Foreign trade is a very perplexing subject to me despite my background in accounting and business. I have spent at least two decades trying to figure out who is the winner and who is the looser. The answer to that would seem to be a simple matter of knowing if you are gaining or loosing from foreign trade, but difficulty lies in figuring what constitutes a gain or loss. The foreign trade balance is the most tangled web I have encountered in my entire professional career. I suspect it is that way for a reason. If your trading partner knew that they were consistently getting the short end of the deal it is unlikely that they would want to continue doing business with you. It makes sense to present the information to your partner in such a way so that they think that the are benefiting from the trade even if they are not.
The numbers show that as a nation the United States imports more then it exports by a wide margin. The immediate impulse is to say that this is bad because we pay more money then we receive… so this must be bad. Lets take money out of the equation for a second since money is simply a substitute for the value of goods. If this was a barter system in which goods are directly traded for other goods, and we were importing more goods then exporting… wouldn’t the difference be called a profit? Isn’t it a good thing to receive more things of value then to give them away? This trade becomes even more favorable if we are paying for those goods with our own paper currency… which we print out of thin air.
Lets look at the trade balance from another prospective. Lets consider living standards. Lets compare the living standards of the average person in the United States verse the average person living in China. China has had a high GDP rate for a very long time but that has not translated in high living standards for the average person. The problem with GDP is that it only measure the total amount of money moving around within an economy, it does not measure profits. I have spoken to a number of people who visit China on a regular basis, they tell me that it is a miserable place by our standards and that they would not want to live there.
The difficulty of seeing clearly if we are gaining or loosing on foreign trade is further compounded by the reality that American companies engaged in foreign import and export have both incentive and easy opportunity to manipulate their transactions to result in the lowest tax liability due to the US government. Indeed working around the IRS is a great motivational reason why a company would want to engage in foreign trade in itself.
It is hard to deny the fact that America was built on cheap labor. The first cheap laborers was indentured servants being who were either criminals or debtors. The next form of cheap labor was slave labor. Fortunately that institute was abolished. When slavery was abolished it was replaced by what many consider “cheaper” immigrant labor. Immigrant labor did not require the large upfront investment of purchasing salves or having to look after them through sickness and old age. Then at some point it was realized that it might be cheaper to export the work rather then import the laborers. The point here is that cheap labor has always been a part of the American economy through both good times and bad times.
Over the last three centuries many in the middle class have pointed to that cheap labor and pronounced it as the cause of their hardship, but I believe that if one investigates deeply into that subject, they may discover an entirely different perspective. When we look at this from the perspective of third world countries, where they have no source of “cheaper labor”, we find that they are stuck at a level where they can only maintain themselves at a very basic level of food and shelter.
I once heard that if you are in a Poker game and do not know who the sucker is, the chances are that you are the sucker. For anyone who does not know this, it is common for poker players to secretly team up and coordinate to take advantage of a player. I think something like this might be going on with the foreign trade situation between the United States, its Allies, and China. The Chinese typically work sunrise to sunset, seven days a week in very harsh conditions to provide Americans with consumer goods that make our life more enjoyable. We give them paper money and promises to pay in return. Who is the sucker?
Tuesday, February 8, 2011
Social Security
The Social Security system is just as unconstitutional as government run health care. No where in the Constitution of the United States does it give authority to the Federal Government to run a retirement program. I believe the existence of the social security system has created a nation of people dependent on big government. The people who have some financially savvy would do far better to invest their money directly. The people who are financially ignorant are fooled into the false comfort that the “government” will take care of them in their old age. Ask any retired person and they will tell you that the payouts from social security are inadequate to live on.
Once a country goes down the socialist path it is very hard to come back because people get use to “entitlements”. The socialist cancer of government run retirement has spread to socialist government run health care and will continue to spread until it is cut off at the root. The root of socialism is the taxes that fund it. The people of this country are very over taxed and the money is spent on socialist programs that it has no business being involved it. The responsibility of the federal government is very simple; defense from foreign enemies, regulate free trade between the states and regulate a stable currency… that is it.
