I've been following the main Ron Paul internet discussion forum. There has been a schism and now there is a second forum.
Based on my analysis, the reason for the schism is The Strawman Fallacy. Ron Paul has said publicly that he favors a second investigation into the World Trade Center attack, and that the first investigation was poorly done and incomplete. This causes a lot of the "9/11 Truth Movement" advocates to be strong Ron Paul supporters. They are posting many 9/11 related topics on the Ron Paul forum. (I have a future post planned for the "9/11 Truth Movement".)
However, the person who runs the first Ron Paul forum is concerned about The Strawman Fallacy. His reasoning is "The mainstream media says that supporters of the 9/11 Truth Movement are insane. If these people are seen supporting Ron Paul, that decreases the legitimacy of Ron Paul's campaign. Therefore, I must ban these topics from the Ron Paul discussion forum." That is defective reasoning.
Unfortunately, everyone is trained to believe The Strawman Fallacy. Perversely, if your primary goal is get Ron Paul elected President, it might be necessary to censor non-mainstream ideas from Ron Paul's campaign forums and meetings. I consider that to be another example of the fundamental structural flaw in the voting system.
Friday, August 31, 2007
I've been following the main Ron Paul internet discussion forum. There has been a schism and now there is a second forum.
Posted by FSK at 11:33 AM
Thursday, August 30, 2007
I've been reading the webpages and arguments of the various income tax protesters. The arguments come down to two main points. The first is "Income taxes are morally wrong". The second is "Income taxes are legally wrong."
However, most tax protesters miss out on the most important point. If you don't pay income taxes, the government will use force to take away your stuff or send you to jail. The government has far more resources than you. It has to make sure that anyone who doesn't follow its rules is punished. Even if you are morally or legally right, the government can still harass you, confiscate your stuff, imprison you, or waste your time.
As long as only a small number of people refuse to pay taxes at any given time, it is practical for the government to crack down on all of them.
Let's consider the first argument: "Income taxes are morally wrong." I agree with this argument. Unfortunately, its legal validity is zero. Income taxes are wrong because they effectively enslave people. With an income tax rate of 50%, that means that 50% of all economic activity is confiscated by the government. It's a huge disincentive to engaging in productive activity.
The income tax means that people cannot work without permission from the government. Everyone is a slave.
The income tax is immoral because it gives value to the dollar, which is intrinsically worthless. A dollar has no inherent value, except that the government demands I give it dollars in exchange for permission to conduct economic activity. The value of a dollar is thus proportional to the government's income tax collection ability. The value of a dollar is proportional to the government's spying capabilities. If there were no income tax, the dollar would have no value at all. People would switch to alternate monetary systems. Any reasonable system you can think of is better. The income tax is the reason none of them are used. Anyone who attempts to operate a private monetary system is shut down by the IRS.
The fundamental problem with income taxes is that all economic activity must be reported to the government. If two people want to make a private transaction, it should be none of the government's business. However, if the people have economic gain from the transaction, then the government claims that it is entitled to know about the activity and tax it. This creates a huge adversarial relationship between the government and its citizens.
Most of the time, taxes are collected in a manner that's transparent to the taxpayer. Payroll taxes are automatically deducted from your paycheck. The government even tends to overwithhold so people get a tax refund. This gives people the illusions that the government is giving them money when they get a refund, when in fact it is merely a partial return of stolen property. When you purchase something in a store, the sales tax is automatically added to the bill and paid by the store owner. Again, this makes the tax invisible to the average person. All corporate taxes are passed on to the average person in the form of higher prices.
What the tax protesters do is they say "Aha! I can arrange my financial activities in a manner so that I don't have to report them to the government." They can do this by performing barter transactions, although barter is tricky because it isn't commonly used. They can do this by various trusts or dealing primarily in cash. Eventually, though the government's spying apparatus, their activities are discovered and they are imprisoned or their assets are confiscated.
Then, the tax protester is forced to use the second argument. "The income tax is legally wrong." However, courts typically disallow tax protesters from making this argument in front of a jury. The courts kind of have a weird point. If some people were able to stop paying income taxes, the dollar would become worthless and the entire economic system would unravel. I think that such a fragile system deserves to unravel. Hopefully, it can be reformed in an orderly fashion.
