The Perversion of American Capitalism 36 comments
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The United States does not rely on industry for growth. Its economic backbone is money. America finances the globe's corporations and emerging markets, its dollar is the world's preeminent reserve currency, and its citizens' puchasing power allows for the monstrous consumption that accounts for over 60% of the world's largest GDP.
It is sad, then, that this nation faces a liquidity crisis out of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that leverage.
Since the 1970s, America has gradually shifted from being an industrial production superpower to a consumption-based financial center, concurrently going from a significant creditor nation to debtor nation. It was able to do this because of the leverage it had on the rest of the world's economies. Trade deficits were allowed and even encouraged because of the supreme strength of the US Dollar, being the world's most important reserve currency. Newly capitalist post-Cold War economies stemming from the Soviet Union's collapse offered huge new markets that America financed and invested in, again providing leverage for debt. The United States was the safest investment in the world, with its strong currency, economy, and liquidity.
Then came Greenspan.
As Federal Reserve Chairman, Alan Greenspan manufactured a credit bubble in the 1990s through a series of interest rate cuts. Because of an extremely inaccurate new methodology of inflation calculation introduced by Bill Clinton, interest rates were manipulated to aritifically ease credit, which grossly misdirected capital and created a series of bubbles, in information technology, dot-coms, equity markets, real estate, and credit in general. The 90s were a period of ridiculous economic growth in America, but it was substantially artificial, as overconsumption pervaded the perceived growth. This overconsumption was financed by borrowing using artificially free credit. True purchasing power was significantly below perceived wealth, and thus asset values shot up and, now, are shooting back down twice as hard and twice as quick.
Now that the credit market has collapsed (as well as credit-dependent markets, namely housing and automobile), purchasing power is going to begin a quick descent to real terms. Americans are going to lose wealth quickly, especially through their invested capital in mutual funds and pensions funds, as well as their homes. To ease the flow of credit to get Americans borrowing again and consequently consuming, propping back up the American economy, the Fed has been lowering interest rates again, but this time there is an added problem-- inflation.
The recalculation of inflation is now manifesting itself in a weakening dollar, and eventually valuations will finally come to represent true inflationary levels, most likely around 8% already. The problem is the American government is trying to stimulate consumption once more by re-liquifying banks by buying out bad mortgage-related assets, especially derivatives. Consumption does not drive economic growth on the long term, capital investment does. Capital spurs technology, adds liquidity, and increases output, something America has not experienced since its back on industry. America has enjoyed strong inflows of foreign capital because of its equity markets and strong currency, but neither of those are incentives for investment any longer. The government's plan to buy defaulted credit assets to bailout big banks is in fact worse for its long-run economic growth, because it weakens the dollar even further. The US dollar is now essentially backed by bad mortgage debt, and the only thing propping it up right now is temporary relative strength as the rest of the world experiences its own credit crises and the dollar remains the fundamental reserve currency. But for how long?
American national debt is the last bubble to collapse, and in fact it is still inflating and will continue to until a weakened global economy will force nations to call in their debts outstanding from the United States. This will be the coming of age for the next wave of economic titans: Singapore, Hong Kong, India, China, Australia, and Russia. This will be the downfall of the American Dollar and its replacement as the world's pervasive reserve currency. This will be the true liquidity crisis, as the United States will essentially be forced into bankruptcy with no surplus to pay off debts and no way of financing through an illiquid banking structure.
This will be the end of capitalism in America. Socialist programs of the '60s and '70s foreshadowed the economic collapse, Alan Greenspan ushered it in, George Bush and his debt-financed wars worsened it, and Barack Obama and his socialist taxpayer-funded big government programs and bailouts will make it a perfect storm. I see in the future the possibility of an economy characterized by free credit but no demand and no purchasing power based on ridiculous inflation. Sounds eerily similar to 1930s Germany. Who will be America's demagogue?
Buy precious metals now to save yourself. Venture capitalists are gone, there are no new IPOs, there is no industry, the currency is going to be worthless, hyperinflation may kick in, and there is no demand curve growth in sight. Buy precious metals.
