The Communist Manifesto's Successful Implementation in the USA

The Communist Manifesto states that ten things need to occur in order to transform a society from capitalism to communism. Let's see how the USA scores. By my calculations, communism wins a resounding victory.

This list of Communist Manifesto planks was copied from Wikipedia. The exact same text can also be found in other sources.

1. Abolition of property in land and application of all rents of land to public purposes.

Anyone who owns land pays property tax. For example, with a property tax rate of 5%, you pay 5% of your property's value each year to the government. If you don't pay property taxes, your land is confiscated. Effectively, a person doesn't own their land; it's a perpetual transferable lease from the government. Owning something means you don't have to pay anything for the continuing privilege of ownership. By this standard, nobody in the USA owns land. All land is owned by the government and rent is paid.

Score: Communism 1, free market 0

2. A heavy progressive or graduated income tax.

Need I say more?

Score: Communism 2, free market 0

3. Abolition of all right of inheritance.

Estate taxes are pretty hefty. The Bush tax cuts eliminate the income tax in 2010, although it reverts to the old law in 2011. People with tremendous wealth can use trusts to dodge estate taxes. However, they're paying an effective tax to their accountants and estate planning lawyers; for large estates, estate planning services take a percent of assets. Estate taxes hit hardest on families with a business valued in the $1M-$10M range. Their business may not have the cashflow to pay the estate taxes and they may be forced to sell. I'll score this as half a point for each side.

Score: Communism 2.5, free market 0.5

4. Confiscation of the property of all emigrants and rebels.

Are you kidding me? There are many laws making it very easy for the government to confiscate the property of "terrorists" and other criminals. The law makes it very easy for the government to seize assets of people accused of tax evasion. With a globalized economy, you can't really transfer wealth outside of the country. Where else could it go? All countries have the same bad rules for capital ownership, with the USA having slightly better rules!

Score: Communism 3.5, free market 0.5

5. Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

This is easy: The Federal Reserve.

Score: Communism 4.5, free market 0.5

6. Centralization of the means of communication and transport in the hands of the State.

There is pretty heavy government regulation of transportation and communication. Most telecommunication companies are big corporations that are heavily regulated. Centralized control in a few corporations is effectively the same as State control. A government-granted monopoly with heavy regulation is the same as State control. Televisions and newspapers are concentrated in a few corporations. However, the Internet is one noteworthy exception that is at risk for being crushed soon, if "network neutrality" is stopped. The free market manages another half-point here, due to the Internet. Will it be able to hang onto this half point? Will the free market score again?

Score: Communism 5, free market 1

7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.

The farming industry is heavily regulated and government subsidized. Most industrial farms follow the practices set out by a few agricultural companies (i.e. Monsanto). Factories are hardly even built in the USA. Besides, concentration of manufacturing power in a few big corporations is effectively the same as State control. Maybe the free market should get partial credit here, but I'm going to give Communism a full point.

Score: Communism 6, free market 1

8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.

I think that "industrial armies" could be interpreted as huge corporate control of factories and farms. The food industry is certainly heavily regulated.

"Equal liability of all to labour". I'm not sure what that means. I think it means that most people are employees/wage slaves, rather than entrepreneurs. There are so many barriers to starting a small business that most people are effectively forced to work as employees. The average person is a laborer, not a capital owner. Even a small business owner is effectively a government employee, because of the confiscatory effect of income taxes.

Score: Communism 7, free market 1

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

Agriculture is mostly industrialized now. Small farmers are mostly squeezed out or marginalized. The increasing power and regulation of the Federal government means that the ability of cities to make their own laws is reduced. For example, people in California want to legalize marijuana but are forbidden by the Federal enforcement of drug laws.

Score: Communism 8, free market 1

10. Free education for all children in public schools. Abolition of children's factory labour in its present form. Combination of education with industrial production.

This is another huge win for Communism. There are huge problems with the current implementation of schools, enough for another article. Even though there are private schools, most of them follow the model set by public schools. They are better in quality, but suffer the same structural defect.

The structural defect in schools is that they teach loss-avoidance rather than value-creation. You start with a grade of 100% and are punished for each mistake. Perfection is required to avoid punishment. There is no benefit to learning the material after the test; you just move on to the next subject. If a student sees his mistakes after a test and correctly relearns the material, there is no reward.

Schools are designed to created obedient workers. Their "loss-avoidance" training means that they are reluctant to risk any sort of job loss, making them obedient workers. They are reluctant to risk money in the stock market, and invest in savings accounts or bonds where inflation erodes their savings.

Score: Communism 9, free market 1

By my scoring, the Communist Manifesto has been nearly completely implemented in the USA. The free market only scored two half-points. It scored a half-point for the ability of wealthy people to dodge estate taxes. It scored another half point for the Internet. The half-point that the free market won for the Internet is at risk, if telecommunications companies have their way and abolish network neutrality.

Is there a free market out there anywhere?

Ironically, as I was about to post this, the exact same topic was discussed on the "Ron Paul Forum". http://www.ronpaulforums.com/showthread.php?t=4841

That post includes some points I missed, so I'm going to copy and reproduce that post here. I'm copying the post rather than merely providing a link, because the discussion forum may disappear after Ron Paul's campaign ends. This post appears to be itself a direct copy of http://www.criminalgovernment.com/docs/planks.html.

10 Planks of Communism happening in America?

---

TEN PLANKS OF THE COMMUNIST MANIFESTO

Could this be happening in America? If so, how?

Our "elected representatives" have passed laws implementing these anti-freedom concepts. The communists have achieved a de facto FEDERAL SOCIALIST GOVERNMENT in America.

