investment in new capital. This is all the stimulus anybody needs — and it won't cost the taxpayer one cent.
For stage three, things actually get easy. We need to identify our first investment, ideally one to which every single American currently has access . . . but is unable to finance due to lack of capital (not consumer) credit — that credit coming from opening up the Federal Reserve capital credit spigot for ordinary Americans.
What is most people's single largest investment? Their house. The problem is that it's not really an investment. Housing is a consumption item . . . unless . . .
Unless you're a landlord purchasing property to rent out to a tenant. Then what would ordinarily be a consumption item for you turns into an investment (capital) for you, and a consumption item for your tenant.
That being the case, what's wrong with being both landlord and tenant? The rent you pay as tenant then becomes the means by which you as landlord pay for your investment. This is the financial technique of purchasing only investments that pay for themselves within a reasonable period of time out of the income that the assets themselves generate, that is, "self liquidating" assets. The purchase of existing facilities, including rentable space, by creating new money to do so is as sound as financing future construction — better, in fact, because you have a "track record" of established tenancy or production to provide a solid indication of the present value of the future income stream.
An added bonus (and it's a big one) is that many analysts believe housing is the primary "leading economic indicator." Save the housing market, and (so many analysts believe) you will have saved the entire economy. (You could say something similar for food and clothing, but you must live where you live — meaning you can't live where you are not — while you don't have to grow your own food or make your own clothing right there.)
Stage three is thus to save the housing market, and do it in a way that turns a consumption item into an investment so that you can create the money to save the market in a non-inflationary way. We haven't mentioned it lately on this blog, but there is a proposal to do just that, the "Homeowners' Equity Corporation," or "HEC."
A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.
The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.
Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of increasing mountains of government debt. Let the free market decide what happens to those institutions deemed "too big to fail." If they truly are "too big too fail," then they won't. Otherwise, they clearly weren't "too big to fail" at all.
Wednesday, February 4, 2009
Ireland's Balanced Budget
As if to highlight the importance of the several mentions we've made of how the current global financial crisis is affecting Ireland, today's Washington Post carried an all-too-brief article about Taoiseach Brian Cowen's efforts to get a handle on the situation. Considering the slavish adherence to Keynesianism we see on the part of virtually all world leaders, Mr. Cowen's common sense effort to balance the budget by cutting a few billion Euros off government expenditures comes across as bold and statesmanlike, even radical.
One shocking move for Ireland, in which securing a government pension is often viewed as having achieved worldly success and a ticket to permanent financial security (I've seen "personals" ads specifying that a desirable marriage partner must have vesting in a government pension), is Mr. Cowen's call to impose additional levies on the wages of 350,000 State employees — more than 15% of the total workforce. The new deductions would take an average of 7% from workers' pay for pension contributions, previously funded without such charges. Pay increases already agreed upon would be set aside for the next two years.
It sounds harsh, especially compared to Mr. Obama's continual ratcheting up of proposed spending (now in excess of $900 billion) with promises of money for all, but Mr. Cowen's realistic approach is much more responsible and, while a bitter pill for some, lets the citizens of the Republic know that government workers are not a special class, but are in the same boat as everyone else. In contrast, at a time when the president of the United States is asking for nearly $1 trillion in new spending to add to the budget, the U.S. government is the only large organization in the country that is hiring instead of imposing pay cuts, freezing new jobs, or laying off workers.
As a Certified Public Accountant, however, I know that cutting expenditures is only a third of the solution — and usually the least third. The way to turn things around in a business or a country is not simply to 1) keep an eye on what is spent, but 2) spend what you spend wisely, and, most important, 3) increase revenue, that is, help the private sector produce more, thereby generating income and increasing the tax base.
From reports in the Irish Independent and other Irish newspapers, it is clear that Mr. Cowen and his government (particularly his Finance Minister, Mr. Brian Lenihan), are carefully scrutinizing the budget to spend wisely as well as cut expenditures. We may not agree with some of their decisions, but at this point the effort itself is more than commendable, especially as Mr. Obama seems to be making every effort to invent more and more ways to spend money that doesn't even exist.
That is why the brief article in the Washington Post caught our eye, even though buried on page D7. Yesterday, not entirely by coincidence, we sent bound copies of our book, Capital Homesteading for Every Citizen to Mr. Cowen, selected members of his government, and a number of party leaders: Mr. Brian Lenihan (Minister of Finance), Mr. Charlie O'Connor (member for Dublin South West), Mr. Enda Kenny (leader, Fine Gael), Mr. Eamon Gilmore (leader, Labour), Mr. John Gormley (leader, Green Party), and, while not a representative in the Republic, Mr. Gerry Adams of Sinn Fein, who has publicly called for participation of the Irish throughout the world in the reunification process — for which we believe a sound economy structured in conformity with the principles of the Just Third Way is a necessary first step, just as it is to finding a solution to the situation in the Holy Land.
We got multiple copies of Capital Homesteading to Mr. Obama's people during the campaign, and a CESJ member received the personal assurance of Mr. Obama during a rally in Nevada that he was familiar with CESJ and its work. As president, however, Mr. Obama seems to have committed himself to turning down the potholed Keynesian dead end with a bridge out rather than travel the Just Third Way.
If you would like to send copies of Capital Homesteading for Every Citizen to your own legislators and representatives, individual copies can be purchased through Amazon and Barnes and Noble. The book is also available on Amazon Canada and Amazon United Kingdom.
If you are in the continental United States (that is, the "48 contiguous states"), you can purchase quantities of ten (10) or more copies at the wholesale price of $14.00 per copy, plus $1.50 per copy shipping direct from us, sending payment in advance with your name and street address (NOT a P. O. Box; UPS doesn't deliver to P. O. Boxes) to:
If you're in Ireland or the U.K., we have a contract with a printer in the Midlands, and should be able to arrange for direct bulk sales; let us know your needs.
