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Friday, August 10, 2007

Reader Mail #3 - Collected Comments

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. Sometimes, there's a question whose answer is too complicated to fit into the comment box. It looks like I have enough material to make this a regular feature.

According to Google Analytics, I'm up to 300 Absolute Unique Visitors now, with 50-70 regular visitors.

Google has taken my blog out of "Supplementary Results". I'm back in the main index. Apparently, enough people are linking to my blog to boost its PageRank.

In Reader Mail #2, Broken Ladder says:

1. I don't care what FSK says about voting. Range voting will solve most of the world's problems.

2. People are inherently collectivist. There's no escape from that.

As I said before, voting is a waste of time. Voting is not a legitimate means for establishing a government. There will be times where people rationally in their self-interest pass stupid laws. Further, not everyone has equal intelligence. It's too easy to manipulate people into voting foolishly.

I agree that Range Voting is the least defective voting method. I say that voting has no legitimacy at all. You are free to waste your time advocating for Range Voting. I don't see such a reform passing for Congressional or Presidential elections in the USA.

I also disagree that people are inherently collectivist. How do you know that there isn't some malicious force training everyone to think like a collectivist/socialist/communist? A lot of violence and government force is required to keep the fasco-capitalist, socialist, communist, police, welfare state running.

In Reader Mail #1, randyleepublic asks:

How does the Federal Reserve affect the Prime Interest Rate? Why does the Federal Reserve pay money to the US Treasury? I'm referring to "Payments to U.S. Treasury as interest on Federal Reserve notes" in their financial statements. Does this have anything to do with the Prime Interest Rate?

Implicit in this question is another question: "How does monetizing the debt work?"

The Prime Interest Rate and the line item "Payments to U.S. Treasury as interest on Federal Reserve notes" are completely unrelated.

The interest charged by someone who borrows at the Prime Rate is typically the Fed Funds Rate plus a spread, currently 3%. This "spread" of 3% is pure profit for the financial industry. They borrow from the Federal Reserve at 5.25% and loan out at 8.25%. It's pure "Illicit Interest Arbitrage". A profit of 3% is made, but no work is performed.

The Prime Rate of 8.25% is much closer to the true inflation rate of 8-12%. Many large corporations can borrow as cheaply as 6%, through bond offerings. The Prime Rate of 8.25% is charged to retail customers and small businesses. Large corporations get to borrow much cheaper than individuals and small businesses. There's a huge government subsidy to the financial industry and large corporations, paid by everyone else as inflation.

In a fairer market, individuals should be able to borrow directly from the Federal Reserve at 5.25%. Why should borrowers have to go through the middlemen of a bank and pay an extra 3%? (Of course, in a truly free market, there would be no Federal Reserve, nor any government at all.)

That's one problem with the US economy. The middleman always gets his cut, even though he does no real work. It's more profitable to be a middleman, than to be an actual worker.

When the Federal Reserve "monetizes the debt", it creates new money to repurchase Treasury notes that are nearly expired. This allows the Federal Reserve to keep interest rates at an artificially low level without doing any work. The Federal Reserve buys back Treasury notes, but it creates the money used to buy back the notes.

For example, the Federal Reserve buys back Treasury notes with a face amount of $1B. They are nearly expired, so their market value is $999M. The Federal Reserve creates a debit of $999M in its own account, and a credit of $999M in the account of whoever sold the Treasury notes, typically a bank. That is $999M of new money. Fractional reserve banking causes that $999M to be multiplied by the reserve ratio, say 10x, to $9.99B in new money.

A few days later, the Treasury notes expire. The Treasury notes are redeemed with the government for their face amount, $1B. The $999M debit in the Federal Reserve's account cancels out, leaving a credit of $1M. The Federal Reserve did no work when it purchased the bond. It created the money it used to buy back the Treasury notes. The Federal Reserve has no cost of capital. The Federal Reserve made a riskless profit of $1M. As long as interest rates are positive, the Federal Reserve can make a guaranteed riskless profit.

After using this riskless profit to pay its expenses, the balance must be returned to the Federal government. However, the Federal Reserve's open market transactions have never been audited. It could use tricks to inflate or deflate its earnings. For example, instead of printing $999M to buy the Treasury notes, it could buy the Treasury notes directly with cash on hand. That would deflate its apparent earnings.