There is another possibility. A large number of people could do substantial barter transactions and not report them for taxation. The government's power would be reduced by that amount of untaxed economic activity. As long as no dollars change hands and no records are kept, it would be very hard for the government to track the barter activity. This would weaken the government's power. At some point, the unreported economy might be bigger than the reported economy. At that point, the unreported economy could effectively hire security services to protect it from the government. That would be the end of the government, because then everyone would start seeking the protection of the private security organization instead of the government. A private police force is preferable to a government-mandated police force. In cases of suspected abuse, people would shop around for alternate vendors. This scenario is the hope of an agorist revolution.
Posted by FSK at 10:25 AM
Tuesday, August 28, 2007
I originally wrote this article for the Ron Paul wiki, and I broke it up into several pieces and copied it here.
The Federal Reserve is Unconstitutional
The Constitution grants the right to coin money to the Federal government. It does not allow the government to delegate that authority to a private corporation.
The Constitution also says Congress may "coin" money. It doesn't say anything about paper. That's probably the reason Federal Reserve Notes say "This note is legal tender" and Treasury-minted coins don't say that.
Of course, decisions by a corrupt Supreme Court have said that the Federal Reserve and Federal Reserve Notes are perfectly valid.
The Federal Reserve is a Price Fixing Cartel
The Federal Reserve's primary mission is to "fix interest rates". In practice, the Federal Reserve sets interest rates at a far lower level than what they would be if interest rates were allowed to float. This is, in effect, a huge government subsidy to the financial industry, paid by the average person in the form of inflation.
Why shouldn't the financial industry pay market rates for its supplies (money) just like every other industry?
To fix interest rates at a specific rate, currently 5.25%, is as ridiculous as fixing the price of oil at a specific price, say $10/barrel. The government could, if it wished, force the price of oil to $10/barrel by printing enough money to pay oil producers the difference between $10/barrel and the fair market price. The oil industry would love it, because it would guarantee they could sell all the oil they drilled. The average person might appreciate cheaper oil, but they wouldn't realize they were paying the costs anyway via inflation.
The economic distortions caused by artificially low interest rates are far worse than the economic distortions an artificially low oil price would cause. The costs are carefully hidden from the average person, but they are paid via inflation. Just like the oil industry would love government-subsidized artificially low oil prices, the financial industry loves government-subsidized artificially low interest rates.
Just like an artificially low oil price would enable an oil company to sell all the oil it could, artificially low interest rates allow financial companies to sell all the loans they can. Because loans are priced artificially low, when a business does a cost/benefit analysis of the merits of the loan, the loan is usually the best financing option. Cheap loans allow businesses to expand, but that expansion comes at a cost of inflation paid by everyone else.
Without artificially cheap loans, alternative financing methods would be more common. Selling equity or paying for growth from earnings would be much more attractive if loans were fairly priced.
The Government Ceded its Money-Printing Authority, Seignorage Privilege, and Sovereignty to the Federal Reserve
When the Federal Reserve was set up, Congress was stripped of its power to directly print money itself. The Federal Reserve fixes interest rates at an artificially low level. If Congress was allowed to directly print and spend its own money, this would cause market interest rates to rise, which would be contrary to the Federal Reserve's goal of keeping interest rates artificially low.
The privilege of seignorage, the profit gained by printing new money, rightfully belongs to the government. The Federal Reserve has effectively transferred all seignorage profit away from the government to the financial industry. Since the economy grows at a rate of 2-4% per year, the government could directly print and spend 2-4% more money without causing inflation. This profit rightfully belongs to the government, and not to the financial industry.
The growth rate in the economy would likely be higher if a fair monetary system were instituted.
When Congress ceded its money-printing authority to the Federal Reserve, it was the functional equivalent of Congress ceding sovereignty to the Federal Reserve. It's as if Congress signed a treaty of surrender to the international banking cartel. As part of the surrender, all US citizens were sold as slaves via the income tax.
The Federal Reserve Causes the Federal Budget Deficit
The Federal Reserve forbids the government from putting new money into circulation by directly spending it. Instead, new money is put into circulation via loans, either loans to the government or loans to the financial industry. However, when new money is created via debt, the money to pay off the interest on that debt is not simultaneously created. This means that debt always increases exponentially faster than the money supply.
