Work in progress, but thought I’d share it.
For some years now, I have been calling for what I call
a Capitalist Revolution. Effectively, it
would be comparable in magnitude to the Copernican Revolution in cosmology, but
within economics. My ideas have the potential to change people’s lives the world
over in both physical and cultural ways.
You no doubt consider this hyperbole. You SHOULD consider this hyperbole, if your
BS detector is intact and in current use.
When was the last time you saw somebody back up a statement like
that? I am going to tell you virtually
all economists—even the best, including Milton Friedman, Thomas Sowell, and
others I admire greatly—have been screwing up. I am going to tell you Karl Marx
was not fully wrong.
But I would beg your momentary indulgence. This is a quick read, or should be for most
people. Please consider carefully what I
am about to say, and then judge me and my ideas as you choose.
In my own estimation, my ideas on this topic are clear,
my reasoning is flawless as far as I can tell, and the facts are on my
side. This means that it DOES NOT MATTER
that I am an outlier, saying seemingly outlandish things. I take Ayn Rand’s call to see things “with my
own eyes” seriously. These ideas stand
on their own merits, and I am continuing my appeal to people of intelligence
and good will to consider and act on them, over some time horizon.
Let me be specific:
1) I believe that in a properly ordered economy, the
proper direction of the value of money is in the direction of increase; put
another way, that “deflation” is good and should be the aim of intelligent
policy. Dollars in a coffee can should
increase steadily in value, or at least remain the same across long stretches
of time.
This idea is in direct conflict with what I might term the Keynesian Swindle. Keynes knew what he was doing, and most people are too fucking stupid to see that he lied to them in front of their eyes, and made little effort to conceal it. They only see what they are told to see.
2) In such a system, year over year growth is
unnecessary, homeostasis is both possible and desirable, and overconsumption is
a vice, not a virtue.
3) The ability to create money from nothing is
inherently abusive. Strong and cogent
moral objections to this process can and should be raised.
4) In a properly ordered system, the profession of
Economics would be utterly superfluous.
The Terracentric idea, as I would contextualize it
within my map of the economic universe, consists in the opposing ideas, namely
that small annual inflation is the “price we pay” for economic growth, that
annual growth is absolutely essential for economic well being, that bankers
provide a needed and invaluable service, and that only economists can help us
prevent regular calamities (and when they happen anyway, help us explain them).
Please consider this fact: in 1980, about $2 trillion
existed (M2); in 2015, about $12 trillion existed. I will do the math for you: this is a
six-fold increase in 35 years.
The Laws of Supply and Demand are about as basic as you
can get in terms of economic rules, so even after allowing that many factors
affect the de facto buying power of money, this means in theory that each
dollar tucked away in a coffee can in 1980 and pulled out in 2015 could only
buy one sixth what it did. If it bought
six loaves of bread then, it would buy one now.
This is really quite breath-taking if you ponder it carefully.
Between 1980 and 2010, household debt, as a ratio of
debt to Disposable Income—and in a period of steadily rising incomes–increased
from 50% to 110%. In 1980 average savings as a ratio of Disposable income was
12%. In 2015, that number was 5%.
One last statistic: in 1947 banking represented 10% of
non-farm business profits. That number
in 2011 was 29%. One third of the money made in America was
made by banks. One dollar in three. Look at the skyline in your city. What do you see? If your city is typical, banking and
insurance buildings.
Applying common sense to these numbers, is it so hard to
see that lenders are getting richer, while borrowers—most all of us—are getting
poorer? Do I need to cite increases in
national debt, which is to say the money owed by all of us, to some of us?
Now, the political Left talks incessantly about this
“1%”. The claim is that the rich are getting richer. As a conservative I have to say I agree fully
with them, but that they have misunderstood the mechanism, and are thus poorly
positioned to propose a solution.
Conservatives, of course, claim that all you have to do
is work hard, save your money, invest in your vision, and the sky will rain
money. This is true for some, but fewer and
fewer. It is obvious beyond any
possibility of debate that the combination of free markets, the protection of
property rights, and true political liberalism have done more to alleviate
poverty the world over than any combination of forces in human history, but we
still have to ask why, when technology gets better every year, things get
cheaper every year, that even with hard work so many people owe so much money
to so many people.
Between 1960 and 2011, GDP per capita—individual
productivity–rose from $17,747 to
$48,242. For simplicity, let us
call this a 4-fold increase.
If we consider personal wealth not as the stuff in your
house, but as the value of your net assets minus your net debts, has wealth in
America increased 4-fold? Of course
not. We have, on the contrary, LOST net
worth. Most of us owe as much or more
than we are worth.
Where did this wealth go? If we are getting more done every hour for
every year that passes, why are we not building wealth and instead borrowing
the illusion of it? We all know people
in $300,000 houses with $100,000 in credit card debt and very little net
equity. Can we REALLY see evidence of a
four-fold increase in productivity and following income? Where is the very comfortable middle class of
our parents youth? Where are the
pensions? Where the security?
This
is the salient economic question which nobody—on the left or the right– seems
to want to address. I will.
