Banks are necessary to any economy and were carefully regulated until the Reagan years. De-regulation was touted as a move that would stimulate the economy by expanding the role of banks; instead it led to the Savings and Loan debacle of the '80s that wound up costing the taxpayers $500 billion. The Federal Reserve is the ne plus ultra of unregulated financial institutions, and we have seen the results of placing the nation's monetary policy in such hands. From this experience we should be able to redefine the role of banks and legislate such regulatory measures that would best serve all parties alike. The previously mentioned change in the accounting method employed by banks would be among the first items on the list. Banks must not be allowed to create money from thin air as they presently do.
The freed up dollars following the dissolution of the Federal Reserve System must be funneled into state banks to restore reserves of cash to 15%; this should marginally increase the value of the dollar and so help retard inflation. Banks will issue credit and mortgage instruments but will revert to the old tried-and-true VIVA (Verifiable income, Verifiable Assets) metric to ensure the issuance of well performing loans. The role of banks as safe havens for their depositors' money must be accompanied by responsible use of that money in lending. To this end we would propose the institution of State Banks.
A State Bank would be the central repository of all public funds derived from taxes, federal grants, and other sources. From these funds would the elected and appointed officers of the state be paid and from which funds for statewide capital improvements would be secured. This would go a long way toward eliminating waste as the economic condition of the state would be reflected in the financial condition of the bank. If the governor and legislators use this public money wisely then the state would prosper, the bank would be strong, and prosperity would reign. This would not be the case in the short run for many states as the complete revamping of a state's economic base would take time, but the State Bank would support the sovereignty and self-determination of each state. The bank's financial position would also be available to any citizen's review at all times. The bank would also accept deposits from individuals and operate much like a credit union where a share of the profits is added in the form of interest over and above the base, published rate.
This set of proposals is only a sketch, much to be filled in as organization and operation, but in essence it would amount to a co-operative banking system, the components of which would mutually support one another. The Federal Bank, operated by the Treasury Department would operate as a "market maker" in addition to regular operations. In this context it would issue and call for loans to/from state banks. State bank surpluses could be loaned to the Federal Bank which, in turn could lend funds to states in need of further funding. Interest rates would be held to a modest 5% for these transactions as progress will replace greed and unfair advantage in the market place. Done well this would be a self-regulating economic system with all participants, bankers and individuals alike having complete disclosure at every level.
Thursday, February 12, 2009
Monday, February 9, 2009
Silver Lining - The Regulated Economy
The role of government in economic affairs being inescapable it will be our concern to describe an ideal role for government in regulating the economy. For one thing we can recognize the importance of having a national currency, the dollar, as opposed to each state producing its own, as was the case in the early years of the republic. The government issues the currency and accepts it as payment for taxes, which the government needs to fulfill its role in the overall economy. Interstate highways, national parks and wildlife preserves, national defense (not aggression), the power grids, and other functions that are most efficiently served by a central government, should be the extent of government participation in the economic affairs of the various states. But some regulation is necessary to ensure an "orderly" market.
The ultimate collapse of the present government will undoubtedly usher in a new era of States' Rights, and the American government of the future will be a model based on the experiences of the past 100 years. The mistakes of the past must not be repeated and the technology of the present day must be utilized to its fullest to ensure the best possible results in this endeavor.
The biggest changes I see are; the restoration of the US Constitution as the supreme law of the land and the repeal of the Seventeenth Amendment: Senators must no longer be elected to office but appointed by the governors of the respective states, thereby being subject to recall at any time they fail to live up to the responsibilities they assume in representing their constituencies, or bring disgrace to their persons, their states, and to the American people at large.
The Federal Reserve will be abolished and with it the enormous (illegal) debt it represents to the common weal. Elections will be held on the Internet and instead of an election day we will have an election week, to ensure that everyone has the opportunity to participate; eligibility will be simplified - if you have a Social Security number you're eligible! The census may also be taken on the Internet by counting active Social Security numbers. Both these latter changes will result in tremendous cost savings - and they are very do-able by virtue of secured sites.
The ideal government participation in the economy would encompass three things; to ensure a consistent and proper money supply to cover the trade of the entire nation; to regulate corporate activity in such manner that such activity not create unfair advantage, and to publish reliable data on various sectors of the economy. With the elimination of the illegal tax on wages and salaries, excess IRS staff could be reassigned to supplant the SEC (Securities and Exchange Commission) and report the true conditions (ownership, profitability, debt, etc.) of firms on the stock markets. It would have the same effect as the present audits conducted by the agency; random and unannounced audits would go a long way toward ensuring honesty and soundness of business firms in general. These are suggestions only; every safeguard is vulnerable to tampering or outright defeat, but installing regulations (term limits is a good one) that will aim at the enhancement of free domestic trade, counter the forces of political corruption, while still overseeing proper professional licensing and maintaining fair and equal labor standards.
