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Tuesday, July 31, 2007

The BitTorrent Economy

BitTorrent is a good model for founding an alternative economic system.

BitTorrent is used to transfer large files on the Internet. It can be used for large downloads. It's more commonly used for illegal downloading of copyrighted content. The BitTorrent user is able to escape detection due to the decentralized nature of the network.

Each download is broken up into a bunch of pieces. Different clients trade with each other. If one client has piece #543 but not #420 and another client has #420 but not #543, those clients can trade. A well-written client tries to make sure its upload and download rates to each other client are nearly even. Clients download pieces semi-randomly. They try to download pieces that other clients don't have, so they can continue sharing.

A client with the entire download is called a seed. At least one seed must be present to guarantee that everyone will be able to finish the download. The seeds try to upload their pieces to the clients with the highest upload rate. This ensures that other clients become seeds as quickly as possible.

A hash check is used to compare uploaded data. This insures that the data received is valid.

There is a centralized tracker. A client logs into the tracker, announcing its IP address and port. The client then receives a list of other clients that it can connect to. Whenever a piece of the file is sent, both clients report to the tracker that the piece was transferred. Because both clients are reporting a successful transfer, that means that a client can't cheat. The tracker logs everyone's upload and download rates, so the seeds know which client it is most efficient to upload to.

The tracker represents a single point of failure for the BitTorrent network. A BitTorrent download could be eliminated by shutting down the tracker. If I were using BitTorrent as a model for an alternate monetary system, I would make it not dependent on a centralized tracker.

Most consumer internet packages have a defect. The download rates are typically a lot higher than the upload rates. For example, I can download at 100k/second, but only upload at 20k/second. This is bad for BitTorrent, because any download by one person must be matched by an upload by someone else. A misbehaving client could download a lot more than it uploads, ruining the performance of everyone else.

Some BitTorrent trackers have a "ratio policy". Each user is given a unique ID#, so they know exactly who is uploading and downloading. The ratio of uploads to downloads for each user is tracked. Users with a low ratio are called leechers. Users with a very low ratio are banned.

In other words, the BitTorrent economy fairly tracks this limited resource: upload bandwidth. A BitTorrent tracker with a "ratio policy" is an example of a fair economy. It's an example of a Social Credit Monetary System. A user gets a credit for uploaded data and a debit for downloaded data. New users are given some free downloads, so they can start sharing. The penalty for violating the policy is that the violator is banned from the community. Some sites are pretty sophisticated in the banning of violators and ensuring that duplicate accounts are not created.

That is another point about the BitTorrent economy. Violence is not needed to enforce the rules. Banning someone is a sufficient penalty.

Some of the ratio sites have a policy where a banned user can be readmitted on an upload-only basis, so they can repay their debt. There is an opportunity to earn member status again.

The Federal Reserve and the income tax enable the government and financial industry to leech off my productive abilities. Even if I disapprove of the government's policies, anytime I do productive work I'm supporting the bad guys. Is it possible for people to say "LEECHER - BANNED!" to the Federal Reserve, financial industry, and income tax?

Sunday, July 29, 2007

Reader Mail #2 - Collected Comments

I've received several interesting comments in response to some posts. Also, I didn't fully answer all the questions raised in that car discussion forum on Reader Mail #1.1.

Some people may not go back and reread my posts after the comments were published, so I'll repost my favorite questions and responses here.

I have Google Analytics enabled for my blog. I get the most visits from California, which shouldn't be too surprising. I get scattered visits from almost everywhere. I've had visits from almost every state in the USA. In the past week, I've been getting a lot of visits from Australia. I'm up to 200 Absolute Unique Visitors, and I have something like 30-40 visitors who come back regularly.

Google has my blog in "Supplementary Results". That means that I'm probably not getting many visits from search. According to Google, pages get banished to "Supplementary Results" only if they are duplicate pages or spam pages.

According to Google Analytics, my most popular post, by a wide margin, has been The Voting Scam.

On The Voting Scam, Broadlighter asks:

Are you suggesting that 'We the People' revolt?

Yes, it's time to revolt.

I am not advocating a violent revolt. I am advocating an economic revolt. I am advocating that people develop a private monetary system. I am advocating that people develop a private contract enforcement system. I am advocating that people do productive work and not report it to the government for taxation, confiscation, and regulation. With taxation rates of 50-95%, people will see tremendous productivity gains by working in an alternate economic system. I arrive at a 95% taxation rate by considering not just direct taxes, but also indirect taxes, the inflation tax, the regulation tax, the inefficiencies of large corporations, the lower quality products produced by large corporations ("planned obsolescence", i.e. a car designed to last only 3-5 years so you'll buy a new one), and the profits/rents collected by monopolies and oligopolies.

I think a Social Credit Monetary System is most suited for this purpose. The Social Credit Monetary System does not require a centralized issuing authority in order to work. Several groups of people acting independently can set up a Social Credit system. An alternate monetary system needs to be decentralized, because otherwise the red market would use force to shut it down.

Any red market enforcement action against people participating in an economic revolt would be ridiculous. Is the red market going to start arresting people for working? That might work in other countries, but in the USA the pretense of trial by jury hasn't been completely dropped yet. In the USA, there still is the presumption that anything you do in private is none of the red market's business, provided you stay away from black market activity. Besides, grey market activity can be disguised as white market activity. Someone mowing your lawn, cooking a meal, or fixing an air conditioner is not, by itself, suspicious. Black market activity, such as growing marijuana, is much more risky.

It probably won't be possible to win a direct violent confrontation with the red market until it's obvious that it has been defeated. Currently, the red market's possession of superior resources, weapons, and numbers is too overwhelming. Maximum stealth is necessary for survival. If you operate away from the government's view, and only trade with trustworthy people, there should be very low risk of getting caught.

On The Voting Scam, Broken Ladder says:

Range Voting will solve all the problems with the current election system.

No, it won't. What right does a majority of 51% have to force me to use a corrupt monetary system? What right does a majority of 51% have to impose income taxes on me? Income taxes don't hurt wealthy people. Income taxes hurt productive people. Income taxes mean that a percentage of everything I produce goes to the bad guys. Wealthy people can use trusts and other legal tricks to avoid taxes. Wealthy people can get government perks that are worth more than the income taxes they pay. Corporations pass on their taxation expense as higher prices.

Besides, how do you plan on getting the Range Voting reform passed? I don't see it happening. You aren't going to be able to educate that many people and get them to be strong advocates for voting reform. My solution only requires educating a handful of people. I only need to educate enough people to get an alternate economic system started.

On The Voting Scam, Broken Ladder says:

Under Range Voting, you will be more satisfied with the election results. The alternatives to Range Voting are not tolerable. Third parties advocates are wasting their time until they get Range Voting.

I agree that Range Voting is the best election method I've read about. I disagree that elections are a valid means for choosing a government. There is an alternative to Range Voting reform. It is the idea that government has no legitimacy at all.

Third party advocates are wasting their time, along with major party advocates. Who needs a government at all? Advocating for a specific candidate or voting reform is a waste of time. A grassroots political campaign is like slaves petitioning their masters to be less cruel. The only thing that isn't a waste of time is building a replacement monetary system and political system.

Debating alternate voting systems is like debating how much lubricant a rapist should use. When I suggest that people should not be raped at all, everyone acts like that's a totally bizarre idea.

On The Voting Scam, TZ says:

Direct Democracy, where people vote directly on individual issues, is a workable system.

No it isn't. As above, what right does a majority of 51% have to impose stupid laws on me? A majority of 51% could impose a tax of $1000/post on bloggers.

Suppose you had a magic wand and everyone received a proper education and the media wasn't corrupt. There still would be situations where people rationally in their self-interest pass stupid laws.

On The Voting Scam, Broken Ladder wrote:

Libertarians are cool.

No, Libertarians are fools. Like all other voting advocates, Libertarians are merely slaves petitioning their masters to be less cruel. Pursuing change through the election system is pointless. Libertarians are fed up with big government. However, they haven't reached the conclusion that government itself is the problem. The Libertarian Party is designed to hold out the false hope that elections can be used to curtail excessive government power.

People already conducted an experiment with a government that had carefully limited powers. That didn't turn out so well. Once you have a government, its power only grows over time.

On The Voting Scam, TZ wrote:

The US government stopped following its original charter in 1913, with the creation of the Federal Reserve.

The Federal Reserve Act is more like a surrender treaty than a banking reform bill. The income tax is the other half of the surrender. The income tax sold all US citizens into slavery.