In 1848 Karl Marx and Frederick Engels wrote a book outlining a political ideology, titled "The Communist Manifesto". Marxism's basic theme is that the proletariat (the "exploited" working class of a capitalistic society) will suffer from alienation and will rise up against the "bourgeoisie" (the middle class) and overthrow the system of "capitalism." After a brief period of rule by "the dictatorship of the proletariat" the classless society of communism would emerge. In his Manifesto Marx described the following ten steps as necessary steps to be taken to destroy a free enterprise society!! Notice how many of these conditions, foreign to the principles that America was founded upon, have now, in 1997, been realized by the concerted efforts of socialist activists? Remember, government interference in your daily life and business is intrusion and deprivation of our liberties!

First Plank: Abolition of property in land and the application of all rents of land to public purposes.

(Zoning - Model ordinances proposed by Secretary of Commerce Herbert Hoover widely adopted. Supreme Court ruled "zoning" to be "constitutional" in 1921. Private owners of property required to get permission from government relative to the use of their property. Federally owned lands are leased for grazing, mining, timber usages, the fees being paid into the U.S. Treasury.)

Second Plank: A heavy progressive or graduated income tax.

(Corporate Tax Act of 1909. The 16th Amendment, allegedly ratified in 1913. The Revenue Act of 1913, section 2, Income Tax. These laws have been purposely misapplied against American citizens to this day.)

Third Plank: Abolition of all rights of inheritance.

(Partially accomplished by enactment of various state and federal "estate tax" laws taxing the "privilege" of transfering property after death and gift before death.)

Fourth Plank: CONFISCATION OF THE PROPERTY OF ALL EMIGRANTS AND REBELS.

(The confiscation of property and persecution of those critical - "rebels" - of government policies and actions, frequently accomplished by prosecuting them in a courtroom drama on charges of violations of non-existing administrative or regulatory laws.)

Fifth Plank: Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

(The Federal Reserve Bank, 1913- -the system of privately-owned Federal Reserve banks which maintain a monopoly on the valueless debt "money" in circulation.)

Sixth Plank: Centralization of the means of communications and transportation in the hands of the State.

(Federal Radio Commission, 1927; Federal Communications Commission, 1934; Air Commerce Act of 1926; Civil Aeronautics Act of 1938; Federal Aviation Agency, 1958; becoming part of the Department of Transportation in 1966; Federal Highway Act of 1916 (federal funds made available to States for highway construction); Interstate Highway System, 1944 (funding began 1956); Interstate Commerce Commission given authority by Congress to regulate trucking and carriers on inland waterways, 1935-40; Department of Transportation, 1966.)

Seventh Plank: Extension of factories and instruments of production owned by the State, the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan.

(Department of Agriculture, 1862; Agriculture Adjustment Act of 1933 -- farmers will receive government aid if and only if they relinquish control of farming activities; Tennessee Valley Authority, 1933 with the Hoover Dam completed in 1936.)

Eighth Plank: Equal liability of all to labor. Establishment of industrial armies especially for agriculture.

(First labor unions, known as federations, appeared in 1820. National Labor Union established 1866. American Federation of Labor established 1886. Interstate Commerce Act of 1887 placed railways under federal regulation. Department of Labor, 1913. Labor-management negotiations sanctioned under Railway Labor Act of 1926. Civil Works Administration, 1933. National Labor Relations Act of 1935, stated purpose to free inter-state commerce from disruptive strikes by eliminating the cause of the strike. Works Progress Administration 1935. Fair Labor Standards Act of 1938, mandated 40-hour work week and time-and-a-half for overtime, set "minimum wage" scale. Civil Rights Act of 1964, effectively the equal liability of all to labor.)

Ninth Plank: Combination of agriculture with manufacturing industries, gradual abolition of the distinction between town and country, by a more equitable distribution of population over the country.

(Food processing companies, with the co-operation of the Farmers Home Administration foreclosures, are buying up farms and creating "conglomerates.")

Tenth Plank: Free education for all children in public schools. Abolition of children's factory labor in its present form. Combination of education with industrial production.

(Gradual shift from private education to publicly funded began in the Northern States, early 1800's. 1887: federal money (unconstitutionally) began funding specialized education. Smith-Lever Act of 1914, vocational education; Smith-Hughes Act of 1917 and other relief acts of the 1930's. Federal school lunch program of 1935; National School Lunch Act of 1946. National Defense Education Act of 1958, a reaction to Russia's Sputnik satellite demonstration, provided grants to education's specialties. Federal school aid law passed, 1965, greatly enlarged federal role in education, "head-start" programs, textbooks, library books.)

http://www.criminalgovernment.com/docs/planks.html

(Research source: Encyclopedia Britannica.)

The Prohibition Joke

I read this joke somewhere and found it pretty funny.

Two men are walking down the street. One has a gold coin in his pocket and the other has a bottle of whiskey. In 1932, the man with the gold coin is an upstanding citizen and the other is a criminal. A year later, the man with the gold coin is a criminal and the man with the whiskey is an upstanding citizen.

Background: In 1933, President Roosevelt outlawed gold ownership by private citizens. They were ordered to turn in their gold for paper money. The US was still nominally on a gold standard, but US citizens couldn't redeem their money for gold. Only international banks could redeem dollars for gold. President Roosevelt had to outlaw private ownership of gold. Otherwise, people would have started using gold as money and abandoned worthless paper money.

Also in 1933, Prohibition ended and it was legal to own alcohol again.

In 2007, at least it's legal to own both the gold coin and the whiskey, although the gold coin no longer has status as legal money.

The True Purpose of the Income Tax

The fact that the income tax and the Federal Reserve were created at the same time is no coincidence. Each needs the other to survive.

The income tax serves three purposes.

