it's almost like you've got nothing better to do
I know it’s been a few weeks since I’ve updated, and I’m getting back on track here. Thanks for caring, though!
I decided to carve some pumpkins for Halloween this year, and here are the results:
Run o' the mill scary pumpkin.
The fantastic Ron Paul Jack-o-lantern
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 “WALL STREET,” thinking that these executives with their golden parachutes are the ones who will bear the brunt of this fall. they couldn’t 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 isn’t just US citizens we’re talking about. because of Ron Paul’s 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 … i’m not saying that’s a good thing, but it’s 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. What’s 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.
It seems Comedy central finally found something funnier than Colbert.
I will be reviewing a segment on the Daily Show regarding the current bailout situation. Part two of this blog will cover the second half of Clinton’s interview.
| The Daily Show With Jon Stewart | Mon – Thurs 11p / 10c | |||
| Bill Clinton Pt. 1 | ||||
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Hopefully, by this point you’ve heard at least part of the outrageous legislature proposed by U.S. Treasury Secretary Henry Paulson.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Seriously??? This guy should be replaced and charged with treason for even proposing such a bill. Fortunately, many citizens have been calling their Senators and Representatives, demanding that they vote against it. What we’re seeing now is an upwelling of constituents and members of Congress who recognize that we’re in an untenable situation. Unfortunately, it seems most lack a fundamental understanding of how we arrived at this predicament in the first place.
Clinton says if we put up this $700 billion, we should have a moratorium on foreclosures, and then have each mortgage reviewed for possible write-downs. It sounds like a good plan, but let us examine just how it would work:
The moratorium would have to be very short term and the manual reviews completed quickly. On the surface, it seems like “homeowners” (I use that term loosely, because I would not consider someone who has a 0.5% stake in a house the owner) would get a break. They get a chance to have the bank write down their debt without losing their house. The bank only loses interest they would’ve earned with the larger debt, and it doesn’t become insolvent and risk a run — the federal government underwrites the loss (that means we pay for it). Even assuming that congress could find qualified reviewers and implement this plan quickly, there are fundamental flaws.
Foreclosure is simply a means of enforcing debt. If you can’t pay your mortgage, the bank is able to keep the interest you’ve paid them over time, and the property which was collateral for the loan. The borrower loses any money he or she has invested in the house, and is unlikely to secure another loan for some time, due to credit reporting. You might be asking yourself a few questions at this point. If the banks have been implementing so many foreclosures, and if they have gained both the property and the interest paid since the origination of the loan, then why are they failing? It would seem that they are now richer than they were when they started. That makes sense, but it is not the truth. If you read my post about creating money from debt, you’ll remember that when you obtain a mortgage, the bank is not actually loaning you their own money. Literally, they are just writing that amount into your account out of thin air. Our government allows that check to be treated as real currency and to be payable in real dollars at other financial institutions where the seller might deposit or cash it.
In order to keep their balance sheets straight, the banks keep two separate accounts. One says how much they have written on all those outstanding loan checks, and the other says how much they have been paid back. Just like they didn’t actually have that money to lend you in the first place, they don’t get to keep it when you pay it back. When you make a payment, part goes to principle and part goes to interest. The principle amount is deducted from your overall debt to the bank, and hence it is also deducted from the total amount the bank has lent out on those loan checks. In simpler terms, the money disappears back into nothing since it didn’t exist to begin with. The banks have a limit on how many of those loan checks they can lend out from thin air, and this is called fractional reserve banking. Typically, they can lend up to 9 times the amount they have on reserve at the central federal reserve bank. So, when they get principle payment back from you, they are free to lend out that money again to someone else and earn even more interest on it. The interest amount is the bank’s profit which goes to pay employees, stockholders, or it may even be deposited at the central bank to allow them to lend out even more money.
What happens when there is a foreclosure and you can’t pay it back? In that case, the overall amount the bank has lent out on those checks stays high. Therefore, the money is not freed up for them to lend out to others. They have lost both the interest you would have paid them and the interest they’d earn if they had freed up that money to lend out to others. On the upside, they do have the house and land as collateral. So… can’t they just sell that? Yes, but it will usually not cover the amount of unpaid principle, and it costs the bank money to take over the maintenance of the house. When someone loses their house due to foreclosure, they’re usually not a happy camper. When I was trained in mortgage lending, I was told that often people will destroy the house out of spite or take whatever materials can be sold for scrap (metal, wood, etc.). Even if the house is in good condition, there is another problem. Too many houses on the market drives the price down, which means the bank cannot recuperate their costs. As you can see, foreclosure isn’t going to make the bank richer.
You might also ask yourself why the Congress can’t just change the laws and allow the banks to lend out more money to gain interest. If the fractional reserve requirement allows nine dollars to be lent out for one dollar on reserve, why not make it ten? Or twenty? Or a hundred? What difference does it really make as long as we save the banks? Wouldn’t this be better than paying 700 billion dollars to bail them out? Absolutely not, and the reason is inflation. As the banks are creating money from debt, that money is being circulated in the economy. More money being moved around for the same amount of goods and services is called inflation. It means the money is worth less than it was before. Now you understand why a dollar doesn’t go as far as it used to; there are too many dollars in the system. Sometimes less really is more. The federal reserve wouldn’t want to increase the ratio because it would lead to hyper-inflation, a severe and rapid reduction in the value of money. This is one of the factors that caused the Great Depression, it is why counterfeit money is illegal, and it is the cause of economic turmoil in many other countries.