The task appears enormous but not at all impossible. The reconstruction of the United States in societal, political, and economic terms must be carried out rationally, in non-partisan co-operation. No longer should we tolerate leaders who lust after world domination but those instead who seek to place this nation in concert with the other nations of the world. Regulation of the economy is essential to these aims and must be a two-way street: regulation of the government as well as by the government.
Next: Banks and Credit
The ultimate collapse of the present government will undoubtedly usher in a new era of States' Rights, and the American government of the future will be a model based on the experiences of the past 100 years. The mistakes of the past must not be repeated and the technology of the present day must be utilized to its fullest to ensure the best possible results in this endeavor.
The biggest changes I see are; the restoration of the US Constitution as the supreme law of the land and the repeal of the Seventeenth Amendment: Senators must no longer be elected to office but appointed by the governors of the respective states, thereby being subject to recall at any time they fail to live up to the responsibilities they assume in representing their constituencies, or bring disgrace to their persons, their states, and to the American people at large.
The Federal Reserve will be abolished and with it the enormous (illegal) debt it represents to the common weal. Elections will be held on the Internet and instead of an election day we will have an election week, to ensure that everyone has the opportunity to participate; eligibility will be simplified - if you have a Social Security number you're eligible! The census may also be taken on the Internet by counting active Social Security numbers. Both these latter changes will result in tremendous cost savings - and they are very do-able by virtue of secured sites.
The ideal government participation in the economy would encompass three things; to ensure a consistent and proper money supply to cover the trade of the entire nation; to regulate corporate activity in such manner that such activity not create unfair advantage, and to publish reliable data on various sectors of the economy. With the elimination of the illegal tax on wages and salaries, excess IRS staff could be reassigned to supplant the SEC (Securities and Exchange Commission) and report the true conditions (ownership, profitability, debt, etc.) of firms on the stock markets. It would have the same effect as the present audits conducted by the agency; random and unannounced audits would go a long way toward ensuring honesty and soundness of business firms in general. These are suggestions only; every safeguard is vulnerable to tampering or outright defeat, but installing regulations (term limits is a good one) that will aim at the enhancement of free domestic trade, counter the forces of political corruption, while still overseeing proper professional licensing and maintaining fair and equal labor standards.
The task appears enormous but not at all impossible. The reconstruction of the United States in societal, political, and economic terms must be carried out rationally, in non-partisan co-operation. No longer should we tolerate leaders who lust after world domination but those instead who seek to place this nation in concert with the other nations of the world. Regulation of the economy is essential to these aims and must be a two-way street: regulation of the government as well as by the government.
Next: Banks and Credit
Saturday, February 7, 2009
Silver Lining - Government and the Economy
John Maynard Keynes, the famous British economist of the first half of the 20th Century developed an economic model for the industrial age. There are so many theories about what Keynes said by so-called Keynesian economists, most of them seriously wrong, that it behooves us to view the facts and develop a greater understanding of what it's all about. First and foremost: Keynesian economics does not replace the laissez faire model of Adam Smith; it refines it to cover a changing world of trade.
Adam Smith's model pertains to a largely agrarian society, the Keynesian model to an industrial society, and these differ from one another in a number of significant ways. An agrarian society with a small industrial base relies on unskilled and semi-skilled labor; a labor force that is highly flexible, mobile, and adaptable to changing conditions.
An industrial society relies on semi- and highly-skilled workers, specialists in fields that are not readily adaptable to other areas of the economy, and so is far less flexible, less mobile, and not readily adaptable to changing conditions. Keynes saw all this and prescribed a role for government to accommodate these differences: that of overseer and lender (investor) of last resort. The present system of government spending is an aberration of Keynesian principle. Keynes' model did not allow for a capitalist economy but one of free enterprise in which capital represents 10% of the total money supply. We have strayed far from that mark.
We might envision the role of government in economic affairs as being very much like a market maker on the trading floor of a stock exchange. This person deals with only one issue of stock and has an account containing x number of shares of this stock. Stocks are bought and sold by investors as a regular part of trading and, as is most often the case, there is some disparity between buyers and sellers; if an investor wishes to sell shares of the stock and there are not enough others willing to complete the trade, the market maker buys the excess. Conversely, if there are more buyers than sellers the market maker sells the difference from his own account. The role of the market maker is to ensure an orderly market. This is what Keynes had in mind as the role of government.