The US government stopped following its original charter several times:
  1. In 1861, Congress didn't have a quorum to continue operating during the Civil War.
  2. In 1913, Congress passed the Federal Reserve. Congress has the right to coin money. It does not have the right to delegate this power to a private corporation.
  3. In 1913, the income tax amendment was passed. Some people say this amendment was fraudulently ratified. Some people say that income, as defined in 1913, did not include wages as income. The legal status of the income tax is unclear; its moral status is obvious. The income tax converts all US citizens into government slaves.
  4. Selection of Senators by state legislatures was usurped by the 17th amendment, which some people say was fraudulently ratified. Originally, the House was supposed to represent the people and the Senate was supposed to represent the states. With a Senate chosen by the state governments, it would be much harder to pass laws that usurp states' rights. There was supposed to be a balanced power struggle between the Federal government and the state governments. The 17th amendment removed this balance. The Senate was supposed to be the primary advocate for states' rights.
  5. In 1933, President Roosevelt declared US bankruptcy. US citizens could not redeem their paper dollars for gold, although foreign central banks still could. Private ownership of gold was outlawed. People had to turn in their gold for worthless paper, which was an illegal seizure of property.
  6. In 1971, President Nixon declared US bankruptcy. All pretense of convertibility between dollars and gold was dropped.
  7. Pretty much every important Constitutional provision has been repealed. The requirement that only gold and silver are money has been repealed. The right of trial by jury has been repealed; defense attorneys may not remind juries of their jury nullification rights. The right of trial by jury has been repealed through biased jury selection methods. The right of habeas corpus has been repealed. The right to own a gun has been repealed, by taxation, regulation, and registration of gun ownership. Protection from illegal searches and seizures has been repealed. The right of free speech has been restricted. The right of free assembly has been restricted; government spies frequently infiltrate citizen advocacy groups. The right of a free press is gone with concentration of newspaper ownership, although the Internet is a noteworthy exception. The right to a speedy trial has been repealed; many trials drag on for years. The ban on cruel and unusual punishment has been repealed. Many of these rights were repealed via Supreme Court decisions. Others were made by executive order or acts of Congress that went unchallenged, or were challenged and upheld by the Supreme Court.

On another forum someone wrote:

Panama has no central bank.

Panama's currency is pegged to the US dollar. This makes the Federal Reserve the central bank for Panama.

Every single country has a corrupt monetary system and taxation system. The current global economic and political system is one of absolute perfect enslavement. I have yet to see an example of a country that does not have a corrupt monetary system and taxation system.

One guy on that car discussion forum mentioned in Reader Mail #1.1 said:

You don't have an MBA or economics degree. No mainstream economics book mentions the Compound Interest Paradox. Therefore, your analysis is wrong.

How do you know I don't have an MBA or economics degree? Can't you judge the validity of my arguments on your own?

An MBA or economics degree is a certificate that says you are skilled at exploiting the current defective economic system. I prefer to work in a fair economic system.

One guy at work asked me:

Suppose there really is a Supreme Leader of Humanity. Suppose you've discovered a plan for defeating him. If there actually is a Supreme Leader of Humanity, he has the capability to trace your postings back to the source and kill you. Isn't this incredibly dangerous?

How do you know that the Supreme Leader of Humanity doesn't secretly approve of my plan for a nonviolent economic revolt?

From many sources:

How could you live without a government? Government prevents someone from breaking into your house and stealing your stuff. Government prevents someone from shooting you randomly on the street.

In the USA, those two services are provided by the local government, out of local taxes. Those services are not provided by the Federal government.

Almost everyone agrees that someone who breaks into your house is committing a crime. Almost everyone agrees that shooting someone randomly on the street is a crime. That is true under any political system that isn't run by complete fools. It is even mostly true under political systems that are run by complete fools, such as the current system.

The problem is the subtle crimes that government encourages. The theft of your savings via inflation is a crime. A massive government subsidy to the financial industry and large corporations is a crime. The theft of your labor via income taxes is a crime.

Further, the government has NO OBLIGATION to protect your property or your safety. If someone breaks into your house, the government will try to catch the thief and recover your property. If the government fails to catch the thief or doesn't try too hard, there is no penalty for the government. If someone assaults you on the street, there is no obligation for the government to try and catch the crook. The government does the best it can to stop obvious crimes, but it is under no obligation to do so. That is one of the reasons why the right to bear arms is important.

Suppose I hired the services of a private police force. If someone robbed me, the private police force would be responsible for tracking down the criminal. A good private police force would replace my stolen property immediately and assume responsibility for collecting from the criminal. If someone assaulted me on the street, the private police force would have an incentive to catch the criminal. Otherwise, it would lose customers.

On many discussion forums:

A return to a gold or silver standard would be a disaster. The international bankers are hoarding all the gold and silver. A gold or silver standard would be a boon for them.

This argument is extremely stupid. Currently, the international bankers control the whole world's wealth without spending an ounce of gold or silver. Instead of controlling the whole world's economy, their influence would be limited to the actual amount of gold or silver in their possession.

Further, many central banks are selling off or leasing their gold and silver reserves. They are manipulating the price of gold and silver downward. Gold and silver prices are considered to be the standard measure of inflation. Central banks manipulate gold and silver prices downward so that people won't realize how bad inflation really is.

Even if the central banks have 99% of the world's gold and silver supply, a return to a gold standard is feasible. Anyone who suddenly appeared with a huge quantity of gold or silver would be viewed with suspicion. It is not sufficient to have gold and silver. You also need someone who is willing to trade with you.

Further, honest fractional reserve banking in a free market would multiply the gold and silver that is not under the central banks' control.

If a gold standard is beneficial for the bad guys, why would they have abandoned it? If a gold standard is beneficial for the bad guys, then why is there so much propaganda saying that a gold standard is bad?

On many discussion forums:

WAAH! Central banks are suppressing the price of gold and silver. That's not fair!

If you believe central banks are suppressing the price of gold and silver, then you should buy gold and silver. If you are unleveraged and take physical delivery, you should profit eventually. Your investment timeframe might need to be 10-20 years or longer. The laws of supply and demand cannot be tricked forever.

Actually, it is reasonable for stock investments to outperform gold and silver, at least until the red market collapses. Large corporations are the recipients of a massive government subsidy, which they partially distribute to shareholders as dividends. Gold and silver just sits there, and you have to pay storage costs or carefully conceal it. Investments in stocks and dollars will be worthless eventually. Gold and silver will have the same purchasing power, or more, after the red market collapses. Personally, I'm thinking of moving 10% of my savings to physical gold and silver, concealed in my residence.

On The Social Credit Monetary System, TZ asks:

How can you have a monetary system without a centralized issuing authority?

That is one of the false ideas that everyone has been taught. A centralized issuing authority is not needed to ensure integrity of money. Multiple competing vendors is superior. For all services currently provided by the red market, multiple competing vendors is a superior model.

The only possibility of a centralized authority would be a credit rating agency. The credit rating agency would keep track of who is trustworthy and who is untrustworthy. Multiple competing vendors is superior to a centralized authority with a monopoly. A credit rating agency could make sure its records are encrypted and distributed, minimizing the risk of an IRS raid.

Historically, any centralized money issuing authority cannot resist the temptation to cheat.

Also remember that people working under a Social Credit system will be doing so voluntarily. There is no way to force them to use the centralized issuing authority.

You are forgetting an important point. The red market has not been defeated yet. Anyone attempting to run a centralized Social Credit authority would be painting a giant bullseye on themselves. I would not trust a centralized Social Credit authority with my records, because the IRS would seize them and come after me. I might trust an authority with a list of who I considered trustworthy and who I considered untrustworthy. Such a list is still dangerous, if seized by the IRS.

Of course, many people participating in a Social Credit system may not use their real names. Anonymity is important, because of the red market threat.

That is the failure of systems such as e-gold. From time to time, the IRS seizes the assets of the e-gold vendors, making them unreliable.

Any centralized issuing authority would be, in the eyes of the IRS, a barter exchange. A centralized authority would be required to issue 1099 forms to the participants. A centralized authority would be required to report all transactions to the IRS. However, if the Social Credit system is implemented by people acting independently, there is no reporting requirement. If there is no centralized authority and the IRS seizes one person's records, it does not place all other users in jeopardy.

On The Social Credit Monetary System, TZ asks:

How would a mortgage work under a Social Credit system?

Trading a house for future wages can be implemented under a Social Credit system. If the price of a house is 30,000 ounces of silver, you would give the seller a credit of 30,000 and the buyer a debit of 30,000. The buyer would be expected to pay off the debt at a rate of 1,000 per year or other specified rate. The seller could charge interest, if desired. With non-fiat money, interest charges should be small; the free market interest rate would probably be 1-2%. If the buyer dies before paying off his debt, then the seller gets first claim to the house, if nobody else is willing to assume responsibility for repaying the debt.

With non-fiat money, housing prices should be stable. The seller would be risking much less in the event of a default.

However, buying or selling a house under the Social Credit system is probably not feasible until after the red market falls. With the Federal Reserve subsidizing interest rates, it makes sense for a home buyer to borrow from the Federal Reserve through a bank. If you anticipate a hyperinflationary crash of the dollar, a fixed-rate mortgage looks very attractive.