America's only hope? After four years of Obama, Barry Goldwater is resurrected from the dead to preach Austrian School capitalism and libertarian social policy.
Long recommendations: GLD, SDS, SKF, QID
Disclosure: I am long none of these ETFs, but will be after the current countertrend bear rally finishes (expecting around February-March).
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This article has 36 comments:
Will people wake up, or will the siren's call of socialism continue to have the country vote for people like Obama?
On Nov 05 05:32 AM Rocknbob wrote:
> Mr. Sanaullah, i agree with most of your premises , except that
> part about inflation . If we proceed on the present path , we will
> inevitably end up with deflation, as money becomes cheap, it will
> be hoarded, rather than lent/ borrowed. This should counter the inflation
> you refer to, and possibly the need to invest/ hide in precious metals.
On Nov 05 05:32 AM Rocknbob wrote:
> Mr. Sanaullah, i agree with most of your premises , except that
> part about inflation . If we proceed on the present path , we will
> inevitably end up with deflation, as money becomes cheap, it will
> be hoarded, rather than lent/ borrowed. This should counter the inflation
> you refer to, and possibly the need to invest/ hide in precious metals.
We will fight amongst ourselves, but when an outsider comes in, we will put aside our differences for awhile and make the outsider sorry and then we'll go back to squabbling amongst ourselves.
Sometimes we even need to go all the way to the edge of the cliff before we realize that we're fixing to fall and then we will back up, put our American ingenuity back to work and figure a way out of this mess.
Now I write all the time about the economy and what is causing this mess and how to fix it on my web site at www.KeepAmericaAtWork.... but I can tell you one thing and that one thing is this.
History has proven time and time again that socialism does not work.
Capitalism has proven time and time again that it does work.
If you were to go buy an hour glass and set it on your desk and study it for awhile, you will find that the sand starts out slowly and then it picks up speed.
We turned this hour glass over in the 70's when we started sending our work and our infrastructure overseas.
Now here it is, nearly 40 years later and we're at the edge of that cliff and our eyes are starting to open and we're realizing that we turned that hour glass over and we're shifting the worlds capital from the Nations that had it to the Nations that did not have it..
I'm here to tell you that as American's, we're fixing to turn that hour glass back over and put our money back to work rebuilding the infrastructure that we and our friends and neighbors in their countries sent overseas foolishly following our lead.
I have already created a Wall of Shame on my web site and I'm anxiously and eagerly looking for companies that are contributing to the demise of America so that I can add their names to the list.
Virgil Bierschwale
www.KeepAmericaAtWork....
This, of course, will change over time. If the US model does not work, then US labor rates will go down (probably via devaluing of the US dollar versus Chinese currency). Then labor intensive manufacturing in the US will make economic sense.
As far as the welfare programs, etc. Again, when the costs become apparent, we shall see.
I hope Obama rights our economic ship. We need our trade deficits to come down, our currency to strengthen, and investment in science, technology and industry. We need jobs not credit.
And we certainly do not need Wall Street financials skewing our "post industrial" economy so that the money flows into their pockets. I've argued hard to let them fail. Let the depression come, let's reboot our economy and come out stronger in the end.
As for inflation, I doubt it. Deflation is a more likely outcome. The fiat derivative money is disappearing faster than it was created. The Fed cannot inject liquidity fast enough to prevent it. But, I support Bernanke, he's trying for a soft landing.
Contributions to 401ks are decreasing rapidly, because there is less disposable income, and the middle class has come to realize they can never save enough for a comfortable retirement, so why try.
Put your faith in gold, guns, and gas.
"History has proven time and time again that socialism does not work.
Capitalism has proven time and time again that it does work."
The Crash of 1929 and the following depression, and the financial meltdown today and the coming worldwide recession, are perfect examples of why unregulated capitalism DOES NOT WORK.
Socialism has not worked as yet, because generally it has been accompanied by a fascistic political system.