The relationship of government to economics is a precarious one to say the very least. A successful juncture of the social, legal, and economic realities of the society is a matter of critical importance and must clearly define the extent to which government should be involved in economic processes. The history of the United States over the past fifty years shows that the failure to implement proper safeguards against undue government interest has spawned corruption that has infested the halls of state like a metastasized cancer. Lobbying for special interest, pork barreling, and government spending have unleashed a Pandora's Box of evil that has all but destroyed the economy at the macro level. The current recession, bank failures, the excesses of unrestrained derivatives trading, all point to one glaring fact: that the government has utterly failed in its oversight of the economy. We are now involved in the Second American Revolution, the prime evidence of which fact is the growing number of states proclaiming sovereignty - other words it's a polite form of secession. This I believe is the prelude to the collapse of the Federal Government, a bankrupt monolith that is completely out of touch with the people it supposedly serves. They forgot that the people have the power and that power is going to demonstrate itself in no uncertain terms.
Governments collapse all the time. It happens when the interests of the government (those in power) diverge so drastically from the interests of the people they were elected to represent that the people take matters into their own hands. It will come in our nation when an informed public, fully cognizant of the crimes perpetrated in their name (undeclared resource wars, cover-ups of 911, the Franklin Scandal, the USS Cole, the influence of AIPAC (American Israeli Political Action Committee), rigged elections, and the rest of the rot, all of which have driven the United States into unparalleled and unsustainable debt, will say ENOUGH!
"It's the economy, stupid!" This mantra from the Clinton days has always been the main concern of the people. It has now become a major concern which can only result in the collapse of the government. Not a bad thing if we think about it. For one thing the Federal Reserve would lose its best customer and the national debt would be wiped out since it was incurred by the government acting without the consent of the people. The domestic economy would still operate pretty much the same as it does now without recourse to the events in Washington DC. Federal Reserve notes would still be used for buying and selling, people would still be making a living, and the agencies of government not directly connected with the political realities of the government would still function. At the end of the day we would still have to decide, as a free people, the role of government in our economic affairs.
One thing must be made quite clear: that the excesses of government are in large part due to the unregulated monetary policy that the secretive Federal Reserve, acting without the knowledge or consent of the people and their representatives, enjoyed as they brought the republic to the verge of collapse. Regulation of the economy is the key to economic recovery on the scale that we will demand.
Regulation in economic affairs has been seen as an affront to the free flow of trade in this country, something that totalitarian governments employ to control their societies. But it's not regulation itself that is to blame, rather it is the kind of regulation in force. Up till now it had been regulation by the government in areas that allowed for taxation without representation, unbridled spending, and horrendous debt. Such regulation as has been applied by government; the wrong kind, in the wrong places, and for the wrong reasons, has been a one way street: regulation by the government without regulation of the government.
Adam Smith's model pertains to a largely agrarian society, the Keynesian model to an industrial society, and these differ from one another in a number of significant ways. An agrarian society with a small industrial base relies on unskilled and semi-skilled labor; a labor force that is highly flexible, mobile, and adaptable to changing conditions.
An industrial society relies on semi- and highly-skilled workers, specialists in fields that are not readily adaptable to other areas of the economy, and so is far less flexible, less mobile, and not readily adaptable to changing conditions. Keynes saw all this and prescribed a role for government to accommodate these differences: that of overseer and lender (investor) of last resort. The present system of government spending is an aberration of Keynesian principle. Keynes' model did not allow for a capitalist economy but one of free enterprise in which capital represents 10% of the total money supply. We have strayed far from that mark.
We might envision the role of government in economic affairs as being very much like a market maker on the trading floor of a stock exchange. This person deals with only one issue of stock and has an account containing x number of shares of this stock. Stocks are bought and sold by investors as a regular part of trading and, as is most often the case, there is some disparity between buyers and sellers; if an investor wishes to sell shares of the stock and there are not enough others willing to complete the trade, the market maker buys the excess. Conversely, if there are more buyers than sellers the market maker sells the difference from his own account. The role of the market maker is to ensure an orderly market. This is what Keynes had in mind as the role of government.
The relationship of government to economics is a precarious one to say the very least. A successful juncture of the social, legal, and economic realities of the society is a matter of critical importance and must clearly define the extent to which government should be involved in economic processes. The history of the United States over the past fifty years shows that the failure to implement proper safeguards against undue government interest has spawned corruption that has infested the halls of state like a metastasized cancer. Lobbying for special interest, pork barreling, and government spending have unleashed a Pandora's Box of evil that has all but destroyed the economy at the macro level. The current recession, bank failures, the excesses of unrestrained derivatives trading, all point to one glaring fact: that the government has utterly failed in its oversight of the economy. We are now involved in the Second American Revolution, the prime evidence of which fact is the growing number of states proclaiming sovereignty - other words it's a polite form of secession. This I believe is the prelude to the collapse of the Federal Government, a bankrupt monolith that is completely out of touch with the people it supposedly serves. They forgot that the people have the power and that power is going to demonstrate itself in no uncertain terms.