So then, what if Clinton’s moratorium on foreclosures becomes law? Consider this: why would someone worry about paying their mortgage if they can’t lose their house? They wouldn’t. You pay your mortgage before you pay your cell phone bill because you can’t live without your house. Once the threat of losing it is gone, you are free to use your money for other purposes. People won’t pay back their mortgages because foreclosure isn’t an option. The banks will have lent out the $700 billion from the government as new mortgages, which also won’t be paid back in a timely fashion because, once again, foreclosure isn’t an option. In this case, the banks are still out of money and back in the position they were, only now the government has invested stockpiles of money to stave off collapse for a short period of time. Not only this, but it exacerbates the inflation problem described above. The money out there from these bad loans is not being repaid so that it can disappear back into nothing. Also, $700 billion are being infused into banks allowing them to create even more money from debt. This will cause hyper-inflation and the complete collapse of the dollar much sooner than even the first scenario I described above.
In the second half I’ll discuss how Congress plays into all of this, President Bush’s plea for cooperation, and what it would look like if we just let the banks fail. See you then!
My buddy Philip was up later than usual tonight and we were chatting about our usual range of topics (girls, politics, girls, the Bible, girls, food, etc.)
This afternoon I received my brand new copy of The Revolution: A Manifesto, by Ron Paul. As Philip and I were talking, I began babbling some of my sentiments about “the good Dr.” as many of his supporters are wont to call him, and I thought I’d share that conversation here (unedited, in all it’s AIM glory):
i don't know why i've been so energized by this guy. less than a year ago, i thought politics were just another spectator sport
had no interest in economics past my own individual budget
probably wouldn't have even registered to vote yet
if it weren't for reading up on his campaign
i guess he's the first politician that i thought wasn't a liar or a sellout and who said things that i thought have real bearing on the direction of our country
and even when he gets excited he doesn't take pot shots at the other candidates
2:01 when the media tries to pin him down to support either mccain or obama, he tells them neither and then goes right back to talking about the issues
he won't shut up about it
it's awesome
Talk to any Ron Paul supporter and you’ll hear much the same story. Someone who was once apathetic becomes a near-raving lunatic trying to get out the news about this Ron Paul guy and more importantly, his message. (Part of his campaign even included a “Ron Paul cured my apathy” slogan.) Freedom makes people excited. Hopeful. The truth makes people resolute, even if the truth is incredibly scary. Knowing it just seems to take the fear out of things.
—–
One time there was a man who clambered up a slippery rock in Athens. He might have looked a little crazy as he eyed the polished statues around him and the philosophers who talked among them. Then he opens his mouth.
“Men of Athens! I see that in every way you are very religious. For as I walked around and looked carefully at your objects of worship, I even found an altar with this inscription: TO AN UNKNOWN GOD. Now what you worship as something unknown I am going to proclaim to you.”
Later on this same man came to Ephesus and made some silversmiths angry for jeopardizing their income. They started a riot in the local stadium and the crowd wanted him dead. He wanted to get up and reason with them, but some of his good friends prevented him so that he wouldn’t be killed by the mob.
Eventually his travels brought him to Jerusalem, and once again some very angry people tried to kill him. The military took him into protective custody while they tried to sort things out, but he wouldn’t go quietly:
“I persecuted the followers of this Way to their death, arresting both men and women and throwing them into prison, as also the high priest and all the Council can testify. I even obtained letters from them to their brothers in Damascus, and went there to bring these people as prisoners to Jerusalem to be punished.”
What in the world possessed this man who had been killing followers of the Way, to change? To become a near lunatic, risking death and torture in the service of this Way?
” ‘Who are you, Lord?’ I asked.
‘I am Jesus of Nazareth, whom you are persecuting,’ he replied.”
Paul met Jesus Christ on his way to kill and imprison Christians. When he met Jesus, he completely changed his attitude. No one could dissuade him from speaking about the Resurrection. He would not shut up about it.
I’m a big fan of Ron Paul, and I think his message is important. But in the cosmic scope, it’s really not. The United States will one day be a union that used to exist. Whether it happens now, or at the end of time, it is an inevitability.
The message that really matters, that really gets me excited is the Resurrection. If I’m wrong about that, then all bets are off. As Paul said, pity me if I’m wrong about that. If I’m wrong, then I’ve been epically duped. All my eggs are in that one basket, because i believe it’s the truth.
Jesus of Nazareth was able to convince Saul of Tarsus to become excited. To become hopeful. Once he knew the truth about the Resurrection, it took the edge off even the sharpest of realities. Was Saul a murderer? Yes. Had he persecuted the Son of God? Yes. Would he be with God forever at the eschaton? Yes!
Those truths should mobilize us as Christians more than any political rally or concern for our own well-being. Let us wake up, open our eyes, and be hopeful about tomorrow, for we serve the Lord of the Resurrection.