Also, with non-fiat money, there would be no substantial difference between renting a house and owning it. Currently, homeowners receive a subsidy from the government. Federal Reserve subsidized mortgage rates are only 6%, which is a negative real interest rate. Homeowners also get a tax writeoff for their interest expense. In a truly free market, the cost of renting a house would not be much higher than the cost of owning a house.

On The Social Credit Monetary System, TZ asks:

1. Who determines what an ounce of silver is worth?
2. Who determines how much silver is needed to trade?
3. The system's effectiveness is proportional to the level of trust. Isn't that a problem?

The value of an ounce of silver is determined by the free market. An ounce of silver is worth whatever you can trade for it. If there is a surplus of silver, prices will rise. If there is a shortage of silver, prices will fall.

There is no obligation to use silver. If you prefer gold or copper coins, you may use gold or copper. If you want to pay me in gold or copper, and I prefer silver, I'll look at the market price for gold/silver or copper/silver to decide what price to quote. Currently, I'd just use the spot prices quoted in fiat money. Later, there will be dealers who specialize in metal exchange.

It does not make sense to talk about "the price of silver" in isolation. You can mention the price of gold/silver, copper/silver, or bread/silver. The "price of silver" only has meaning relative to something else. When you talk about prices in fiat money, such as bread/$, you have a problem because fiat money is inherently worthless; there's a division by zero error.

The free market determines what supply of silver is required. I chose silver rather than gold because the gold market is more heavily manipulated than the silver market. Silver has more industrial uses than gold, guaranteeing a demand.

Under a Social Credit system, I don't even need possession of physical silver to trade. As long as there is some silver available that I can trade for, I can make silver-denominated transactions. If I have a balance of payments, I don't need physical silver. As long as the value of what I sell equals what I buy, it works out fine.

Yes, the system's effectiveness is proportional to the trust level. Untrustworthy people will be banned. A high level of trust is absolutely needed, because you need to be sure your trading partners won't rat you out to the red market. I have zero trust for the current fiat money system, so any alternative is better.

After the red market falls, the rules can be relaxed. Anonymous purchases can be made with physical metal. In a transaction, the seller must prove his trustworthiness and the quality of his product. The buyer must only show his coin. For example, if I eat in a restaurant, I need assurance that I won't get food poisoning. The restaurant owner only needs assurance that my coin isn't forged. In the present, the buyer must also prove his trustworthiness, because the seller needs to have his identity protected from the red market. On the other hand, it pays for buyers to declare their identity to sellers, in case they later want to file a claim that the product or service was defective.

If there is a surplus of silver, prices will be high and interest rates will be low, and people will prefer to hold physical silver or store it in 100% reserve warehouses. In times of uncertainty, people will prefer to hold physical silver. If there is a shortage of silver, interest rates will rise and people will deposit their silver in fractional reserve banks for the interest. If there is a shortage of silver, prices will fall and people will be encouraged to spend. Fractional reserve banks will be required to disclose their balance sheets to depositors. In the event of a bank failure, common law would hold bank management and the owners personally liable for a shortfall. If a fractional reserve bank issues loans with an average duration of 90 days, then depositors should only be allowed to withdraw 1/90 of their balance each day; that clause would only be invoked during a time of economic stress. Fractional reserve banks would advertise their interest rate, reserve ratio, and loan duration, so people could judge risk and reward.

I have thought about this carefully, and I've come to a different conclusion than what I posted elsewhere.


In a truly free market, a fractional reserve bank's interest charges would equal payments to depositors plus expenses plus profits. There is no Compound Interest Paradox in a truly free market. A fractional reserve bank can legitimately expand and contract the money supply to match the size of the economy. As long as the bank's loans are based on goods that are actually being produced and properly priced, the system works. The amount of bank-created money matches the size of the economy. It is necessary for there to be people capable of fairly auditing the bank's books.

When a fractional reserve bank expands the money supply, it guarantees that the labor represented by the silver equals the labor represented by the product purchased. As long as all paper promises for silver can be redeemed in silver or equivalent goods, the system works. As long as the banks are sound and openly disclose their books, the system would work.

There would be no legal tender laws forcing people to accept paper at parity with metal. If a bank's solvency was in doubt, its paper would trade at a discount to metal. If a bank was sound, its paper would trade at parity to metal.

The problem is forced taxation, payable in money that is only obtainable from a bank. Banking is not intrinsically evil. It is the conspiracy between banks and government that is evil. When there is forced taxation in money that is only obtainable from a bank, the banks have a monopoly and can impose usurious interest rates.

One problem is the limited liability corporation. This encourages dishonest behavior by bank management and owners if the bank is nearly insolvent. It pays for them to cover up their financial status, in hope of a recovery. If a bank fails with a balance of -$1 or -$1,000,000,000, it makes no difference. In either case, the owners only lose their investment in the bank. Under common law, the management and owners would be held personally liable if depositors are cheated. The limited liability corporation is an artificial creation of a coercive government.

Without the limited liability corporation, there is a natural limit to the size of a business. Otherwise, the owner would be taking undue risk if his employees were dishonest and he didn't notice. A group of small banks that mutually honor each other's paper would be more efficient than a few huge banks. With a group of small banks keeping each other honest, a single bank failure won't disrupt the entire economy.

In the Social Credit Monetary System, everyone is effectively their own bank. It will probably be necessary to operate this way for maximum stealth and safety.

Another problem is bank regulations. The presumption is that the government is auditing the banks, but this is used as an excuse to conceal information from depositors. A depositor should demand full disclosure of a bank's balance sheet. A depositor is a creditor, and creditors have the right to inspect the books of the debtors. Another problem is the "demand deposit". A demand deposit and a fractional reserve bank are incompatible. A fractional reserve bank should only promise to honor a certain % of its deposits on any given day; after that, depositors will have to wait until loan payments come in. Another problem is "bank holidays". When a bank is insolvent, it should be forced to cease operations and liquidate, either until all depositors are paid or depositors stop demanding payment. If a bank hasn't met all the withdrawal requests of depositors, it cannot issue new loans until all its depositors are paid. If depositors demand withdrawal, they would be paid as outstanding loans come due; if the bank's loans are sound, they could be sold to other banks. A government-imposed bank holiday allows a bank to still collect from others, while ignoring its depositors.

Suppose there was a truly free market, but one person happened to be in possession of all the gold. If he only offered the gold under usurious terms, then properly educated people would choose something else as money. However, government-imposed taxation, with payment demanded in gold, forces people to borrow from banks to get gold to pay taxes. If most of the gold is in the hands of a few people, usurious terms can be demanded, knowing people must borrow to pay taxes.

On The Social Credit Monetary System, TZ asks:

What happens if a group of people start improperly colluding? Government is needed to prevent one person from attaining excessive influence.

Are you paying any attention at all? There already is a Supreme Leader of Humanity. The Supreme Leader of Humanity has used government to enslave everyone else, with a corrupt monetary system and taxation system. There already is a small group of people colluding to enslave everyone else. The situation you fear has already occurred.

More accurately, the purpose of government is to prevent anyone from gaining enough influence to challenge the Supreme Leader of Humanity. The red market agents are all really working for the Supreme Leader of Humanity, even though most aren't consciously aware of it.

In the current situation, suppose group A controls the red market and is discriminating against group B. Group B is stuck. It is pointless for group B to appeal to the red market for help, because the red market is controlled by group A. We currently are in the perverse situation where group A is the Supreme Leader of Humanity and group B is everyone else.

Suppose the government has been defeated, and group A was discriminating against group B. Without the government, group B would just say "Forget about group A; let's set up our own economy. Let's trade among ourselves and ignore group A.". Since group A does not have a monopoly on violence, group B should be able to defend itself. If group A was strong enough to impose its will on group B via force, that would mean that group A was now the government. A new red market has been established. If people are stupid enough to set up a new government again after defeating it once, they deserve what happens to them.

If group A started acting like a government, people would start defecting. It would split into multiple competing groups. If group A was too powerful, everyone not in group A would unite in opposition.

I am trying to advocate for group B, where group B is productive workers who are frustrated by the current defective monetary system and taxation system.

On The Social Credit Monetary System, TZ claims:

People have the right to vote with their money.

Under an inflationary fiat money system, people are denied the right to vote with their money. With fiat money, people are pressured into spending their money before it loses its value. Under a pure gold standard, there is another option: not voting at all. You can hold onto your physical gold, knowing that its purchasing power will be preserved. You won't earn interest, but at least you'll hold your purchasing power.

Ironically, inflationary fiat money is the same as the Australian compulsory voting system. You are forced to vote; i.e., you are forced to spend your money before inflation steals its value.