First, the Federal Reserve Act stripped the US government of its seignorage privilege. The government could not directly print money itself. If the government was allowed to directly print money itself, that would cause interest rates to rise, which was contrary to the Federal Reserve's cartel goal of keeping interest rates artificially low. The government needed an alternative means to fund its activities.

Second, the income tax prevents people living in the US from boycotting dollars. Suppose you realized the dollar was inherently worthless and returned to a barter system. In the eyes of the IRS, you owe income tax on the dollar equivalent of your barter transactions. Even if you wanted to live without using dollars, you would need to acquire dollars to pay income taxes. The income tax creates a certain demand for dollars.

Third, the income tax effectively converts all US citizens into government slaves. Income taxes force me to turn over 40% of everything I produce to the government. I'm including the 15% Social Security plus Medicare taxes, in addition to a 25% regular income tax rate. With a 40% taxation rate, I'm effectively working for the government 5 months per year. If people were forced to directly work for the government 5 months per year, there would be massive rioting. When it happens indirectly via payroll deductions, people don't notice as much. Could you imagine what would happen if everyone had to directly write a check for $10k to the government each year? That would make taxes a lot more noticeable. I have limited freedom to choose my own job, but that just means that the government figured out the free market can allocate my labor more efficiently than a slave system can. I can structure my investments to minimize taxes, but why should taxes affect my investment decisions?

Also, the income tax has allowed the Federal government to overrule states' sovereignty. The money the Federal government steals via the income tax is returned to the states, but only if they pass laws that the Federal government likes. Years ago, the Federal government said that states had to pass a 55 mph speed limit law, or they would not receive any Federal highway money. Because of high Federal income taxes, the states wouldn't have enough money to pay for roads without this money. The Federal government denies states education money unless their schools comply with Federal guidelines. The Federal government denies states welfare money unless their welfare program follows Federal guidelines. The high income taxes means that there isn't enough money leftover to pay for state services if they don't follow the Federal government's guidelines. For example, the Federal government could say that states receive no Federal money at all unless they comply with the REAL ID act. The practice of excessive taxation and withholding money is abusive. This effectively eliminates state sovereignty.

That's why the only tax the Constitution originally allowed was a fixed tax per person. That's much fairer than the current system. Income taxes ensure a diminished reward for increased work and increased productivity. Even though the income tax is progressive, income taxes hurt the average productive person more than they hurt wealthy people. First, most wealthy people can shield a lot of their income via trusts. Second, wealthy people can lobby for government perks; these perks are worth more than the income taxes they pay. Third, when a corporation has to pay income taxes, it just passes those taxes along as higher prices. Progressive income taxes give the illusion of taxes being paid primarily by the wealthy, but a lot of those taxes just get passed back to the average person.

People and corporations go to huge efforts to avoid paying income taxes. Frequently, the costs paid for tax avoidance and tax compliance are greater than the actual tax collected. The income tax is great for accountants and tax lawyers, but it's a huge drain on the economy.

Even though the dollar is intrinsically worthless, it's given value by the income tax. The dollar is backed by the US government's willingness to use violence against its own citizens to collect the income tax. The dollar is backed by the US government's willingness to invade people's privacy to make sure all economic activity is reported and taxed.

Even though the dollar is intrinsically worthless, the income tax makes the dollar effectively backed by all economic activity in the US.

Think of a dollar as a receipt that says "The bearer may conduct $3 of economic activity." (assuming a 33% tax rate). The IRS is the collection mechanism for these receipts. These receipts have value because they are needed in order to conduct any business at all.

That is why some of the IRS' most egregious violations were crackdowns on private communities that have returned to a barter system.

All other countries have a similar monetary system. It is easier to conduct economic activity in the US than most other countries. That's why a receipt that says "bearer may conduct economic activity in the US" is more valuable than a receipt that says "bearer may conduct economic activity in China". That's the only reason why dollars are considered more desirable than other currency.

You can't avoid the income tax by moving, because every country has a tax system with a similar basis. At one time, the US had a huge advantage over other countries, because it had a fair tax system and monetary system; the only legal tax was a fixed amount per person. That advantage has been largely eroded.

The income tax effectively turns everyone into government slaves, because you have to spend 40% or more of your time directly working for the government. If the government demanded that you work directly for them for 40% of the time, there would be riots everywhere. The income tax makes the effective outcome the same.

That's why some politicians who say "reinstate the draft" are being impractical. Right now, my annual income taxes are almost enough to pay one soldier's salary. I give up 40% of my income because I have no practical alternative. When the government tries to force people to directly work in the military, that theft is too obvious and there'd be protests. Besides, economic conscription (the current system) is much more effective than a draft. Economic conscription means that a certain number of people are so poor that their best career alternative is joining the military.

There are some tax protesters who argue "The income tax is immoral" or "The income tax is illegal" or "The income tax is unconstitutional". However, the IRS has more resources than you and can hassle you. If the IRS takes you to court, there is no guarantee you would get a jury that understood the complicated issues. In fact, most people who serve on jury duty are government employees, people who directly benefit from the income tax. You would even be denied the opportunity to explain the issues to the jury. The bottom line is that it isn't practical to try and avoid the IRS (unless you're really clever). The only solution is to try and get the laws changed.

On the other hand, the odds of the income tax law changing are zero. Maybe the correct approach is for a bunch of people to get together and be really clever about doing productive work while avoiding taxes and regulations.

The True Purpose of the Federal Reserve

Before the Federal Reserve was founded, banks were fiercely competing with each other. Each tried to offer the highest rate to attract deposits and tried to offer the lowest rate on loans. Interest rates were determined by the market. At that time, money and gold were equivalent, so there was a fixed supply of actual money. When a bank failed, customers lost their deposits.

There was a problem that concerned the large international banks. Large pools of private capital were forming, outside the control of the international banks. These private capital pools meant that it was possible to start a business that the international banks could not control. It was necessary to corrupt the financial system to destroy these private equity pools.