People broadly talk about repealing the government run health care bill and acknowledge how corrosive it is… but do not realize that the idea was born from the failing Social Security System that came before it. Few politicians, even strict constitutional ones, are willing to attack the social security system. They can not, because it has corrupted all of America and made it dependent on it. Entitlements and Dependency is the bait and trap of socialism. If we continue down this path we will soon end up like France, a broken socialist nation, with no hope of every prospering.
So what is to be done with Social Security at this point. Sadly we can not just cut it off, because generations of American have now become dependent on it. For any politician to propose tearing down the social security system it is political suicide. The answer is to turn the system over to the states. Give that responsibility back to the states who are closer to the people and are better suited to assess their needs. The Federal Government should turn over the system to the states without any mandates of how it should be administered. Within time the smarter states will realize what a hopeless endeavor government run retirement is and will phase it out all together.
Once a country goes down the socialist path it is very hard to come back because people get use to “entitlements”. The socialist cancer of government run retirement has spread to socialist government run health care and will continue to spread until it is cut off at the root. The root of socialism is the taxes that fund it. The people of this country are very over taxed and the money is spent on socialist programs that it has no business being involved it. The responsibility of the federal government is very simple; defense from foreign enemies, regulate free trade between the states and regulate a stable currency… that is it.
People broadly talk about repealing the government run health care bill and acknowledge how corrosive it is… but do not realize that the idea was born from the failing Social Security System that came before it. Few politicians, even strict constitutional ones, are willing to attack the social security system. They can not, because it has corrupted all of America and made it dependent on it. Entitlements and Dependency is the bait and trap of socialism. If we continue down this path we will soon end up like France, a broken socialist nation, with no hope of every prospering.
So what is to be done with Social Security at this point. Sadly we can not just cut it off, because generations of American have now become dependent on it. For any politician to propose tearing down the social security system it is political suicide. The answer is to turn the system over to the states. Give that responsibility back to the states who are closer to the people and are better suited to assess their needs. The Federal Government should turn over the system to the states without any mandates of how it should be administered. Within time the smarter states will realize what a hopeless endeavor government run retirement is and will phase it out all together.
The Impossibility of Economic Utopia
People can not seem to understand why it is absolutely impossible to have an Economic Utopia. A Economic Utopia is a state where you have 100% employment and everybody makes enough money to buy everything they want. This is an absolute impossibility due to human nature.
What is Human Nature within the context of business? It is a struggle between greed and laziness. On the one hand people want to do as little work as possible… and on the other hand people want as much luxury as possible. When the possibly of excelling above their peers is not available through the force of greed, such as in a socialist system, people will fall back to laziness and work as little as possible. As people work less and less, first luxury items will become scarce and then basic needs like food and shelter will no longer be produced. Hence Utopia is an impossibility in a Socialist system.
A capitalist system is also driven by the same human characteristics of greed and laziness, but the system favors greed. So why is economic utopia still an impossibility in capitalism??? Because even at the highest levels of greed there is still an element of laziness. The average businessman will not set up a business model to satisfy 100% of a given population. The Average businessman is content to target 60% or less of a given population; 60% if he targets the middle class, 20% if he targets the high end market and 20% in the low end market.
I will give a personal example from my experience to clarify what I mean. I owned a food service establishment that targeted the middle class and of course was accessible to the upper class… but the prices were prohibitive to the lower classes. Here is a simple calculation I made for a restaurant with 100 seats. I could sell a cheese burger deluxe for $7.50 and expect to sell it to 80 people… or I could sell it for $6.00 and sell it to 100 people. Either way I would gross $600, (7.50×80) vs (6×100). The difference is that when selling it for $7.50, I only have to serve 80 people… less work, same money. So I will choose to only target 80% of the population every time.