Mr. Cowen should be applauded for his efforts to balance the Irish budget. It's now up to us to let him know there's help available — and to help him set a good example to other world leaders.
One shocking move for Ireland, in which securing a government pension is often viewed as having achieved worldly success and a ticket to permanent financial security (I've seen "personals" ads specifying that a desirable marriage partner must have vesting in a government pension), is Mr. Cowen's call to impose additional levies on the wages of 350,000 State employees — more than 15% of the total workforce. The new deductions would take an average of 7% from workers' pay for pension contributions, previously funded without such charges. Pay increases already agreed upon would be set aside for the next two years.
It sounds harsh, especially compared to Mr. Obama's continual ratcheting up of proposed spending (now in excess of $900 billion) with promises of money for all, but Mr. Cowen's realistic approach is much more responsible and, while a bitter pill for some, lets the citizens of the Republic know that government workers are not a special class, but are in the same boat as everyone else. In contrast, at a time when the president of the United States is asking for nearly $1 trillion in new spending to add to the budget, the U.S. government is the only large organization in the country that is hiring instead of imposing pay cuts, freezing new jobs, or laying off workers.
As a Certified Public Accountant, however, I know that cutting expenditures is only a third of the solution — and usually the least third. The way to turn things around in a business or a country is not simply to 1) keep an eye on what is spent, but 2) spend what you spend wisely, and, most important, 3) increase revenue, that is, help the private sector produce more, thereby generating income and increasing the tax base.
From reports in the Irish Independent and other Irish newspapers, it is clear that Mr. Cowen and his government (particularly his Finance Minister, Mr. Brian Lenihan), are carefully scrutinizing the budget to spend wisely as well as cut expenditures. We may not agree with some of their decisions, but at this point the effort itself is more than commendable, especially as Mr. Obama seems to be making every effort to invent more and more ways to spend money that doesn't even exist.
That is why the brief article in the Washington Post caught our eye, even though buried on page D7. Yesterday, not entirely by coincidence, we sent bound copies of our book, Capital Homesteading for Every Citizen to Mr. Cowen, selected members of his government, and a number of party leaders: Mr. Brian Lenihan (Minister of Finance), Mr. Charlie O'Connor (member for Dublin South West), Mr. Enda Kenny (leader, Fine Gael), Mr. Eamon Gilmore (leader, Labour), Mr. John Gormley (leader, Green Party), and, while not a representative in the Republic, Mr. Gerry Adams of Sinn Fein, who has publicly called for participation of the Irish throughout the world in the reunification process — for which we believe a sound economy structured in conformity with the principles of the Just Third Way is a necessary first step, just as it is to finding a solution to the situation in the Holy Land.
We got multiple copies of Capital Homesteading to Mr. Obama's people during the campaign, and a CESJ member received the personal assurance of Mr. Obama during a rally in Nevada that he was familiar with CESJ and its work. As president, however, Mr. Obama seems to have committed himself to turning down the potholed Keynesian dead end with a bridge out rather than travel the Just Third Way.
If you would like to send copies of Capital Homesteading for Every Citizen to your own legislators and representatives, individual copies can be purchased through Amazon and Barnes and Noble. The book is also available on Amazon Canada and Amazon United Kingdom.
If you are in the continental United States (that is, the "48 contiguous states"), you can purchase quantities of ten (10) or more copies at the wholesale price of $14.00 per copy, plus $1.50 per copy shipping direct from us, sending payment in advance with your name and street address (NOT a P. O. Box; UPS doesn't deliver to P. O. Boxes) to:
CESJFor 25 or more copies, or if you are in Alaska, Hawaii, Canada, or Mexico, send an e-mail to thirdway [at] cesj [dot] org before placing an order so we can calculate the shipping and let you know in advance the total amount of the bill. People generally get their books within ten business days of when we receive an order with payment.
P. O. Box 40711
Washington, DC 20016
If you're in Ireland or the U.K., we have a contract with a printer in the Midlands, and should be able to arrange for direct bulk sales; let us know your needs.
Mr. Cowen should be applauded for his efforts to balance the Irish budget. It's now up to us to let him know there's help available — and to help him set a good example to other world leaders.
Tuesday, February 3, 2009
Update: Iceland's Financial Crisis
Jóhanna Sigurðardóttir, Iceland's new prime minister, is ostensibly taking quick action on the financial crisis, although at this point she appears to have fallen into the trap that engulfs virtually every other leader in the world, of locking the barn after the horse has been stolen. She is demanding the resignation of the heads of the three largest banks in Iceland — who appear to be guilty only of following today's standard Keynesian economic assumptions during the economic boom of the recent past.
What Ms. Sigurðardóttir needs to do is not figure out how to implement bad policies better, but to study and implement better policies. She needs to lead the way in guiding the Althing — Iceland's legislature (reputedly the oldest in Europe) — toward an idea even older than they are: that each and every man, woman, and child should have the opportunity to be economically free and independent through democratic access to the means of acquiring and possessing the means of production.
Such a program is Capital Homesteading — and the reason why, earlier today, we took the trouble to send every member of the Althing, including Ms. Sigurðardóttir, a letter explaining Capital Homesteading briefly. We also sent a press release to the Icelandic media for which we could locate e-mail addresses. (If you're a member of the press in Iceland and did not receive a copy of the release, or have an interest in news relating to Iceland, send us a request for the press release at thirdway [at] cesj [dot] org.)
We believe that Scandinavia's democratic traditions, often sidetracked into socialism, would provide fertile ground for a concept such as Capital Homesteading. Immigrants from Scandinavia, especially Sweden and Norway, were prominent among those taking advantage of Abraham Lincoln's 1862 land Homestead Act. It's now time for Iceland to lead the way toward a new future for everyone by being the first to enact a Capital Homestead Act.