The banks got together and decided to fix prices. However, rather than doing it informally, where there would be a temptation to cheat, they decided to get their price-fixing mechanism coded into law. The Federal Reserve keeps interest rates artificially low compared to where they would be in a free market, where interest rates are allowed to float. The Federal Reserve has access to an unlimited amount of dollars and bonds, so it can manipulate the market at will.

By getting the price fixing mechanism coded into law, small banks who weren't in on the scam would be forced to follow the cartel-fixed rate, rather than the market rate. Most of the small banks who weren't in on the scam were forced into bankruptcy during the Great Depression.

Artificially low interest rates inflate the demand for loans. If a business has a choice between financing growth from earnings or financing growth from a loan, the loan is the more attractive option. Because loans are priced artificially low, many extra loans are issued, which is good for the financial industry. Artificially low interest rates destroyed the private equity pools, because financing via debt was now guaranteed to be better than financing via equity.

The Federal Reserve's practice of fixing interest rates at an artificially low level is the primary reason for the Discounted Cashflow Paradox.

Government-subsidized artificially low interest rates are great for the financial industry. Similarly, government-subsidized $10/barrel oil prices would be great for the oil industry. Either way, the average person would be paying for them through taxes or inflation. A government-subsidized $10/barrel oil price would encourage people to consume all the oil they could. Similarly, artificially low interest rates encourage people and businesses to take out all the loans they can.

The government ceded its money printing authority to the Federal Reserve. This was functionally equivalent to ceding sovereignty. The government no longer directly issues new money. It just borrows it from the Federal Reserve. In theory, the government still could directly print money without going through the Federal Reserve, but the last President who tried that was JFK and we know what happened to him. The reason it was necessary to strip the government of its money issuing authority was that otherwise the government could frustrate the Federal Reserve's interest-fixing attempts by issuing money.

Due to fractional reserve banking, any new money directly printed by the government would get amplified by the reserve ratio, such as 10x. In other words, if the government directly printed and spent $1 trillion, this would lead to an increase of $10 trillion in the money supply, due to the effect of fractional reserve banking. Under a fractional reserve banking system, government bonds don't count as reserves. When the government has deficit spending via a bond, it doesn't have the multiplicative money effect. That's why the government has to issue bonds rather than directly printing and spending money.

Normally, the Federal Reserve prints money, buys government bonds, and sells them back to the government at maturity, canceling out the money it just printed. Doing this, the Federal Reserve makes a guaranteed riskless profit. If the government directly printed and spent its own money, the Federal Reserve would have to sell bonds to soak up the extra money, to contain inflation. The Federal Reserve can't make a guaranteed riskless profit this way. Actually, it would lose money. That's why the government has to be barred from directly printing and spending money.

If the government issued its own money independently of the Federal Reserve, it would be like stepping on the accelerator and the gas pedal at the same time. The Federal Reserve would be acting to keep interest rates artificially low, while the government would be driving up interest rates when it was printing and spending new money.

Another goal of the Federal Reserve system was to artificially restrict the supply of money, which the Federal Reserve had a monopoly on generating. Due to the Compound Interest Paradox, each of the Federal Reserve's actions have a net effect of decreasing the total amount of money in circulation. The Federal Reserve can temporarily increase the money supply by offering more loans (i.e. lowering interest rates), but all that new money has to come back eventually, plus more, as loans are repaid. This naturally leads to boom/bust cycles. There's a boom as rates are lowered to increase the money supply, followed by a bust as the money supply naturally contracts as the loans are repaid. During the bust cycle, money is tight. Banks are able to foreclose on real assets, confiscating real assets that they only "earned" because of money they created artificially through debt. The insiders of the Federal Reserve system know in advance when credit is going to be tightened and the bust cycle will occur. They stop making loans before their competitors, increasing their cash holdings so they have an advantage during the upcoming credit crunch. The first bust cycle was the Great Depression. Nowadays, the Federal Reserve is careful to make sure the busts aren't so bad that people start questioning the fundamental nature of the system.

During the Great Depression, the Federal Reserve insiders made a killing. Knowing that credit was going to be tightened, the banks who controlled the Federal Reserve converted all their holdings to cash. They stopped issuing loans, knowing that credit would be tightened. Then, after the crash, they bought assets at a discount. They intentionally kept credit tight until Roosevelt became President so he could take credit for the economic recovery.

The Federal Reserve is also the reason most Americans are struggling under debt. Due to the Compound Interest Paradox, there are more debts than actual cash in circulation. Due to this circumstance, most Americans must be net debtors. People subconsciously act as if the market is a zero-sum game; another person's wealth necessarily came at the expense of others. On the face of it, this seems silly; why should someone else's wealth detract from me? It's not so silly when you see the structural flaw in the system. Due to the Compound Interest Paradox, one person can have great wealth only if a lot of other people are in debt by a greater amount. The Compound Interest Paradox makes the market worse than a zero-sum game. It's a negative sum game, because each new debt decreases the total score. In reality, the market should be a positive-sum game, because new goods are being produced and business processes are always being streamlined. However, new goods can't be created faster than the Compound Interest Paradox sucks the money away.

That's why people and politicians are always complaining about "not enough money". It's not "There's a shortage of productive capacity." or "Productivity is too low." The complaint is "There's not enough money." There literally isn't enough money. The amount of outstanding debts is far greater than the money in circulation. There never can be enough money under the current financial system.