Governments collapse all the time. It happens when the interests of the government (those in power) diverge so drastically from the interests of the people they were elected to represent that the people take matters into their own hands. It will come in our nation when an informed public, fully cognizant of the crimes perpetrated in their name (undeclared resource wars, cover-ups of 911, the Franklin Scandal, the USS Cole, the influence of AIPAC (American Israeli Political Action Committee), rigged elections, and the rest of the rot, all of which have driven the United States into unparalleled and unsustainable debt, will say ENOUGH!
"It's the economy, stupid!" This mantra from the Clinton days has always been the main concern of the people. It has now become a major concern which can only result in the collapse of the government. Not a bad thing if we think about it. For one thing the Federal Reserve would lose its best customer and the national debt would be wiped out since it was incurred by the government acting without the consent of the people. The domestic economy would still operate pretty much the same as it does now without recourse to the events in Washington DC. Federal Reserve notes would still be used for buying and selling, people would still be making a living, and the agencies of government not directly connected with the political realities of the government would still function. At the end of the day we would still have to decide, as a free people, the role of government in our economic affairs.
One thing must be made quite clear: that the excesses of government are in large part due to the unregulated monetary policy that the secretive Federal Reserve, acting without the knowledge or consent of the people and their representatives, enjoyed as they brought the republic to the verge of collapse. Regulation of the economy is the key to economic recovery on the scale that we will demand.
Regulation in economic affairs has been seen as an affront to the free flow of trade in this country, something that totalitarian governments employ to control their societies. But it's not regulation itself that is to blame, rather it is the kind of regulation in force. Up till now it had been regulation by the government in areas that allowed for taxation without representation, unbridled spending, and horrendous debt. Such regulation as has been applied by government; the wrong kind, in the wrong places, and for the wrong reasons, has been a one way street: regulation by the government without regulation of the government.
Friday, February 6, 2009
Silver Lining - Levelling Off
Up to this point we have considered the steps necessary to restore our economy to full potential. First and foremost we have to get rid of the Federal Reserve; this move will erase trillions in debt that the US government owes in interest to this patently unconstitutional central bank. Next we looked at changing the accounting methods that banks use to eliminate the multiplication of the electronic money they create. Say we did these things; now what? For starters, what shall we do with all the Federal Reserve Notes floating around - trillions of them?
Nothing. What they are called is unimportant; what they are is all that matters. If they are debt free dollars it doesn't matter what they are called as long as they are accepted in exchange for goods and services - and they always will be. The proponents of a stable currency will have to go slowly; sudden changes in monetary policy would be as disastrous in the short run as the present situation. I have $12,000 in savings; I am told that the present dollar is worth only four cents; does that mean my savings would become $480.00 in sound money? That is a big downside correction and would put me on the verge of poverty unless prices were drastically scaled back as well and across the board. That's too much to think about, so let's leave things the way they are - for now. If we can't scale back the money supply to increase the value of the dollar then the only alternative is to raise the value of the existing currency. If by now we have a debt free money supply and have cut out the multiplier that banks have cranked out, then we are halfway home with a relatively stable money supply and dramatically reduced budget deficits.
By this time the collection service for the defunct Federal Reserve System, the Internal Revenue Service would also have been abolished. The Sixteenth Amendment was never properly ratified, the present tax on wages is a violation of the Thirteenth Amendment, and is further unconstitutional as it represents and un-apportioned direct tax. No more income tax. This will leave more money in the hands of the people where it belongs, and as we all know people will either spend it or save it. Either one helps the economy: spenders stimulate production and savers provide capital by way of bank loans on those savings; each has a place in a vibrant economy.
Our primary objective should not be with sound money but rather with a stable currency. Soundness is a subjective view: people have differing ideas about what constitutes sound money, usually respecting a precious metal backing but also art collections, rare coins, or anything that retains value. That defines sound money but doesn't address the matter of distribution. A stable currency, on the other hand, is all about distribution: supply and demand, full employment, fair wages and prices, and a currency that enjoys and intrinsic value of its own without regard to any other standard. This leads to the question of a managed economy.
All economies are managed. The true questions are; who's managing it? How is it being managed, and who benefits from this management? For five hundred years the economies of Europe and the Americas have been managed by central bankers, the wealthy self-interested power brokers whose only aim was to enrich themselves. A stable currency in the hands of the people and governed by sound economic principles is the wave of the future. Government plays an important role in this transformation, and its participation must be made accountable to the people. A government that regulates business must itself be run like a business, not, like at present, a drunken sailor on shore leave after months at sea.
Next: The Role of Government.