There are no safe investments. All assets go up and down in price, due to inflation and deflation in the money supply. Your purchasing power is probably most preserved with gold and silver, but the fiat money price of gold and silver is subject to fiat money supply volatility. Holding physical gold or silver won't get you the fiat money you need to pay taxes.

On The Social Credit Monetary System, TZ asks:

Have you read C. H. Douglas?

Yes, partially. He correctly observes that productive capacity exceeds purchasing power. He sort of understands The Compound Interest Paradox. However, I think the name "Social Credit Monetary System" confused people. C. H. Douglas defines "social credit" as a direct payment from government to the people, spread equally over all people. He also calls it a "social dividend". This payment is meant to balance out the Compound Interest Paradox. This payment is meant to make sure that the productivity gains of a growing economy are spread evenly.

There are two reasons why productive capacity exceeds purchasing power. The first reason is the Compound Interest Paradox, which guarantees that there isn't enough money in circulation for everyone to pay back their debts. The Compound Interest Paradox guarantees that there always is a shortage of purchasing power. The problem is not a shortage of productive capacity; it's a shortage of purchasing power.

The second reason is that the Federal Reserve fixes interest rates at an artificially low level, compared to the free market interest rate. During the boom phase of the Federal Reserve induced business cycle, businesses are deluded into building factories that aren't economically worth it. Artificially cheap credit encourages wasteful spending. During the bust phase of the artificial business cycle, businesses can't find buyers for their products so they can repay their loans. There isn't enough money to go around. By statistical necessity, some businesses are forced into bankruptcy and banks confiscate their assets. By the time banks get around to selling off the confiscated assets, the economy is in the boom phase again. The banks get a good price when they sell their stolen property.

C. H. Douglas is wrong because he proposes government reform to solve a government created problem. He falls short of the correct conclusion: "Who needs a government at all?"

On The Social Credit Monetary System, TZ asks:

Have you read Louis Even?

Yes. I read his pamphlet "The Money Myth Exploded". I had read about the Compound Interest Paradox on many different websites. This was the simplest explanation I saw, although I think my own explanation is even simpler. I didn't understand the Compound Interest Paradox until I read Louis Even's explanation.

"The Money Myth Exploded" also describes a Social Credit system that is similar to my proposal. The only difference is that I start everyone with a balance of zero. The pamphlet starts everyone at an artificial balance of $200. Starting at zero is the correct approach. You should be willing to trade with people who have slightly negative balances. Also, my implementation of Social Credit does not have a centralized issuing authority.

In "The Money Myth Exploded", the problem was that the issuer of money had a monopoly, and the other workers weren't smart enough to figure out the problem. If the workers had demanded that the total interest they paid the banker equaled the banker's own living expenses, then there would be no Compound Interest Paradox. When the issuer of money has a monopoly, there is no "free market" interest rate. In a free market without government coercion and many competing banks, the free market interest rate would make sure that bank interest income equaled the bank's expenses plus reasonable profits. There is no Compound Interest Paradox in a market that is free from government coercion and has some educated workers.

The Compound Interest Paradox can only occur when the issuer of money has a monopoly backed up by government force.

On The Social Credit Monetary System, TZ asks:

Have you read Bryan Monahan?

Do you mean Bryan Monahan of the Alberta Social Credit Party? I looked at the website briefly after you mentioned it.

Like the Range Voting advocates, C. H. Douglas, and the Libertarian Party, he is a wimp. He is petitioning the government to solve a problem that was caused by government. He has not made the key realization that government itself is the problem. There is zero chance that a government will voluntarily switch to a fair monetary system, just like there is zero chance that a government will voluntarily switch to a Range Voting system. The Supreme Leader of Humanity would never allow that to happen.

Since you brought it up, I'll mention some of the websites I've found interesting.

The Mutualist Blog is pretty interesting. The author has also come to the conclusion that government itself is the true problem. I sometimes take his topics and repost them in simpler form. has some interesting stuff. Most of it is pretty basic, but some of the links are interesting.

Recently, I've been reading Dr. Antel E. Fekete. His posts are on a gold investment advocacy site. Some of his stories are interesting. I couldn't find any references to "Discount House" or "Acceptance House" elsewhere. His "Discount House" economic model is logically equivalent to the Social Credit model I suggest, except that interest would be credited/charged on all nonzero balances. I don't think that interest should be charged on small balances among frequent trading partners. I liked the story about how the Bank of Portugal got cheated by counterfeiters in the late 1920s; I have an upcoming post on that.

On The Social Credit Monetary System, TZ says:

When you suggest a complete abandonment of the current economic and political system, you are throwing out the baby with the bathwater. It is possible to patch up the current economic and political system.

Are you saying that you see the current economic and political system as a baby who needs a bath? Your vision is really bad. I see an old man who fell and broke his neck while taking a shower. Am I the only one who noticed that everyone else is wasting their time washing a corpse? Even more ridiculous, this corpse has been dead since 1913.

Saturday, July 28, 2007

Income Tax Thoughts

I originally wrote this article for the Ron Paul wiki, and I'm copying it here.

Ron Paul has stated that the IRS is unconstitutional and he would abolish it by executive order if he were elected president.


There are two arguments that are frequently cited for the unconstitutionality of the income tax.

Ron Paul did say that the IRS was unconstitutional. I'm not sure what is his justification.

The 16th Ammendment did not Repeal the 5th Ammendment

I believe this is the argument Ron Paul is using for the unconstitutionality of the income tax. The IRS does not have the right to demand that citizens report their income. The IRS does not have the right to demand that citizens report all economic activity. This violates the 5th Amendment. However, without the ability to force people to report their income, it's pretty impractical to collect income taxes.

Some of the IRS's most egregious violations have come against people for not reporting all their income. In particular, people who do substantial barter transactions have come under heavy pressure.

The 16th Amendment was Never Properly Ratified

This is the argument that some tax protesters make. I'm not sure if this is the argument that Ron Paul makes. I saw a post on a Ron Paul forums saying that Ron Paul supports this argument.

There also are some arguments that say that the law authorizing the income tax is incredibly complicated and vague. It doesn't clearly state anywhere that the income tax was meant to apply to individuals. However, IRS agents and tax courts have ruled that the IRS' practices are acceptable. I'm not sure if it's been appealed to the Supreme Court.

Income is not Properly Defined

This isn't an argument used by tax protesters, but I like it. The 16th amendment leaves it up to Congress to define "income". In the late 19th century and early 20th century, "income" meant investment income. In those days, income was things like stock dividends and rent collected. Income meant "passive income". Wages were separate from "income". Is it possible that people who voted for the income tax amendment thought that it was applying only to investment income and not to wages?


Abolish the Federal Reserve, Fund Government via Seignorage

If the Federal Reserve were abolished, the government could fund its activities primarily though seignorage, the printing of new money. See my posts on the Federal Reserve for more information on the injustice of the Federal Reserve System.

The economy grows by 2-4% per year, and inflation is currently 3% according to the official CPI, but actually 7-10% according to more realistic measures. If you believe the official CPI, the government could print 5-7% more money each year and spend it directly into circulation, and the average person would experience the same inflation rate they do now.

This alone would probably be more than enough to fund the government's activities. The government should reclaim the profits that currently accrue to the financial industry due to the Federal Reserve's interest rate fixing practices.

Abolish Fractional Reserve Banking, Fund Government via Seignorage

Currently, banks effectively print new money when they loan out customer deposits. The right to create money should be an exclusive perk of the government. Banks would be required to keep customer deposits segregated, invested in treasury bonds, paying customers that interest minus the bank's expenses. If fractional reserve banking were outlawed, banks would have to borrow from the government, and in turn loan that money out. Banks would borrow from the government at a slight premium to the treasury bond rate, say 0.50% more. The spread between the treasury bond yield rate and the loan rate would be seignorage income for the government. Currently, the financial industry recognizes seignorage profit whenever it creates new money via a fractional reserve loan.

The two items above should be enough to fund the government and have surpluses, without any other taxes at all.

There are still other means for the government to raise money.

Tariffs and Excise Taxes

The Constitution allows the government to collect tariffs. A tax on imported oil is an example of a tariff.

The Constitution allows excise taxes. A tax on tobacco sales is an example of an excise tax. A national sales tax would be an example of an excise tax.

However, tariffs and excise taxes cannot be a percentage of the goods sold. For example, a federal tariff or excise tax of $0.50/gallon on oil is valid. A tariff of 20% is invalid. The tax must be per quantity, not a percentage of price.

A Direct Tax Based on the Census

A direct tax of a fixed amount per person would also be a valid tax. Such a tax would be regressive. The Constitution allows each state to decide how the fixed tax per person is allocated.

Who Needs Government, Anyway?

With a fair monetary system and taxation system, big government would be unnecessary. It probably is a good idea to cut back on the government's taxation power and its size. However, there are a large number of people dependent on government subsidies, pensions, and handouts. They won't give up their perks.