I don't think that the original creators of the system really understood the effect of the Compound Interest Paradox over time. They realized that the Compound Interest Paradox enabled them to make huge profits. I don't think they planned well enough to see 50-100 years into the future, when the sum total of outstanding debts would be far far greater than the money supply. The current state of affairs is starting to get ridiculous. Debt is always going to increase exponentially faster than the total amount of money. Typically, a system like this starts to get unstable and may collapse in hyperinflation. In a period of hyperinflation, the Federal Reserve may lose its ability to regulate the economy, especially if inflation is so high that people are forced to return to a barter system. Similarly, in a deflationary depression people would be forced to return to a barter system. In a depression, anyone who was unleveraged and holding concrete assets would benefit; anyone who's in debt is stuck. In a hyperinflation scenario, someone holding gold or silver would benefit, because it would represent real value rather than worthless paper. In a deflationary depression scenario, someone holding gold or silver would benefit, because they could sell it and buy other things at a bargain.

The income tax was passed the same time as the Federal Reserve Act. That is no coincidence. Without an income tax, people would be able to effectively boycott the Federal Reserve's money, and instead perform barter transactions. However, if you perform a barter transaction, you still have to pay taxes on the equivalent value of the transaction in dollars. That means it's impossible to live solely performing barter, because you'd have to somehow acquire dollars to pay taxes. The income tax guarantees that everyone needs to use dollars to a certain extent. The tax system creates a certain guaranteed demand for dollars. However, hyperinflation would cause the whole system to fail, because the dollar value at the time of a barter transaction would be far less than the dollar value when it was actually time to pay the taxes. In a hyperinflation scenario, a return to a barter system would be necessary for survival.

Even though the banking cartel benefits greatly under the current system, a total collapse of the dollar cannot be their goal. I don't think the insiders who support the Federal Reserve system want to see total worldwide economic collapse. In such an event, a lot of their wealth and power might be lost.

That is an interesting question. Can a period of hyperinflation and collapse be postponed indefinitely under the current system? Or, will it be possible to stabilize inflation at the current level of 8-10% per year? If inflation starts to get out of control, it could happen. In particular, China has a huge economic bomb it could use against the US. If China decided to simultaneously dump all its dollars (such as buying up a large amount of commodities), other countries would follow suit and there might be hyperinflation that would break the system. Nobody would be willing to buy long-term US government debt anymore, and the high interest rates the government would have to pay on 10-year and 30-year bonds would still be causing inflation as they are retired.

On the other hand, the US has one benefit that other countries with a hyperinflation problem did not have. All of the US government debt is denominated in dollars, a currency the US controls. Other countries have had trouble because their debt was in dollars but their income was in local currency, which they could not effectively convert back to dollars. They took out dollar-denominated loans, and the Compound Interest Paradox made it hard for them to raise dollars to make the interest payments. This benefit alone might be enough to prevent the US from having hyperinflation. Having all your debts denominated in a currency you control makes it impossible for you to default. A partial default via inflation is certain, but not a complete default.

The hedge fund and leveraged buyout industry has, to a large extent, evolved to take advantage of the Federal Reserve's policy of artificially low interest rates. Hedge funds are allowed to use leverage of about 7x-10x. With interest rates fixed at a level that is 3-5% below where they naturally would be, that leads to a profit rate of 21% to 50% for the hedge funds, just from the use of leverage.

Leveraged buyouts usually target a company with a clean balance sheet (i.e. no debt). A company that is prudent and minimizes debt is effectively punished with a takeover. The takeover can be financed primarily by loading the acquired company with debt. This is made possible because money can be borrowed at an artificially low rate. It's a no-win situation for the prudently managed company. If you have no debt, you are a takeover target. If you have debt, you are subject to foreclosure by your creditors during the next bust cycle. The only companies that can effectively carry a lot of cash on their books are companies that are so big that they couldn't be a takeover target, companies such as Microsoft and Berkshire Hathaway. The average person senses that there is something unjust about hedge funds and leveraged buyouts. They are right. Hedge funds and Leveraged buyouts are made possible by the price-fixing practices of the Federal Reserve.

In summary, the Federal Reserve is bad because it's a price fixing cartel that fixes interest rates at an artificially low level. This policy has created a tremendous amount of economic distortions. I haven't mentioned all of them here.

The official CPI is 3%, but I suspect the true inflation rate is in the range of 6-10%. That means that the Federal Reserve has to have inflation-adjusted interest rates of -1% to -5%, just to encourage enough borrowing to keep enough money in circulation. The spread is only going to grow over time. All economic scams must come to an end eventually. The market cannot be tricked forever.

The Imported Labor and Outsourcing Subterfuge

The average person believes that importing cheap labor or outsourcing jobs is inherently wrong. Similarly, machines that automate production are derided as costing jobs. Public attention is drawn to these issues because it distracts attention from the real problem.

Basic logic says this is wrong. Providing jobs to people who willingly take them is good. Automation is a good thing for society as a whole. There must be a defect in the economic system, if people are concluding that efficiency gains are wrong.

If a job that pays $50k/year is sent to another country where the cost is $5k/year, the corporation has saved $45k/year. Its competitors will most likely do the same thing, and prices will decrease by the amount of salary saved.

The person who lost the $50k/year job will be forced to take some other job, perhaps one that pays $45k/year. This is a job that would have previously went unfilled and unperformed. The displaced worker is the beneficiary of lower prices along with everyone else. Prices have decreased by $45k. Another person is doing productive work valued at $45k. The aggregate wealth of society has been increased by $45k/year. Who gets this $45k?

If the money supply were kept constant, the average person would experience a price decrease greater than the lost wages. Each job loss would harm a specific person and benefit every else a little. In aggregate, over time, the standard of living should be rising. This is not what actually happens.

The problem is that the money supply is diluted via inflation. However, the benefits of inflation are not spread equally over all citizens. The benefits are concentrated in the financial industry, who have the privilege of creating the new money, with help from the Federal Reserve. The Federal Reserve fixes interest rates at an artificially low level, making it very easy for the financial industry to create money by issuing loans. If the average person wants to borrow, he has to borrow at a rate much higher than what the financial industry is charged.

