floydius it's almost like you've got nothing better to do

3Oct/08Off

a world without debt

matrix system failure

I’m going to show these people what you don’t want them to see. I’m going to show them a world without you — a world without rules and controls, without borders or boundaries — a world where anything is possible. Where we go from there is a choice I leave to you.Neo

If you’ve managed to stick with me thus far, congratulations. I expect this will be my last big “economy lecture” for some time. If you’re just tuning in, I suggest reading my previous posts on this subject. At the very least, please do yourself a favor and watch Money as Debt. The key is that you understand how money is created in the U.S. and how the fractional reserve lending system works. I will continue under the assumption that you have a grasp of those concepts. If you have any questions, feel free to leave them in the comments and I will address them.

After I condemned the bailout as a disastrous plan and flooded Facebook with Ron Paul videos, many of my intelligent friends asked me some important questions:

Matthew: “Do you think that shrinking credit is not a problem? … it is likely that most of you were only able to go to college b/c of the system of subsidized loans. Do you now oppose the existence of that system? I mean, do you realize that if the credit market fails, then one casualty might be school loans? … Do you think that an ad hoc bailout with little benefit to taxpayers is a better alternative to a systemic bailout where taxpayers may benefit?”

Daniel M: “Where do you go from here? Do we allow the stock market to continue to rise a little and then fall into a deeper downward spiral until most Americans have lost all of their savings, thereby depleting the economy even more? What is the solution? … I am not sure how the free market can make a course correction when it seems to be in a gradual (but ever growing) tailspin … credit is needed to buy these necessities of life … Lending/borrowing is a necessary part of our market economy.”

Daniel L: “I know that borrowing/lending is a necessary evil. The big issue isn’t as much the borrowing/lending itself, but the overuse/abuse of it. If this were something that could be fixed, it would’ve been already. I think we’ve gotten ourselves to the point where we have to “hit rock bottom” to reset this scenario.”

Jeana: “if everyone just stops freaking out, won’t the economy and market just gradually balance itself back out?”

Bryan: “who does this most directly affect? the constituents who are opposing this bill shout ďWALL STREET,Ē thinking that these executives with their golden parachutes are the ones who will bear the brunt of this fall. they couldnít be more wrong … the people who will pay for this will be baby boomers … now, at 65 years of age, they can either sell their homes (at record low home values) or find a new job.”

“and remember: this isnít just US citizens weíre talking about. because of Ron Paulís beloved Free Trade, the countries of the world are all tied up in this mess together.”

“on merely a tidbit of news that congress might actually reach an agreement before the apocalypse, the stock market rallied significantly. yes, $700B adds to our $10T national debt … iím not saying thatís a good thing, but itís better than a world-wide financial meltdown where my 401K becomes worth nothing at all.”

Philip: “In free market enterprise, folks have to be able to borrow money. Whatís the alternative?”

The fact is undeniable… we live in an economy that is addicted to credit. Daniel was right; small businesses can hardly start up without either selling stock (borrowing from individuals) or getting a bank loan (borrowing from a corporation). You cannot purchase a house without credit. You need a loan. You cannot go to school without credit. You need a loan. Worse than that, you can’t obtain credit for those things or even rent a car unless you establish credit with something smaller.

Because we use fractional reserve lending, the banking industry literally can create unlimited amounts of credit, as long as those loans are mostly paid back. (It is mathematically impossible for all debt to be repaid; the amount of debt exceeds the money supply, and new money can only be created with more debt.) When loans are not paid back, it limits their ability to create money. Usually, interest from the rest of the loans being paid covers the loss, and they still earn a nice profit. When lots of loans default simultaneously, we run into the problem known as a credit crunch, and that is what we’re seeing today. When you have an economy addicted to credit and the source begins to dry up, there are withdrawals. When you take drugs away from an addict, they often feel as though they will die if they can’t have more. We are terrified that if our credit source dries up, our economy will die. While it is true that the loss of easy credit will cause us pain and discomfort, it will not kill us. More of the drug — more easy credit and inflation — will eventually do so.