Now here is where it gets interesting… and the part that a lot of people don’t get. If somehow money became available through some artificial means like welfare and 100 people started showing up at my door because they could now all afford my prices… I would increase my prices to $9.40 so that only 80% could afford the prices even at a level where I am grossing $750, (7.50×100) vs (9.40×80). So I am back to working at only 80% of capacity. At 80% capacity, the customers that I do get will get better service since the place is running under capacity. While this may seem like a flaw in the system, it can actually serve as incentive. In a system that naturally favors less then 100% capacity, there is an competitive incentive for people to work hard to stay in that top 80% (middle class). The only incentive that people would have to not work hard to get into the middle class is if their is a fail-safe underneath them like wealth-fare.
This is a market force that completely escapes those who wish to create some fantasy world where everyone can have everything they want. It is a complete waste of time to try to put economic gimmicks into place to satisfy 100% of the population.
What is Human Nature within the context of business? It is a struggle between greed and laziness. On the one hand people want to do as little work as possible… and on the other hand people want as much luxury as possible. When the possibly of excelling above their peers is not available through the force of greed, such as in a socialist system, people will fall back to laziness and work as little as possible. As people work less and less, first luxury items will become scarce and then basic needs like food and shelter will no longer be produced. Hence Utopia is an impossibility in a Socialist system.
A capitalist system is also driven by the same human characteristics of greed and laziness, but the system favors greed. So why is economic utopia still an impossibility in capitalism??? Because even at the highest levels of greed there is still an element of laziness. The average businessman will not set up a business model to satisfy 100% of a given population. The Average businessman is content to target 60% or less of a given population; 60% if he targets the middle class, 20% if he targets the high end market and 20% in the low end market.
I will give a personal example from my experience to clarify what I mean. I owned a food service establishment that targeted the middle class and of course was accessible to the upper class… but the prices were prohibitive to the lower classes. Here is a simple calculation I made for a restaurant with 100 seats. I could sell a cheese burger deluxe for $7.50 and expect to sell it to 80 people… or I could sell it for $6.00 and sell it to 100 people. Either way I would gross $600, (7.50×80) vs (6×100). The difference is that when selling it for $7.50, I only have to serve 80 people… less work, same money. So I will choose to only target 80% of the population every time.
Now here is where it gets interesting… and the part that a lot of people don’t get. If somehow money became available through some artificial means like welfare and 100 people started showing up at my door because they could now all afford my prices… I would increase my prices to $9.40 so that only 80% could afford the prices even at a level where I am grossing $750, (7.50×100) vs (9.40×80). So I am back to working at only 80% of capacity. At 80% capacity, the customers that I do get will get better service since the place is running under capacity. While this may seem like a flaw in the system, it can actually serve as incentive. In a system that naturally favors less then 100% capacity, there is an competitive incentive for people to work hard to stay in that top 80% (middle class). The only incentive that people would have to not work hard to get into the middle class is if their is a fail-safe underneath them like wealth-fare.
This is a market force that completely escapes those who wish to create some fantasy world where everyone can have everything they want. It is a complete waste of time to try to put economic gimmicks into place to satisfy 100% of the population.
Bank Foreclosures
There has been a lot of discussion of Government interfering with the foreclosure process. As always, in any developed country when government tries to help one group, it necessitates hurting another group. Government interference is a zero sum gain almost all the time. It is my opinion that since government will do harm to some party regardless of what action it takes or does not take… government should interfere as little as possible. At least in that case people can blame each other or themselves. When government interferes, it is entirely governments fault. In the case of government interference, the harm that government will inevitably do to one group or another is funded by taxpayer money which adds to the damage.
I see little benefit coming out of government interference with a private loan contracts between willing parties. There are two major problems politicians face if they interfere with the foreclosure process of banks.
-First, if lenders don’t believe they can collect their collateral on default, they won’t lend any more in the future… That is obvious, no one would.
-Second, if borrowers believe that they don’t risk foreclosure… they will stop making any effort to pay back loans. Families are always forced to prioritize their budget. If they don’t risk foreclosure… paying the bank back goes down on the priority list.
It has long been my opinion that individuals should never, ever borrow from banks for personal items like houses or cars. They would do better to discipline themselves for a period of five to ten years and buy a house they can afford… not a mansion they can not afford. I have witnessed too many people fall into the trap of buying a house far more expensive then they should, just because they were able to secure a loan for such a house. This does nothing but enslave them to a life time of labor. Over a period of 30 years they pay back three times the value of the house… and at the end of that 30 year period the house will be in ruins.
