Philosophical Musings

Philosophical Musings

Wednesday, January 15, 2014

Dilution of wealth

I've been trying to get a simple, clear explanation of fractional reserve banking & monetary policy for years. I could see the evils of inflation, & how it robs people of their life's savings, & i could see the dangers of fiat money, & the seemingly automatic degeneration of a culture or empire once that becomes the basis for the currency. But i haven't been able to get it boiled down to the essence.. the simple basics of what is actually happening, & tying it all together.

As usual, it is not the system that is necessarily flawed, but the way govt has worked it. Fractional reserve banking has been with us for centuries, & if managed in a responsible way, is a workable system for a nation to regulate it's currency & money supply. Here is the progression that i see, & how we have gotten to where we are. And of course, none of these things happened in a vacuum, either, but were part of the timeline of events in history, from the american revolution to the civil war, to the new century.

1. Creation of the federal reserve, 1913.
These periodic banking panics were symptomatic of a less dramatic but more regular problem:
the seasonal variation in the need for currency for transactions. The system of gold and legal
tender notes was not elastic, and it was subject to money “shortages” especially at harvest time.
In 1913, this problem was addressed by the creation of the Federal Reserve System (Fed).33 The
Fed was to remedy the situation in a two ways. First, it would provide a means by which banks
could borrow in times of stringency to satisfy their customers’ demand for cash. Second, it could
create a new form of money, Federal Reserve notes, which could be expanded or contracted in
quantity to respond to the need for more cash.
The creation of the Federal Reserve had little if any effect on the gold standard. The dollar was
still defined in terms of gold. Federal Reserve notes were redeemable in lawful money. The Fed
not only operated under the gold standard, but was charged with maintaining it, and kept a
percentage of gold cover for its notes. Gold still dictated the value of the dollar.
Basically, the fed was created to allow banks to extend themselves more in fractional reserve banking.. IOW, they were not required to have ALL the assets on hand to make loans, but would get guarantees from the fed to cover any runs on the banks. This took some risk away from the banks, & also seemed to insure the deposits & savings of the people. But, it created unintended consequences, which had to be addressed by more govt measures.

BTW, the creation of the fed was a private entity not run by elected govt officials, & not really accountable to the american people, congress, or other banks. This institution was given tremendous power, to control the nation's money supply. While it was still under the gold standard, it ability to manipulate the currency was limited.

2. FDR ends the gold standard, 1933. 
This was one of the greatest administrative overreaches in american history. He got congress to rubber stamp it.. which, btw, was controlled by the democrats. The senate was 59/36 & the house 313/117 in dem/pub ratio. Basically, the problem was runs on the banks, & a lack of confidence in the banking system. People were converting their liquid assets to gold, & the federal reserve bank was finding itself overextended, as the fractional reserve created bubble in the roaring 20s had burst. But instead of letting a correction happen, the govt intervened. Private gold ownership was outlawed. People had to conduct all transactions with federal reserve notes. It was all done under the guise of 'save the economy, save the children!' It provided a temporary solution to the failing banks. Socialism was growing in the world, as was a sense of entitlement to basic needs.

The problems of fractional reserve banking became obvious in the roaring 20s. The stock market was booming, & margin buys were common. That is essentially buying stock on credit.. you have money to buy 10 shares, but can buy 100 on margin. This is fine as long as stock keep rising. But if they fall, the bill comes due for the rest of the stock purchase, which has not decreased in value so selling it does not provide the money to pay the original cost. Eventually, all liquidity is lost, & bankruptcy ensues, or jumping out of the wall street windows.

But this was the start of the dilution process. Margin buying was not 'creating' anything, or actual production, but was 'fake' wealth.. an illusion of increase, based only on monetary policy & inflation. This boom in the money supply, created by the fed, was not justified by actual, physical production in the nation. The economy was booming in the postwar 20s.. farmers were growing & expanding, with production increasing exponentially with the appearance of the internal combustion engine.. tractors could do the work of many mules & horses, with one man driving it. Building was booming.. houses, factories, economic growth was exploding. But much of it was on margin.. credit. When the bubble burst, it took many people down with it.

The statist cheerleaders could not face the prospect of taking blame for their own govt meddling, so they blamed gold. It was a roadblock to continued economic expansion. So the solution? Outlaw gold, & force usage of the declared (fiat) money.

This is also when people began to get rich from money shuffling.. sure, there have always been money lenders, who get rich off of usury, but this was different. It was cutting the real wealth with a bulky filler.. printing more money with the same basis, & allowing middle men to skim off for their own enrichment. This was different than the typical money lender, charging interest for the loan. This was not REAL value, but something 'created' by the fed, then skimmed off by multiple middle men.. money shufflers who don't produce anything. They are leeches in the system, & the new structure was causing an explosion of growth. But the actual production was not growing at the rate of the money supply, so the producers were not able to support all of these middle men, each diluting the original value of the product. It is drug dealer dynamics.. a ponzi scheme system of monetary supply.