The welfare state evolved to compensate for defects in the monetary system and taxation system. With a fair economic system, welfare would be unnecessary.


The Income Tax Discriminates Against Labor and in Favor of Capital

Different Tax Rates for Wage Income and Capital Gains

Ordinary wage income pays around a 25% federal income tax, plus a 15% Social Security and Medicare tax. Half the Social Security and Medicare tax is paid by your employer, but the fact that your employer has to pay it means that less money is now available for salaries. Without the employer portion of Social Security and Medicare taxes, your salary would be 7.5% higher, even though this doesn't show up as a deduction on your paycheck.

Capital gains are taxed at a rate of 5% or 15%, if it's a long-term gain. Stock dividends are also taxed at 5% or 15%. Furthermore, if a stock has appreciated in value, you don't realize the income until you actually sell it, making the effective annualized tax rate a lot lower for a long-term investor.

Social Security and Medicare taxes do not need to be paid on capital gain income and dividend income.

Labor is Assigned a Value of Zero

If I buy a stock for $50/share and later sell it for $60/share, I don't owe $60/share in capital gains. I only pay tax on the $10/share gain.

If I sell my labor for $30/hour, I owe tax on the full $30/hour. The tax law assigns a value of $0 to my time until I have sold it.

Really, when I sell my labor for $30/hour, my time had some value to me. I should only be taxed on the difference between the intrinsic value of my time and the wages gained. You could argue that my labor had a value of $30/hour, because that's what I sold it for. Under that viewpoint, wages should not be taxed at all because I sold something and received something of equal value in return, for a net gain of $0.

For example, instead of working for $30/hour, I could have done repairs on my house, saving $10/hour I would have paid someone else. In that case, I only gained $20/hour by working instead of fixing my house myself. Consider another example. I work for $30/hour but I have to send my children to a daycare center paying $15/hour. I only gained $15/hour by working, but the full $30/hour is taxable income.

The courts have made it clear that taxing labor income is legal. I'm pointing out that this method is biased against labor.

Income Taxes Cause Inefficient Allocations of Capital

If I buy a stock for $5/share and it is now worth $50/share, I might be reluctant to sell because of the capital gains I would owe. I might be better off selling some of the stock and investing it elsewhere, but I am discouraged from doing so because of taxes.

Similarly, suppose a corporation wants to sell a factory for $100M, for which it paid only $10M years ago. It will have to pay taxes on that $90M gain. Due to the effect of taxes, the corporation might be reluctant to sell its factory. It would have sold it for $100M, but due to the tax cost it is effectively selling it for less. That factory is then denied to another business that might have used it more efficiently.

If a business loses $100M, its owners take the full $100M loss. If a business makes $100M, its owners only get to keep a fraction of the gain and the government keeps the rest. Income taxes cause businesses to be risk-adverse, because the reward for success is diminished.

Income Taxes Exacerbate the Effect of the Hidden Inflation Tax

If I invest $10,000 in a money market account for 1 year, earning 5% interest, I have to pay taxes on the $500 interest I received. For a federal tax rate of 25%, I paid $125 in taxes. My effective interest rate was only 3.75%. A lot of the interest income I received was merely compensation for inflation. Inflation is probably higher than 3.75%, so I actually lost ground relative to inflation.

If I buy a stock for $10/share and sell it 10 years later for $30/share, I owe taxes on the $20/share gain. However, during those 10 years inflation might have been 70-100%. About $7-$10/share of my gain on the stock was merely compensation for inflation. I have to pay taxes on the additional stock price gain that was merely compensation for inflation.

Further, most tax brackets are not properly indexed to inflation. The example that most people know about is the alternative minimum tax. Using the CPI to index tax brackets is wrong, because the CPI understates the true inflation rate.

Income Taxes Force People to use Dollars and Makes Barter Impractical

Even if a group of people saw the absurdity of the dollar and decided to boycott it, the income tax prevents them from doing this. People could boycott the dollar and return to a barter system.

However, the IRS demands that people performing barter transactions report the dollar-equivalent value of their transactions as income. The income tax must then be paid in dollars. The government would not accept barter as payment for income taxes.

Even if someone wanted to boycott dollars, they would not be able to do it completely because they would need to acquire dollars to pay taxes. That's why the IRS has cracked down so heavily on private communities that try to return to a barter system.

Without income taxes, the dollar would be completely worthless. People would switch to other means of conducting trade, and only acquire as many dollars they need to pay taxes.

The Dollar is Backed by Violence

Even though the dollar is inherently worthless, it is actually backed by something. Every economic activity in the US is subject to the income tax. Income taxes must be paid in dollars. This means that the dollar is effectively backed by all the economic activity in the US. The value of a dollar is thus proportional to the effectiveness of the government in collecting income taxes.

In other words, the dollar is backed by the US government's willingness to use force against its citizens, to require them to pay income taxes. The dollar is backed by the US government's willingness to invade people's privacy to make sure all economic activity is reported as taxable income.

Think of a dollar as a receipt that says "bearer may conduct $3 of economic activity", assuming a 33% income tax rate. The dollar has value because the IRS will enforce collection of the receipts. The IRS ensures that all economic activity is reported and taxed.

Dollars have value because the rules for economic activity in the US are still more favorable than the rules for economic activity in other countries. Even with the huge drag due to income taxes, the rules for commerce in the US are more favorable than in other countries. A dollar gives the bearer the right to conduct economic activity in the US, and people from other countries frequently can conduct economic activity more efficiently in the US than in their home country.

Other Constitutional means of tax collection do not require citizens to report all economic activity to the government. Under such a system, the dollar would only be backed by those activities that are taxed, and not by all economic activity.

The Income Tax Effectively Converts all Citizens into Government Slaves

The income tax means that the government gets a cut of all economic activity. Anytime someone does productive work, they must report it to the government for taxation. It is illegal to do productive work without being taxed. Income taxes require me to hand over 40% of everything I produce to the government.

It is as if every citizen is required to work 4-5 months per year directly for the government. I am given limited freedom to choose my job, because the "free market" allocates labor more efficiently than a pure slave system can. However, the requirement that I give a percentage of my productivity to the government makes me a slave. I have certain limited property rights and a limited ability to structure my savings to minimize taxes, but I am still a taxation slave.

Effectively, the income tax means that I must get permission from the government in order to work. I cannot work without giving dollars to the government. That's functionally the same as needing government permission to work.

Friday, July 27, 2007

The Liberty Dollar Scam

The idea of privately-issued money seems attractive to me. However, when I saw Liberty Dollars and how they are implemented, I was deeply offended.

Liberty Dollars are issued both in coins and in paper. A 1-ounce silver coin has a face amount of "$20" stamped on it. This is wrong, because an ounce of silver is currently worth around $13. The coin is not worth $20. It is only worth its metal value.

The trick of stamping a coin with a face amount greater than its metal value only works for the government, because it will use force to back up its money. Further, the Liberty Dollars are made to look sort of like regular money, which is potentially confusing for the average person.

Even worse, you can get a $20 paper Liberty Dollar. This is backed by one ounce of silver, according to NORFED, the corporation that sponsors the Liberty Dollars. However, if the price of silver goes over $20/ounce, they will halve the amount of silver that each liberty dollar represents. In other words, your $20 paper Liberty Dollar, which represented one ounce of silver before, now represents only a half ounce of silver. Who gets the rest of the silver? It is profit for the NORFED corporation!

If you're going to have a paper certificate that represents silver, you should make the amount of silver constant. Devaluing the money when the price of silver goes up defeats the entire purpose. Fortunately, that $20 coin still has an ounce of metal. You can even pay a reminting fee and have it changed into two half-ounce $20 coins. In other words, if you are dumb enough to use Liberty Dollars, make sure you get actual silver rather than paper. Only pay based on the silver content, and not the face amount of the coin.

Besides, carrying around a couple of ounces of silver or gold is not a serious burden. Silver and gold coins actually are usable as money, because the price of the metal is so high! There's no need for paper representing gold or silver; you might as well use the actual metal.

The bottom line is that if you do want to use silver as money, get generic silver coins where you'll only be charged the spot price of silver plus a transaction fee. Paying $20 for $13 of silver is stupid. Further, it's always better to be holding physical silver rather than paper that's a promise for silver. You never know when the issuer will go bankrupt or default. If you did pay $20 for $13 of silver, at least you may have a profit eventually if silver goes over $20/ounce.

Further, Liberty Dollars don't allow you to fully boycott the Federal Reserve. Liberty Dollar transactions are still taxable, and you need to pay income taxes in regular dollars.

I'm so offended by Liberty Dollars. There are legitimate concerns with Federal Reserve Notes, but Liberty Dollars are just preying on people who are mad at the government and ripping them off.