What Ms. Sigurðardóttir needs to do is not figure out how to implement bad policies better, but to study and implement better policies. She needs to lead the way in guiding the Althing — Iceland's legislature (reputedly the oldest in Europe) — toward an idea even older than they are: that each and every man, woman, and child should have the opportunity to be economically free and independent through democratic access to the means of acquiring and possessing the means of production.
Such a program is Capital Homesteading — and the reason why, earlier today, we took the trouble to send every member of the Althing, including Ms. Sigurðardóttir, a letter explaining Capital Homesteading briefly. We also sent a press release to the Icelandic media for which we could locate e-mail addresses. (If you're a member of the press in Iceland and did not receive a copy of the release, or have an interest in news relating to Iceland, send us a request for the press release at thirdway [at] cesj [dot] org.)
We believe that Scandinavia's democratic traditions, often sidetracked into socialism, would provide fertile ground for a concept such as Capital Homesteading. Immigrants from Scandinavia, especially Sweden and Norway, were prominent among those taking advantage of Abraham Lincoln's 1862 land Homestead Act. It's now time for Iceland to lead the way toward a new future for everyone by being the first to enact a Capital Homestead Act.
Monday, February 2, 2009
Stimulus, Part III: The "Real Bills" Doctrine
As we saw in the previous posting in this series, Say's Law of Markets contradicts Keynes' belief that it is economically sound to create money without first producing something. Say's Law, however, is only half the story. The other half is something called the "Real Bills" doctrine, which Keynesians have been careful to declare has been "discredited" without giving any reason other than it contradicts Keynesian dogma.
The "Real Bills" doctrine assumes the validity of Say's Law. Thus, if we produce something, we have generated income and increased wealth, that is, we have created something that has value. We can 1) consume the wealth ourselves, 2) exchange some or all of our wealth directly for whatever others have in the way of wealth that we want or need to have instead (barter), 3) go to a bank or other financial institution and turn our wealth into "money," or generalized purchasing power, by giving the banker a lien on our wealth, or 4) sell the wealth outright for money.
When we exchange our wealth for money (#4), the transaction ends there. We take what is now our money, and do with it as we please, while whomever we sold our wealth disposes of what is now his or her wealth as he or she pleases. If, however, we give a bank or other financial institution a lien on our wealth (#3), we have to pay it back, plus a fee for the service that the bank provided in "monetizing" our wealth (generalizing our purchasing power by substituting the bank's promise for our own), or the bank has the right to take possession of that portion of our wealth on which it has a lien.
If the wealth we have monetized in this fashion consists of inventories of existing goods we have produced, there is usually no problem. We can sell our inventory of goods, and make a profit out of which we redeem the lien on our goods, pay the service fee to the bank, and provide ourselves with income. This is possible because no bank or other financial institution will ordinarily create money to exchange for more than the wealth is worth, and usually much less, thereby ensuring that the lien will be redeemed — banks don't want your inventory, they want the service fee they charge for monetizing your inventory. Keynesians don't (usually) have a problem with this process. The wealth, "savings" or unconsumed wealth, clearly exists, and can thus be exchanged, traded, or confiscated by the State for redistribution among the unproductive. Keynes' assumption, that saving must precede investment, appears to hold true.
The problem is that, carried out in a rational manner, the above process contradicts Keynes. Money created by a bank by taking a lien on existing inventory goes to pay for the costs of producing the inventory (including the service fee to the bank), and provide a just profit to the producer, out of which he or she meets his or her consumption needs. Only a small proportion of the money created is available for new investment, whether new productive machinery or additional inventory, although (depending on the amount of profit and the wants and needs of the producer) a large proportion of the profit might be diverted into new capital formation instead of being consumed. This is the "matching principle" in accounting, and is the basis for accrual accounting. Accrual accounting assumes that revenue generated by the sale of a good or service goes first to meet the costs of producing that good or service, then provide a profit — income, or an increase in wealth — for the producer. The profit, the amount by which revenue exceeds costs, not the total revenue, represents the increase in wealth that can either be consumed or saved.
The "Real Bills" doctrine assumes the validity of Say's Law. Thus, if we produce something, we have generated income and increased wealth, that is, we have created something that has value. We can 1) consume the wealth ourselves, 2) exchange some or all of our wealth directly for whatever others have in the way of wealth that we want or need to have instead (barter), 3) go to a bank or other financial institution and turn our wealth into "money," or generalized purchasing power, by giving the banker a lien on our wealth, or 4) sell the wealth outright for money.
When we exchange our wealth for money (#4), the transaction ends there. We take what is now our money, and do with it as we please, while whomever we sold our wealth disposes of what is now his or her wealth as he or she pleases. If, however, we give a bank or other financial institution a lien on our wealth (#3), we have to pay it back, plus a fee for the service that the bank provided in "monetizing" our wealth (generalizing our purchasing power by substituting the bank's promise for our own), or the bank has the right to take possession of that portion of our wealth on which it has a lien.
If the wealth we have monetized in this fashion consists of inventories of existing goods we have produced, there is usually no problem. We can sell our inventory of goods, and make a profit out of which we redeem the lien on our goods, pay the service fee to the bank, and provide ourselves with income. This is possible because no bank or other financial institution will ordinarily create money to exchange for more than the wealth is worth, and usually much less, thereby ensuring that the lien will be redeemed — banks don't want your inventory, they want the service fee they charge for monetizing your inventory. Keynesians don't (usually) have a problem with this process. The wealth, "savings" or unconsumed wealth, clearly exists, and can thus be exchanged, traded, or confiscated by the State for redistribution among the unproductive. Keynes' assumption, that saving must precede investment, appears to hold true.
