REVERSING THE ‘PONZI’ SCHEME
One valid and practical idea to generate a source of income for a government is to reverse the current fractional reserve scheme and have the Government sell access to credit creation to the private, commercial, retail banking system.
This proposed process would not apply to the investment banking system, which would have to be a totally independent system divorced from any form of Government support and denied the legislative access to fractional reserve credit creation. The reason for this distinction is that investment banking is largely a financial gambling system with the sole motive of profiteering. Its interest in productive and employment issues is strictly limited to the profit potential related to the buying and selling of organisations and/or their related physical or paper assets. Genuine productive businesses have a plentiful array of options for raising capital without being dependent on the services of investment bankers, but it must be up to that banker to carry any risk involved as its own responsibility.
The fractional reserve system is essentially a ‘ponzi’ scheme, but if reversed and modified in a properly controlled manner, it can be made to serve the benefit of the society. Instead of allowing the private banks to create ‘new’ money as they currently do, by advancing interest bearing credit out of thin air, the Government, on behalf of the people, would create this ‘new money’ and sell it to the private banks. Obviously, the creation of this ‘new money’ would be a simple bookkeeping, or computer spreadsheet activity, exactly as it currently applies. The private retail banks would be set up in the same manner as presently in place, by obtaining capital from investors through the issuing of shares, debentures or bonds. As legitimate registered businesses, they would be eligible to apply for, and purchase, ‘new money’ from the government at a price which would allow the bank to "resell" with a market controlled "profit". It is assuned this "new money" would be lent out on an interest basis, and the interest rate would be controlled by market competition, as well as prudent banking practices, especially if the Government is no longer the lender of last resort, as propsed below. The amount of ‘new money’ the banks request would be set as a ratio of their subscribed capital, and perhaps, any long term deposit money they hold on behalf of their customers.
As a registered business, these banks would operate under standard corporate law and be responsible for their operations without any reliance on the government as lender of last resort. The banks would have to take out, and maintain, appropriate private insurance to cover their customer’s deposits as part of their legitimate registration responsibilities. Every application to purchase ‘new money’ from the government would be made with an appropriate set of audited accounts.
Under the current system, Governments borrow money from private sources and pay interest on the bonds they issue. This revised system would operate through modifying the role of the Reserve/Central Bank. Specifically, this Bank’s role would be to monitor the nation’s productivity/consumption factors and handle the sale of ‘new money’ to the private sector banks on behalf of the people. This sale of “new money” would actually be represented as selling the private banks a defined amount of ‘credit’ which they could then pass on to their customers at a higher, but competitive, rate of interest above the purchase price they paid the Government. The Government would have to be constitutionally constrained from creating this ‘new money’ in excess of the production/consumption parameters, but a controlled fractional reserve ‘ponzi’ system is a way of increasing the money supply in keeping with the needs of a growing economy. Effective constitutional restrictions on the level of ‘new money’ the Government is allowed to create, and sell, would be calculated from properly defined productivity measures. This would effectively control inflation as the volume of money would keep pace with the volume of goods and services available.
A ratio between a private bank’s capital, and the ‘credit’ they would be allowed to buy from the Government, could be determined from a number of factors. Some of those factors would be the number of registered banks, their location, and possibly their size of operation. This ratio could vary with circumstances, but would aim at providing the banks with an adequate level of funds to use in passing on the credit to their customers. As the economy grows the banks would be in a position to increase their capital base, and thus, apply for additional ‘new money’ to support the continued growth. As proposed above, the necessary controlling regulations would be related to the nation’s productivity and consumption factors, which the Government would monitor as the primary determination for the creation of ‘new money’. A loan is merely a legal agreement, and in the case of advancing credit, it is simply the ‘monetisation’ of future effort. The borrower promises to repay the loan at a later date from the fruits emanating from the advance. In this respect, all credit is really public property because only people are capable of producing products and services that will create the ability to repay the advance. The creation of credit should never have been handed over to the private banks in the carte blanch manner which applies today.