Most students of psychology have to admit that even when
Freud was wrong, he was often right. He
had many interesting insights, but misinterpreted them. So, too, with Karl Marx. His “science” of history failed in the only
lab—actual events—which should matter for someone with his particular conceits,
and clearly formulated hypotheses.
But he was also right: there does in fact exist a core
class distinction at the root of our society, which is increasing the wealth of
the elites at exponential rates, while the rest of us are increasingly working
harder in the midst of plenty, being told to buy things we don’t need to keep
the economy going, and worrying about retirement, healthcare costs, and even
our very jobs.
That class distinction is between those empowered by law
to create money, and those who must work to create concrete goods and services
which people are willing to buy at the costs they can be sold profitably at. The first group is the bankers, and the second
group I call Capitalists.
True Capitalism, as I would define it, is the process of
investing ones resources of time and effort, money, and creativity in providing
innovative and new solutions to existing problems, or creating new markets to
tap latent demand. True Capitalism is
inherently involved in solving real issues of supply and demand, both for real products
and services.
Let me ask an obvious question: If we went from 2
trillion dollars in existence, to 12 trillion dollars, how did this
happen? How did this money enter our
economy?
Please consider, as you likely never have, how banks
operate. How they start is with a large
pool of capital. Rich people put their
money in, and at a certain point they have enough that a State will grant them
a license to begin banking. Once they
have this license, what do they do? They
begin taking deposits. This is where the
problem begins.
By law, a bank can loan out 90% of the money which is
“deposited” in its “vaults”. Now, most
money is electronic, and exists as a digital fiction, but in theory each bank
has to keep a certain amount of hard currency in its literal vault, and a
certain amount as 1’s and 0’s. The
amount it cannot loan out is set by the Federal Reserve.
Let us say a bank takes in $100 in deposits. Without tapping its initial capitalization,
it can loan out $90. This money has now
been cloned. It should have been sitting
in a vault—let us for the moment imagine gold coins—where it was completely
removed from circulation until needed, but in fact it reentered circulation almost
immediately. The checking and savings
accounts of 200 people were used to create a home mortgage.
In terms of M2, the money that is owed the depositors
still exists, but so too does the money created for the loan. $190 now exists, where only $100 did
before. And let’s be clear: when the
bank makes the loan, the money flows out.
It pays the home developer, who uses it to pay his carpenters, and
plumbers and electricians, who take those paychecks and deposit them in their
own bank accounts. Once in those bank accounts, THAT money can now be relent by
those banks. In a robust economy, you
could in theory take 90 plus 81 (90% of 90), plus $73 (90% of 81), etc. $100 in theory can create close to
$1,000. This is how you get most monetary—money—inflation.
Like everything else, money is susceptible to the laws
of supply and demand. The more money
there is, the less it is worth. A gold
coin in a vault does not affect the price of money. A digital “coin” in circulation does.
There is something called the speed of money. The more exchanges happen, the more quickly
prices will rise in conditions of increased money supply, but prices do not
always exactly correlate with the amount of money in existence. This confuses many people.
First, let’s ponder the process of price inflation as it
relates to monetary inflation. Let’s
take the quite real example of real estate.
It is an axiom of human psychology that almost all people will vastly
discount future benefits relative to present benefits. What you get when you get a “housing bubble”
is a lot of people competing, using banks, to purchase scarce or highly desirable
real estate. They are willing to pay
more and more and more, because the money is not due immediately, but rather
over a very long time horizon.
Let us say a house was worth $100,000, but credit is
easy, interest rates are low, and people really want to live in that
neighborhood. It is both tempting and
easy to offer $110,000 to make sure you get that house. The neighbors take note, and raise their
prices accordingly. Soon, prices may
double or triple, despite NO changes in the neighborhood, or even the relative
affluence of the people living there.
People simply pay more for getting what they have been conditioned to
compete for.
If one house is sold a year, then this process will take
a long time. If 50 are sold a month,
then this process can happen very, very quickly. The net outcome is the same, but the time
needed can vary greatly.
Put simply, where supply—here, of money—is increased
greatly, demand is stimulated, and this demand affects the price of the
supply. The value of that money is
decreased. It is decreased for EVERYONE,
to varying degrees, depending on how far they are, literally or practically,
from where the price inflation is happening.
Now, the amount of money can be increased tremendously
without immediate price inflation. That
is what has been happening for some time now, as the Fed had pumped at least a couple
trillion dollars into our banking system, which was created from nothing. This is all new money.
While harmless now—we have low de facto inflation, from
what I can tell–what this money is is an acid that in the right
circumstances—full employment, for example—would corrode rapidly all the wealth
people possess in this country, to the benefit of bankers, and the detriment of
the rest of us.
For this reason, the Consumer Price Index cannot be
relied on to determine monetary inflation.
It measures prices, which can not only be affected by the velocity of
money, but also by simple factors like improved methods, bad harvests, fuel
costs and the like.
The key point, though, is that virtually
everything that bankers do affects the price of all goods and services in
circulation in a negative way. The details are virtually infinitely complex,
and occupy very excellent minds in the Economics departments of universities
the world over. But the net is that what
they do makes each hour of labor worth less, and it creates wealth for them
without the necessity of innovation in the realm of any real goods or services. Nobody needs money. They need what money will buy.