The Federal Reserve and the government have been using credit to prop up this system for a long time. However, even they recognize that too much credit in the system will increase inflation beyond the point where people will continue to accept paper money as payment for anything. Hence, they have resorted to obtaining funds in a different way; not through taxing the American people, but through borrowing from the governments of other countries. We provide them with IOUs, and they provide us with oil, food, electronics, or whatever else we wish to buy. Those IOUs are denominated in U.S. dollars, and that is what constitutes the national debt you always hear about on the news. Most of it is currently held by Japan and China. This increasingly large bailout package will be paid for by borrowing even more from other countries.

Somehow, people forget that the consequences of debt are extrapolated even for a huge account like ours. However, there is no such thing as Chapter 13 on a national scale where we get to start over and keep our home. When a government goes bankrupt, other nations will simply stop lending it money. When our credit becomes so poor that other governments will no longer lend to us, an even greater consequence will accompany that move. They will no longer accept our dollars at all.

“We’ve had a huge debt for a long time,” some will undoubtedly argue. They’d be right. Why is our credit so good with other nations, exactly? There are several reasons, including our military influence. More important than that though is an agreement we struck up with world governments in 1941, near the end of World War II, called the Bretton Woods system. The world governments agreed to use the U.S. Dollar as the reserve currency, thereby guaranteeing that most trade would rely on our dollar. In return, we promised to allow foreign asset holders to convert their dollars into gold on demand at a fixed rate. This worked out very well until our dollar began to lose value due to our over-extension of credit. Many asset holders began to demand their dollars in gold, and we had what amounted to a run on the U.S. Treasury stores. In 1971, Richard Nixon disallowed this conversion to gold, thereby ending the Bretton Woods agreements and ensuring that the dollar was not backed by anything of inherent value. He staged this suspension as temporary, but it has not been lifted to this day, nearly 40 years later. Since then, the dollar has continued to lose value, despite Nixon’s promises. Because the system was already in place, other governments continued to use the dollar even without gold backing. That practice is coming to a close. Once we create enough money through credit extension that these foreign governments no longer see value in our huge debt to them, they will stop lending and begin to demand repayment.

Because of the bad debts in the system, many banks may no longer extend credit and some have faced runs on their deposit stores. The proposed bailout would authorize more borrowing for the purpose of extending more credit, which will further inflate our money supply. This will lead to other nations refusing to accept dollars as payment and refusing to lend to us any more. When that happens, our currency will be valueless, since most of the actual resources and goods in this country are coming from outside. Imagine what happens when China stops sending us all the cheap goods we buy from them. Can you think of many clothes, toys, household items, or nearly anything that is not made in China? And what happens when Japan and Korea cease sending us their vehicles and electronics? Now you can see the problem. Few real goods inside our nation and a huge monetary supply will translate into a worthless dollar, even within our own boarders. The greatest fears expressed above about the lack of credit will come to pass in a much harsher way if we consent to inflate the money supply as this bill requests. It will delay the current crisis for a short time, and then bring about an even more serious crisis from which there will be no quick escape.

One option at that point would be to accept a long-lasting depression in which America must begin to produce its own goods and services and severely reduce our standard of living. That could cause civil unrest and political radicalism, or it could pass peacefully, assuming other nations leave us alone during this time. There is no way to predict those factors. Another would be to look at a completely new currency system and attempt to start over at the bottom of the chain. If you think that unlikely, perhaps you should google the word, “Amero.”

Many of you have asked for alternatives. I would like to propose one here. Let us examine what would happen if we just allowed the unstable banks to fail and did not inject our system with additional credit. Banks would fail, yes. There would be a recession, yes. That is what we are already seeing now. People would not be able to get loans, and the assets (houses, cars, etc.) would have to be liquidated in some manner. They might be sold at a low price, destroyed, or used by the government to aid the poor and those on welfare. Either way, the banks lose out and many go out of business. Some jobs would disappear, while others would be created. Many more people would work in factories, industry, and farming. Less people would retire early. Less would go to college. More would sell their big screen televisions and pay off their debts so that they could begin saving for the future. Folks, someone has to do these jobs. We need clothing, food, and textiles. Long have we enjoyed other nations doing that for us while we borrowed from them to pay for it. That cannot last, nor should it. The people in charge of those countries sell their citizens into slavery for their own gain, and we are the buyers. Do you doubt the leaders of our own nation would do the same when it’s time to turn the tables? They are doing so already, and this bailout is merely moving that process along.