The problem is that, carried out in a rational manner, the above process contradicts Keynes. Money created by a bank by taking a lien on existing inventory goes to pay for the costs of producing the inventory (including the service fee to the bank), and provide a just profit to the producer, out of which he or she meets his or her consumption needs. Only a small proportion of the money created is available for new investment, whether new productive machinery or additional inventory, although (depending on the amount of profit and the wants and needs of the producer) a large proportion of the profit might be diverted into new capital formation instead of being consumed. This is the "matching principle" in accounting, and is the basis for accrual accounting. Accrual accounting assumes that revenue generated by the sale of a good or service goes first to meet the costs of producing that good or service, then provide a profit — income, or an increase in wealth — for the producer. The profit, the amount by which revenue exceeds costs, not the total revenue, represents the increase in wealth that can either be consumed or saved.
Friday, January 30, 2009
Washington Post: "Economic Signs Turn From Grim To Worse"
In the musical 1776, the John Adams character spends the first few minutes of the show loudly singing about how Congress should begin discussing his proposal on independence for the American colonies. The other characters sing back (even more loudly), telling John Adams to sit down and be quiet so that they can get back to swatting flies and moaning and groaning about how bad things are — the important issues in Philadelphia in late June of 1776.
As readers of this blog and participants in the binary economics discussion group are aware, the Global Justice Movement in general and CESJ in particular have been working very hard to try and bring Capital Homesteading to the attention of the powers-that-be. We've had some success, but by and large have not yet gained the ear of anyone in a position to do anything. Instead, we are treated to headlines like those in today's Washington Post that inform us on page one of "Another Wave of Evidence Of a Deepening Recession."
The time may be ripe to get politicians to listen to proposals on Capital Homesteading . . . if they can be persuaded that, far from being hopeless, the current crisis is the best opportunity in a long time to implement something for which the time is always ripe: the Just Third Way. Write to your legislator, president, prime minister, prince, or pooh-bah, and let him or her know that there is an alternative available to what even the Post is now describing as a grim situation. Otherwise, we may soon become accustomed in our daily newspapers to reading such heartening opening sentences as, "On the eve of what is expected to be the clearest evidence yet of the nation's deepening recession, bad news rolled in from across the economy and the world."
As Father William Ferree pointed out in his short pamphlet, Introduction to Social Justice, there is no excuse for this sort of thing — nor are we helpless. After reminding us that we each have a personal responsibility to work together to change things, he concluded,
As readers of this blog and participants in the binary economics discussion group are aware, the Global Justice Movement in general and CESJ in particular have been working very hard to try and bring Capital Homesteading to the attention of the powers-that-be. We've had some success, but by and large have not yet gained the ear of anyone in a position to do anything. Instead, we are treated to headlines like those in today's Washington Post that inform us on page one of "Another Wave of Evidence Of a Deepening Recession."
The time may be ripe to get politicians to listen to proposals on Capital Homesteading . . . if they can be persuaded that, far from being hopeless, the current crisis is the best opportunity in a long time to implement something for which the time is always ripe: the Just Third Way. Write to your legislator, president, prime minister, prince, or pooh-bah, and let him or her know that there is an alternative available to what even the Post is now describing as a grim situation. Otherwise, we may soon become accustomed in our daily newspapers to reading such heartening opening sentences as, "On the eve of what is expected to be the clearest evidence yet of the nation's deepening recession, bad news rolled in from across the economy and the world."
As Father William Ferree pointed out in his short pamphlet, Introduction to Social Justice, there is no excuse for this sort of thing — nor are we helpless. After reminding us that we each have a personal responsibility to work together to change things, he concluded,
No problem can ever be too big, too complex, too widespread, too vast for Social Justice to tackle. There is in the field of Social Justice no such thing as an impossible situation. . . . The completed doctrine of Social Justice places in our hands instruments of such power as to be inconceivable to former generations. . . . The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.
Now we know.
That is the difference.
News from the Network, Vol. 2, No. 5
Focus on President Obama's near-trillion dollar "stimulus" package seems to be diverting people's attention away from more effective solutions to the financial crisis, such as Capital Homesteading. We've begun posting a series on why the stimulus package will, in all likelihood, not have the intended effect, but have also managed to carry out some "off-the-blog" activities as well.
• On Monday, January 26, Michael D. Greaney, CESJ's Director of Research, returned from a short trip to Lancaster, Pennsylvania. The economic situation in Lancaster, in common with the rest of the country outside the Washington, DC Beltway, is dire. People inside the Beltway may have it hard, but the federal government (the largest employer in the area) has not yet started laying off people, so those who work for the government or whose jobs depend in some way on the government are being shielded to a certain extent. This may explain the otherwise inexplicable support for a "stimulus" package that combines a great deal of political pork with spending that is either unproductive or concentrates power in the hands of the State. Yesterday morning's comment by an economist on television that the way to get out of the current financial crisis is for the government to spend more, while it makes perfect sense within the unique economy inside the Beltway, does nothing to bolster confidence of people in the real world.
• On Tuesday, CESJ sent a brief letter to Father Cassian Yuhaus, Rector of the Shrine of St. Ann's Basilica in Scranton, Pennsylvania, a member of the CESJ Board of Counselors, to ask for his assistance in arranging a meeting with His Holiness, Pope Benedict XVI, both to follow up on a series of meetings with the late Pope John Paul II, and to present the Holy Father with the Abraham Federation as a possible solution to the increased violence in the Holy Land.Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
• Also on Tuesday CESJ sent a letter to His Excellency, the Hon. Hjálmar W. Hannesson, Ph.D., Ambassador of Iceland, to acquaint him with the possibilities offered by the Just Third Way to save the Icelandic economy from what appears from news reports to be a virtual shambles. His Excellency was educated in Ireland (University College, Dublin), so we mentioned to him the fact that a number of Irish politicians are beginning to give serious consideration to CESJ's Capital Homesteading proposals.