Because the net total debt in the economy is always increasing, the only way that private citizens could have any money at all is for the government to have a huge debt.
That was the problem during the Great Depression. The Compound Interest Paradox sucked all the money out of the private sector. During the boom in the 1920s, artificially cheap debt encouraged speculators to borrow, expanding the money supply. The banks who controlled the Federal Reserve could see in advance what was going to happen. They were able to stop issuing loans and convert their holdings to cash before the money supply crashed. They had enough cash to survive while others were forced into bankruptcy. Then, they were able to buy assets at a bargain after the money supply crashed. The only way to reintroduce money to the private sector (i.e. stop deflation), was to have the government start deficit spending. This deficit spending in turn forced the government off the gold standard.
The interest earned by increasing the money supply via debt belongs to the government as seignorage profit. Currently, this profit goes directly to the financial industry.
The Federal Reserve Forced the US off the Gold Standard
Since the inception of the Federal Reserve, money could only be created via debt, and only the amount borrowed is created and not the money required to pay the interest. The Federal Reserve System guaranteed that total debt could only increase over time. This accumulated debt guaranteed that the government would eventually be forced off the gold standard.
The Federal Reserve is Responsible for the Economic Enslavement of Most Americans
The total amount of debt in the economy is far greater than the total amount of money in circulation. This guarantees that Americans will continually struggle to pay their bills. Through this mechanism, all surplus productivity is effectively drained from the people and turned over to the financial industry. The income tax is the other part of this mechanism, because it forces people to use dollars and enables the government to confiscate a large percentage of all wealth created by workers.
I am careful to manage my finances so that I have little or no debt. However, almost all the people around me are suffering under a crushing debt burden. Since I am competing with economic slaves for jobs, that effectively makes me an economic slave, even though I have no debt.
The Federal Reserve is a Private Corporation
The Federal Reserve is a private corporation. To a certain extent, its management is chosen by the President and Congress. However, it is carefully shielded from political influence.
The actual people who work at the Federal Reserve are chosen by the private corporations who own it. The Board of Governors has a yes/no vote on who actually works there, but the real power is still with the private ownership.
Further, even though there are 12 Federal Reserve banks, the real power lies with the New York branch, which is the one that performs the open market operations to keep interest rates artificially low.
Also, the Open Market Committee is separate from the Board of Governors. The Open Market Committee has the real power, because it is what sets the interest rate target. The Open Market Committee is appointed by the private corporations that own the Federal Reserve.
The Federal Reserve was Designed to be Unaccountable to the President or Congress
The Board of Governors serve 14 year terms, with 7 members elected every 2 years. This means that one President in a single term can only appoint two members. That means that a President who wants to fix the flaws in the system will have to wait until he has served 2 full terms and had an opportunity to appoint four members.
If it was discovered that the President was hostile to the Federal Reserve, interest rates would be raised, causing a recession. The media would blame the President for the economic problems and not the Federal Reserve. A President who is hostile to the Federal Reserve would have no chance of being reelected. In other words, the Federal Reserve cannot be controlled by the President.
Previous central banks were given a charter that automatically expired after 20 years, and then renewal was successfully fought. The Federal Reserve was given an indefinite charter and intentionally shielded from political pressure so that it would be very difficult for the President and Congress to fix the system.
If the Federal Reserve was only given a 20 year charter like the previous US central banks, do you really think it could have gotten its charter renewed during the Great Depression?
Even though the President nominates the Board of Governors, he chooses from a list provided by financial industry insiders. It would be unthinkable (and literal suicide) for the President to nominate someone who hadn't been approved by the international banking cartel.
The Federal Reserve Subsidizes Hedge Funds and Leveraged Buyouts
Due to their large asset base and risk management, hedge funds are able to borrow cheaply, paying slightly more than the Fed Funds Rate, currently 5.25%. Since interest rates are kept artificially low, the leverage hedge funds use allow them great profits. If a hedge fund uses 10x leverage, and interest rates are 3-5% below where they should be, that means that hedge funds can make 30-50% profits just from their use of leverage.
Artificially low interest rates also encourage leveraged buyouts. A company with a "clean" balance sheet (no debt) is penalized because it becomes a takeover target. This penalty exists because of artificially low interest rates. Artificially low interest rates mean that it's profitable to buy a company and load it up with debt to fund the purchase.