The easily credit has also pushed real estate far beyond its natural value over the last 30 years. A house should not be worth more then the value of the land, material and labor less erosion. The value of a house should go down with its age, not up. The only thing that should appreciate is the land that it sits on. This natural process of house devaluation has been reversed due to easy credit, which allows people to bid up the price of real estate with money they DO NOT HAVE. However, this is a private matter that is being corrected by the recession. The recession is not the the problem, it is the fix.
I see little benefit coming out of government interference with a private loan contracts between willing parties. There are two major problems politicians face if they interfere with the foreclosure process of banks.
-First, if lenders don’t believe they can collect their collateral on default, they won’t lend any more in the future… That is obvious, no one would.
-Second, if borrowers believe that they don’t risk foreclosure… they will stop making any effort to pay back loans. Families are always forced to prioritize their budget. If they don’t risk foreclosure… paying the bank back goes down on the priority list.
It has long been my opinion that individuals should never, ever borrow from banks for personal items like houses or cars. They would do better to discipline themselves for a period of five to ten years and buy a house they can afford… not a mansion they can not afford. I have witnessed too many people fall into the trap of buying a house far more expensive then they should, just because they were able to secure a loan for such a house. This does nothing but enslave them to a life time of labor. Over a period of 30 years they pay back three times the value of the house… and at the end of that 30 year period the house will be in ruins.
The easily credit has also pushed real estate far beyond its natural value over the last 30 years. A house should not be worth more then the value of the land, material and labor less erosion. The value of a house should go down with its age, not up. The only thing that should appreciate is the land that it sits on. This natural process of house devaluation has been reversed due to easy credit, which allows people to bid up the price of real estate with money they DO NOT HAVE. However, this is a private matter that is being corrected by the recession. The recession is not the the problem, it is the fix.
Tax Cut Extension
“I am glad the rich will get their tax cut extension… because I plan on becoming a billionaire, and I don’t want to be taxed unfairly in the future.”
The statement I made above is something that I think about 50% of the population does not grasp. That would be the 50% who favor raising taxes for the top 2%. Unfortunately, not seeing yourself as a potential billionaire means that you will not make efforts to get above your current financial level. It is a matter of striving to better yourself, setting financial goals and planning a way to get there. It has been my observation that average person who favors taxing the rich heavily does not see themselves as ever getting to that level. While the average person who is against taxing the rich heavily, can identify themselves with the rich in one way or another and see themselves as potentially getting there. This is an important difference in mindset. In a free market economy, prosperity is a self-fulfilling prophecy. Do you believe in yourself? Do you believe that your efforts today will lead to your prosperity in the future? Perhaps this makes you question if you are planning hard enough to get rich. Very few will every actually attain billionaire status, but the effort to become one will comfortably get you into the millionaire club.
As for Obama… what he should have done was raise the high-bar from $250,000 to 1 million per year for the highest tier. A lot of households make 250,000 to 500,00 even if they don’t report it. Look at every small retail store in your neighborhood. There is a good chance they are above the 250,000 income level. They have a lot of flexibility in reporting their moderate income, and certainly identify themselves as people who plan to be very rich some day. A lot of homeowners have more then 250,000 in capital gains locked into their homes that they bought 20 years ago, so that higher tax on income over 250,000 does not sit well with them (regardless of homeowner and capital gains tax limitations). Obama does not realize that the goal of the middle class is to become part of the upper class… not stay middle class. Obama is fighting against the middle class in this sense.
Obama would have been more successful if he attempted to change the tax tiers. He should have changed the highest tax tier so that instead of starting at 250,000, it started at 1 million or even 2 million. This might have brought over just enough support to his plan to pass. This should have been done before the 2010 election. After the election it was too late for even this to work. Obama took an “all or nothing” chance… and lost.