• On Wednesday . . . we shoveled snow and chipped ice. More importantly, we also began the series of blog postings on why we believe that Mr. Obama's stimulus package is headed in exactly the wrong direction. We will probably not post the entries on successive days, but we do expect to complete the series within two weeks. We urge that you follow the series carefully, and if you think it worthwhile, you might want to forward links to your Representative in the Congress and both your Senators, as well as the governor of your state and your representatives in the state legislature. If you are not a U.S. citizen, consider sending a link or two to your own government (especially if you happen to live in Iceland or Ireland), along with links to the CESJ web site together with a short explanation that the material on the web site might suggest some possibilities for economic recovery that do not rely on 1) deficit spending or 2) foreign investment.
• Sales for Capital Homesteading for Every Citizen, listed on Amazon and Barnes and Noble, as well as In Defense of Human Dignity, ditto, ditto, have been encouraging, but could be better. We remind you that these books can be very effective ways to acquaint friends, neighbors, business associates, and (especially) religious and political leaders with possibilities for economic recovery that are not rooted in bankrupt (and bankrupting) Keynesian economics. You don't have to be a CESJ member or a licensed retailer to get the wholesale price — $4.00 off the retail price, plus $1.50 per copy for shipping within the continental United States — when you purchase 10 or more copies directly from CESJ in a single order sent to the same address (and they don't have to all be the same title, just as long as you order a minimum of ten copies total). William Cobbett's The Emigrant's Guide is also available from Amazon and Barnes and Noble, and can be purchased in wholesale lots from CESJ on the same terms as Capital Homesteading for Every Citizen and In Defense of Human Dignity, and can be "mixed and matched" with those two titles. (Sorry — Curing World Poverty (1994) was put out by a different publisher in conjunction with CESJ, and isn't included in this offer because it was printed by a different company than we use now.)
• As of this morning, we have had visitors from 18 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 100% increase in total readership, according to the statistics counter of "Google Analytics." Visitors from the Republic of Ireland (Éire) have increased 800% according to Google, with the most popular "key word" search being "solution to economic crisis in Ireland," and "is Irish government Keynesian." We received a comment from a lady in Ireland a few weeks ago who was pleasantly surprised that some of the Irish politicians to whom we sent brief descriptions of the Just Third Way and Capital Homesteading responded in a positive manner, notably Mr. Charlie O'Connor, of the Dublin South West constituency, who gives indications of serious interest in Capital Homesteading. Evidently, if Irish politicians want an "easy" way to be both popular and effective, Capital Homesteading offers some definite possibilities. Visitors from California (according to last night's news, the "eighth largest economy in the world") have increased nearly 150%, so perhaps Governor Schwarzenegger and members of the state legislature in Sacramento will soon be receiving some letters from concerned residents of the Golden State. (That's a hint, by the way.) In the U.S., more people visit from New York (both city and state) than any other region. Our most popular postings continue to be those dealing with the problems associated with Keynesian economics and the seriously flawed solutions that are being implemented to solve the world's economic and financial problems, although our most popular posting by far is "Inauguration Means Beginning."
Thursday, January 29, 2009
Stimulus, Part II: An Alternative to Keynesian Economics
In the previous posting in this series we learned that a Keynesian stimulus package can only make matters worse. This is because a Keynesian program is founded on demonstrably false assumptions that contradict basic common sense, as well as on self-defeating monetary and fiscal policy that, in essence, operates on the fixed belief that you can get out of a hole by digging yourself in deeper.
The pivotal problem with Keynesian economics, however, is an article of dogmatic faith in that belief system. That is Keynes' — unproved and unprovable — opinion that it is impossible to create money through the extension of bank credit for capital formation (investment). It is, however, absolutely necessary to create money through the extension of bank credit for government and personal debt for government spending and consumption. Keynes' belief is the basis for his rejection of "Say's Law of Markets" and the "Real Bills" doctrine, both of which flatly contradict Keynes' dogmas.
Say's Law of Markets, named for a French political economist Jean-Baptiste Say (who didn't actually develop the law, but expressed it best) is based on the observation that production equals income. That is, whenever anyone produces something, whether for sale, for trade, or for personal use, that production results in an increase in wealth. The production is "income," even if the producer never makes a sale or exchange, but consumes all of his or her own produce him- or herself.
The operation of Say's Law is easier to see when people produce for exchange, thereby taking advantage of specialization, comparative advantage, and differences in individual, local, and national skills and resources. The essence of the law, however (that production equals income), remains the same, whether an individual produces only for his or her own consumption, or produces nothing for personal consumption, preferring to trade with others for whatever he or she wants or needs. As Say expressed it in a letter to Thomas Malthus (who, like Keynes, rejected Say's Law),
Issuing money without first producing is a way of trying to get something for nothing, of creating a claim on what others produce without having to produce anything yourself. Nobody in his or her right mind, absent some form of coercion (usually an overseer with a whip) is going to work to produce goods and services, whether by means of labor or capital, just so somebody else can take it away.
The pivotal problem with Keynesian economics, however, is an article of dogmatic faith in that belief system. That is Keynes' — unproved and unprovable — opinion that it is impossible to create money through the extension of bank credit for capital formation (investment). It is, however, absolutely necessary to create money through the extension of bank credit for government and personal debt for government spending and consumption. Keynes' belief is the basis for his rejection of "Say's Law of Markets" and the "Real Bills" doctrine, both of which flatly contradict Keynes' dogmas.
Say's Law of Markets, named for a French political economist Jean-Baptiste Say (who didn't actually develop the law, but expressed it best) is based on the observation that production equals income. That is, whenever anyone produces something, whether for sale, for trade, or for personal use, that production results in an increase in wealth. The production is "income," even if the producer never makes a sale or exchange, but consumes all of his or her own produce him- or herself.