My argument is this: banks are able to make claims on
our collected productive output, without contributing anything intrinsically
useful in return. Fractional reserve banking
is thievery, as it is currently constituted.
It is legally sanctioned theft, and it is not recognized as such because
the system is so complex, and the effects have been subtle. They try never to take too much, or to expose
what they do to too much scrutiny.
But how much money could YOU make if I gave you a magic
checkbook which you could write checks with in modest amounts, in such a way
that you kept the profits, and got bailed out or went bankrupt (as an
institution, never as a person) whenever the money did not get repaid? Tails you win, heads you win less. Over time, you could become quite
wealthy. You just repeat the process
over and over.
Again: banks represent around 30% of the business
profits in America today. Can you see
any reason this number would not continue to go up, or remain the same as a
percentage, and continue to rise with GDP?
The amount of money we are talking is astronomical.
What to do? Here
is where my ideas are unique. Much of
what I have been talking about has been covered by people like Murray Rothbard
(much of whose writing is available for free download).
My thought process is this: logically, if the outcome of
the banking process over the past 50 years has been to move wealth from the
control and use of individuals, to the control and use of massive, enormously
wealthy banks, using the process of money creation, why not reverse the
process?
We know that the American people are heavily in debt at
all levels. We owe as individuals. We owe as municipalities. We owe as counties. We owe as States. And of course the Federal Government owes
roughly $19 trillion, mainly to the Federal Reserve—which by the way is buying
the majority of Obama’s debt–and to member banks.
We know this situation is not sustainable. If the Fed
stopped buying Federal Securities tomorrow, the Government would go bankrupt.
We know at some point, the interest payments on the
national debt will exceed current Department of Defense expenditures. We are talking $600 billion annually or more,
within the next 5 or at most 10 years.
Most experts agree that at some point the sterling
credit of the United States government has to come to an end, and our credit
rating will be downgraded because the illusion cannot be sustained any
longer. At that point, interest rates on
the debt will go up, and we may be looking at a trillion or more annually JUST
IN INTEREST PAYMENTS. We are talking
national calamity and the destruction of virtually all the services the Federal
government has annexed to itself since Roosevelt’s New Deal.
My solution, while enormous, while revolutionary, while
politically impossible in ordinary times, is simple: pass a law bringing the
Federal Reserve back under the direct control of the United States
Government. Use it to pay off all debts,
public and private, at all levels of government, for all individuals, and for
all corporations. Everybody. This will transfer wealth—real wealth, which
is to say titles to lands, cars, businesses and the like—back to the people. This will eliminate our national debt.
Then we start over.
We require all banks to be 100% reserve, which is to say that rich
people can still lend money to whomever they like, but it is their money at
risk, and they lose it if they make a bad decision. Banks make money several ways. First, by serving as investment aggregators
in the form of Certificates of Deposit, which are interest-bearing vehicles by
means of which the bank itself is able to lend money at still higher rates of
interest, and make money on the spread. Second,
banks can also make money providing check cashing and money movement services,
and as secure repositories for money storage. You still write checks, and still
have a debit card, but now you pay a monthly fee. This is a small price to pay. And you can always put your money in a coffee
pot if you prefer. Cash makes sense in
this system.
We eliminate the Federal Reserve, and we never alter the
quantity of money in existence again.
What will happen with continuing increases in productivity brought on by
continually improving technology is that the value of money will increase
steadily, making all hours worth more, and truly democratizing wealth.
While this solution is radical, it directly addresses a
core concern of economists: deflation.
When people are in debt up to their eyeballs—as they were before the
great Crash of 1929, and as they are now—then when the money deflates in value,
all their loans become much larger, effectively. They can’t pay them back. This is why so many banks failed in the early
1930’s. The runs happened because banks
were not getting their loans repaid, and were in many cases failing, and simply
closing their doors. People heard about
this, and proactively took their money out, which caused many more failures.
But in a condition of ZERO debt, there are no
loans. We WANT the value of money to
increase. Savings start to make sense,
and people are able to self fund their projects, rather than being beholden to
the banks, and having their lives depend on their credit scores.
Nobody else is saying this. These ideas are unique. But after a long period of trying to get
feedback, nobody has found any substantive issues with my analysis, and when I
look at the course of the next 30 years, it is my considered view that
something like this is absolutely essential.
National decline and failure are of course options too, but I find them
far less attractive options.
From a strictly personal perspective, I also believe
that it is wrong to get wealthy on the backs of others without carrying any of
the load, without contributing anything of true importance. It is wrong to demand profit when things are
good, and protection when they are not.
The freedom to succeed must come with the freedom to fail.
Even though this approach addresses many practical
problems, what I would suggest is that the most important element is moral.
Calls for sound money used to be common, when people
were smarter, more aware, more educated.
But very few people are calling for it today. They have simply lost the memory of anything
but continually raising prices, a constantly accelerating rat race, and the
loss of time for everything but work and their preferred form of inebriation.