The statement I made above is something that I think about 50% of the population does not grasp. That would be the 50% who favor raising taxes for the top 2%. Unfortunately, not seeing yourself as a potential billionaire means that you will not make efforts to get above your current financial level. It is a matter of striving to better yourself, setting financial goals and planning a way to get there. It has been my observation that average person who favors taxing the rich heavily does not see themselves as ever getting to that level. While the average person who is against taxing the rich heavily, can identify themselves with the rich in one way or another and see themselves as potentially getting there. This is an important difference in mindset. In a free market economy, prosperity is a self-fulfilling prophecy. Do you believe in yourself? Do you believe that your efforts today will lead to your prosperity in the future? Perhaps this makes you question if you are planning hard enough to get rich. Very few will every actually attain billionaire status, but the effort to become one will comfortably get you into the millionaire club.
As for Obama… what he should have done was raise the high-bar from $250,000 to 1 million per year for the highest tier. A lot of households make 250,000 to 500,00 even if they don’t report it. Look at every small retail store in your neighborhood. There is a good chance they are above the 250,000 income level. They have a lot of flexibility in reporting their moderate income, and certainly identify themselves as people who plan to be very rich some day. A lot of homeowners have more then 250,000 in capital gains locked into their homes that they bought 20 years ago, so that higher tax on income over 250,000 does not sit well with them (regardless of homeowner and capital gains tax limitations). Obama does not realize that the goal of the middle class is to become part of the upper class… not stay middle class. Obama is fighting against the middle class in this sense.
Obama would have been more successful if he attempted to change the tax tiers. He should have changed the highest tax tier so that instead of starting at 250,000, it started at 1 million or even 2 million. This might have brought over just enough support to his plan to pass. This should have been done before the 2010 election. After the election it was too late for even this to work. Obama took an “all or nothing” chance… and lost.
High Taxes Breed Tax Cheating… and Trade Deficits
Warning! The Truth is sometimes disturbing!
Let us consider the Foreign Trade Deficit. Officially the statistics show that the US economy has been falling behind in International Trade for decades. I can assure you that companies make a profit on almost every single trade made, otherwise they would close the doors. Furthermore, it is not logical that the any Country would be able to maintain a trade imbalance for so many decades. Any thinking person would conclude that there must be more to the trade deficit then appears on the surface.
Here is a question to ponder. Do you seriously think that the owners of any company are going to submit to the ridiculously high taxes that the US Government demands? Does anyone expect business owners who take the risk of investing capital into a business to just hand one third of their profits over to someone else who took no such risk? It is really counter intuitive. Companies have an incentive to under-report profits, hence the illusion of a trade deficit. It is my observation… that the high taxes in this country have turned ordinary businessmen and women into criminals. This has been a very common trend throughout all of history. The higher taxes and tribute are, the more effort people will put into beating the tax system rather then being productive.
The fact is that at once you get above the point were you are working for a salary, taxes are voluntary. Business-owners objectively consider how much they have to pay in taxes and how much it costs to beat he system. As long as it costs less to beat the tax system, ordinary people will take that option. The way it works is simple. Hypothetically, if I buy a product from China (or any other country) that costs $1, I will have my buying-agent in China record the cost as $8 on the invoice and I will send $8 in payment to the agent in China. I then sell it for $10 in the US and show a profit of $2 to the IRS. Meanwhile my agent in China wires $6 to my bank account in Panama or some other country and keeps $1 for himself for his assistance. The fact is that there is more US dollars outside the US then inside the US. Taxes are way to high when ordinary businesspeople will go to such great lengths to avoid them.
The underlying misconception has been that American Companies prefer to import rather then buy domestically. This is false. Purchases made domestically fall under US jurisdiction and records can be easily obtained by seopena. This is not the case with international transaction going through foreign banks who have every incentive to protect their account holders and none to help US government agencies… and are not legally obliged to do so.
The average businessman today is more concerned about his potential tax liability then he is about his competition. That is contrary to free market ideology where government is not suppose to interfere. Taxes are way to high when peoples actions are influenced by the tax consequences to the extent of Trillion Dollar Trade Deficits.