No one wants to face a serious recession, but the good news is that it wouldn’t last that long. After the government finally stopped attempting to spend more money to make jobs through projects like FDR’s Tennessee Valley Authority, the Great Depression ended within a year. Our own recession would not be so severe nor last so long if we allowed the market to correct itself now. So many are worried about the stock market and their 401K plans, but such changes are also temporary. Once companies have actual capital and are not experiencing major debt, they will be free to increase in value and once again, and investors will lend their money with confidence. Even after the House blocked the last bill, the market dropped less than 800 points. In percentage terms, this does not even make the top ten list of worst adjustments. The numerical figure is misleading because it has been inflated along with the monetary supply. The sky will not fall without this bailout.

Finally, for those willing to hear it, I’d like to propose a second option. Once this correction takes place (it will eventually, with or without the bailout), why would we want to become slaves to the bank again? Why should those who simply manage money be master over those who produce the goods and services that make our country wealthy? Do you really want to re-enter massive debt for a few comforts? Whether we are called slaves or not, we remain under the control of lenders until our debt is repaid. When you consider that they lend without even having the money to give us in the first place, this is even more sickening.

The first step toward freedom is to sever our relationship with central banks and fractional reserve lending. In our case, that means dismantling the Federal Reserve. They are not elected, they have no oversight, nothing stops them from creating unlimited credit, and they have vast wealth gained simply by manipulating symbols of value and enslaving others in debt. I cannot support that, and I doubt anyone would wish to do so. At this level of freedom, debt would still exist, but lenders could only lend money if they actually had it on deposit to lend. In this way, they risk their own assets first and then those of depositors if someone should default. They are thus encouraged to make responsible loans and to work with debtors to salvage the debt if there are problems in repayment.

The second step would be to abolish interest on loans, known by many people as usury. Most world religions condemned usury, some even ascribing the death penalty for those who took interest. What if private corporations, friends, or even the government, lent out money without interest? For one thing, far fewer loans would be held, and less people would be in debt, forced to use their income to pay back a lender. This is a good thing. Second, loans would not be given for frivolous entertainment or wasteful spending. Accountability keeps people out of debt. Of course the new American dream is to make lots of money and to “let your money work for you.” We need to re-examine whether this is even ethical.

The final step would be to do away with debt altogether, relying on the good will of people and the protection of the government to help care for the poor. In this way, no one is ever in debt, and hard work is rewarded.

The very rich will usually reject this proposition; it is not in their interest. The bankers and certainly the Federal Reserve owners will reject it. It relieves them of control and power.

A world without debt may not be likely, but we can certainly avoid allowing our lending institutions to control us and to lend out money that does not exist. With a vote on this bill planned for today, we are able to tell them how this will begin. We are also able to remain in our current position and march toward economic chaos.

Where we go from there is a choice I leave to you.

Comments (7) Trackbacks (0)
  1. You still haven’t convinced me of what I still believe: free market enterprise without lending is a functional economic oligarchy if low & middle class folks don’t have access to capital.

    Lending without usury? It’s a bold proposition. I have mixed feelings. On the one hand, if God says it can it be bad? On the other hand, if there is no interest (#1) what is the upside for rich people to stake their money & loan it someone, and (#2) does the borrower have as much incentive to pay it back? If we all lived under the purview of Kingdom of God, LLC, I agree it woudl be the way to go. But in FME, I can’t see how this would work.

    I just don’t think a world without debt is very practical.

  2. The world without debt, I agree, is very unlikely to be realized. It can happen for me, as I never plan to buy a house for which I can’t pay in cash. The rich only get richer under our current system of lending. Eventually there will be no middle class, only very rich and very poor.

    I’m convinced lending at interest is immoral. If that is the case though, I’ve got to find some way to disengage from that system. If I’m being totally consistent, I can’t invest in the stock market or even hold an interest-bearing bank account.