Nothing. What they are called is unimportant; what they are is all that matters. If they are debt free dollars it doesn't matter what they are called as long as they are accepted in exchange for goods and services - and they always will be. The proponents of a stable currency will have to go slowly; sudden changes in monetary policy would be as disastrous in the short run as the present situation. I have $12,000 in savings; I am told that the present dollar is worth only four cents; does that mean my savings would become $480.00 in sound money? That is a big downside correction and would put me on the verge of poverty unless prices were drastically scaled back as well and across the board. That's too much to think about, so let's leave things the way they are - for now. If we can't scale back the money supply to increase the value of the dollar then the only alternative is to raise the value of the existing currency. If by now we have a debt free money supply and have cut out the multiplier that banks have cranked out, then we are halfway home with a relatively stable money supply and dramatically reduced budget deficits.
By this time the collection service for the defunct Federal Reserve System, the Internal Revenue Service would also have been abolished. The Sixteenth Amendment was never properly ratified, the present tax on wages is a violation of the Thirteenth Amendment, and is further unconstitutional as it represents and un-apportioned direct tax. No more income tax. This will leave more money in the hands of the people where it belongs, and as we all know people will either spend it or save it. Either one helps the economy: spenders stimulate production and savers provide capital by way of bank loans on those savings; each has a place in a vibrant economy.
Our primary objective should not be with sound money but rather with a stable currency. Soundness is a subjective view: people have differing ideas about what constitutes sound money, usually respecting a precious metal backing but also art collections, rare coins, or anything that retains value. That defines sound money but doesn't address the matter of distribution. A stable currency, on the other hand, is all about distribution: supply and demand, full employment, fair wages and prices, and a currency that enjoys and intrinsic value of its own without regard to any other standard. This leads to the question of a managed economy.
All economies are managed. The true questions are; who's managing it? How is it being managed, and who benefits from this management? For five hundred years the economies of Europe and the Americas have been managed by central bankers, the wealthy self-interested power brokers whose only aim was to enrich themselves. A stable currency in the hands of the people and governed by sound economic principles is the wave of the future. Government plays an important role in this transformation, and its participation must be made accountable to the people. A government that regulates business must itself be run like a business, not, like at present, a drunken sailor on shore leave after months at sea.
Next: The Role of Government.
Thursday, February 5, 2009
Silver Lining - Funny Money and Bad Accounting
As pointed out in the first essay of this series credit is the root cause of inflation; when anyone purchases goods on credit a demand for cash with which to repay the debt created. That means cash must be printed and put into circulation; when interest is figured in then more currency must be created. If this is true for individuals then it is disastrous when the US government borrows money at interest from the Federal Reserve. How much is this debt? Certainly many trillions of dollars, accumulated over the course of sixty years or more. The news is rife with reports of the soaring national debt and the burden it puts on tax payers. We are told that we can never repay all that money - and that is true, but it's not the last word.
There are two ways to satisfy a debt obligation; one is to pay the debt, the other to kill the creditor. Think of how many trillions of dollars would be written off if the US Congress abolished the Federal Reserve; something it has the constitutional power to do and to authorize the creation of debt-free currency. It is their mandate under the constitution to "print and coin money and to determine the value thereof." There is a growing movement to do just that - the people demand it and it will be done. But that is only part of the story. We must also deprive banks of the power to create money out of thin air.
When a bank makes a loan it creates money from nothing and counts it as an asset. If the money is deposited in another bank, that bank also counts the money as as asset. The same would be true for a third, fourth,or any additional banks. All the banks participating in this daisy chain of money creation are free to write loans based on these phony assets after deducting the three percent reserve requirement. And it all revolves around the fraudulent accounting methods the banks employ.
The old axiom states: You can't have your cake and eat it too. Well, that's what banks are getting away with - and it must be corrected. Here's how.
A bank is a business like any other. Let's say you're in the household appliance business; you build refrigerators. In any given month you will build 1,000 units and will need a motor for each one. The motors are $300.00 each, so you will pay $300,000 for them. At this point you have the motors but not the capital; make sense? But if you did business the way banks do you would have the money and the motors. Something is wrong with this picture.
In accounting Assets and Expenses increase by debiting; all other accounts increase by credit entries. Cash is an asset, therefore it would be credited by the purchase of the motors.The motors are a cost of doing business and therefore must be counted as an expense. But the motors are also and asset and must be counted as such. That would balance out the assets, but here wold be an expense debit hanging out in space that would have to be reconciled. This is done my crediting a Revenue account by the amount of the motor cost plus the share of the selling price represented by these components. This markup could then be entered as an Accounts Receivable entry. Let's say that the markup for the finished product is 20% and base our calculations on that. It would look like this;
Cash
Debit............. Credit
.................... $300,000
Inventory Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
Explanation: Your Assets have diminished by $240,000; the $300,000 you spent minus the $60,000 in Accounts Receivable. The capital outlay is balanced by the Expense entry and the Revenues account is balanced by the Accounts Receivable entry. We must bear in mind that this transaction pertains to only one component of the refrigerator and the similar entries would be made for all components, either in detail or collectively.