One of the major anomalies in relation to the current financial system is the fact that when the private banks create credit out of thin air and loan it to
a customer, they do not directly provide that customer with the interest that will have to be repaid. In the case of, say, a typical 25 year mortgage, the total amount of interest that would be paid over the 25 years would amount to around 200% of the
original principle advanced. It is this interest money that has to come from somewhere, and that somewhere is inevitably, from someone else's pocket. While it is argued that the interest comes out of the profit made by the entrepreneur that profit comes from
Unfortunately, the vast bulk of consumers are wage/salary earners and it is easily proven that that 'income' only accounts for 25% to 35% of the cost of any product or service created by the entrepreneur/manufacturer. Thus, this vast bulk of consumers can never have sufficient 'income' to pay for the products and services they need to buy without going into perpetual debt to the banking industry, or using up whatever savings they have been able to put aside.
The other anomaly occurs by allowing the banks to create "money" as a ratio to the deposits they hold - usually that ratio is at least 10:1, meaning, they can create $10 out of nothing for every dollar they hold as deposit. Two things to note regarding the customer's deposits - a very high percentage of these deposits are themselves, "money" created as a loan or credit advance - and secondly - these deposits are never actually lent out as loans, as many people believe - because no bank customer has ever had their balance reduced because it has been lent to someone else.
Insurance Companies becoming the “Lenders of last Resort”.
As mentioned above, the additional restraint on the private banking system, both retail and investment banks would be for the banks to take out their own depositor’s insurance, thus removing the Government as the “lender of last resort”. If the banks are properly run there would be no problem in arranging this insurance. If the insurance cover cannot be arranged then the bank would lose its licence to operate.
DEFINING THE REAL PURPOSE OF MONEY
What Argentina calls RGT, other countries call LETS - Local Energy Transfer System - it is a well known system that has been in place around the world at least since the 1930's, possibly earlier. Both systems work the same way, people exchange goods and services using a barter system that revolves around a locally created medium of exchange.
The LETS units don't involve interest payments,
they aren't considered a commodity, and there is no "foreign exchange market" to allow them to be manipulated for the sake of making a profit. They are a medium of exchange and there is no point in accumulating LETS units other than to use them for an exchange.
In fact, they serve the only real and fundamental purpose for having a monetary system in the first place.
When people talk about 'saving' LETS units till they have enough to buy what you want - that is quite different to accumulating them in the way people accumulate money - putting it aside - or getting as much as they can to become "rich" for the sake of status - or ego. LETS units aren't depreciated by inflation as they aren't produced without a relation to the energy expended, or the goods and services provided. Essentially, that is the missing link in the worlds financial systems - productive capacity is divorced from consumption capacity. There is absolutely no point in producing anything if it can't be consumed. Once you convert "money" into a commodity and allow gambling into the system, and the creation of "money" without any relationship between production and consumption, it must result in the boom and bust cycles along with inflation and deflation.
As for linking politics and the economy - it is virtually impossible to separate the two.
Actually, two of the best writers on economic issues are C H Douglas and Fredrick Soddy - both practical and qualified professional in Engineering and Chemistry, respectively - and not professional economists. Both wrote in the 1930's and accurately foresaw where the current financial system was heading.
The question of debt
To 'rationalise' going into debt as being a reasonable "capital investment', when it's not your 'capital', and you have no alternative to achieving the generally accepted standard of living, seems to be the approach of a rationalist. Going into debt can work for some people, if used in a responsible manner. However, the "responsibility" is a two way street, it applies to the lender as much as it does the borrower, and when the lender is motivated by the amount lending he can achieve, "responsibility" gets put on the back burner.
Most people have to borrow to buy and live in a house, and in today’s world, to use a credit card through necessity. Some people are fortunate to sometimes have housing provided, but bringing up a family will usually necessitate borrowing. It is not necessarily an either/or statement that if you have to borrow you can't save a penny - a lot of people do both, but the point is they had to borrow in the first instance. However, there are many people who cannot make ends meet in this modern economic society and are in need of food vouchers and other forms of assistance.