We have socialism already in this democratic country to a limited extent (the fire and police departments and the military - want to privatize them?) and medicare and social security - whose overhead is far less than they would be if privatized (the overhead of privatized medicine is about 30%, while medicare is about 2%.)
Capitalism will evolve into socialism, naturally over time, as greedy capitalists prove time and time again how they care only about their own short term profits, and we find ourselves in yet one more "meltdown" or another, and they yet once again, must be bailed out for the sake of society as a whole.
Don't let your grade school, capitalistic brainwashing get in the way of obvious logic.
For this reason, we are much better off today than we were yesterday, since Obama brings both intelligence and honesty to the job, qualities that have been sadly lacking in American politics for decades. It will take time, but I believe that these qualities, combined with the American capacity for entreprenurial initiative, innovation and investment will place this nation on a more productive and more rewarding path.
Read "Atlas Shrugged" by Ayn Rand. Only the chronology is different.
famos
Was that a dream or a nightmare or a prophecy?
famos, last words
On Nov 05 12:42 PM famos wrote:
> Hey Dr. Jackpot,
>
> Was that a dream or a nightmare or a prophecy?
>
> famos, last words
Capitalist industry does not cause crashes and meltdowns. These are caused by our bank-debt money system.
Industry does not "make money". It makes goods and services whose values are denominated in money. The crashes are not economic crashes. Look around you. The physical economy and all its infrastructure and all the people who want to work and produce and buy are still here. This is the physical economy that capitalism built. It hasn't "crashed". It's the same today as it was yesterday. It's only the accounting system that is "crashing".
If you ignore, for a moment, the "financial crash" of 1929 and 2008 you will see that capitalist industry prior to those money crashes produced massive increases in real economy wealth. Some argue that we owe a real economic debt to the planet by overusing resources but this thinking misses the fact that we don't annihilate resources by using them. We just transform raw resources into forms useful to humans. If we all died tomorrow everything we made would eventually rust and collapse back to a 'natural' state. Read Alan Weisman's "The World Without Us".
The point is, we haven't exported the stuff off the planet. It's all still here. And we're using it for our economic benefit. Is it wrong that we need a house and heating and food and clothing and transportation and industry to produce all these things? I don't believe we have any "rights" but if there is one most fundamental right it is the right to try to stay alive.
To live we need to exploit the resources of the planet. Our industrial economy is how we provide ourselves with all the material needs (and wants) that keep us alive. I agree that our values system is overly materialistic and we produce and buy way too much unnecessary junk but I am free to not buy junk and you are free to buy it, if you can afford it. That's the role of our banking system which manages our country's financial credit: to make sure anyone who borrows "our" money will be able to earn enough money to pay us back.
Loose monetary policy makes financial credit easy to come by in the runups to financial crashes. "Financial credit" IS bank loans which IS "money". Why does loose monetary policy always end in financial crashes?
In our bank-debt fiat money system, and the whole world now uses the same system which is why we have the G10-G20-G50 central banking system to manage international financial credit, money enters our economy as bank loans. Which means money begins its existence as "debt" that borrowers owe to their banker. Without bank debt there would BE no "money" in our system. Like it or not, that is the way our money system functions.
This kind of system is absolutely essential to any economy that has advanced beyond peasant agriculture and barter, so banking as an institution is not the problem. In fact our system of banking functions almost unbelievably well given the complexity of any modern economy's financial flows. That's the genius of free enterprise, where everybody pays close attention to their own business and in so doing we collectively take care of the national business. Almost.
In runups to crashes we "borrow" money from banks at a furious pace to invest and cash in on rising prices, or to consume. But there's an arithmetic problem with our money-creation system which makes it impossible for everyone to pay their debts. The problem is that the banks who create the loans-money are private enterprises who need to make a profit from their work so they charge interest on debts.
This is not "evil" or wrong. Bankers are just workers contributing to the functioning of our economy and they need to get paid for their work just like everybody else does.
The problem with interest is that it must be repaid "in money". The industrial economy makes goods and services, not money. Only banks are allowed to "make money". Banks have a monopoly on the creation of money.