The financial industry, with assistance from the Federal Reserve, steals most of the wealth that is created by importing labor or exporting jobs. People are trained to blame the imported labor. People are trained to blame the workers in other countries who take the jobs. People are trained to blame the companies that are trying to cut their expenses and improve efficiency.

You can't even blame the financial industry that much. They're following the rules set out for them by the Federal Reserve. If they didn't cause inflation, one of their competitors would. However, the owners of financial companies are the people who lobbied Congress to set up the Federal Reserve and frustrated all efforts to reform it.

The real blame belongs with the Federal Reserve. It is surprising that none of the mainstream media have placed the blame where it belongs. The insiders who control the big financial institutions also control the mainstream media, preventing an honest discussion of the problem.

Let's perform a calculation. According to official statistics, the Consumer Price Index is 3-4%. Is there an asset price index, which can be used to measure money supply inflation? An asset should have intrinsic value that stays the same as the money supply is diluted. There is a well known asset price index - the stock market. On average, the stock market goes up at a rate of 10-15% per year. About 2-4% of this gain is due to improvements in business practices. The rest is compensation for inflation. In other words, the actual money supply dilution is 6-13% per year. The Federal Reserve reported that M2 grew by 6% last year, but there are other sources of inflation not included in this measure. This means that, if the money supply were not diluted, consumer prices would be going down by 6-13% per year. There is a difference of 9%-17% between the actual CPI and the productivity gains in the economy. This is what is stolen each year by the financial industry, with assistance from the Federal Reserve.

That is the cost of the Federal Reserve to the average citizen: 9%-17% of the total wealth in the country. That is 9%-17% *EACH YEAR*. Don't blame outsourcing, imported labor, or machines. Blame the Federal Reserve. Without the Federal Reserve, banks would have to pay market interest rates, and it would be a lot harder for them to dilute the money supply by writing loans.

Instead of the stock market, you could use the price of real estate or gold or oil. You would reach the same approximate conclusion. Gold has gone up 8% per year since the price of gold was allowed to float. Gold does not go up as fast as the stock market because it has few industrial uses, you have to pay storage costs, and gold isn't actively producing new wealth. Some people say that central banks are artificially deflating the price of gold and silver to cover up how bad inflation really is. Real estate goes up 6-10% per year, not as fast as the stock market because the value of real estate is diluted by new construction. It's easier to use leverage when investing in real estate than investing in the stock market; that's why real estate investors can experience greater returns than stock market investors. However, leverage is risky, because you risk being forced into bankruptcy during the next bust cycle.

The US economy is so efficient that the money supply has to expand by over 6% per year, just to keep consumer prices from decreasing! That's a lot of productivity gains that aren't making their way to the average person. The Federal Reserve is responsible for the theft of these productivity gains.

Until the Federal Reserve is reformed, you should protect your savings by investing in stocks, gold, silver, or real estate. Don't be fooled by price volatility. Asset price volatility is mostly money supply volatility, not volatility in the value of the underlying asset. In the long run, those are the best investments. As long as you are unleveraged, you will be able to ride out price volatility and realize long-term inflation protection.

Ron Paul for President!

There's been a lot of discussion about Ron Paul's campaign on the Internet, even though the mainstream media has been surprisingly silent.

It's hard to tell exactly, because on the Internet one dedicated person can appear to be thousands of people. Also, knowledgeable Internet users aren't representative of the population as a whole. For example, Ron Paul leads all candidates in YouTube subscriptions with 15,000 subscriptions, but that's still only 15,000 votes.

I think that it really is 15,000 unique people and not one person pretending to be 15,000 people. It'll still be an uphill battle for his Internet popularity to translate into recognition by mainstream media, which probably still is necessary for him to win.

He advocates two things that I strongly agree with:

1. Abolition of the Federal Reserve
2. Abolition of the income tax
   

I didn't realize how bad the Federal Reserve and income tax are until I started thinking about them carefully.

The Federal Reserve is bad because it's a price-fixing cartel that keeps interest rates at an artificially low level. Interest rates should be determined by the free market, just like the price of everything else. However, the Federal Reserve has been around for so long that it couldn't be instantly abolished without adversely affecting the economy. The interest rate subsidy would have to be gradually phased out and non-debt-based money introduced into circulation.

The income tax is bad because it creates a demand for dollars. If you wanted to boycott dollars and switch to using gold or a barter system, the income tax prevents this. A barter transaction is considered to be taxable income based on the dollar-equivalent value of the transaction. You could make a barter transaction, but you'd still need to pay income taxes in dollars. Even though a dollar is intrinsically worthless, you need dollars to pay income taxes.

The income tax is self-increasing. As the money supply is inflated, prices rise, and the amount you need to pay in taxes increases.

There's a "Ron Paul Grassroots Supporter's Wiki", and I put some of the content I'm later planning for this blog there:

http://wiki.ronpaulpresshub.com/index.php?title=Main_Page

My contributions primarily are in the "issues" section, for the Federal Reserve, Income Tax, and Gold Standard sections.

http://wiki.ronpaulpresshub.com/index.php?title=Federal_Reserve
http://wiki.ronpaulpresshub.com/index.php?title=Gold_standard
http://wiki.ronpaulpresshub.com/index.php?title=Income_tax

Since the content on those pages is 100% mine, I'm going to reproduce them here later.

However, there is one thing that disturbs me about Ron Paul. He has said that he would abolish the Federal Reserve and IRS. He has not mentioned his substitute plan. The Federal Reserve and IRS have been around for so long that they would have to be abolished gradually. An abrupt closure would lead to economic chaos.