The operation of Say's Law is easier to see when people produce for exchange, thereby taking advantage of specialization, comparative advantage, and differences in individual, local, and national skills and resources. The essence of the law, however (that production equals income), remains the same, whether an individual produces only for his or her own consumption, or produces nothing for personal consumption, preferring to trade with others for whatever he or she wants or needs. As Say expressed it in a letter to Thomas Malthus (who, like Keynes, rejected Say's Law),
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.If, as Say explains, production equals income, and we don't really make our purchases with this thing called "money," but with what we produce, then the Keynesian belief that you can create money at will for consumption without first producing something is stark, raving economic insanity — as well as being so colossally dishonest as to defy the imagination. Assuming that we actually make our purchases with our own productions, when someone issues money for consumption without producing something, the issuer is stealing from whoever is stupid enough to be productive.
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce. (Letters to Malthus, 1821, p. 2)
Issuing money without first producing is a way of trying to get something for nothing, of creating a claim on what others produce without having to produce anything yourself. Nobody in his or her right mind, absent some form of coercion (usually an overseer with a whip) is going to work to produce goods and services, whether by means of labor or capital, just so somebody else can take it away.
Wednesday, January 28, 2009
Stimulus, Part I: Why Obama's Stimulus Package Won't Work
Mr. Obama is indeed correct that the country is at a "perilous moment." The only problem is that, sincere as we assume the president to be, his proposed economic stimulus package will only increase the peril of the moment, to say nothing of wrecking the future.
As I understand it, the whole idea behind Mr. Obama's proposed stimulus package (as of this writing not yet enacted into law) is that the federal government — meaning the taxpayer — will 1) provide funds to help unsuccessful gamblers and speculators recover the money they lost, so they can gamble and speculate again in the vague hope that their doing so will result in some kind of investment that creates jobs, thereby increasing effective demand, 2) provide funds to consumers who presently lack sufficient income to provide sufficient effective demand to keep the economy going, increasing demand and creating jobs, and 3) increase government spending on public works and infrastructure, thereby creating jobs and increasing effective demand.
In the Keynesian universe, the purpose of production is not consumption, but to provide jobs that will generate effective demand. Thus, the basic assumptions underlying Mr. Obama's Keynesian — one might say ultra-Keynesian — approach to economic recovery are 1) increased demand for consumer goods follows increases in capital investment, 2) production for consumption is not necessary, 3) capital investment can only take place by first cutting consumption, then investing, and 4) production does not equal income.
In a Keynesian universe, investors can only form capital when 1) effective demand has been reduced by saving, 2) there is no need for new capital formation other than to create jobs needed to 3) provide wage income to purchase existing goods and services, thereby 4) replacing the funds previously diverted to investment.
Within the Keynesian framework, then, all that should be necessary to stimulate the economy is to 1) create money to replace what was previously diverted to savings, thereby 2) increasing effective demand, 3) clearing existing excess production, and 4) creating jobs to provide income to increase effective demand.
The flaws in the Keynesian program should be obvious. 1) If consumers are simply lent money to increase effective demand, they must at some future time decrease effective demand by the same amount in order to repay the loan, plus reduce future effective demand further by whatever interest rate, risk premium, and service fee is added to the original loan principal. Thus, allowing people to borrow money to finance consumption is worse than self-defeating. It is (not to put too fine a point on it) economic insanity. Because the consumer must pay back more than he or she borrowed, future effective demand is reduced at a greater rate than it was originally increased by the extension of consumer credit. The problem of excess production due to decreased effective demand is worse, and more people lose their jobs in consequence.
2) If a business borrows money for capital formation that results in job creation when there is insufficient effective demand in the economy to justify the investment (a given in Keynesian economics due to Keynes' fixed belief that consumption must be reduced in order to finance capital formation), the business will require a taxpayer subsidy in order to make a profit and stay in business.
a) If the subsidy is provided out of tax collections, effective demand is further reduced, and the business will require increased subsidies to make up for the reduction in effective demand.
b) If the State provides the subsidy by monetizing its deficit (i.e., printing money backed by debt to be repaid by future taxpayers), the resulting inflation will decrease effective demand as the price level increases, again making additional subsidies necessary (whether you call them subsidies, price supports, bailouts, or stimulus packages) in order to make a profit and stay in business.
Either method results in a vicious circle of inflation to overproduction, overproduction to unemployment, unemployment to increased government spending, and increased government spending back to inflation. This is the trap we are in now, with Mr. Obama's stimulus package virtually custom designed to add gasoline to the fire, making the problem infinitely worse.
As I understand it, the whole idea behind Mr. Obama's proposed stimulus package (as of this writing not yet enacted into law) is that the federal government — meaning the taxpayer — will 1) provide funds to help unsuccessful gamblers and speculators recover the money they lost, so they can gamble and speculate again in the vague hope that their doing so will result in some kind of investment that creates jobs, thereby increasing effective demand, 2) provide funds to consumers who presently lack sufficient income to provide sufficient effective demand to keep the economy going, increasing demand and creating jobs, and 3) increase government spending on public works and infrastructure, thereby creating jobs and increasing effective demand.
In the Keynesian universe, the purpose of production is not consumption, but to provide jobs that will generate effective demand. Thus, the basic assumptions underlying Mr. Obama's Keynesian — one might say ultra-Keynesian — approach to economic recovery are 1) increased demand for consumer goods follows increases in capital investment, 2) production for consumption is not necessary, 3) capital investment can only take place by first cutting consumption, then investing, and 4) production does not equal income.
In a Keynesian universe, investors can only form capital when 1) effective demand has been reduced by saving, 2) there is no need for new capital formation other than to create jobs needed to 3) provide wage income to purchase existing goods and services, thereby 4) replacing the funds previously diverted to investment.