When a bank makes a $1000 demand loan at 6% for one year the bank creates a $1000 deposit in your account which you spend into the economy as "money". It doesn't matter if you withdraw the $1000 as cash and spend it, or if you spend it by debit card or cheque. These are just "forms" of money and converting from one form to another does not change the total amount of the money. After a year you have to collect out of the economy the $1000 principal amount that you spent into the economy, plus the $60 interest. Where does the $60 come from?
The arithmetic problem is that the $60 DOES NOT EXIST. Everybody else who borrowed money to participate in the economic boom is in the same boat as you. They put X amount of money into the economy, but they need to collect X + interest OUT of the economy to payout their loan. There is not enough money in the system for everyone to payoff their monetary debts.
Banks don't accept economic goods as repayment of loans so it's not possible to get out of debt by becoming more efficient or producing more goods and services. You must repay with money. But only banks are allowed to create the money. And they individually and collectively did not make enough of the stuff to make it possible for everyone to pay off their monetary debts.
If our money was marbles instead of dollars, and banks had a monopoly on the production of marbles, it would be easy to see that if banks lent out a total of 1000 marbles there is no way the borrowers could "repay" 1060 marbles. There are only 1000 marbles in existence. What makes it worse is that some people want to hoard a few marbles for a rainy day so they take some marbles out of circulation as their "savings". This further starves the economy of the money everybody needs to collect to pay their debts.
In a runup, new loans create new money which is circulated into the economy which makes it possible for previous borrowers to collect enough money to payout their older loans. All these new loans are new money that was created as new "debt". It is this kind of escalating spiral of debt that makes it temporarily possible for people to pay their interest.
But eventually something happens and people stop asking for new loans, or banks stop lending and maybe even start calling in their loans rather than wanting to make new ones, and you get "financial crisis" where it becomes apparent that there is way more debt than there is money to repay the debt.
That's where we are now. We've been here many times before. It's called "the business cycle". But it should be called "the arithmetic problem".
It's so obvious that somehow people can't see it, even when it is presented as clearly as I have shown it here. The problem has been pointed out many times over the past couple of centuries. People deny it. They can't believe it. If it's so obvious then why hasn't anyone fixed it? Because they deny it. They can't believe it. But there it is, staring you in the face.
Because people deny or somehow cannot see this arithmetic problem of finance they blame the crashes on "capitalism". In a sense capitalism is to blame, because in a capitalist system you need to get more out of the economy than you put in so you can make a "profit". Like money and banking, profit is not evil. Would YOU go to work if it cost you $60 to go to work and you only got paid $50?
Profit is a necessary part of any economy beyond barter. Banks need to make a profit so they need to charge interest. The arithmetic problem is not the fault of bankers or banking. So whose fault is it and how do you fix it?
You don't fix it by "socialism". Free enterprise and capitalist corporations make our way of life possible. The experience of history shows that we as humans are not enlightened altruists. If you think you are one of these, then come and do all my work for me for free for the rest of your life, which will be short, because "for free" means you get no food or water or any other economic resources. We are physical beings with physical needs and that puts hard limits on our ability to be altruists.
Joe Stalin showed us how well central planning works to run an economy. "We pretend to work, they pretend to pay us". Workers are unproductive so the rubles the socialists pay you cannot buy anything from the empty store shelves. "We pretend to be producing something, they pretend their money is worth something". Print all the money you want. It only has "value" if you can convert it into economic values, by "buying stuff". No stuff, no value.
Adam Smith observed how peoples' individual pursuit of their own economic self interest is far and away the best way for us to satisfy our material needs and desires. But Smith's "classical economics" really describes the economy of 1776 England which was local and not advanced far beyond barter. Smith was too early to see the arithmetic problem of modern bank-debt fiat money.
The problem is very simple. Our industrial economy and our banking system do not internally generate enough "money" for everyone to pay their debts + interest. It's an arithmetic problem, not an economic problem. There is no shortage of goods and services and productive capacity. Just a shortage of "money".