The budget item "Payments to U.S. Treasury" is the surplus interest income being returned to the U.S. Treasury. However, the open market transactions themselves are not audited. Only the total profit is reported.

The point is not the Federal Reserve's earnings. The point is the massive subsidy to the financial industry in the form of lower interest rates. A token small payment to the Federal government deludes Congress into thinking that the Federal Reserve is good for them. If the Federal Reserve let the free market determine the interest rate, interest rates would be 8-10% or higher. Then, the banks would have to charge 11% or more as the "prime rate". That would make borrowing unattractive. Plus, large corporations would have to borrow at a fair rate, which means they would lose their massive government subsidy.

If Congress directly printed and spent its own money, without using the Federal Reserve, it could directly print and spend 6% more money into circulation each year, and people would experience the same inflation rate they do now. The Federal Reserve causes most of the newly printed money to go to the financial industry, and not to the government.

A prime rate of 8.25% is probably lower than inflation, so it still makes sense to borrow at 8.25%. However, large corporations can borrow at only 6%, giving them a huge advantage over small businesses or individuals.

On Who's the Richest Man in the World, randyleepublic says:

If there actually is a Supreme Leader of Humanity, he's just toying with us. He's giving us false hope and enjoys watching us squirm, even though he knows our position is hopeless.

I'm not sure what the Supreme Leader of Humanity is trying to do.

Is it possible that the Supreme Leader of Humanity isn't evil? After all, if he didn't seize absolute control of the entire world, someone else would have.

If the Supreme Leader of Humanity is that powerful AND evil, then it's completely pointless to do anything.

Maybe he's intentionally manipulating the current political and economic leaders into making the stupidest possible decisions? Maybe he wants the current economic and political system to collapse?

Why would the Supreme Leader of Humanity show more loyalty to the CEO of a multibillion dollar corporation, than loyalty to me? From the Supreme Leader of Humanity's viewpoint, who is more useful? He knows that the CEO is merely leeching off the rest of society. From the Supreme Leader of Humanity's viewpoint, both of us are slaves. (I would prefer to stop acting like a slave, but I need other non-slaves to trade with.)

On History - What Really Happened, TZ says:

I disagree. Fractional reserve banking is intrinsically exploitative.

I disagree with the disagreement. Contrary to popular belief, in a truly free market with no government coercion, fractional reserve banking is *NOT* exploitative. Further, there only needs to be *SOME* people smart enough to understand the potential evils of fractional reserve banking. The presence of *SOME* highly-educated honest people is enough to keep the system honest.

In a truly free market, a bank's interest income equals payments to depositors plus expenses plus reasonable profits. In a truly free market, there is no Compound Interest Paradox. Either government coercion or clueless customers are required to enforce the paradox. I assume a free market under a gold/silver standard or gold standard. Fractional reserve banking is exploitative if ANY of the following occur:
  1. The government demands that taxes be paid in bank-issued money. This creates extra demand for the banks' product. This drives up prices over the free market level. In other words, interest rates are raised over the free market level. This is what allows the Compound Interest Paradox to begin operating.
  2. Banks conceal their books from depositors. In a free market, the creditor has the right to inspect the books of the debtor. A depositor at a fractional reserve bank is a creditor of the bank. If it turns out that bank profits are excessive, then in a truly free market more people would start opening banks. If depositors inspect the bank's books, that prevents the potential abuse where a bank issues more banknotes than deposits. Typically, government banking regulations allow banks to conceal their financial status from depositors.
  3. Banks tell their customers that they have "demand deposits". A "demand deposit" and a fractional reserve bank are incompatible, because the bank would be insolvent if all customers simultaneously demanded withdrawal. A fractional reserve bank that offers demand deposits is technically insolvent at any given time, and is committing fraud. Suppose a fractional reserve bank offers loans of average duration 90 days. In that case, the bank should tell its customers that they may only withdraw 1/90 of their balance each day. Under normal business circumstances, a bank would repurchase a customer's balance for the face amount. However, in the event of a "run", a bank would only have to honor 1/90 of its withdrawal requests each day without defaulting on its promises. If the bank is solvent, customers can always sell their balances to another bank for the face amount.
  4. The existence of "limited liability corporations". The limited liability corporation encourages nearly insolvent banks to take big risks. There is an incentive for nearly insolvent banks to lie to their creditors about their financial status. In a free market, there are no limited liability corporations. Management and the owners are personally accountable in the event of a bankruptcy.
Under a pure gold standard, fractional reserve banks provide a LEGITIMATE service. If the supply of physical gold is less than that required for trade, then fractional reserve banking LEGITIMATELY expands the money supply, provided all loans are backed by actual goods and services. An ounce of gold represents a certain amount of labor value and scarcity value. A fractional reserve bank guarantees that the real value represented by an ounce of gold, or trusted paper promise for gold, equals the real value represented by goods and services.