Take a look at the Form 1040 from 1913: http://www.irs.gov/p…rs-utl/1913.pdf
The first tax tier was….1% (20k to 50K)
The second……………..2% (50k to 75K)
The third………………..3% (75k to 100k)
The fourth………………4% (100k to 250K)
The fifth………………….5% (250k to 500k)
The sixth and final ……6% (500k plus)
The average income in 1913 was only 15k. The median was about 3k. The vast majority of people were exempt. Do you know how rich you were in 1913 to be making 500k a year? These are tax rates at which the the govt would have the people’s support and cooperation. This is how they got the 16th Amendment passed, legalizing the Federal Income Tax. The American people would have never had allowed an Income Tax Amendment to the Constitution if they knew how far the congress would have gone with it. The people have responded in kind by working around it. If the government would reduce taxes to 1913 rates, they would find that people would be more willing to pay a fair share.
Let us consider the Foreign Trade Deficit. Officially the statistics show that the US economy has been falling behind in International Trade for decades. I can assure you that companies make a profit on almost every single trade made, otherwise they would close the doors. Furthermore, it is not logical that the any Country would be able to maintain a trade imbalance for so many decades. Any thinking person would conclude that there must be more to the trade deficit then appears on the surface.
Here is a question to ponder. Do you seriously think that the owners of any company are going to submit to the ridiculously high taxes that the US Government demands? Does anyone expect business owners who take the risk of investing capital into a business to just hand one third of their profits over to someone else who took no such risk? It is really counter intuitive. Companies have an incentive to under-report profits, hence the illusion of a trade deficit. It is my observation… that the high taxes in this country have turned ordinary businessmen and women into criminals. This has been a very common trend throughout all of history. The higher taxes and tribute are, the more effort people will put into beating the tax system rather then being productive.
The fact is that at once you get above the point were you are working for a salary, taxes are voluntary. Business-owners objectively consider how much they have to pay in taxes and how much it costs to beat he system. As long as it costs less to beat the tax system, ordinary people will take that option. The way it works is simple. Hypothetically, if I buy a product from China (or any other country) that costs $1, I will have my buying-agent in China record the cost as $8 on the invoice and I will send $8 in payment to the agent in China. I then sell it for $10 in the US and show a profit of $2 to the IRS. Meanwhile my agent in China wires $6 to my bank account in Panama or some other country and keeps $1 for himself for his assistance. The fact is that there is more US dollars outside the US then inside the US. Taxes are way to high when ordinary businesspeople will go to such great lengths to avoid them.
The underlying misconception has been that American Companies prefer to import rather then buy domestically. This is false. Purchases made domestically fall under US jurisdiction and records can be easily obtained by seopena. This is not the case with international transaction going through foreign banks who have every incentive to protect their account holders and none to help US government agencies… and are not legally obliged to do so.
The average businessman today is more concerned about his potential tax liability then he is about his competition. That is contrary to free market ideology where government is not suppose to interfere. Taxes are way to high when peoples actions are influenced by the tax consequences to the extent of Trillion Dollar Trade Deficits.
Take a look at the Form 1040 from 1913: http://www.irs.gov/p…rs-utl/1913.pdf
The first tax tier was….1% (20k to 50K)
The second……………..2% (50k to 75K)
The third………………..3% (75k to 100k)
The fourth………………4% (100k to 250K)
The fifth………………….5% (250k to 500k)
The sixth and final ……6% (500k plus)
The average income in 1913 was only 15k. The median was about 3k. The vast majority of people were exempt. Do you know how rich you were in 1913 to be making 500k a year? These are tax rates at which the the govt would have the people’s support and cooperation. This is how they got the 16th Amendment passed, legalizing the Federal Income Tax. The American people would have never had allowed an Income Tax Amendment to the Constitution if they knew how far the congress would have gone with it. The people have responded in kind by working around it. If the government would reduce taxes to 1913 rates, they would find that people would be more willing to pay a fair share.