The banking model would work exactly the same way. The motor in the above model would be the loan instrument or contract held by the bank. The same numbers are use for convenience. The loan instrument is expensed as it is a cost of doing business. Like the motor in the first example, the bank acquires it in exchange for the money loaned and it is an expense item in the very same way.
Cash
Debit............. Credit
.................... $300,000
Loan Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
This accounting method doesn't prevent a bank from creating money but will halt the multiplication of these funds when deposited in other banks. Comparing the two models gives this relationship;
Refrigerator Manufacture.........................Bank
Motor.......................................................Loan Contract
Markup....................................................Interest
Offsetting the Loan Expense by an entry in the Revenues account is sound accounting practice as revenues are not receipts, but only the anticipation of receipts. When a payment is received the Expense Account is credited (reduced) and the Revenue Account is debited (reduced): both accounts reduced as their balances are lower. In the Assets group Cash would be debited(increased) by the full amount received and Accounts Receivable would be credited (reduced) by the amount of markup or interest. The imbalance as the result of surplus Cash would be offset by crediting a Capital account in Owner's Equity. The books would be out of balance as all accounting procedures are during accounting periods. Balance is restored at the end of the period when the Profit and Loss Statement is produced and the Owner's Equity accounts are adjusted.
It's a start.
There are two ways to satisfy a debt obligation; one is to pay the debt, the other to kill the creditor. Think of how many trillions of dollars would be written off if the US Congress abolished the Federal Reserve; something it has the constitutional power to do and to authorize the creation of debt-free currency. It is their mandate under the constitution to "print and coin money and to determine the value thereof." There is a growing movement to do just that - the people demand it and it will be done. But that is only part of the story. We must also deprive banks of the power to create money out of thin air.
When a bank makes a loan it creates money from nothing and counts it as an asset. If the money is deposited in another bank, that bank also counts the money as as asset. The same would be true for a third, fourth,or any additional banks. All the banks participating in this daisy chain of money creation are free to write loans based on these phony assets after deducting the three percent reserve requirement. And it all revolves around the fraudulent accounting methods the banks employ.
The old axiom states: You can't have your cake and eat it too. Well, that's what banks are getting away with - and it must be corrected. Here's how.
A bank is a business like any other. Let's say you're in the household appliance business; you build refrigerators. In any given month you will build 1,000 units and will need a motor for each one. The motors are $300.00 each, so you will pay $300,000 for them. At this point you have the motors but not the capital; make sense? But if you did business the way banks do you would have the money and the motors. Something is wrong with this picture.
In accounting Assets and Expenses increase by debiting; all other accounts increase by credit entries. Cash is an asset, therefore it would be credited by the purchase of the motors.The motors are a cost of doing business and therefore must be counted as an expense. But the motors are also and asset and must be counted as such. That would balance out the assets, but here wold be an expense debit hanging out in space that would have to be reconciled. This is done my crediting a Revenue account by the amount of the motor cost plus the share of the selling price represented by these components. This markup could then be entered as an Accounts Receivable entry. Let's say that the markup for the finished product is 20% and base our calculations on that. It would look like this;
Cash
Debit............. Credit
.................... $300,000
Inventory Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
Explanation: Your Assets have diminished by $240,000; the $300,000 you spent minus the $60,000 in Accounts Receivable. The capital outlay is balanced by the Expense entry and the Revenues account is balanced by the Accounts Receivable entry. We must bear in mind that this transaction pertains to only one component of the refrigerator and the similar entries would be made for all components, either in detail or collectively.
The banking model would work exactly the same way. The motor in the above model would be the loan instrument or contract held by the bank. The same numbers are use for convenience. The loan instrument is expensed as it is a cost of doing business. Like the motor in the first example, the bank acquires it in exchange for the money loaned and it is an expense item in the very same way.
Cash
Debit............. Credit
.................... $300,000
Loan Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
This accounting method doesn't prevent a bank from creating money but will halt the multiplication of these funds when deposited in other banks. Comparing the two models gives this relationship;
Refrigerator Manufacture.........................Bank
Motor.......................................................Loan Contract
Markup....................................................Interest
Offsetting the Loan Expense by an entry in the Revenues account is sound accounting practice as revenues are not receipts, but only the anticipation of receipts. When a payment is received the Expense Account is credited (reduced) and the Revenue Account is debited (reduced): both accounts reduced as their balances are lower. In the Assets group Cash would be debited(increased) by the full amount received and Accounts Receivable would be credited (reduced) by the amount of markup or interest. The imbalance as the result of surplus Cash would be offset by crediting a Capital account in Owner's Equity. The books would be out of balance as all accounting procedures are during accounting periods. Balance is restored at the end of the period when the Profit and Loss Statement is produced and the Owner's Equity accounts are adjusted.