This is getting too long, so i'll quit for now.. maybe later i'll finish up with the rest of the progression, from ww2 to nixon, skyrocketing inflation, opec, & the growing explosion of the money supply, along with the dwindling production. Some people already know this, as it is nothing new. But most people do not grasp the significance of the financial meddlings by the govt. 

What it all boils down to is confiscation of wealth.. REDISTRIBUTION from the producers to leeches, via dilution of the value of the currency. The leeches early on were the money shufflers.. bankers, wall street tycoons, etc, & the progressives want to 'share the wealth' with a bunch more leeches in the welfare state. But it is all done on the backs of the producers, & is unsustainable.

I am myself persuaded, on the basis of extensive study of the historical evidence, that... the severity of each of the contractions - 1920-21, 1929-33, and 1937-38 - is directly attributable to acts of commission and omission by the Reserve authorities and would not have occurred under earlier monetary and banking arrangements. ~Milton Friedman

The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. ... Roosevelt's policies were very destructive. Roosevelt's policies made the depression longer and worse than it otherwise would have been. ~Milton Friedman

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold.Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard. ~Alan Greenspan

With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people. ~Friedrich August von Hayek

Tuesday, January 14, 2014

Wealth creation by dilution

Probably the most basic concept about currency, wealth & money is also the most misunderstood. There is this notion that wealth is a pie, managed by the govt. Poor people get a small slice of the pie, while greedy rich people take big slices. The origination of that pie is not considered.

Wealth begins when a crop is harvested, a building is built, or a product manufactured. There is something of value, which people want. Without the demand, the item has no value, so the beginning of wealth starts with demand. All of the wealth of a nation depends on actual creation of something from raw materials, or the production of those raw materials. 

Production is the basis for all wealth & value.

But what about Quantitative Easing? Can't the govt just print more money & provide the currency that fuels the economy? No. All that does is DILUTE the real product of a nation. It is drug dealer dynamics. A drug dealer gets some drugs & cuts it with powdered sugar or some other cheap diluting product, to make it go further, but he does not 'create' more drugs. It is like a distiller producing a barrel of whiskey, then diluting it with water to make 5 barrels. This is what QEs do. They dump more money into the system. It is shuffled around, skimmed off by bankers, politicians & their cronies, & finally trickling down to the people as borrowed money. But it is not based on production. It has NO basis for its creation. It is fundamentally destructive to the economy, not productive.

So what does this dilution accomplish?

1. It enriches the money shufflers. An unintended consequence of QEs or any fiat money scheme is those who originate it profit the most. Instead of the PRODUCERS getting the bulk of the increase from their product, the money shufflers take the lion's share through dilution. They are like the drug dealers, cutting the original drug with bulky filler.

2. It causes inflation. The currency is not based on something of value, but simply declared.

3. It causes income inequality. The money shufflers: bankers, politicians, govt, financial sector manipulators. They get the bulk of the value from the nation's production, so they become rich off of other people's labor.

What is most ironic is that those who oppose income inequality the most, support those who provide the setting for it to happen! Leftists & occupy wall street types are indignant over obscene profits from the banks, yet it is their political cronies that are making this happen. The politicians, via the federal reserve, are responsible for all the QEs, the complex derivatives & secret financial wranglings that dilute the currency & stifle the economy. They trumpet redistribution, but they are already redistributing from the producers to the NON productive money shufflers! Then, they want to INCREASE the dilution by giving away more money to other non producers in the society via the welfare state. They are merely cutting more bulky filler into an already diluted drug. That is why the value or 'potency' of our currency continues to decline. All it does is burn & not provide the high. But like good marketing drug dealers, they tell us what 'good stuff' this is.

This is why the current financial system is doomed to fail. It is based on drug dealer dynamics.. ponzi scheme increases. It is NOT based on real production, nor does it reward it. Real production is discouraged, while money shuffling is rewarded. That is why people pursue MBAs instead of farming... politics instead of construction.. welfare instead of working. Hard, productive work is not rewarded, but shuffling & cons are.

A currency, to be valid, should be based on something of value. That is the difference between 'hard' & 'fiat' currencies. Fiat currencies ALWAYS fail. They operate by dilution. They are currency by theft. They offer illusion in exchange for the created product. But eventually, the actual producers see through the scam & no longer accept the illusion. Then, you get weimar republic inflation & devaluing. The american dollar is allegedly based on our gdp.. gross domestic product. Now this sounds good, IF the currency is actually based on our production. But that is not the case. The GDP is a propaganda construct. It does NOT measure actual production, but money shuffling! So they use the borrowing, shuffling, & skimming of money in the financial sectors to measure the nation's production. It is all paper based numbers with no reflection of reality or actual production.