A company with a "clean" balance sheet is penalized because it's a takeover target. A company that loads up on debt is at risk for bankruptcy during the next deflationary recession. Either way, the banks wind up owning everything. In a bankruptcy, a company's equity is confiscated by its creditors, typically banks. Money that was artificially created by a bookkeeping trick is now converted into a tangible asset.
That's the reason activist hedge funds pressure companies with a "clean" balance sheet to borrow in order to pay a dividend or repurchase shares. If interest rates were priced fairly, it would not make sense to borrow to pay a dividend or repurchase shares. However, with artificially low interest rates, it pays to borrow to pay a dividend or repurchase shares. The interest paid on the loan is less than the expected inflation, and the loan itself causes additional inflation.
The average person knows that excessive hedge fund profits and leveraged buyouts are inherently unfair. They are unfair, but they're only made possible by artificially low interest rates. With fair interest rates, it would be much harder for hedge funds to rack up huge profits. Leveraged buyouts would be far less common, and would only make sense if the management of a company was truly incompetent.
The Federal Reserve Encourages Consolidation of Industries, Monopolies and Oligopolies
Because businesses are financed primarily by debt, the financial industry encourages consolidation because a monopoly or oligopoly is in a sound market position to pay off its loans. A larger business has an easier time borrowing money than a small business. A large business can borrow at a lower premium to the risk-free rate than a small business. That's why small businesses are squeezed out, due to the artificially cheap cost of borrowing. A small business owner tries to finance primarily through equity, using his earnings to grow his business. If a small business owner does borrow, he pays a higher interest rate. The small business owner is risking his entire business and sometimes the owner has to assume personal liability for the loan. A large business can borrow cheaply, and use the money to squeeze out competitors and then raise prices.
A small business typically tries to finance growth through equity, spending for growth out of profits. A large business can finance growth through debt. The large business is assuming less risk by taking on debt due to its size. Debt is artificially cheap, so debt financing gives the large corporation a huge advantage over small businesses.
The Federal Reserve Causes Boom/Bust Cycles in the Economy
During a boom cycle, people are encouraged to borrow and speculate due to artificially cheap debt. During the bust cycle, money is scarce and people have a hard time repaying their debt. A bust cycle is inevitable because money is only created via debt. As more loans are created during the boom cycle, those loans need to be repaid eventually. At some point, loan repayments exceed new loans and the bust cycle occurs. During the bust cycle, bankruptcies occur and some debt is converted to equity. Since debt is typically owned by banks, the banks eventually wind up owning everything.
The Federal Reserve states that its goal is to smooth out the business cycle, but that is impossible because it is the cause of the business cycle. There's no way that the Federal Reserve could keep the economy running by keeping interest rates fixed forever. At some point, loan payments would start exceeding the loans that were taken out, causing a recession.
The first business cycle induced by the Federal Reserve was the Great Depression. At that time, they didn't have the experience to know how to smooth out the cycle. As debt increases faster than the money supply, their ability to smooth out the business cycle will erode.
There were business cycles before the advent of the Federal Reserve. What happened was that the banks were informally colluding to simultaneously offer more loans or fewer loans. Large international banks were colluding and using fractional reserve banking to expand and contract the money supply. Large international banks were able to import/export gold to expand or contract the money supply. They didn't have the benefit of government-forced collusion that they do now, but they still did a pretty good job of creating business cycles to benefit themselves.
The Great Depression is explained as a consequence of largesse. Some people say a depression is the natural after-effect of an expanding economy. That is nonsense. The Federal Reserve is responsible for boom/bust cycles in the economy. Other countries also have boom/bust cycles, because they also have a corrupt monetary system and central bank.
The Federal Reserve Slows Economic Growth
Keeping interest rates at an artificially low level does not stimulate economic growth. Instead, it encourages wasteful spending on projects that aren't economically worth it.
Simple common sense says that the interest rate that maximizes economic growth is the interest rate determined by the free market. Artificially high interest rates would bring economic growth to a halt, because people would prefer to invest in government bonds instead of building things. Artificially low interest rates encourages wasteful spending; the cost is paid by everyone else in the form of inflation.