The solution is equally simple. If the system does not "internally" generate enough money to clear all its debts then it needs and "external" source of money.
Our modern system of fiat money and central banking provides all the tools we need to easily solve the arithmetic problem. The federal government can write an IOU on a piece of paper (a bond) and "sell" the bond to its central bank (e.g. the US Federal Reserve Bank). The Fed then creates a deposit in the federal account, just like a regular commercial bank makes a loan by creating a deposit in your bank account. And the government spends the money into the economy.
Google "Warren Mosler". On his website you will find his "Soft Currency Economics" that lays out all the mechanics of how the government and its central bank can create the "external" source of money that our system need to function without the runups and crashes cycles.
Remember, the government owns the bank, so this is really an accounting formality. Kind of like you saying, "I 'owe' my piggybank three dollars". If you never pay it back no problem. But the Fed is a limitless piggbank. Money is just numbers in bank accounts. There is no limit to the amount of money you can create this way.
Which is exactly the historical problem that led people to want to limit government's ability to create money. If Obama knew he could create $20 trillion and give it to Americans to pay off their debts, and if Americans knew this too, there would be enormous pressure to do it.
But this would cause hyperinflation. And it would destroy the moral imperative of bank lending that borrowers, who used their loan money to get us to do stuff and make stuff for them in exchange for the money, have to earn the repayment money by doing stuff for us.
Financial credit--"bank-debt money"--activates real credit--our ability to produce things. Banking is the institution that keeps track of who is in a debt position and who is in a credit position, and banking makes sure the debts get paid. A bank who doesn't collect the debts fails, both financially and morally. They have to get "our" money back from the borrowers we lent our real credit to.
So how can government put "free" money into the economy without causing hyperinflation and without destroying the moral relationship between borrowing and earning money?
I can list a few ways that would work in principle, but the actual financial mechanics are beyond my knowledge. Bankers, central bankers at the macro level and private borrowers/commercial bankers at the micro level, are the financial specialists who would have to determine how much free money to put into which sectors in order to ensure there is enough money in the system for borrowers to earn to repay their loans + interest, but not too much that causes excessive price inflation.
I don't know this, but I think there would have to be constant price inflation to make this work. The price inflation would be the profits earned by industrial production and bank interest. It's either that, or the boom-bust cycles we get now. And there would be constantly increasing federal debt to its central bank, which is just a numerical accounting formality, for this to work. But people would have to get used to the idea that this kind of "national debt" has no economic meaning at all. It's just numbers on Fed balance sheets. You could periodically change all the numbers to zeros and it wouldn't make a bit of difference.
There are some obvious ways for gov't to get this "external" money into the economy like spending it on infrastructure. People who work on these projects earn income which they spend into the economy, and the gov't never needs to take that money back out of the economy because it is not in "debt" to anyone except its central bank, which is itself.
I like the idea of electric cars like the Volt, Tesla and Canada's Zenn. Federal money could finance the development of these, and at the same time rebuild the electrical grid to handle the new load. The US auto industry needs a "bailout", so why not use it to develop the car of the future? While these are being developed Sarah Palin's natural gas pipeline could be built and cars converted from gasoline to natural gas a la Pickens' plan. This would reduce dependence on oil imports and thus enhance national security.
The possibilities are limited only be the availability of real credit in the US economy. Real credit is things like unemployed people who want to work, and natural resources, and capital equipment and technology and knowledge, and desire to do it. Real credit is economic potential that is currently not being p ut to work.
Social spending could be funded in whole or in part by this "free" federal money. Any country's real credit is not infinite. We may be rich, but we're not "infinitely" rich. We can do "a lot", but we can't so "everything".
So we still have to choose whether everyone gets a million dollars of 'free' health care or if some free market limit needs to remain. How much of our economy do we devote to health care vs. education vs. infrastructure vs. housing vs. consumer goods and on and on and on. These are market choices and it's a big mistake to want to revive Joe Stalin to make the choices for you.