The problem is not fractional reserve banking. The problem is government. Compulsory taxation in bank-issued money drives up interest rates. Government regulation of banking limits the ability of fractional reserve banks to legitimately expand the money supply as the amount of goods and services increases. Government regulation of banking allows banks to commit fraud and not suffer any adverse consequences.

I'm referring to an economy under a pure gold standard or gold/silver standard. Under the current global fiat debt-based money system, the Compound Interest Paradox has the full force of law. The current global economic system is one of absolute perfect enslavement.

In a truly free market, there is no Compound Interest Paradox.

On History - What Really Happened, TZ says:

Please read Bryan Monahan's "Introduction to Social Credit" to get a more complete understanding of this subject. It really is worth the read!

I tried reading it, and it seemed like nonsense and a waste of time to me. It seemed like lots of incoherent babbling with no specific action plan.

I'm afraid that I confused people with my definition of "Social Credit Monetary System". It appears that "Social Credit" has two different meanings.

The first definition of "Social Credit" is the C. H. Douglas version. I believe this is the one mentioned in that article. I'm afraid that Bryan Monahan and C. H. Douglas are red market agents. They are lobbying to government to solve a government-created problem. Like all voting activists, they are slaves petitioning their masters to be less cruel.

According to C. H. Douglas, the Compound Interest Paradox is solved via direct payments from government to the people. New money is put directly into circulation via credits to the people. This runs completely contrary to the Supreme Leader of Humanity's program of complete economic enslavement of everyone. The Supreme Leader of Humanity will never allow government to pass a Social Credit reform of this nature.

After going to all that trouble to establish a system of perfect economic enslavement, do you think that the Supreme Leader of Humanity would allow governments to return to a fair monetary system?

I think that the Supreme Leader of Humanity actually *DOES* want a return to a fair monetary system. However, it has to be done directly by individuals. I think that the Supreme Leader of Humanity has decided that government was a bad invention and he's getting rid of government.

The Supreme Leader of Humanity is intentionally manipulating the people who think they're the economic and political leaders into making the stupidest possible decisions.

The Libertarian and Social Credit movements have been hijacked by the Supreme Leader of Humanity's spies. If you lobby for the Libertarian Party or Social Credit Party, you are wasting your time. Voting is pointless.

I'm afraid that's a very common tactic. An ideology that's attractive is corrupted by the Supreme Leader of Humanity's agents. Even if someone claims to be a Libertarian, Social Credit activist, or anarcho-capitalist, you actually have to read and understand their writing. There's a lot of fakes out there, put there on purpose as a distraction.

The second definition of "Social Credit" is that given by Louis Even in "The Money Myth Exploded". This is what I describe on my post on The Social Credit Monetary System.

I have a specific action plan. People should develop and use their own private monetary system. Lobbying the government for monetary reform is pointless. You'll never rally the 50% support you would need to enact monetary reform. However, if a group of people get together and start their own private monetary system, you can get things started with as few as 10 participants.

Under a Social Credit Monetary System, if I put money into circulation backed by my ability to do future labor, that is not exploitative. I recommend using silver as the basic monetary unit, because silver is plentiful, cheap, and has industrial uses. The gold market is much more manipulated than the silver market. Under a Social Credit Monetary System, everyone is their own bank. Metal coins make the best basic monetary unit, but people can use anything they choose.

When you refer to "Social Credit", you must be clear which version. You are referring to "C. H. Douglas' Social Credit", which I will start calling "Social Credit for Wimps". I prefer Louis Even's definition of Social Credit, which I will call "Real Social Credit" or "Social Credit". Louis Even advocates that people get together and form their own decentralized monetary system, which is the only solution that will work.

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