Gold Standard – Myths and Facts
Historically… gold as a currency has had all the problems of Fiat Money. Aside from the fact that it has no intrinsic value… more of it can be mined and is continually mined. The organizations mining it have an advantage and have historically manipulated the supply to their advantage. The US government at one point confiscated all the gold (a crime). It made itself the sole legal purchaser of gold in the US. That only shifted and further centralized control of gold rather then disperse it. Few people know, that when the US govt went on the Gold Standard, YOU the individual, where no longer allowed to own it. Executive Order 6102 required U.S. citizens to deliver by May 1, 1933 all their gold coin, gold bullion, and gold certificates to the Federal Reserve. An exception of $100 in gold coins was allowed. This does not seem fair or constitutional to me.
Gold historically has been subject to scams such as mixing it with other metals. The only system that is not corruptible is a barter system where you trade actual commodities. Problem there is that the barter system is too slow and cumbersome for anything above a “village level” economy.
The current Fiat system is supposed to be backed by real assets as each dollar is born into existence via debt, which is backed by collateral on real assets.The only flaw in this system is that the government can create/borrow money without putting up real collateral, thus debasing the currency. This is no different then when Rome use to mix other metals into its gold resulting in inflation and instability back then too.
The solution is simply for government to end their print and spend policies. This is the same advice they would give to any third-world nation. The cost of this is that money will always seem in short supply. Both government and individuals will have to make hard choices on how to spend the little money they have. In the short run we will be giving up aggressive boom cycles in favor of long term stability.
Gold historically has been subject to scams such as mixing it with other metals. The only system that is not corruptible is a barter system where you trade actual commodities. Problem there is that the barter system is too slow and cumbersome for anything above a “village level” economy.
The current Fiat system is supposed to be backed by real assets as each dollar is born into existence via debt, which is backed by collateral on real assets.The only flaw in this system is that the government can create/borrow money without putting up real collateral, thus debasing the currency. This is no different then when Rome use to mix other metals into its gold resulting in inflation and instability back then too.
The solution is simply for government to end their print and spend policies. This is the same advice they would give to any third-world nation. The cost of this is that money will always seem in short supply. Both government and individuals will have to make hard choices on how to spend the little money they have. In the short run we will be giving up aggressive boom cycles in favor of long term stability.
How Modern Banking Works
This post is meant to be educational so that everybody knows how our monetary system works. Knowing how the system works is the first step to identifying the problems and considering solutions.
How modern Fractional Banking works:
line 1 Bank Starting Capital………………….1,200
line 2 Reserve for Bank working capital……………………………………. ..200
line 3 Private Loans……….1000…….1000……..1000…….. ..1000
line 4 Int + Prin……………..2000……..2000……2000… ….2000
Total Principal + Interest on Line 4= $8,000
Line 1 Starting capital is only $1,200
Line 2 The bank keeps only 200 in reserve.
Line 3 The bank has lent out $4,000 on $1,000 and expects to get paid back $8,000.
The money to be payed back, the total of Interest + principal on line 4 ($8,000), does not exist because on line 1 they only started out with $1,200.
More money must be created (printed) to pay back the Int + Prin… or the borrowers will default. The system depends on more borrowers coming in after and create more money through debt borrowing. Yes, Factional Banking is a legalized Ponzi scheme, but there is nothing better that would scale to a growing economy that has been thought of yet.
The system is designed so that all new money must be borrowed into existence. More money must be constantly created or else the borrowers will default because at any given time there is not enough money in existence for ALL borrowers to pay back their debt. The Church understood this and tried to ban the practice of Fractional Banking. Andrew Jackson, the 7th US president, knew this too and fought hard to destroy the Second Federal bank. The charter of the First was allowed to expire. The point is that there are costs and benefits to this system that have been known for a long time.
The system is good because it allows for the money supply to scale to a growing economy. The system requires that all borrowings are backed by collateral. So if allowed to work properly, it is a very good system with a built in control on inflation. The money created at the local level IS backed by something. It is backed by real assets which have an intrinsic value much greater then gold. Gold is not good for much except art. If economy grows too fast… it will result in a situation where there are not enough new loans coming in.. when there are not enough new borrowers coming in to borrow more money (create new money), some people will default (recession). This is the built in control on inflation.