For example, suppose a corporation is considering borrowing $100M to build a factory. At an artificially low interest rate of 6%, it makes sense to build the factory. At an interest rate of 10%, which is what the free market rate would be, it would not make sense. With artificially low interest rates, the factory is built. In the meantime, everyone else experiences an extra $100M worth of inflation because of the extra money put into circulation by the loan. The inflation experienced by everyone else is more than the value of the factory. The effect of one single loan is negligible, but when you add up all of them it's a big deal.
The Federal Reserve Causes Volatility in the Stock Market
On a typical day, most stocks move up or down in unison with the indices, with a few exceptions for companies or industries that are moving on specific news. It is ridiculous to believe that a stock that was worth $50 yesterday is worth $48 today, with no substantial news released that affected that company or the economy as a whole.
What is really happening with stock market volatility is that it's volatility in the supply of money. With much more debt outstanding than money in circulation, slight changes get amplified. It's not that the stock went down 2% in one day. It's that the supply of dollars went down 2% in one day; it happened to be a day where more loans were being repaid than new loans were issued.
The Federal Reserve Gives Profits to Insiders
Someone who knew in advance what the Federal Reserve was going to do would have the opportunity to profit immensely.
When the Federal Reserve was first created, artificially low interest rates created the boom in the 1920s. People were encouraged to speculate due to artificially low interest rates. At that time, the Federal Reserve did not publish its interest rate target or reveal its intentions to the public. The Federal Reserve insiders knew that interest rates were going to rise and this would case a depression. They knew to stop issuing loans and convert their holdings to cash before everyone else knew the crash was coming. Then, they were able to buy assets cheap during the depression. They bought up stocks and the debt of good companies at a huge discount to its fair value. They intentionally prolonged the depression, keeping interest rates high, until Roosevelt became president so he could receive credit for ending the depression.
Nowadays, the Federal Reserve is under more public scrutiny. Still, someone who knew about even a 25 basis point move in interest rates would have the opportunity for a huge profit.
The Federal Reserve Ceased Publishing M3
The Federal Reserve decided unilaterally that it would stop publishing M3. The official reason that it was too hard to collect the information. That reason is silly, because instead of publishing it weekly or monthly, they could publish it quarterly or annually, which would still be sufficient disclosure. The Federal Reserve stopped publishing M3 because the huge foreign holdings of dollars would have been too embarrassing.
Ron Paul tried to get Congress to force the Federal Reserve to resume publishing M3, but failed. He said that the other members of Congress didn't understand the issue.
The Federal Reserve Has Never Been Properly Audited
The Federal Reserve has had superficial audits, so it can genuinely claim to have been audited. However, its open-market transactions have never been audited. It has successfully resisted all attempts to audit them or have them made public.
The Federal Reserve Claims that its Records are Immune from the Freedom of Information Act
On its website, the Federal Reserve claims that the details of its open-market currency operations are immune from the Freedom of Information Act. Why would they make that claim unless they had something to hide?
The reason the Federal Reserve wants nobody to see their open market transactions is that they don't want anyone knowing that they primarily act to keep interest rates artificially low. Also, I suspect that the Federal Reserve is intentionally keeping its profits low so it doesn't have to return too much surplus money to the government.
The Federal Reserve Fixes Long-Term Rates and Short-Term Rates
The Federal Reserve only directly fixes short term interest rates. The Federal Reserve claims that it allows the market to determine long-term interest rates. However, because the Federal Reserve is expected to continue fixing interest rates in the future, this affects long-term bond yields. If the 10 year bond yield is 4.8%, that means that the market expects the average short-term interest rate over the next 10 years to be 4.8%. That is approximately guaranteed by predicting the Federal Reserve's policies.
If the expected average future Fed Funds rate and the Treasury yield didn't match, then professional traders working in the "free market" would perform an interest rate swap and correct the discrepancy.
The Federal Reserve Does not Manage the Debt Demand
The Federal Reserve manages the money supply, but that's only half of the picture. It also should be managing the debt demand.
Due to the Compound Interest Paradox, the total debt can only grow exponentially faster than the money supply.
Sound monetary policy would have the total money supply be greater than the total debt.
The Federal Reserve Has Stolen the Social Security Trust Fund
Interest rates are kept at an artificially low level by the Federal Reserve. The Social Security Trust Fund is invested in government bonds. The yield of these bonds is kept artificially low. If Treasury bonds earned a true market rate, which is 3-5% more than the current rate, then the Social Security Trust Fund would not be insolvent.