Federal borrowing from private sources may have to be banned, because the idea is for the gov't to put money into the economy, not absorb it out. If there is too much money in the system government should tax it out. Or the government could only borrow from pension plans and provide a stable rate of interest = inflation so people could safely save for their retirement. Again, the possibilities are virtually endless. I'm just listing a few obvious candidates.
There is another big problem right now that needs to be eliminated before anything else can be fixed. That is the existence of the shadow banking industry on Wall St.
Non-Wall St commercial banks create and manage a country's financial credit. Their capacity to create new money is limited by legislated assets to capital ratios which are usually around 10:1 or 12:1. This is the "leverage". Assets are the loans a bank creates and which are owed to the bank by borrowers. Capital is the amount of money you and I collectively invested in bank stocks in the stock market. The stock market is how you and I and Warren Buffett get to share in the productive process and profits of real economy companies, including banks.
If we collectively invest $1 billion in bank stocks, the banks can collectively create a new $10 billion of "loans" at 10:1, or $12 billion at 12:1. The asset:capital ratio puts legal limits on how much new money can enter the economy to prevent new money from entering too fast and causing high price inflation. The system works well.
But besides the real banks financing the real economy the shadow banks on Wall St are also allowed to create "investment bank money". They are also constrained by asset:capital ratios, but these are adjusted by volatility indexes that can be tweaked to make 30:1 or 50:1 look 'safe'.
In fact NONE of the shadow banking industry's money is 'safe'. Only the capital that was originally invested in these banks at startup is real money from the real economy. Every investment bank dollar that has ever been created, and they created 10s of trillions of dollars of this magic money and sold it to every nation on the planet, is pure inflationary pollution.
Their "assets" are the mortgage debt and credit card debt and business debt that was created by real banks in the real economy. All of the real credit that could be activated by the original bank loans has already been converted into houses and industrial development and consumer goods and services. That "money" should have already been absorbed back into the original banks as debt repayments.
Instead Wall St packaged it as "valuable" assets, and multiplied the value by 30 times and sold it, then someone else bought some and multiplied it by 30 times again and sold it, until there is 60-90 times as much shadow bank money now in existence as there is real bank money. There could be as much as $100 trillion of this phoney money in existence. Before any real solutions can start happening this magic money has to be purged out of the system and the laws that permitted it to happen must be repealed.
I certainly appreciate the monetary banking lesson, but me being a very simple person, I have a hard time with understanding the philosophy of the non-existent "interest" phony money.
I feel that money is a mutual agreement of a unit value that we can use in place of an inconvenient barter system and consequently, we can use it to establish a value on monetary interest (or money put to work). And consequently, I find myself right back where Naufal Sanaullah left me, i.e. our problem resulted from some of us borrowing/spending money that we didn't have, didn't work for or could not pay back. Pretty simple when you think about it.
By the way, I don't think 300 million total American populace can ever pay back $30 trillion of debt because that equals $100 billion for every person in the U.S. Correct me, if I'm wrong.
famos, last words
You outdid yourself. Excellent explanation. I would just add that the Fed Reserve is a privately owned bank so it's not exactly the government but that is merely semantics. Also, the system inherently puts you into debt. It is this very reason that Ron Paul every year tries to pass a bill to do away with the Fed Reserve. I'm in agreement with him but this will never happen. The irony is this debt driven economy was a result of the depression and the people's demand for the creation of the Fed. There is an excellent explanation on wikipedia and also a great video illustration of this on youtube. See the links below.
en.wikipedia.org/wiki/...
www.youtube.com/watch?...
The "American people" will not get us out of this. Their collective merit in intellect and ingenuity is irrelevant. We need libertarian economic policy to get us out. We have to understand that artificially high money supply caused the misdirection of capital that we are falling off of right now. And if we are to remain the economic superpower of the world, we have to let the markets do their work and maintain purchasing power for America.