C, H. Douglas was an engineer in charge of areas of production during WW1 and approached the financial side from a very practical point of view. His books, "Economic Democracy" and, "The Monopoly of Credit" were written back in the 1920 to 30's and are as relevant today as when they were originally written. He pointed out that the wage earner can never have enough purchasing power to buy the goods and services produced because, the wages component of any product is between 25 to 35% of its cost. Consequently, people are forced to borrow to maintain the standard of living in their society. Obviously, the banks love that sort of situation, except, the bankers are now finding it more profitable to deal in those toxic and exotic financial products that actually produce nothing substantial apart from more money for the big time gamblers.
GOLD, TAXES AND BORROWING
In truth, taxes and borrowing are only essential
for a nation that operates on a money supply restricted to the amount of gold they have available. A Monetary sovereign nation using their own currency does not need to impose any taxes at all, unless it needs to cool down an overheated economy. The real problem
with the fiat currency system is the lack of a constitutional restraint on a government from creating money that is not regulated by the growing productivity needs of an expanding society. As the population increases, more goods are needed, and as long as
the money supply is related to the nation's productivity and services, inflation will not be a problem.
When the medium of exchange is created and used for non-productive activities, such as gambling on the stock exchange, in derivatives and bonds, that's when the value is destroyed.
Gold cannot be independent of government manipulation as Roosevelt proved. He confiscated gold at $20 an oz and revalued it at $35 an oz to provide the government with a $3 billion windfall. It was the farcical attempts of the Bretton Woods agreement to try and maintain the price of gold at $35 an oz that was unrealistic. There simply wasn't enough gold in the world to maintain the expanding economic activity, including the ongoing war mongering, after the Second World War.
If a nation, with a growing economy, tries to restrict
its money supply to the amount of gold it has available, it will be forced to either continually revalue the relationship between the money supply and the governments gold supply, or be forced to abandon gold just as happened to Nixon in 1971.
Alternatively, if the relationship is maintained as the population and the economy grows, the government will be forced into ever increasing debt to the private lenders.
Ron Paul is incorrect in defining gold as “money” - gold is not money although it has been used as such, but in today’s world - it is a barometer for measuring the value of any given currency. Gold is really only useful if it can be exchanged for the currency used in the nation.
In fact, it is quite ridiculous to say a nation can only create a medium of exchange if it has a store of gold available. The real problem with fiat currencies is their divorce from the productive capacity of the nation. If governments were compelled to relate the money supply in line with the growing production of assets and services required by their society, that currency would become a 'sound' money supply backed by physical assets of the nation.
Unfortunately, for a country to be governed by the rule of law this requires them to be constrained through a Constitution, a Constitution which is fully supported by their judicial system. That seems to be too hard an ask for most nations in the world today.
The economy of today is based on the fiat currency system and is totally divorced from the gold standard system, at least partially in place until 1971. So few politicians, economists, commentators, educators and members of the general public, realise or understand the significance of this change, and keep discussing the economy in terms parameters that no longer apply. For anyone who really wants to understand the difference, they should read Warren Mosler's book, "The Seven Deadly Innocent Frauds of Economic Policy". It's a small book and can be downloaded on the internet.
Actually, gold, and other "precious" metals, are near perfect barometers in respect to the real value of any currency. In that respect gold is very useful, but it is not, and really cannot be, a controlling factor in the way governments operate their financial system, especially in respect to a growing economy.
The current issues facing the populations are a direct result of deliberate Government fiscal policy, but that policy of slashing the social network, and destroying employment, stems from the fact that the politicians, and the government, are kowtowing to the banks in applying gold standard principles to the fiat currency system. Given that the Government is the monopoly issuer of the fiat currency, then the spending by the government is actually independent of the amount of revenue it can raise. There is no such concept of the government being “out of money” or not being able to afford to fund a program. How much the national government spends is entirely of its own choosing. The government needs to rescind the Federal Reserve act and do what it has the constitutional authority to do, and that is create the nation's currency free of interest payments or the necessity to borrow from the private sector. As long as they restrict the nation's currency to the productive capacity of the nation, inflation would not be a problem.
The Fed does issue the money, but they do so by buying treasury notes/bonds and in effect, lending the government the money and charging interest on the loan. The government got conned into setting up the fed back in 1913, even though the Constitution says the government is the authority and has the sole right to create the nation's money supply. The interesting thing about the fed and every other private bank in the world is that they create the loan money and credit advances out of thin air, under the government sanctioned fractional reserve system.