This seems like an obvious, common sense observation of reality. Yet when we actually propose & debate monetary policy, we think it grows on trees. We want to pass it out like candy. But there is no value without production. Unless a crop is produced, land improved, a product manufactured , or the raw materials mined or acquired for any of these things, all other increases come from dilution.

The solution is to stop the flood of fiat money. That will end the dilution, limit the enrichment from the money shufflers, & give more of the value to those who actually work & produce the product. We need accountability from the fed, & a constant audit of their actions. It is the responsibility of our elected officials to provide a stable currency, which they have not done for over a century. The current system is theft from the producers by dilution. It weakens the currency, discourages production, & breeds corruption & non-productivity. The currency should be tied to actual production of food & raw materials, like lumber, oil, steel, etc. If that could happen, the currency would stabilize, & those actually producing the products would gain the most, & there would be less money printed for the shufflers to skim from. But if we continue along the current path, history shows the outcome: Economic collapse.

Saturday, January 11, 2014

The Question for the Ages..

"There has never been but one question in all civilization-how to keep a few men from saying to many men: You work and earn bread and we will eat it." ~Abraham Lincoln

All of societal interaction.. governance, or anything regarding the human collective, seems to boil down to this Question for the Ages. Human beings seem to be divided between 2 basic philosophies or ideals:

1. Self sufficiency & independence.
2. Entitlement & dependence.

Those who are independent want freedom to reap the harvest of their own labors. Those who want dependency are willing to put up with less freedom, if they are taken care of. The basic philosophy is there, even if it is not clearly defined or stated. Left wing ideology is one of dependence. They look to someone else to provide their basic needs. 

The root of the ideology can be seen by the choices made in our lives. Those who look for easy money in the financial or govt sectors are different than those who pursue productive labor. A farmer creates a crop, useful to people everywhere, & is arguably the most important single industry of mankind. Bankers or govt workers look for others to support them, & purport to offer a useful service for those who are producing.

Our basic needs are few:
1. Sustenance (Food, water)
2. Protection (clothing, shelter, personal defense)

Anything beyond these things are luxuries for an affluent society. The independent work to provide these things for themselves & their families. The dependent look to the producers to provide it for them. 

Throughout the ages, almost every system of human governance was based on the collective working & providing for the governing elite. It did not matter if the system was based on the divine right of kings, or the might of a military dictator. The state used it's power to take from the producing workers & use it for themselves. Some of them used foreign conquest to placate the masses, & bring plunder home for them to share. But until 1776, every system of human governance centered around the many working to support the few.

The american system was a brief interlude in that pattern. Here, the governing few.. regular citizens, not an empowered elite.. were supposed to use their granted powers to protect the individual's rights.. to provide a society where the individual could work & earn a large share from their labors, instead of it being taken by the ruling elite. For nearly 200 yrs, that was the system in place, until the govt grew to the all consuming monster we see today. The granted powers are seen as entitled powers, & the rulers have conned us into working to support them.

For a society to prosper, those producing MUST outnumber the dependents. The expenses of society: govt, infrastructure, fire & police protection, any social services provided by the collective; if these are a small percentage of the income of the society, it can prosper. But, if these dependents grow & the percentage they take increases, eventually the producers cannot produce enough for everyone. A farmer cannot grow enough food for a growing population, if more people do not go into farming. A society cannot support a huge standing army or police force, if they do not produce enough to pay for them.

Probably the most misunderstood concept in the nation is that of production & dependency. Liberal ideology thinks money can be printed, or that there is an unlimited source of food, clothing, shelter, & other commodities to draw from. They think it is everyone's RIGHT to have these commodities. But how is it anyone's right to take what another has worked for? All they are doing is promoting the same scam that has been going on for time immemorial: "You work and earn bread and we will eat it."

That is why the growing dependency in america cannot continue. It is already beyond our ability to provide. The governing elite have just borrowed from future generations to keep the scam running, like a typical pyramid scheme. They are building a bubble with currency, conjuring it from thin air, rather than real production. This is unsustainable, & will eventually crash.

What is the solution? How can we avoid the repetition of history?
1. Demand fiscal responsibility from the elected officials. A balanced budget is essential.
2. Encourage people to pursue productive careers. Farming, manufacturing, building.. these are the foundation that ALL other sectors depend on. They MUST be the preferred, elevated career choices, rather than easy dependency money.
3. Value & esteem production, instead of entertainment & elitism. Rebel against the system, & stop giving the fruits of our labors to unproductive dependents. Clowns, minstrels, & court jesters should not be the richest people in a society.
4. Revolt. Overthrow those who are perverting the constitution.

It will take a change in the values of society, if we are to change the direction we are heading. If we continue the current path, there will be financial collapse first, then the rest of the institutions will follow, until the military force is the only one left.