Within the Keynesian framework, then, all that should be necessary to stimulate the economy is to 1) create money to replace what was previously diverted to savings, thereby 2) increasing effective demand, 3) clearing existing excess production, and 4) creating jobs to provide income to increase effective demand.
The flaws in the Keynesian program should be obvious. 1) If consumers are simply lent money to increase effective demand, they must at some future time decrease effective demand by the same amount in order to repay the loan, plus reduce future effective demand further by whatever interest rate, risk premium, and service fee is added to the original loan principal. Thus, allowing people to borrow money to finance consumption is worse than self-defeating. It is (not to put too fine a point on it) economic insanity. Because the consumer must pay back more than he or she borrowed, future effective demand is reduced at a greater rate than it was originally increased by the extension of consumer credit. The problem of excess production due to decreased effective demand is worse, and more people lose their jobs in consequence.
2) If a business borrows money for capital formation that results in job creation when there is insufficient effective demand in the economy to justify the investment (a given in Keynesian economics due to Keynes' fixed belief that consumption must be reduced in order to finance capital formation), the business will require a taxpayer subsidy in order to make a profit and stay in business.
a) If the subsidy is provided out of tax collections, effective demand is further reduced, and the business will require increased subsidies to make up for the reduction in effective demand.
b) If the State provides the subsidy by monetizing its deficit (i.e., printing money backed by debt to be repaid by future taxpayers), the resulting inflation will decrease effective demand as the price level increases, again making additional subsidies necessary (whether you call them subsidies, price supports, bailouts, or stimulus packages) in order to make a profit and stay in business.
Either method results in a vicious circle of inflation to overproduction, overproduction to unemployment, unemployment to increased government spending, and increased government spending back to inflation. This is the trap we are in now, with Mr. Obama's stimulus package virtually custom designed to add gasoline to the fire, making the problem infinitely worse.
Tuesday, January 27, 2009
A New Icelandic Saga
When we hear of economic breakdown, political unrest, and government collapse, most people don't think of Iceland. The true scope of the current global financial crisis, however, can probably be judged by the fact that Iceland's coalition government collapsed yesterday following an almost unheard-of groundswell of public opposition. The country has been in a state of crisis since this past October, when widespread bank failures resulted from a tremendous load of unserviceable debt, according to an Associated Press report yesterday ("Iceland's government topples amid financial mess" 01/27/09) So far the protests have been mild judging by what we've seen in the rest of the world, limited to banging on pots and pans outside the parliament building in the capital of Reykjavik, and throwing paint and eggs at the Prime Minister's car.
As described in the article, it seems evident that Iceland's troubles can be traced to a heavy reliance on Keynesian economics, coupled with massive borrowing from foreign sources when a strong Krona encouraged many Icelanders to deal in currency arbitrage for consumer purchases. An appreciating domestic currency would allow consumers and other debtors to purchase the loaned currency for repayment at a much cheaper price, essentially engaging in short selling in currency speculation.
A problem, however, results when the domestic currency decreases in value relative to the currency that was borrowed, making it more expensive to purchase the foreign currency with the domestic currency. What seemed like a good idea at the time then becomes a disaster, both individually and nationally. As a result, the country is not only burdened with bailout loans from the International Monetary Fund and a financial system in ruins after the banking collapse, ordinary consumers are loaded with debts that increase dramatically as the Krona declines, at the same time that unemployment and inflation are both rising rapidly.
At this point, the only real help for the situation is implementation of a Capital Homesteading program at the earliest possible date. To that end, CESJ has sent a letter to His Excellency, Dr. Hjálmar W. Hannesson, Ambassador of Iceland in Washington, DC, asking for a meeting with CESJ president Norman Kurland, and briefly describing the potential benefits for Iceland in adopting Capital Homesteading.
As described in the article, it seems evident that Iceland's troubles can be traced to a heavy reliance on Keynesian economics, coupled with massive borrowing from foreign sources when a strong Krona encouraged many Icelanders to deal in currency arbitrage for consumer purchases. An appreciating domestic currency would allow consumers and other debtors to purchase the loaned currency for repayment at a much cheaper price, essentially engaging in short selling in currency speculation.
A problem, however, results when the domestic currency decreases in value relative to the currency that was borrowed, making it more expensive to purchase the foreign currency with the domestic currency. What seemed like a good idea at the time then becomes a disaster, both individually and nationally. As a result, the country is not only burdened with bailout loans from the International Monetary Fund and a financial system in ruins after the banking collapse, ordinary consumers are loaded with debts that increase dramatically as the Krona declines, at the same time that unemployment and inflation are both rising rapidly.
At this point, the only real help for the situation is implementation of a Capital Homesteading program at the earliest possible date. To that end, CESJ has sent a letter to His Excellency, Dr. Hjálmar W. Hannesson, Ambassador of Iceland in Washington, DC, asking for a meeting with CESJ president Norman Kurland, and briefly describing the potential benefits for Iceland in adopting Capital Homesteading.
Monday, January 26, 2009
A Blueprint for Change
Norman Kurland, president of CESJ sent the following letter in response to a comment from a reader that, "The leading governments of the world in their efforts to address the debt-fueled financial crisis are compounding rather than resolving the problem. This is because they have little understanding — or choose to turn a blind eye — to the systemic causes of the developing catastrophe. In brief, they are addressing the wrong issues; putting funding into the wrong hands; and vainly hoping to jump-start the economy by encouraging a spending spree which could shortly be disastrous to the better interests of ordinary people."
I totally agree with your analysis of the current global financial crisis. It's one of the best presentations I seen written to describe the problems of the current financial system, current institutions of finance and defective government policies in the US, the UK and all governments in the world. Some would attribute the problem to a tiny conspiratorial elite intent on dominating global civilization. There may indeed be such an elite.