    As I said, the most likely scenario that people would accept is lending with interest, but only on money that actually exists. That’s the only way that doesn’t inevitably lead to failure. When you create money from debt, there is no other possible end than this. Perhaps we need a large scale depression for people to see the light.

  3. 1.) Oh, the joys of a (generally) free market. In a free market, the pendulum swings because markets are driven by fear and greed. When the pendulum swings, it slices back through like an axe to the other side. The bailout plan will only hold the pendulum away from the populace for a short while longer. Greed has run its course.

    2.) I beg of you the question. Is it smarter for you rent for 30 yrs paying $1200 (my current rent) and walk away with nothing or to buy a house for $200,000 with mortgage payment of $1200 and walk away with $200,000.

    If you are to answer that you should save the extra money above your $1200 until you have enough to buy a house, its impossible. Because even if I save $400 month in addition to my $1200 rent payment, it will take me 41yrs to accumulate $200,000 assuming I can’t loan it to anyone for a profit. The house would cost $1 million dollars by that point and all I would have was a good down payment. Houses tend to fairly steady holders of value over the long term (there are market ups and downs)

    The end result of that is because I couldn’t ever afford to buy a home, the rich person who I rent from only gets richer and I only get poorer. But if I was to borrow the $200,000 and pay it back over 15-30 yrs responsibly, its a win for the lender because they make money off of me and its a win for me because I have valuable asset, something I needed to have/have access to anyway.

    The answer is that you have to be wise about it. Don’t borrow money unless you absolutely have to or its smart to do so. Try to borrow it not at interest. Don’t lend money to someone for something that they shouldn’t be borrowing for or under unfair terms. Give and lend to people who are without means out of the goodness of your heart at times. and teach others to do the same.

    And read No Debt, No Sweat by Steve Diggs, a practical guide living a debt free life.

  4. The Gar Man makes an appearance! Nice!

  5. Garman,

    Great to see you on here! This is your first time commenting on the blog, yes?

    In reference to the pendulum, you’re absolutely right. Greed is running its course. However, I disagree that this is the fault of free market economics. We have not operated under a free market since 1913. The Fed is given a monopoly both to create money and to manipulate interest rates at their discretion. Money creation should be a government function, not left to private bankers. Interest rates would then be left to the market to decide. As it is, we purchase Federal Reserve notes (also called ‘dollars’ now) and pay private bankers interest for our own currency. Insanity to be sure, but far from a free market.

    House prices are too high right now. If we left it to the free market, prices would fall, houses would still not be going up with no one to buy them, and you would not need a 30 year mortgage. I worked in mortgages and ran amortization tables for customers all the time when I worked for the bank.

    Let’s do a real world example. I’m going to use the credit union where I worked since we have competitive rates. Let’s say you have a home that costs $200K and you buy it right now, at 5.375%, which is what NFCU is offering as the lowest right now. Over 30 years, you pay a total of $403,178.40. So the bank gets to loan you $200K, which they didn’t have prior to you requesting it, and they earn more than that amount in interest. You pay $400K for a $200K house. Also, you pay property taxes every year, even though the bank technically ‘owns’ your property, having paid for it with money they simply conjured into your account. Also, you pay homeowner’s insurance because the bank requires it to protect their collateral. Also, you’re going to pay PMI (this insurance protects the bank, in case you default) probably until you get your LTV down to 80%. If I’m reading this right, I’m estimating your property taxes would be in the ballpark of $3200/year on a $200K home in MA. To keep a conservative estimate, I’m going to say that amount never goes up for inflation. So $3200×30=$96,000. Now our total is up to $499,178.40. Let’s talk homeowners insurance. According to this, the average in 2007 for homeowner’s insurance was 1050/year. This almost never decreases and typically increases yearly. Just to keep with the conservative estimate, let’s keep it at $1050 at 30 years. $1050×30=$31,500. Total cost so far: $530,678.40. I’m not going to try and calculate PMI because it varies depending on the lender. So we’ll just say your cost is at minimum, $530,678.40 for 30 years. This also doesn’t include closing costs and fees banks charge when you go through the mortgage process; it doesn’t include the fact that few people keep the first house they mortgage on and few go without taking out a home equity loan once they’ve paid off some of the debt.