It's a start.
Tuesday, February 3, 2009
Silver Lining - Inflation and Waste
Life is full of paradoxes: happenings or conditions that intuition tells us are bad but which turn out to be quite good. Inflation and waste are two of these dark clouds with silver linings, if you understand the philosophy. First, let us consider the root causes of inflation. Contrary to popular belief the Federal Reserve does not create inflation by printing fiat dollars; inflation is created by consumers, the Fed only feeds it.
The old axiom, Time is Money, is as true today as ever. The difference between paying cash for a purchase or using credit is simple: when you spend cash your resources are reduced immediately, when you use credit your resources are scheduled to be reduced at some time in the future - with more cash than a straightforward transaction requires: interest. Credit purchases create money out of thin air and provide that the cash must be available to satisfy the obligation when it comes due.
Banks issue credit, that's how they stay in business. But they would not be able to issue credit if people weren't buying things on time (as money). In a ideal capitalist system banks would lend money to be used as capital to finance business ventures that would generate revenues enough to produce profits and pay off the loans. In such circumstances money would fulfill its role as a medium of exchange and the economic system would be relatively stable.
Banks are debtors as well as creditors. When you deposit money in a bank you are lending it to them. For this they pay interest a few points lower than they charge for the loans they make. The difference, called the spread is how they generate revenues of their own. And banks are finicky; they like to have both principal and interest paid to them. This is where capitalism took a sharp left turn; why pay back all that money when you can get away with paying only the interest? There's a place where that can happen: Wall Street.
Stocks are loans to businesses that do not have to be repaid as long as investors hold onto them. Stocks earn interest in the form of dividends but it's still interest. Corporations then have an incentive to produce profits that will enhance the value of their stocks and keep their investors on board. Stock were once good investment vehicles: it was when P/E (Price/Earnings Ratios) were lower than they are at present. If a stock sells for $10.00 and pays a dividend of one dollar a year, the investment will be recouped in ten years. The P/E is ten; the reciprocal (E/P) is interest. Simple? But today P/E's of 40 or more are common, meaning that it takes much longer to break even . Stock prices are theoretical values, what investors believe the prospects of a business concern are expressed as a cash value. They base their estimates on data provided by the corporations themselves - an almost irresistible temptation to "cook" the books - think Enron, Global Crossing, Worldcom, and other, lesser players.
In 1905 J. P. Morgan formed US Steel and introduced the world to the possibilities of investing in business enterprises. After World War I the US economy really got rolling, most of today's major corporations were formed, investment banks and stock brokerages sprang up, and banks were left in the lurch. So what did they do? They started investment departments and invented mutual funds which they called Trusts. Banks started buying stocks and sold shares in the net value of their holdings. On October 24th, 1929, the Great Crash changed everything. Then, as now, the culprit was credit in the form of margin buying. Banks got into stocks and brokerages got into banking: lending money to investors to purchase stocks that they held as collateral under the illusion that the stocks represented real money. So what's the bottom line?
Simple. Today we have so much stuff that people want to buy and so many dollars to buy it with. Now we are in a recession which, in a word, is a business downturn. These businesses are not selling all the stuff they have on hand, and because they have been run so inefficiently and dishonestly for decades their chickens have come home to roost, and therein lies the paradox: What's bad for the macro-economy (Wall Street, banks, corporations) is great for the micro-economy (you and me). And people are waking up to the opportunities, not spending so lavishly and - get this - saving money! And we are slowly coming to realize the true value of money - what we say it is! That is, what we are willing to spend our dollars to buy. It's that simple. And Americans are spending less on frivolities and more on staples. If prices are too high we just don't buy as much or at all, and search for ways to compensate. The corporations, when they lay off hundreds or thousands of their employees profess that they are getting leaner and more efficient, but so are we!
There are movements afoot to return to hard currency, money based on gold and silver. This is very unlikely. Currency is the blood of commerce and there must be a sufficient supply of it to go around. Our population has doubled and then some since the dollar was backed by specie metal: there wouldn't be enough to back a currency in the amounts required to carry on business unless we adjusted price levels to what they were in 1945. In 1945 you could buy a two bedroom home for $8,000.00, a new car for $2,000.00; bus rides were a nickel (jitney), gasoline was twenty cents a gallon; everything was cheaper by present standards - a lot cheaper. So what do we do?
As long as we exchange goods and services our Monopoly money, i.e.Federal Reserve Notes, has value. The difference is that the value is not fixed, rather the value is indeterminate, constantly shifting upward or downward depending upon the market pressures that bear on the currency through the normal exchange of goods and services. In simple terms this means that when a buyer wants to buy more than the seller wants to sell, prices rise; when seller wants (or needs) to sell more thanthe buyer wants to buy, prices fall.