In 2008 the notional value of all outstanding derivatives totalled approximately $1.144 QUADRILLION. It is probably much more today. If anything is going to cause the next economic collapse it is going to be this enormous confidence trick that no one wants to talk about. As for fund managers, Warren Mosler in his book, "The Seven Deadly Frauds of Economic Policy", describe them perfectly, along with the rest of the financial system that feeds off them. “The really damaging impact of this fraud is the need to manage this massive pool of funds for the future beneficiaries. The trillions of dollars compounding in these funds are the support base of the dreaded financial sector. Thousands of fund managers use these vast sums of money to gamble on any available market. Feeding on these "bloated whales," are the inevitable sharks - the thousands of financial professionals in the brokerage, banking and financial management industries who owe their existence to this deadly fraud".
Buying derivatives isn’t "investment," it is gambling, pure and simple. The banks packaged these bits of paper and flogged them off to gullible gamblers, after stuffing them with sub-prime mortgages, which they knew could never be honoured. Even if the 'bits of paper' were filled with prime assets, they still would not have represented anything of productive benefit to the society. A bank loan that is created and directed to something productive, or an investment in a business aiming to produce a product or service needed by society, represents a clear benefit. On the other hand, share trading on the market is really only another form of gambling, which is basically corrupted by the high speed computer betting and/or inside trading. Investment is a total misnomer, as once the share is listed; any subsequent trading is of no direct benefit to the business concerned.
CHANGING THE SYSTEM
At the root of everything is the financial
system - any alternative has to start with a complete overhaul of the current farcical system. When I say everything - I mean everything - the environment - the wars - the spying - the way governments operate - corruption - expanding prisons - the judicial
system - etc - etc. If you want an alternative to the financial system, start with Fredrick Soddy and read his original book, "The Role of Money" (It can be downloaded off the Internet)
The next step is to understand that the primary reason we, the people, agree to create a Government is for that Government to serve a "public purpose". One of the Governments principle responsibilities it to sustain the rights of every individual in its society.
To achieve any of these sorts of alternatives under a free and democratic type of society requires the people to create a truly binding Constitution that can only be amended through a referendum of all the eligible citizens in that society.
It is conclusively proven, the people cannot trust their elected representative with that responsibility - nor can we trust the judicial system - particularly when a small unelected group of people sitting in a Supreme Court cannot come to a unanimous decision on any legal issue. Quite obviously, any split decision is proof that the decision is flawed.
There is just so much wrong with the current systems that we could start just about anywhere to find an alternative - but - finance really has to be the fundamental foundation for any significant improvement.
We need a new economic system if things are ever really going to change. The Modern Monetary Theory (MMT) is a system that points the way, as it looks at the reality of the fiat currency system that came into effect in 1971. Most of the
problem with current economic thinking, and practice, is that people, both economists and the general public, can't get their head around the fact that the gold standard system no longer applies - and neither do all the parameters associated with that system.
Governments had no choice but to borrow money when their monetary system was controlled by the amount of gold that possessed. Although some people disagree, a growing population and a growing economy requires an expanding supply of "money tickets", but as
long as the the increase is related to the productive and consumption capacity of a nation, inflation will not be an issue. It is only when that relationship is ignored that inflation/deflation take over.
C H Douglas explained all this back in 1920 when he opposed the ideas of Keynes. The distinction at that time was the economy being tied to the gold standard system.
AN ABBREVIATED EXPLANATION OF THE MODERN MONETARY THEORY
Although the Modern Monetary Theory (MMT) is referred to as a “theory”, it is actually a statement of facts about how the world’s currency systems actually can work.
There are a number of very important issues that need to be understood about the role of Governments using the fiat currency system.
When a society grants their government the authority to issue currency on their behalf, it creates a position whereby the sovereign government can never become insolvent. There is no such thing as debt to be repaid because; the government is both the lender and the borrower at the same time. In the world of fiat currency, a rational government does not have to raise revenue through taxation, or borrowing, when they have the monopoly to create the currency.