America works because it is, like everyone is saying, debt-driven. America is the best investment in the history of the world. Or at least it was. We rely on that image for foreign investment and reliance. We rely on that image for purchasing power. We have to prove it now. We need to get Alexander Hamilton on their ass.
Dawg, free market FOR THE WIN.
www.american.com/archi.../
Yes, that is the explanation that is hinted around at or found in a footer in the textbooks, but it doesn't work.
Banks create money on a balance sheet. On one side the $1000 shows up as their asset, on the other side the $1000 shows up as a deposit in your account. When you payout the principal both sides of the balance sheet are written down to zero and the money ceases to exist. The money has no real existence other than numbers in these accounts. There is no $60 left for the banker to spend into the economy. Your principal repayment eliminated exactly as much money as the loan created.
Temporarily you can convert your loan to cash by withdrawing it from your deposit account and hold it in a physical form, but even if you repay the bank in cash the bank will apply the cash as a deposit to your account then write down both your deposit balance and their asset balance by $1000 and the loan money ceases to exist.
You got the cash from the bank and paid it back to them, so that cash doesn't change the total amount of money in the system. The total amount of money put into the system = the total principal amount of the loans that were deposited to accounts. When any principal balance is repaid the amount of money in the system is reduced by that amount. There is no money left to pay interest.
If a borrower defaults on a loan and goes bankrupt without repaying his loan principal, the bank cannot get that money back. The bank writes down its asset side by $1000 and "writes off" the debt. As far as the bank is concerned, that money has ceased to exist.
Whoever the borrower gave the money to (as payment for something) now "owns" the money. This money now exists in the system as owned money that does not have to be paid back, because the person who owns the money is not the same person who borrowed the money.
In crashes lots of borrowers default and lots of debt is written down so over time there is lots of owned money in the system that nobody who owns the money has to pay back because it was not them who borrowed it. They "earned" it by selling stuff to the borrowers. This confuses the arithmetic problem and adds money into the system that new borrowers can collect to repay their loans + interest, but all this does is transfer ownership of the interest money from the person who owned it to the banker who collects it as interest and now owns it. The interest money was created by defaulters and bank writeoffs of debt, not by the 'normal" operation of our money-creation and money-destruction system of bank-debt money.
An intuitive 'proof' of this scenario is the fact that all booms end in busts with lots of loan defaults and debt writeoffs. Can you think of another reason the scenario always plays out this way? Making bad loans to people who probably don't have the income power to repay the loans does not change the arithmetic of the situation. It just guarantees there will be defaults. If nobody defaults and no debts are written off, the arithmetic stands.
zeitgeistmovie.com
I just watched the video. I became aware of this conspiracy theory, or conspiracy, about 25 years ago. I have an entire bookshelf devoted to it. Everything in the video, except the chip which hadn't been invented yet, has been known for some time.
Are you familiar with the book of Revelation? This whole scenario is described beginning in chapters 12-13 and concluding in chapters 17-18.
The troubling aspect of the conspiracy's success is that it simply takes advantage of human weaknesses and exploits them for power. When Moses freed his people from slavery in Egypt most of them didn't want to go. "Slavery" in Egypt was just what we would call working class today. Most of the people preferred a secure life in slavery to taking their chances with freedom. Only a fraction of Israel returned from Babylonian captivity. Most of them had grown up in Babylon and they liked it there. Life was soft and sensuous. People preferred that to freedom. That hasn't changed today.
The Bible's advice is, "Come out of her, my people." Among Christians today there seems to be a belief in universal salvation--everybody will be saved no matter what they do with their life here. But this is the exact opposite of what Jesus taught. Jesus said he didn't come to bring peace but division. He came to separate the sheep from the goats. Each will go to his own reward.
Jesus said no one can serve both God and Money, because they take you in opposite directions. Service to God takes you upward along the path to spirit and an afterlife; service to Mammon takes you back down the path to your animal nature and death.
Paul wrote to the Philippians, "therefore work out your salvation in fear and trembling". Each of us, alone or in our family or group, has to choose which master we will serve. Freedom is hard, but I think it's worth it.