Abruptly eliminating the Federal Reserve would cause interest rates to skyrocket. All the money would drain out of the economy as more loans were repaid than issued. There would be another depression. There would need to be a mechanism for stabilizing interest rates as the Federal Reserve is abolished. New money would need to be printed and spent into circulation, either by repurchasing government debt, issuing loans, direct spending, or tax rebates.

Abruptly eliminating the IRS would case the value of a dollar to drop to zero. Right now, there is a demand for dollars because the government demands them as payment whenever any economic activity occurs. Without this collection mechanism, there'd be no demand for dollars. As people start switching to barter, there would be hyperinflation. The people who converted their dollars to gold and silver first would benefit tremendously. The income tax needs to be gradually phased out as the value of a dollar is stabilized by other means.

I still think Ron Paul is a good candidate. I'd like to see him clarify how exactly he would go about abolishing or reforming the Federal Reserve and the IRS.

The Compound Interest Paradox

I made an updated series of posts on the Compound Interest Paradox. Some people complained this post is too complicated, and I made a simpler version.

By a wide margin, this is my most popular post. It's popular for a good reason. You don't understand the corrupt nature of the economic system until you understand the Compound Interest Paradox.

---

I've seen the following argument mentioned on many "critics of the Federal Reserve" pages. It confused me immensely until I finally figured it out. The argument is that in a financial system like the one in the United States, where money is created via debt, the only outcome can be that the banks will eventually own everything. The problem is that, in the course of repaying a loan, the sum amount of payments always exceeds the amount of the loan. The net effect of a loan is to decrease the amount of money in circulation. Since money can only be put into circulation via a loan, the system guarantees that the banks will eventually own practically everything.

Suppose you buy a house for $350,000. You make a $50,000 downpayment and take out a loan for $300,000 at a fixed 6% interest rate payable over 30 years. Your total payments over the lifetime of the loan (assuming you don't repay it early), will be $647,514.

What is the effect of this loan on the money supply? When you take out the loan, the money supply was increased by $300,000. Either the bank loaned you money that was already on deposit, or it borrowed the money from the Federal Reserve at the discount rate. As you pay off your loan, money is removed from circulation. In practice, as you pay off your loan, that money will be used to issue other loans, or be paid out as the bank's expenses and profits. (Actually, the bank typically will sell your loan immediately so it isn't exposed to the risk that the short-term interest rate will change. That was the cause of the S&L crisis; banks were borrowing short-term from depositors but lending long-term to mortgages. When short-term interest rates spiked up due to inflation and the abandonment of the gold standard, the banks were stuck.)

The net effect of your loan, viewed in isolation, is that the total money supply has DECREASED by $347,514. You collected $300,000 and repaid $647,514. Fortunately for you, between the time you received your loan and when you repaid it, the bank was also issuing other loans to other people. Enough extra money was printed so that you could repay your loan.

But where does that $347,514 go? It goes to the financial industry. They are receiving the money in the future, when it will be worth less than it is now. Some of that money is paid out as profits and salaries and expenses. But what effort did the bank spend to create the $300,000 it gave you? The answer is: no effort at all. It was just a bookkeeping entry. They may have borrowed the money from the Federal Reserve at the risk-free rate of 5.25%, so they could loan it to you at 6%, but the Federal Reserve ultimately just printed the money it lent to the bank. The bank had sufficient collateral, its assets and other deposits (and now your mortgage).

In such a system, the banks will eventually own everything. The only way for new money to be created is by a loan, and money lent out is always less than money repaid. Total debt can only increase exponentially over time.

That is why newspapers and television are never critical of the banking industry. You will never see a major newspaper or TV show criticize the fundamental structure of our financial system. That's because the banks were careful to make sure they control all the major media. After all, with all the money, it's very easy to buy up all the major media. Their control is hidden via trusts and preferred voting shares. Plus, any story critical of the banking industry really wouldn't be entertaining. It would be too complicated for the average person to understand and wouldn't attract advertisers. A TV station wouldn't want to lose the ads placed by banks.

However, the banks don't own absolutely everything. A careful person can minimize his use of debt, and eventually build up a reasonable amount of investments. Plus, debt at a rate of only 6% might be beneficial, if you can invest the proceeds at 10% or more. It's only possible to do this because other people are making loans as well. If you knew that the loan you took out would be the last one ever issued, you would never be able to repay it.

Each loan has the effect of decreasing the number of dollars in circulation, because the payments always are more than the principal. What would happen if all the banks got together and said "let's collude and offer no more new loans"? As loans were repaid, there would be fewer and fewer dollars in circulation. Prices would drop. Some people would be unable to pay off their loans. The banks would foreclose, taking possession of real assets, even though the dollars they loaned out cost nothing to print. Provided the bank had managed its risk effectively, the value of the confiscated assets, plus the loan repayments received, would be enough to stay in business and still profit.

If all outstanding loans were called in, would there be enough dollars in circulation to pay them all back simultaneously? I suspect the answer is no, but I couldn't find hard statistics. That's why the Federal Reserve is able to lower the money supply by increasing interest rates. As interest rates are raised, fewer new loans are issued. The net effect is that loans are called back and the amount of money in circulation decreases.

The Federal Reserve is able to force banks to collude and offer fewer loans, because the Federal Reserve controls interest rates. If the interest rate was so high that no new loans were offered at all, then banks would just invest their assets with the Federal Reserve at that rate, instead of investing by issuing loans.

Economic cycles are inevitable in an economy where money is only created by debt. Artificially low interest rates encourage borrowing. At some point, those loans need to be repaid and there's a temporary decrease in available money. During a recession or depression, loans are defaulted on and the banks take possession of real assets. That is the only time that total debt decreases, but even with these defaults, debt increases exponentially faster than the money supply.