The only problem with this system is the Government. The government has given itself the ability to borrow as much money as it wants without putting up real assets as collateral. The Treasury just prints up paper bonds and sells them to the Fed Reserve for new cash. The govt basically gives itself an IOU for new money. This is proof that anything that government touches… turns to sh1t.
It is false to say that our money is not backed by anything, it is infact backed by real assets that borrowers use as collateral. The only problem in this system is the Government borrowing which is not backed by anything of value other then its “power” to tax and confiscate property almost at will.
As the govt borrows more and more, its debt becomes a bigger percentage of ALL the Outstanding debt. As that Government percentage goes higher, it means that a greater percentage of our money is NOT backed by real assets.
There is only one possible solution to this problem at this point. The national debt can never be paid back, since in this system the money to pay it all back never exists at any point in time. The amount not actually owed to anyone can be written off. That should be balanced by proportionally decreasing the private debt and the money supply. The effect of this is “Deflation”. The problem of this is only psychological as people will have to get use to the idea of taking a pay cut every year. That however would be offset by lowered living expenses.
How modern Fractional Banking works:
line 1 Bank Starting Capital………………….1,200
line 2 Reserve for Bank working capital……………………………………. ..200
line 3 Private Loans……….1000…….1000……..1000…….. ..1000
line 4 Int + Prin……………..2000……..2000……2000… ….2000
Total Principal + Interest on Line 4= $8,000
Line 1 Starting capital is only $1,200
Line 2 The bank keeps only 200 in reserve.
Line 3 The bank has lent out $4,000 on $1,000 and expects to get paid back $8,000.
The money to be payed back, the total of Interest + principal on line 4 ($8,000), does not exist because on line 1 they only started out with $1,200.
More money must be created (printed) to pay back the Int + Prin… or the borrowers will default. The system depends on more borrowers coming in after and create more money through debt borrowing. Yes, Factional Banking is a legalized Ponzi scheme, but there is nothing better that would scale to a growing economy that has been thought of yet.
The system is designed so that all new money must be borrowed into existence. More money must be constantly created or else the borrowers will default because at any given time there is not enough money in existence for ALL borrowers to pay back their debt. The Church understood this and tried to ban the practice of Fractional Banking. Andrew Jackson, the 7th US president, knew this too and fought hard to destroy the Second Federal bank. The charter of the First was allowed to expire. The point is that there are costs and benefits to this system that have been known for a long time.
The system is good because it allows for the money supply to scale to a growing economy. The system requires that all borrowings are backed by collateral. So if allowed to work properly, it is a very good system with a built in control on inflation. The money created at the local level IS backed by something. It is backed by real assets which have an intrinsic value much greater then gold. Gold is not good for much except art. If economy grows too fast… it will result in a situation where there are not enough new loans coming in.. when there are not enough new borrowers coming in to borrow more money (create new money), some people will default (recession). This is the built in control on inflation.
The only problem with this system is the Government. The government has given itself the ability to borrow as much money as it wants without putting up real assets as collateral. The Treasury just prints up paper bonds and sells them to the Fed Reserve for new cash. The govt basically gives itself an IOU for new money. This is proof that anything that government touches… turns to sh1t.
It is false to say that our money is not backed by anything, it is infact backed by real assets that borrowers use as collateral. The only problem in this system is the Government borrowing which is not backed by anything of value other then its “power” to tax and confiscate property almost at will.
As the govt borrows more and more, its debt becomes a bigger percentage of ALL the Outstanding debt. As that Government percentage goes higher, it means that a greater percentage of our money is NOT backed by real assets.
There is only one possible solution to this problem at this point. The national debt can never be paid back, since in this system the money to pay it all back never exists at any point in time. The amount not actually owed to anyone can be written off. That should be balanced by proportionally decreasing the private debt and the money supply. The effect of this is “Deflation”. The problem of this is only psychological as people will have to get use to the idea of taking a pay cut every year. That however would be offset by lowered living expenses.
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