Besides, the whole point of Social Security is not "is there money around to pay the benefits". The real question is "does our economy have enough surplus productive capacity to support retired people"? Due to artificially low interest rates, the productive capacity of the economy will always be greater than the aggregate purchasing power. The government could, if it wanted, fund Social Security by deficit spending or printing new money. The surplus productive capacity is there; there just isn't money around to buy it.
A government surplus is deflationary. A government deficit is inflationary. A government can't store value by holding money in a special account, because there's no intrinsic value to the money.
Actually, investing the Social Security Trust Fund in the stock market or in gold wouldn't have been such a stupid idea. Then, there would have been actual real value stored, rather than a bookkeeping fiat money trick. Purchasing gold and silver actually makes more sense than stocks, because gold is the traditional store of value. There is one objection, that the government shouldn't be involved in the market. Social Security should be insurance, independent of the market. On the other hand, if there was a stock market crash, deficit spending by the government would be needed to reintroduce money into circulation, so it would make sense to invest the trust fund in the market and have the government guarantee the benefits with deficit spending, if necessary.
The Federal Reserve Has Stolen the Retirement Savings of Most Americans
The average person near retirement is advised to keep a substantial amount of his savings in bonds. Because interest rates are artificially low, a person who invests in bonds receives a far lower interest rate than he would receive if interest rates were determined by the market. Since interest rates are artificially low by 3-5%, this means that the Federal Reserve steals 3-5% of all money invested in bonds each year, and turns that money over to the financial indsutry.
The Federal Reserve Discourages Saving by Most Americans
Interest rates are artificially low, and the average person keeps his savings in a bank account. The interest the average person receives is insufficient compensation for the loss in value over time to inflation. The reward for saving is sufficiently low to discourage saving.
Also, because of the Compound Interest Paradox, there just isn't enough money in circulation to allow for every American to have savings. Money is created via debt, so one person's savings must be offset by a greater debt by someone else or by the government.
The Federal Reserve is Responsible for the Resentment of the Average Citizen Towards the Wealthy
The average person intuitively, and correctly, believes that any wealthy person must have earned his money due to the suffering of others. Logically, that makes little sense, because someone who produces something valuable benefits everyone and should be rewarded. However, because debt always increases faster than the supply of money, one person can have great wealth only if a lot of other people are in debt. There isn't enough money in circulation to simultaneously pay back all debts, so anyone with a lot of money has it at the expense of many other people in debt.
In other words, the average person has intuitively figured out the unjust nature of the system. They can't point to the specific reason, the Federal Reserve, because the Math is complicated, the average person is intentionally kept ignorant about Math, and the details are carefully hidden. In a properly functioning monetary system, one person's wealth would not be guaranteed to come at the expense of the suffering of many others.
If there was enough money in circulation to simultaneously pay back all debts, then you wouldn't have so many people forced into bankruptcy.
The Federal Reserve Has not Returned its Profits to Congress
The Federal Reserve was originally supposed to return its profits to the government. As indicated in a previous post, the Federal Reserve can make a guaranteed riskless profit. However, I suspect it keeps its profits artificially deflated to avoid turning money over to the government. As the Federal Reserve builds up a cash surplus, instead of printing money to buy Treasury bonds, it just directly buys them with cash. This deflates its apparent profits. The Federal Reserve's open market transactions have never been audited, so it's impossible to say what's really happening.
Abolishing the Federal Reserve Might be Necessary to Prevent Total Worldwide Economic Collapse
Debt can only grow exponentially faster than the money supply, due to the Compound Interest Paradox. When money is created via debt, only the principal is created and not money to make the interest payments. As debt grows exponentially faster than the money supply, eventually the total debt will be huge compared to the money supply. Then, even a slight change in interest rates will have a dramatic effect on the total money supply. Pretty soon, the Federal Reserve might lose its ability to stabilize the economy via interest rate manipulations. As the debt grows, there is a risk of more severe oscillations between deflationary recessions and inflationary booms.
Government debt isn't included in money supply statistics. However, government debt counts as money for all practical purposes, because there is a liquid market where government debt can be traded for cash. The Federal Reserve doesn't have a trick for reducing the total amount of government debt, and huge government debt is needed to allow the private sector to have any money at all.