Thursday, July 26, 2007

It's Hard to Start a Business

What are the obstacles to starting your own business? I can do productive work, probably better than most people. As an employee, most of what I produce goes to other people. Taxes and inflation take away 40-50% of my salary. I pay tax (in a sense) to my employer. Part of what I produce goes to his profit. Part of that is a tax rather than true earnings, because of the obstacles to forming a new business. It's much harder to start a software company today than 10-15 years ago; the first movers had an advantage. It's possible; it's just a lot harder.

People say "if you don't like being an employee, start your own business". It isn't as easy as it sounds. There are a lot of obstacles, put there on purpose by the government and large corporations.

One obstacle is marketing and attracting customers. It isn't enough to have a good product; people have to find out about it somehow. The problem there is that there's a information distribution monopoly by the media and newspapers. It's very hard to reach potential customers without their help. One of the roles of the red/pink market is that it matches workers and employers.

Large corporations like to buy from other large corporations. They don't like to buy from small businesses. Government regulations and the corporation's own bureaucracy are a hindrance. In the eyes of a large corporation, it isn't worth the hassle or risk to deal with a small business.

Further, if you're an independent contractor or consultant, you're still a form of employee. Your income is still limited by the amount of hours you bill. If you have only 1 or 2 customers, you have the same problems as an employee. To have a viable business, you have to be producing something and selling it to a lot of different customers.

Ideally, the customers of a small business should be other small businesses. However, regulations and the Federal Reserve's cheap monetary policy favor large businesses over small businesses. There aren't enough small businesses around. If there were lots of existing small businesses, then it'd be easier to start a small business that targeted individual owners. Selling to a large corporation, you aren't selling to the owner. You're selling to someone who may prefer to give the contract to his friends rather than buying the best product.

They say that the key to starting your own small business is "networking". In other words, if you have a contact at a large corporation who will buy your product, then you have a viable business. That isn't really a free market. That's more like nepotism-capitalism or crony-capitalism. A skilled worker without "contacts" is stuck working as an employee.

Why should the ability to do productive work and the ability to sell be completely divorced from each other? It's an intentional structural defect in the economic system. It's red market agents protecting their turf. Red market agents like to deal with other red market agents. They don't want to deal directly with white market workers, except to cheat them.

Another problem is compliance with government regulations. I'd have to spend a lot of effort making sure I'm compliant with tax laws and other regulations. I'd have to incorporate to protect my personal assets. I'd probably have to hire a lawyer and accountant to help me, but I'd still need a basic level of competence to make sure they do their jobs correctly. If my lawyer or accountant make a mistake, I'm still liable. I'd be $5000-$10,000/year in the hole just on legal fees and accountant fees, plus the time I spent making sure they did their job correctly. Plus, I still have to pay double Social Security and Medicare taxes. I have to pay income taxes, as if I were an employee.

I'd have to pay for my own health insurance, and an individual policy is way more expensive than a group policy. Going without insurance is not an option, because the face amount for medical care is typically a lot higher than what an insurance company actually pays. Some hospital bills have a face amount of $100k but your insurance company may actually pay $20k. If you were uninsured, you'd have to come up with the full $100k. Doctors, hospitals, lawyers, and accountants have a government-endorsed monopoly, so the prices are guaranteed to be high.

Another potential obstacle is patent law. Nowadays, patents tend to be frivolously issued. It's hard for a small business owner to be aware of all the patents that are out there. If you build up a business that has some success, you may find yourself in a lawsuit over a patent you never heard of. As a small business owner, being dragged into an expensive patent lawsuit is the equivalent of being forced into bankruptcy. The problem is that the patent examiner is not necessarily an expert in the subject domain. For example, Amazon's "one-click" patent is kind of frivolous. The idea that you can set up a system that makes it easy to buy things online isn't patentable. It's an idea that's intrinsically obvious to any expert programmer.

Another example is Research in Motion's Blackberry patent lawsuit. If you're going to set up a system for sending wireless E-Mail, there are only a few reasonable approaches; these systems would be obvious to any computer expert. Someone had patented one of these methods. The patent was bought out by a patent holding company who used the legal system to extort a huge settlement from Research in Motion. In the Blackberry case, the original inventor of the patent wasn't even the person who benefited. The patent lawsuit corporation benefited from the patent. The patent lawsuit corporation didn't even have a product that was competing with the Blackberry. The effect of that patent was purely destructive. In other words, as a small business owner, you may find yourself frustrated by patents you never heard about. Large corporations sign patent treaties with each other, mutually licensing their patents and squeezing out all smaller competitors.

Another obstacle is raising capital. When a large corporation borrows, it gets to borrow at slight premium to the Fed Fund rate. When an individual borrows, the individual has to pay a much higher rate. The individual might even need to pledge his home or personal assets as collateral. The owners of a large corporation are not taking much personal risk, because their shareholdings are diversified. A small business owner is typically risking all his savings on his business.

Summarizing, most of the obstacles to starting your own business are defects in the financial system, legal system, and information distribution system. Those defects are there on purpose, put in place by large corporations to discourage competition. The obstacle to starting a business isn't someone's ability to do productive work. It's the fact that an entrepreneur has to deal with lots of artificial regulatory and legal hassles, rather than just doing something productive and useful.

Tuesday, July 24, 2007

The Social Credit Monetary System

The Social Credit Monetary System is a sound basis for a monetary system. It completely eliminates the need for a bank, or even a centralized issuing authority.

Suppose that A manufactures and sells shirts for $20 each, and B manufactures and sells shoes for $60 a pair. In a pure barter system, A could trade with B, three shirts for one pair of shoes.

In the current economic system, A and B would never perform a direct barter exchange. With a 50% taxation rate, for example, A would need to sell 6 shirts to get enough money to buy one pair of shoes. A sells 6 shirts for $20, pays $60 in taxes and has $60 left. B needs to sell 2 pairs of shoes to get enough money to buy 3 shirts. The government has stolen half of A's and B's work. Wouldn't it be nice if A and B could barter directly with each other and not report their transaction to red market agents? It's none of the government's business what A and B decide to do in private. Besides, it would be very difficult to enforce unless red market workers spy on everyone all the time. The Social Credit Monetary System has no centralized issuing authority. This makes confiscation via taxation or inflation difficult.

In this post, I ignore the confiscatory effect of taxes. Taxes could be collected under a Social Credit system, by giving credits to the government. This would allow for 100% transparency in how tax money was spent. Even better, under a Social Credit system there might be no involuntary taxes at all. People would only pay for services used.

Instead of quoting prices in dollars, A and B could have quoted prices in silver. For example, A could sell shirts for 1 ounce of silver each. B could sell shoes for 3 ounces of silver a pair. They could quote prices in gold. They could quote prices based on the time spent laboring. For example, it takes A 1 hour to make a shirt and B 3 hours to make a pair of shoes. However, there's a defect in quoting prices based on time spent laboring. Perhaps making shoes is harder than making shirts. Perhaps B is a more efficient worker than A. Perhaps shoes have more expensive raw materials than shirts.

The important thing is that A and B agreed that a pair of shoes is worth 3 times as much as a shirt. The same ratio of 3:1 applies no matter what they agree to use as money.

An alternate monetary system should not use Federal Reserve Notes or any fiat money as its basis. That defeats the entire purpose of an alternate money system. People could still trade for Federal Reserve Notes if they want to. People still need Federal Reserve Notes to pay taxes and purchase pink market services, even if they work under a Social Credit Monetary System sometimes.

People could use anything they wished as money, provided they agree on a method to convert from one to the other. For example, if two people agree that 1 ounce of gold is worth the same as 20 ounces of silver, then they can trade if one person has gold instead of silver. People can convert from silver to fiat money at the current market price.

If I was starting a Social Credit Monetary System, I would organize it so that people could use anything they wanted as money. I'd prefer to do all my personal transactions in silver or gold.

Below, assume all prices are in ounces of silver, but any unit of stable value works. Quoting prices in dollars doesn't work, because the issuing authority for dollars inflates. Using gold or silver makes sense, because they have stable real value and can't be forged. The mining rate of gold or silver is slow enough to not affect things much.

In the Social Credit Monetary System, everyone starts with a balance of zero. There is no central bank or issuing authority. Continuing our above example, A sells shirts for 1 each and B sells shoes for 3 a pair. If A buys a pair of shoes from B for 3, now A has a balance of -3 and B has a balance of +3. If C buys 3 shirts from A, now A has a balance of 0 (he owes B 3 and has a credit of +3 from C), B has a balance of +3, and C has a balance of -3. Suppose that B and C trust each other. Then, B can allow A to exchange his debt for for C's. A's balance is now zero, B has a balance of +3 (owed by C), and C has a balance of -3 (owed to B instead of A).