Spending beyond the economy’s total productive capacity is what leads to inflation. Any creation of excess money leads to higher prices as it bids for the available products and services. The economy can only create a certain amount of money, which is dictated by its productive capacity. The growth of that capacity is supported by an increase in the monetary base, provided the consumption capacity of the society remains in
balance. There is absolutely no point in producing anything if it is not going to be consumed. That simply results in a waste of resources, of effort and expenditure, not to mention increased pollution and unnecessary depletion of resources.
The total productive output of the national economy is what must constrain the amount of money a government creates. The fiat currency system is not conditioned by some arbitrary threshold, such as lumps
of precious metal, but by the level of economic activity based on actual
physical capacity. While there should be enough money in circulation to buy the production and service available, the critical and most difficult aspect, is finding the best means to distribute the money for the benefit of the society.
With reference to a return to a gold standard, the following in relevant:
Prior to the Federal Reserve Act of 1914, the $20 bill actually printed on the note that it was exchangeable for a gold coin, which in 1905, was
the equivalent to 1oz. Although the $20 bill was still exchangeable for gold after 1914, it was not printed on the note. After the 1933 Executive Order, $20 notes could not be exchanged for gold. A year after making monetary gold ownership illegal, FDR used
the Gold Reserve Act to revalue gold from $20.67 per ounce to $35 an ounce. Apart from resulting in a $3
billion boost to the Government’s coffers, it illustrated the farcical belief
that a ‘gold standard’ could control a government’s lust for creating “money”.
At the end of World War
II, the Bretton Woods agreement came into effort, which pegged the world’s currencies to the U.S. dollar, which in turn, was pegged to gold at the US$35 per ounce, as revalued by FDR in 1934. As a result of the excessive Vietnam spending Nixon inherited
from the previous administrations, international pressure forced him to abandon the Bretton Woods system on August 15, 1971. The U.S. dollar was no longer convertible to gold on the international exchange
markets. This was the final break in the links between a commodity of intrinsic value and the nominal currencies. From this point on, governments around the world used fiat currency as the basis of their monetary systems.
This major shift in defining “money” fundamentally altered the economic principles related to a ‘gold standard’. The logic of the gold standard system is no longer applicable to the flexible exchange rate - non-convertibility conditions of the fiat currency era, and cannot be translated, or rationally used, in the new system, even though very few politicians, economists, and the general public, recognise this.
Under a fiat monetary system, “state money” has no intrinsic value and survives, purely on the “faith” of the holder that it can be exchanged for goods or services. Given that the Government is the monopoly
issuer of the fiat currency, then the spending by the government is actually independent of the amount of revenue it can raise. It can spend however much it likes subject to there being real goods and services available for sale. This is a dramatic change
in economic policy philosophy which is completely misunderstood by most people and most economists. There is no such concept of the government being “out of money” or not being able to afford to fund a program. How much the national government
spends is entirely of its own choosing.
There are no financial restrictions on this capacity.
While there clearly are restrictions on government spending, as defined by the quantity of real goods and services available and the levels of unemployed in a society, these are not financially constrained in the fiat currency system. However, a Government’s spending decisions, along with taxation and borrowing decisions, have significant impact on interest rates, economic growth, private investment, and price level movements, all of which can constitute further restrictions.
limits a government chooses to set, in terms of economic growth, are purely voluntary in the world of fiat currencies. Thus, the size of the budget deficit and the growth in public debt is really, in truth, only of concern when it is unrelated to the productivity
and consumption capacity of the nation. Unfortunately, aggressive war mongering and creating money for military spending comes under the “unrelated” concerns, as
does the huge expenditure involved in “security” to protect nations from the propaganda driven fear of “terrorism”.
In a fiat currency system the government does not need to finance spending
by issuing interest bearing debt through their monetary authority or the treasury. This is a fundamental departure from the
gold standard mechanisms, where borrowing was necessary to fund government spending, because the money supply was fixed by the quantity of gold. Taxation and borrowing were intrinsically tied to the government’s management of its gold reserves, which in turn, determined the nation’s capacity for growth. In essence, this was quite a ridiculous situation and unrelated to the needs of a growing economy. If insufficient gold were available to a nation, its growth could only be achieved by going into debt and borrowing funds from private sources.