Thank you for correcting my math. Overwhelmed by all the zeros. I believe you to be right on both counts. Refreshing to know someone does read the comments.
famos, the last word
capitalism by fiat operates on debt and borrowing, true capitalism operates on savings and ingenuity. in socialism taxes curb savings, and in fiat capitalism inflation curbs savings. savings and production are the only way to generate real value. socialism is a zero sum argument, and fiat capitalism delivers negative returns- the numbers might look good, but the value actually falls over time.
On Nov 05 10:42 AM ferguson wrote:
> Very good, insightful article, but not necessarily correct. All social
> and economic systems (capitalism no less than socialism) are necessarily
> wheels of fortune. In order to accomplish anything investment is
> necessary. In a socialist society that means taxes. In a capitalist
> society that means borrowing and debt. And both systems are dependent
> on the belief that the unproven ends are worth the unavoidable cost.
> So, spin the wheel and place your bets. The best assurance of a reasonable
> degree of success is that we have honest and intelligent people running
> the game.
>
> For this reason, we are much better off today than we were yesterday,
> since Obama brings both intelligence and honesty to the job, qualities
> that have been sadly lacking in American politics for decades. It
> will take time, but I believe that these qualities, combined with
> the American capacity for entreprenurial initiative, innovation and
> investment will place this nation on a more productive and more rewarding
> path.
Bald assertion indicating a political agenda always catches my eye. A very cursory Google easily uncovers that this change in methodology was specifically advocated by Greenspan and pushed by Speaker Newt Gingrich immediately upon assuming office after the Republican takeover of Congress after the 1994 elections. Said Gingrich, as quoted in The Washington Post (January 16, 1995), "We have a handful of bureaucrats who, all professional economists agree, have an error in their calculations. If they can't get it right in the next 30 days or so, we zero them out," transfer the job to the Federal Reserve or the Treasury, "and tell them to get it right." Several Democratic senators have taken issue with Gingrich, speaking out, as quoted by Associated Press (January 19, 1995), against "pressure exerted by politicians" and in favor of "careful study." (Quoted in The Consumer Price Index, the deficit, and politics. By Norwood, Janet L. (former head of the BLS during the Reagan and Bush 41 Administrations) Publication: Government Finance Review Date: Saturday, February 1 1997)
Just because something happened during the Clinton Administration, doesn't necessarily mean that it was "introduced by Bill Clinton". The fact is, the change in the methodology was specifically a Republican goal, and effected only after the Republicans flexed their political will. Baldly blaming it solely on Clinton only serves to hide the Republican culpability and calls into question the bias of the author as well as the validity of any conclusions as just another political hit piece.
I would have mentioned the huge number of high-growth, low-debt industries in the United States such as Google and Apple, but have you even seen Apple's headquarters? Is Steve Jobs nothing more than a hologram? And Google... do they exist either? I thought Baidu copied Google, but it could be the exact opposite: Baidu created Google! Can you travel back in time to prove otherwise?!
I loved the comment the author made about the British pound becoming the new reserve currency. It was the proverbial nail the coffin for the author's credibility.
an additional author comment caught my eye relative to the current raging debate between inflation/deflation, which indicated that money known to be inflating will be spent rather than hoarded.
to me, that single comment will probably be driving my investment thinking over the next year. regarding inflation, it's not "if", it's "when". Either the US inflates or defaults. Inflation is much less obvious.
--ikk
I echo other's comments on a great piece. If only more people understood this. (I hope I do...LOL)
Anyway, all that phony money being written off, (I've read) 75% of the world's liquidity (and about 10% more in Yen carry) is fast disappearing into the very thin air it was created from.
This is the core of our problem. No money. We've created so much phony money, the Fed can no longer affect the price of money. If this disappearing act continues, we'll soon be down to about 8% of today's money supply...fed power money. Imagine that. It's not pretty, but it's also probably unavoidable.
No wonder banks won't lend. And the Fed physically just cannot keep up replacing that lost phony money through liquidity injections. But, God bless him for trying.