If B and C did not trust each other, then B would be unwilling to let A swap C's debt for his own. A would have to carry a debt of 3 to B and a credit of 3 from C. If B demanded payment of physical silver, than A would have to call his debt from C. If C defaulted, then A would have to come up with silver via some other means.

Suppose that D has a balance of -1000. D wants to buy a shirt from A for 1. A will look at D's balance of -1000, and may refuse the transaction. He might demand immediate payment in physical silver. On the other hand, B might come to A and say "D is a good guy. He'll pay off his debt eventually." In that case, A would accept a debt of 1 from D, but A would hold B accountable if D defaulted.

There is no centralized issuing authority. When C says he has a balance of -3, he should also cite who has a debt to C and who has a credit to C. This allows others to check C's trustworthiness.

Very little physical silver needs to be delivered. It works as long as most people keep a balance near zero, and the parties mutually trust one another. Further, suppose that B was a very skilled shoemaker. He might have a large net positive balance of payments. In that case, instead of demanding physical silver, he might be content to have A, C, and D owe him potential future favors. Unlike a bank, who would extort via the Compound Interest Paradox, B would extend credit to his friends for future favors. If the unit of value is stable, such as an ounce of silver, then B does not even need to charge interest. In fact, B might be better off leaving some of his wealth with A, C, and D. If B has physical silver, red market bandits could seize his silver. (An IRS seizure is an example of red market theft.) Red market agents can't steal the favors owed by A, C, and D! (However, red market agents could kill or imprison all four of them.)

Notice that in the Social Credit Monetary System, you can't just keep track of the total balance. You also have to keep track of who owes what to whom. Debts can only be exchanged when the parties mutually trust one another. If someone has an imbalance of payments, they can always deliver physical silver or other goods to correct the imbalance. There is no centralized issuing authority. A's debt is backed by A and only by A. If A dies with outstanding debts and insufficient assets, then his creditors are stuck.

This system has no centralized issuing authority. There is no possibility of the Compound Interest Paradox sucking away the wealth of society. People can still make loans at interest, if they want to. In the above example, A could offer to D "I'll sell you a shirt for 1.05, but you don't have to pay me for a year."

The Social Credit Monetary System has a much sounder basis than the traditional financial system. There is no need for a centralized issuing authority. There isn't even a need for people to trade physical silver or gold, if everyone keeps a balance of payments. Everyone keeps track of their own transactions. It is potentially cumbersome and different that what people are used to. However, computers could easily process the transactions. It could be implemented in a way that is easy for the average person to understand.

Sunday, July 22, 2007

Reader Mail #1.1 - Educating Clueless Losers is Pointless

I received another E-Mail from that same reader. I'll paraphrase his question and summarize my response.

Dear FSK,

I'm still debating clueless losers in another forum. They raised a whole bunch of stupid arguments and I can't really answer them all properly. Will you give it a try?

Wage Slave Wasting His Time Educating Fools

The topic of the Federal Reserve was initially raised in a forum about cars. The question that started the thread was "Am I better of paying for a car with cash, or taking out a loan?"

I'll answer the initial question first. This is a simple Discounted Cashflow Analysis. The first question is: What rate of return do you expect to earn on your other investments? If you keep your money in a bank account earning 1%, you're probably better off paying cash (and you're also a fool for letting inflation steal your savings). If you believe you can get 6% investing in the stock market, use that rate. If you believe you can get 10%, use 10%. I have been averaging over 15%/year on my investments, over a 7 year period. After 7 years, I'm not sure if it's luck or skill or a combination of both. I think that my knowledge of the structural flaws in the monetary system have helped me be a better investor.

The other question is: Do you have other loans at a cheaper rate? If you have a mortgage at 6% and your car loan is 8%, you're better off paying for the car in cash and keeping your mortgage.

As long as you have a payment schedule for the car loan and a lump-sum cash price, you can do a discounted cashflow analysis to figure out the implied interest rate. The interest rate the car dealer is telling you is probably wrong. You have to take into account all fees and the "discount" you might get for paying cash. I would advise you to do the calculation yourself.

The Discounted Cashflow pricing model is sophisticated enough to handle a comparison of (1) purchase with cash, (2) purchase via loan, and (3) lease. When you analyze the loan and the lease, you need to analyze *ALL* payments, compared to the price you'd be charged with the cash purchase. This lets you calculate the effective interest rate of the loan. A lease is slightly more complicated, because a lease usually contains an option to purchase the car at the end of the lease term; valuing this option is tricky.

There is an inherent risk with leverage. You don't know when the next bust cycle will occur. If you use leverage, you risk being forced into bankruptcy during the next bust cycle. Any leverage used should be carefully minimized.

Typically, the car loan will be at a sufficiently high interest rate to make it unattractive compared to other ways to borrow money for investing. However, you can use a Discounted Cashflow analysis to do a true comparison. Excel has a function that calculates Discounted Cashlfow pricing for you.

Now, I'll address the specific points raised by the clueless losers in that forum:

The Federal Reserve only fixes short-term interest rates. The Federal Reserve does not fix long-term interest rates. Long-term interest rates are chosen by the free market.

That's not true, because the Federal Reserve is expected to be fixing short-term interest rates in the future. If I knew that the average Fed Funds Rate would be 5% over the next 10 years, then the yield of a 10 year Treasury bond should be 5%. If it was more or less, there would be an arbitrage opportunity. This arbitrage is performed by the "free market", but it's an inevitable consequence of the fact that the Federal Reserve is expected to set future interest rates in a certain range.

With a corrupt monetary system, how can there be a "free market"? There is some free trade occurring, but it's heavily dampened by the corrupt monetary system, the taxation system, and government regulations.

This FSK guy isn't citing facts from reliable sources. Therefore his analysis is wrong.

M2 is growing at a rate of over 6% per year. You can look that up on the Federal Reserve's website. The current Fed Funds rate is 5.25%. You can look that up in many locations. Let's see, 5.25% minus 6% is -0.75%. Real interest rates are negative. I used 100% mainstream information sources for that part.

Some people say that M3 would be growing at a rate of 8-10% or more, if the Federal Reserve were still publishing M3. There's no "reliable source" for that anymore. Why not?

The Federal Reserve's policy of debt-based money can be confirmed from mainstream information sources. The Compound Interest Paradox is just straight Mathematics. The Compound Interest Paradox is very simple. When money is created via debt, only the principal is created. The money required to make interest payments is not simultaneously created. This guarantees that debts increase exponentially faster than the money supply over time. The Compound Interest Paradox guarantees that everyone is enslaved under a crushing debt burden. Even if I have no debts, everyone around me has crushing debts. I have to compete with debt-slaves when I look for a job. I am forced to accept the same working conditions as debt-slaves, even though I have no debts.

Unfortunately, if you aren't able to understand the Compound Interest Paradox, I'm probably not going to be able to help you. It took me a couple months of thinking to figure out what other sites were complaining about when they mentioned the Compound Interest Paradox. I think I've managed to explain the Compound Interest Paradox in simple terms.

The obsession with "reliable sources" is a form of the Strawman Fallacy. It's a form of censorship. A lot of "reliable sources" are heavily censored. To perform a true analysis, it is frequently necessary to cite alternative information sources. That's one of the things I'm trying to provide in my blog. I read other "alternative sources" and translate the information into simpler language. For example, I think I do a good job of explaining The Compound Interest Paradox in simple language.

Everyone knows that bloggers who disagree with mainstream media sources are insane.

This is a bias that mainstream news sources are themselves spreading. I've heard many people repeat this.

If I controlled a newspaper like the NY Times, I would write about The Compound Interest Paradox at every available opportunity. If I controlled a major TV station, I would do my best to educate people about the fundamental structural flaws in the monetary system and taxation system.

Fortunately, I don't control a major newspaper or TV station. I'd probably die a mysterious death if I owned a mainstream media outlet and tried to publish such stories. Currently, my audience is only 150 people. I will educate them before attempting to reach a wider audience. As an obscure blog, I can fly under the radar of the bad guys.

I know that it is kind of incredible to realize this. It is a huge mental block to overcome. It's kind of depressing to realize this complete and total betrayal by mainstream news sources. It's more comfortable for you to think that I'm insane rather than actually check my analysis.

I consider it a major defect in the education I received, that The Compound Interest Paradox was never mentioned. I've read several economics books, and not one mentions The Compound Interest Paradox.

Are you saying that if the mainstream news doesn't cover something, that automatically means it isn't true?

It is much more convenient for you to believe that there is something wrong with me. The only alternative is extremely depressing. You don't want to realize that you have been completely and totally betrayed by television, newspapers, and the educational system.

I view this as another instance of The Grand Conspiracy Experiment. Anyone who suggests there is a big and nasty conspiracy is automatically insane. Their opinions are not worth considering. Everyone must believe The Strawman Fallacy. This guarantees that the big and nasty conspiracy will continue to exist forever.