    Now let’s look at renting. You don’t pay property tax, homeowner’s insurance, or PMI. $1600x12x30= $576,000 by itself. That is a lot of money to pay over the years and not even own anything at the end of it, and it’s $46K more expensive than going the mortgage route. Of course, with the mortgage, you actually own the house when you’re done. Sounds like a pretty good deal in comparison.

    The thing the banks don’t tell you is that these are not your only options. We have grown accustomed to a standard of living that says we have to rent a nice house and live in a nice neighborhood. If we don’t do these things, we feel like we just won’t survive, because that’s the message our culture sends us. I live in a 2 bedroom, 2 bathroom apartment and the rent is $425/mo. Of course, Searcy is a far cry from the Boston area in terms of price, so let’s go with $800/mo instead. That would drop the cost to $288K over 30 years and leave you $288K at the end with which to purchase a house. Actually 288K is a low figure, since you could put the money in CDs and earn sizable interest during that time. If you put way $800/mo for 30 years at a 4% interest rate, you’d have just over $555K. That keeps you from putting the money into investments, where it would be vulnerable, and assumes a low CD rate. You could probably find a house you liked for $555K. Even if you just started with a lower rent apartment and then saved up the extra money for a down payment to get a mortgage when you had a family and needed the extra space, you could eliminate a huge chunk of the interest you’d be paying right at the start. It makes sense to live low rent as long as you can if you are able to save up during that time.

    Now, you mentioned inflation and that’s a big problem, no doubt. One of the reasons fractional reserve lending is so bad is that it literally is the cause of inflation. It is inflation. They create money from nothing, and because of the rules, the loan amount is multiplied close to 100x in terms of extra money in the system. Even if we say that we have to retain lending with interest, at the very least we must abolish fractional reserve lending. It makes no sense, it is the cause of inflation, and it only benefits the bankers. If you are unsure what I mean when I say that they create money from nothing or that the money is multiplied up to 100x, please check out the links to my older blogs in the original post, or watch the Money as Debt link.

    All that having been said, your advice at the end is the best, no matter which system of lending we find ourselves in. I accept that lending is unlikely to be abolished completely, and that lending at interest is unlikely to be outlawed. The very least we must do, though, is to get rid of fractional reserve lending. It has no other option but to fail. As you mentioned, adding inflation will only stave off collapse for a short time, and then we will feel it. The level of inflation needed to stave off this collapse increases exponentially every year. We are soon approaching the point where we could not possibly borrow enough (with hopes of paying even one monthly payment) fast enough to inflate to our needs. We need to revamp the system.

  6. Garman,

    That’s a fair assessment. I had no idea rent was so expensive up there. Also, I feel I owe you an apology; my intent was not to say that you feel entitled, but looking back on it, I think it reads that way.

    In any case, I still am convinced that fractional reserve lending is a problem for the overall economy, even if you accept lending as necessary. Low inflation is better for everyone except the banks, and in the end it turns out to be bad for them, too, as we’re seeing now.

    I’m not sure how to handle the issue of interest on loans being condemned in the OT, but I’ll leave that for another day. I have a vehicle loan (albeit at 1.9% which is less than my savings dividends rate, and I keep enough saved to pay it off if I ever need to), so I’m not falling in line with that either.

  7. I agree that fractional reserve lending creates money and drives up prices, but assuming that there is only so much “central bank money.” and banks “should” only lend out so much to maintain their solvency, isn’t there still a limit to how much money can be created. If this were the case, prices would still level at some point.

    Granted, inventment banks like Bear Stearns, Lehman Brothers, and AIG make unwise investments or corporate loans, sometimes leveraging their capital 30-40:1 which drives up the market needlessly. What we shouldn’t do in this situation is to create more central bank money to socialize the losses, especially when the central bank money created is actually borrowed money, secured only by the power of our military. It makes me sad that some day those loans will come due.


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