In my "Discounted Cashflow Paradox" post, I made an argument that the value of a dollar is zero. If the supply of dollars in circulation is less than the sum of all outstanding loans, the the value of a dollar is not zero, it's imaginary! I mean imaginary in the strict Mathematical sense. If there's no way that all outstanding loans could be simultaneously repaid, then the supply of dollars will always be less than the total demand. If you solve the equations, you get (I suspect), an imaginary number. In practice, this does not occur, because new loans are always being issued.

I really need to look up this statistic - sum total of all outstanding loans and sum total of all dollars in circulation. I have no idea where to look, but I suspect that the sum of all dollars is far less than the sum of all loans. New loans need to keep being issued to prevent collapse.

For example, the accumulated federal deficit is larger than the current M2 money supply. How can the government be in debt by more money than actually is in circulation? That's kind of silly.

Of course, if there was an absolute bar on issuing new loans, it would soon be obvious to everyone what is happening. Instead, what happens is that the price of a loan is increased slightly. This means that marginal loans are not issued. There are now slightly fewer dollars in circulation, but not so much fewer that the entire scam is exposed. Only the people with the worst credit rating are forced into bankruptcy. Does this sound familiar? It's the current "sub-prime lending" problem.

The Federal Reserve doesn't say "Let's increase the wealth confiscation rate." Instead, they say "We are concerned about inflation and decreasing unemployment and we are increasing the short-term interest rates."

Why should the Federal Reserve be concerned about decreasing unemployment? Decreasing unemployment means that workers are starting to be able to demand higher salaries. Their standard of living is increasing. That means that there is more wealth available due to a more productive economy. That wealth needs to be confiscated. The easiest way to confiscate it is to take money out of circulation, forcing everyone who has a loan to have a harder time repaying it.

When the money supply starts getting too tight, the fed lowers interest rates. However, the average person does not get to borrow at the risk-free rate. The benefits of financial stimulation (lower rates) primarily go to financial industry insiders. The average person just sees inflation, especially if he has money in the bank instead of inflation-hedged investments.

Plus, the average person does not know in advance when interest rates are going to be raised or lowered. That makes it much riskier for the average person to take out a loan. An insider has the opportunity to profit immensely.

There needs to be continuous inflation or else the whole system will collapse. Inflation is needed to ensure there's enough new money to pay back all the loans. If everybody simultaneously refused to borrow money, the financial system would collapse. If a substantial percentage of people simultaneously refused to borrow money, everyone else would be forced into bankruptcy.

Another benefit of inflation is that the average person keeps his money in the bank, or has benefits such as a pension or social security. These payments are not properly adjusted for inflation. Inflation allows the financial industry and government to slowly confiscate these assets. That's why the government doesn't want to ever contract the money supply too much. If the money supply contracted too much there would be deflation and the average person, who is holding mostly cash, would benefit.

As long as the Federal Reserve keeps a balance, the average person won't get wise to the situation. As long as a certain number of new loans are made, the average person will have access to enough money to repay his debts. There will be some foreclosures and bankruptcies, but from the point of view of the average person, those people deserved it. They won't say "The financial system was stacked against them - a certain number people had to go bankrupt because there wasn't enough money in circulation."

Most of the people who are aware of the details of this scam are themselves billionaires already. Knowing the defect in the financial system, they are able to profit from it immensely. Plus, they are insiders who know in advance which way interest rates are going to be moved. It's easy to make money if you know that. They have no incentive to fix the current system, except for the possibility that it might completely collapse soon. Any billionaire who is aware of the system can profit immensely from it. Any billionaire who is not aware will soon lose his wealth. With an awareness of the manipulations of others, it is possible to structure your own investments to maximum advantage. The basic advice I would give the average person is to minimize debt and invest in concrete assets - stocks or real estate or your own business.

If the banks wound up obviously owning everything, the average person would revolt. Some of the assets are hidden in trusts, so the average person doesn't know about it. Most media companies are incorporated in a way that insiders effectively control the company, even though they own a minority interest, through the issue of preferred voting shares. The money supply and tax rate are carefully managed so that the average person gets to own enough so that they don't revolt.

The national debt is actually absolutely necessary under the current system. Money can only be created via debt, and debt increases exponentially faster than the supply of money. The only way that someone can have money is for someone else to be in debt by an even bigger amount. Since the government is the only entity that can have unlimited debt without being forced into bankruptcy, the government needs to have bigger and bigger debt just so that there would be a supply of money for other people to have.

Is there any escape from this system? I think there is, but it would take a massive coordinated effort. I'm worried that the government and media are too corrupt to be trusted to fix this problem. It's tricky, because any solution would have to be implemented without breaking any existing laws, which are specifically designed to prevent anyone from ending this system of abuse.

I thought about advocating a return to a barter system. That wouldn't work, because a person doing barter legally has to pay income taxes on the value of his transaction, and the only valid means for paying taxes is with dollars. Because the government demands that taxes be paid in dollars, that creates a certain demand for dollars. It's impossible to live legally without dollars, because you have to pay your taxes. Maybe that's why the income tax had to be implemented the same time as the Federal Reserve system was established. Without income taxes, a person could effectively boycott the Federal Reserve, only making enough transactions in dollars to pay their taxes and dealing in barter otherwise. Since barter transactions are taxed the same as dollar transactions, with taxes paid in dollars, there's no way to boycott the Federal Reserve system by returning to a barter system.

The only way to fix the monetary system is by changing the laws. There's no way for individuals to legally boycott the standard financial system, because they have to pay their taxes in dollars.

That's one thing that annoys me about the other "critics of the Federal Reserve" websites. They explain the problem, but they don't really propose a workable solution. I don't think there is a solution possible without getting enough grassroots support to change the laws.