It is kind of amusing. The person citing my blog in that car discussion forum is performing The Grand Conspiracy Experiment for me.

FSK proves he's a fruitcake when he starts talking about the Communist Manifesto.

This point was correctly answered in the forum. This is the Strawman Fallacy. If you disagree with my analysis of the Communist Manifesto, that does not detract from my analysis of The Compound Interest Paradox. My two strongest arguments are "The Federal Reserve is Evil" and "The Income Tax is Evil". I have yet to see any convincing arguments that the Federal Reserve and income tax are not evil.

I like my post on the Communist Manifesto. I concluded that 9/10 planks were implemented in the USA. Do you disagree?

Actually, I think my fruitiest post is the one on The Supreme Leader of Humanity. I'm not 100% convinced there actually is a Supreme Leader of Humanity. The possibility is serious enough that I think it's worth mentioning. My post on Transistors and UFOs is also kind of fruity. I think those topics are interesting, and so I mention them. Why should I censor myself because of The Strawman Fallacy?

When the stock market goes up, new money is created.

This is false. New money is created by a bank when they issue a fractional reserve loan. Typically, banks loan out the maximum amount they are legally allowed; banks with surplus reserves lend them to other banks. New money is only created by the Federal Reserve when it repurchases short-term Treasury notes. This money is then multiplied by banks as fractional reserve loans, driving up the money supply.

Consider a specific example. I make a shirt and sell it to you for $10. Has the money supply changed? No. The money supply is the same. You have $10 less and I have $10 more. Only banks and the Federal Reserve have the power to create money. When I made the shirt, I didn't create money. I created wealth.

Creating wealth is deflationary. There are more goods and services, but the same amount of money. Therefore, prices should decrease over time. Prices don't actually decrease, because the Federal Reserve creates new money faster than new wealth is created.

Similarly, the stock market does not create money. When stock prices go up, the stock can be used as collateral for loans and cause money creation that way. Stock prices go up, because the Federal Reserve keeps printing new money. As the rate of money creation goes up or down, stock prices go up or down. As the expected future rate of money creation goes up or down, stock prices go up or down.

If I buy a share of stock from you for $50, that transaction neither created nor destroyed money. You have $50 more and I have $50 less. Each stock transaction, no matter what the price, neither creates nor destroys money. Many people who invest in the stock market are leveraged. They will suffer margin calls if stock prices decline, so money actually is destroyed when stock prices decline. People are forced to repay their margin loans when stock prices decline, i.e. money is destroyed. As stock prices rise, people take out more margin loans, i.e. money is created.

I'll mention this point in boldface. Wealth and money are not the same. A shirt is wealth. A piece of paper with the number "20" printed on it is money. In a fair monetary system, they would be practically equivalent. In a fair monetary system, the amount of money someone has would equal the amount of wealth they had created, minus the amount of wealth they had consumed. Corrupt money is a tool that lets the bad guys steal the wealth of productive people.

If you are critical of the Federal Reserve and our monetary system, you are being critical of the free market.

The defective monetary system is the primary reason why the US does not have a free market. The defective monetary system is the primary reason the US economy resembles a communist dictatorship more than a free market.

I would like to see a free market. As an extremely skilled worker, I would welcome the opportunity to sell my services in a free market. Unfortunately, no free markets exist anywhere in the world.

Guernsey has a free market.

Actually, it doesn't. According to the Wikipedia article cited, British pounds trade interchangeably with Guernsey's money. This makes the British central bank Guernsey's central bank. Further, Guernsey is under pressure for compliance with EU regulations. I don't think Guernsey can be accurately described as a true free market.

A free market is an abstract ideal that can't be realized.

How do you know there isn't some malicious force preventing a truly free market from existing? How do you know that there aren't a group of people who secretly control the whole world's resources? Maybe they're intentionally preventing free markets from existing, because they would represent a threat to their absolute power?

If you're in debt and there's hyperinflation, you're screwed.

That's false. If you're in debt and there's hyperinflation, it's like you can repay your loan for nothing.

If you're in debt, the thing you have to fear is deflation. The Federal Reserve will never allow deflation over an extended period of time. That would benefit the average person, who is holding primarily cash. In the late 1990s, there was deflation briefly. Due to productivity gains from computers, the economy was expanding faster than the Federal Reserve could inflate the money supply. New wealth was being created too quickly.

I started my own business without taking on any debt. Worship my business acumen!

It is quite impressive to start a business without debt. You were overcoming a humongous handicap. Why should the monetary system be so unfair that a successful small business is the exception, rather than the rule? Why should the monetary system be so unfair that only exceptionally talented people can successfully start their own business?

The 1929 stock market crash was caused by greedy speculators.

The 1929 stock market crash was caused by the Federal Reserve.

Quick trivia question: Was the Federal Reserve created BEFORE or AFTER 1929? Most people will answer AFTER. The correct answer is BEFORE. The Federal Reserve was created in 1913.

The boom in the 1920s was caused by the Federal Reserve. The Federal Reserve kept interest rates at an artificially low level. This encouraged a lot of speculation in the "free market". Prices shot up. The Federal Reserve insiders knew that interest rates were going to be jacked up in 1929. They sold assets and stopped issuing loans before the crash. Then, the Federal Reserve jacked up interest rates, causing the crash. The insiders made a bundle, buying assets cheap after the crash. The non-insiders were all bankrupted.

This cycle is repeated every 5-20 years. The average person is not an insider. The average person doesn't know when the bust is going to occur, so it's risky for the average person to take on debt. A lot of wealth was confiscated in 1929, so the boom/bust cycles don't need to be as severe anymore.

There was a banking crisis in 1933. This was "solved" by President Roosevelt. President Roosevelt confiscated everyone's gold and declared the United States bankrupt. The US government defaulted on its promise that dollars were backed with gold.

There can't be a fundamental structural flaw in our monetary system. Congress would never allow such a thing to happen. The government is looking out for our best interests.

Are you kidding me?

Let's start with one specific example. Some polls indicate that over 70% of the population favors an immediate withdrawal from Iraq. Why does the US still have troops in Iraq?

Similarly, even if 70% of the people managed to develop extreme outrage towards the current monetary system, that still doesn't mean that the monetary system would be reformed. It is impossible to achieve meaningful reforms by voting.

The international bankers bribed a bunch of Congressmen and the President to pass the Federal Reserve. They were able to get banking leaders in the US to support a corrupt monetary system, because the banking leaders knew they would benefit handsomely from the Federal Reserve. They knew in advance when interest rates would be raised or lowered, and made outrageous profits.

In case you haven't noticed, Congressmen are not selected for their intelligence. They are selected for their ability to look good on TV. They are selected for their ability to be corrupted by lobbyists. Most Congressmen don't have the time to read every single law. They vote the way their backers tell them to vote.

Schools are intentionally dumbed down. People are intentionally kept ignorant about Mathematics and economics. It is important to make sure most people don't understand the Compound Interest Paradox.

I'm afraid that the Compound Interest Paradox is sufficiently complicated that only 1-5% of the population is capable of understanding it. It is impossible to make more than 50% of the people understand and vote for a sound monetary system.

There are too many people who profit handsomely from the corrupt monetary system and taxation system. They won't give up their perks voluntarily.

I don't live in the USA. Why should I care about the Federal Reserve?

All countries have a corrupt monetary system and taxation system. Replace "Federal Reserve" with the name of the central bank in your country. They're all the same.

The only solution is for Congress to repeal the Federal Reserve Act. Alternatively, Ron Paul could be elected President and abolish the Federal Reserve via executive order.

There is zero chance of that happening. It is impossible to educate 50% of the people and make them be strong advocates for monetary reform. Even with 50% support, how do you know which candidates to vote for? There are all sorts of dirty tricks that can be used.

There is another solution. People should develop their own private monetary system. They should do productive work and not report it to the government for taxation and confiscation. In other words, it's the Ayn Rand "Atlas Shrugged" solution. It doesn't matter what the clueless fools decide to do. They aren't important. It's only necessary to convince the people who are smart enough to be productive workers. I'm planning to give the details of this solution in later posts.

I'm not just some idle talker. I have a specific solution and I'm getting ready to start looking for people to implement it.

I tried to answer all the points raised on that forum. Let me know if I missed any.

That's one of the reasons I decided to start my own blog. It's impossible to get an intelligent debate on someone else's forum. I try to answer all comments here, except for those that are obviously spam.

I'm not really interested in wasting my time debating clueless losers anymore. I'm not responsible for what happens to them. On the other hand, I'm trying to answer all reasonable questions.

My intended audience is people who are smart enough to understand things like the Compound Interest Paradox and the Strawman Fallacy. I'm not going to censor some of my weaker arguments, so that people will take my stronger arguments seriously. I have yet to see any convincing arguments anywhere that the Federal Reserve is not evil and that the income tax is not evil.

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