But, as Bucky Fuller wisely reminded serious people: "We are called to be architects of the future, not its victims." Since I believe you and I see the obvious flaws in the system, its institutions and its laws — and these "social artifacts" were created by humans within paradigms of the past — I interpret Bucky's challenge as one that reminds serious people that anything — including outdated and flawed paradigms perpetuated and taught by followers of "some defunct economic economist" — that has been created by humans can be re-created or restructured by humans.
Of course the quality of any restructuring of the global economic order and its national and global institutions and laws will depend on the soundness of our vision for change, the logic of the paradigm shaping our strategies for change, and the clarity of the principles of social and economic justice we apply for implementing the new blueprint for change.
If we can agree so far, I think we can further agree that we will not find that new vision and paradigm or any sound principles of economic and social justice taught within the "soft sciences" of academia, nor in any leading university or think-tank of which I am aware. Hence, architects for change must be found outside of academia and they need to unify around a new blueprint for change that can overcome the inertia among the academic elite and in policy makers and leaders whose minds have been shaped by academics clinging to paradigms threatening the future of global civilization.
We need a new paradigm, a new blueprint or vision of the future that can be implemented in any country, and a new strategy to unite other architects for change to overcome the inertia of the present system.
Such a new paradigm exists and it can be found in the seminal writings of Louis Kelso and Mortimer Adler (for free downloads click on www.kelsoinstitute.org), the Ashford-Shakespeare book /Binary Economics: The New Paradigm /and in my paper and Ashford's papers published in /The Journal of Socio-Economics/. (My paper "A New Look at Prices and Money" has been republished in the Shakespeare-Challen book as well as in our book /Capital Homesteading for Every Citizen/ and its logic has never been challenged, at least in the 8 years since it was first published.)
A new and comprehensive blueprint for policy and legislative change that can be adopted by any country is contained in the /Capital Homesteading /book, which can be downloaded free at http://www.cesj.org/homestead/summary-cha.htm.
A movement united to advance this new Kelsonian paradigm and new blueprint has already produced some success stories and prototypes that are already being implemented in various countries. (See http://www.cesj.org/about/CESJ-Accomplishments.pdf and various projects described at www.cesj.org, www.globaljusticemovement.org and www.theamericanmuslim.org.) A number of people you sent your paper to are working on new initiatives in East St. Louis, IL, in Bangladesh, in tackling the sub-prime mortgage crisis on Capitol Hill, and in getting a "foot in the door" to top policymakers in the Obama Administration. And several marketing/media professionals have volunteered to spearhead a CESJ Marketing/Media campaign to bring our Capital Homesteading "solutions" to media and public attention.
Thank you for your excellent comment. I hope that my response is useful to you and others who have not yet joined our growing band of "architects for change." Our door remains open to those who share our vision, paradigm, principles of social and economic justice, strategy and blueprint for change.
I totally agree with your analysis of the current global financial crisis. It's one of the best presentations I seen written to describe the problems of the current financial system, current institutions of finance and defective government policies in the US, the UK and all governments in the world. Some would attribute the problem to a tiny conspiratorial elite intent on dominating global civilization. There may indeed be such an elite.
But, as Bucky Fuller wisely reminded serious people: "We are called to be architects of the future, not its victims." Since I believe you and I see the obvious flaws in the system, its institutions and its laws — and these "social artifacts" were created by humans within paradigms of the past — I interpret Bucky's challenge as one that reminds serious people that anything — including outdated and flawed paradigms perpetuated and taught by followers of "some defunct economic economist" — that has been created by humans can be re-created or restructured by humans.
Of course the quality of any restructuring of the global economic order and its national and global institutions and laws will depend on the soundness of our vision for change, the logic of the paradigm shaping our strategies for change, and the clarity of the principles of social and economic justice we apply for implementing the new blueprint for change.
If we can agree so far, I think we can further agree that we will not find that new vision and paradigm or any sound principles of economic and social justice taught within the "soft sciences" of academia, nor in any leading university or think-tank of which I am aware. Hence, architects for change must be found outside of academia and they need to unify around a new blueprint for change that can overcome the inertia among the academic elite and in policy makers and leaders whose minds have been shaped by academics clinging to paradigms threatening the future of global civilization.
We need a new paradigm, a new blueprint or vision of the future that can be implemented in any country, and a new strategy to unite other architects for change to overcome the inertia of the present system.
Such a new paradigm exists and it can be found in the seminal writings of Louis Kelso and Mortimer Adler (for free downloads click on www.kelsoinstitute.org), the Ashford-Shakespeare book /Binary Economics: The New Paradigm /and in my paper and Ashford's papers published in /The Journal of Socio-Economics/. (My paper "A New Look at Prices and Money" has been republished in the Shakespeare-Challen book as well as in our book /Capital Homesteading for Every Citizen/ and its logic has never been challenged, at least in the 8 years since it was first published.)
A new and comprehensive blueprint for policy and legislative change that can be adopted by any country is contained in the /Capital Homesteading /book, which can be downloaded free at http://www.cesj.org/homestead/summary-cha.htm.
A movement united to advance this new Kelsonian paradigm and new blueprint has already produced some success stories and prototypes that are already being implemented in various countries. (See http://www.cesj.org/about/CESJ-Accomplishments.pdf and various projects described at www.cesj.org, www.globaljusticemovement.org and www.theamericanmuslim.org.) A number of people you sent your paper to are working on new initiatives in East St. Louis, IL, in Bangladesh, in tackling the sub-prime mortgage crisis on Capitol Hill, and in getting a "foot in the door" to top policymakers in the Obama Administration. And several marketing/media professionals have volunteered to spearhead a CESJ Marketing/Media campaign to bring our Capital Homesteading "solutions" to media and public attention.
Thank you for your excellent comment. I hope that my response is useful to you and others who have not yet joined our growing band of "architects for change." Our door remains open to those who share our vision, paradigm, principles of social and economic justice, strategy and blueprint for change.
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