So what is the value of the dollar? Whatever WE say it is!
Period!
Next time: How to counteract inflation.
The old axiom, Time is Money, is as true today as ever. The difference between paying cash for a purchase or using credit is simple: when you spend cash your resources are reduced immediately, when you use credit your resources are scheduled to be reduced at some time in the future - with more cash than a straightforward transaction requires: interest. Credit purchases create money out of thin air and provide that the cash must be available to satisfy the obligation when it comes due.
Banks issue credit, that's how they stay in business. But they would not be able to issue credit if people weren't buying things on time (as money). In a ideal capitalist system banks would lend money to be used as capital to finance business ventures that would generate revenues enough to produce profits and pay off the loans. In such circumstances money would fulfill its role as a medium of exchange and the economic system would be relatively stable.
Banks are debtors as well as creditors. When you deposit money in a bank you are lending it to them. For this they pay interest a few points lower than they charge for the loans they make. The difference, called the spread is how they generate revenues of their own. And banks are finicky; they like to have both principal and interest paid to them. This is where capitalism took a sharp left turn; why pay back all that money when you can get away with paying only the interest? There's a place where that can happen: Wall Street.
Stocks are loans to businesses that do not have to be repaid as long as investors hold onto them. Stocks earn interest in the form of dividends but it's still interest. Corporations then have an incentive to produce profits that will enhance the value of their stocks and keep their investors on board. Stock were once good investment vehicles: it was when P/E (Price/Earnings Ratios) were lower than they are at present. If a stock sells for $10.00 and pays a dividend of one dollar a year, the investment will be recouped in ten years. The P/E is ten; the reciprocal (E/P) is interest. Simple? But today P/E's of 40 or more are common, meaning that it takes much longer to break even . Stock prices are theoretical values, what investors believe the prospects of a business concern are expressed as a cash value. They base their estimates on data provided by the corporations themselves - an almost irresistible temptation to "cook" the books - think Enron, Global Crossing, Worldcom, and other, lesser players.
In 1905 J. P. Morgan formed US Steel and introduced the world to the possibilities of investing in business enterprises. After World War I the US economy really got rolling, most of today's major corporations were formed, investment banks and stock brokerages sprang up, and banks were left in the lurch. So what did they do? They started investment departments and invented mutual funds which they called Trusts. Banks started buying stocks and sold shares in the net value of their holdings. On October 24th, 1929, the Great Crash changed everything. Then, as now, the culprit was credit in the form of margin buying. Banks got into stocks and brokerages got into banking: lending money to investors to purchase stocks that they held as collateral under the illusion that the stocks represented real money. So what's the bottom line?
Simple. Today we have so much stuff that people want to buy and so many dollars to buy it with. Now we are in a recession which, in a word, is a business downturn. These businesses are not selling all the stuff they have on hand, and because they have been run so inefficiently and dishonestly for decades their chickens have come home to roost, and therein lies the paradox: What's bad for the macro-economy (Wall Street, banks, corporations) is great for the micro-economy (you and me). And people are waking up to the opportunities, not spending so lavishly and - get this - saving money! And we are slowly coming to realize the true value of money - what we say it is! That is, what we are willing to spend our dollars to buy. It's that simple. And Americans are spending less on frivolities and more on staples. If prices are too high we just don't buy as much or at all, and search for ways to compensate. The corporations, when they lay off hundreds or thousands of their employees profess that they are getting leaner and more efficient, but so are we!
There are movements afoot to return to hard currency, money based on gold and silver. This is very unlikely. Currency is the blood of commerce and there must be a sufficient supply of it to go around. Our population has doubled and then some since the dollar was backed by specie metal: there wouldn't be enough to back a currency in the amounts required to carry on business unless we adjusted price levels to what they were in 1945. In 1945 you could buy a two bedroom home for $8,000.00, a new car for $2,000.00; bus rides were a nickel (jitney), gasoline was twenty cents a gallon; everything was cheaper by present standards - a lot cheaper. So what do we do?
As long as we exchange goods and services our Monopoly money, i.e.Federal Reserve Notes, has value. The difference is that the value is not fixed, rather the value is indeterminate, constantly shifting upward or downward depending upon the market pressures that bear on the currency through the normal exchange of goods and services. In simple terms this means that when a buyer wants to buy more than the seller wants to sell, prices rise; when seller wants (or needs) to sell more thanthe buyer wants to buy, prices fall.
So what is the value of the dollar? Whatever WE say it is!
Period!
Next time: How to counteract inflation.
Subscribe to:
Posts (Atom)