Since the US economy is intricately linked with the world economy, a collapse in the US would have a severe effect on other countries as well.
Maybe Total Worldwide Economic Collapse is a Good Idea
Perhaps it would be better if the current fiat money system completely collapsed. The collapse would be caused by people switching to alternative monetary systems and avoiding income taxes.
Perhaps the only fair solution is a complete collapse of the current economic system, and the destruction of all dollar wealth and stock market wealth.
The people who think they're the economic and political leaders had their chance to fix the current economic system. They could have fixed the current system and protected their wealth. There have been plenty of people who have warned them about the defects in the current system. They had the chance to clean up their mess, and they neglected their responsibility. The people who think they're the economic and political leaders deserve to lose their wealth and power.
Posted by FSK at 4:31 PM
Sunday, August 26, 2007
A lucky baseball fan caught Barry Bonds' record-breaking home run ball. Many sources are saying that he would owe income tax on the value of the ball if he decides to keep it. They say he is forced to sell it to pay income taxes.
Personally, I'm confused as to why he would owe tax if he didn't sell it. He may be receiving bad tax advice.
In the US tax system, taxes are owed only when money changes hands.
I think that it should be considered an investment. His cost basis is the price he paid for the ticket to the game. When he sells the ball, he realizes a short-term or long-term capital gain, based on how long he had the ball.
The idea that he's forced to sell the ball to pay income taxes is completely ridiculous. In the US tax system, no taxes are owed until money changes hands. He shouldn't owe income tax until he sells it.
Consider this analogous situation. I buy a 1000 shares of stock for $0.50/share. The stock rises up to $100/share. Do I owe taxes? No, I don't owe taxes until I sell the stock.
My opinion is that he "bought" the baseball for his admission ticket to the game. Besides, how would the IRS know he has the ball, if his name hadn't been published all over the newspapers?
Posted by FSK at 11:20 PM
Saturday, August 25, 2007
Many people are concerned that there will be an increasing consolidation of power in government and large corporations. People are afraid that there will be a global dictatorship. People are concerned about the possibility that a few megacorporations will control the entire world economy. In short, people are concerned that a few people will effectively control the entire world.
This has already happened. There already is a Supreme Leader of Humanity. He already has absolute control over all world governments. He already has absolute control over all large corporations. Any corporation that doesn't follow orders could be bankrupted or bought out. Any government that doesn't follow orders is invaded or infiltrated. Every person is effectively the Supreme Leader of Humanity's slave, due to a corrupt monetary system and taxation system. Everyone is a slave, because they cannot work without permission from their government.
If one person seized absolute control of the entire world, it would be the end of history. All scientific progress and social progress would come to a halt. Some writers refer to this as a singularity.
People are concerned about the possibility of this singularity occurring. It has already occurred, and we are now on the other side of the event horizon. All the political and economic conflicts you see are actually staged conflicts. In all conflicts, the same group secretly controls both sides.
It is too late to ask "How can we prevent someone from seizing absolute control of the entire world?" That has already happened. The correct question is "What is the Supreme Leader of Humanity trying to accomplish next?"
Suppose you actually did seize absolute control of the entire world. What would you do next? For awhile, you'd bask in your absolute unopposed power. After that, you'd get incredibly bored. There'd be no challenges at all.
That's the question that's really bothering me. It appears that the Supreme Leader of Humanity is manipulating the people who think they're the global economic and political leaders. He's intentionally manipulating them into making the stupidest possible decisions. It appears that the Supreme Leader of Humanity actually wants an agorist revolution to occur.
Is it possible that the Supreme Leader of Humanity isn't completely evil? Maybe he has realized that the invention of government was a mistake, and he is in the process of correcting that. All useful services currently provided by the government could be more efficiently provided by multiple competing vendors in a free market. In particular, there should be a monetary system, police force, and justice system that is not controlled by an unaccountable monopoly.
People say they are concerned about the end of the world. I see the end of the world as a past event. It's too late. Someone has already seized absolute complete control of the entire world.
Posted by FSK at 11:00 AM
Friday, August 24, 2007
Atlanta Falcons quarterback Michael Vick pled guilty to Federal charges that he ran an illegal dogfighting ring.
In the whole discussion, I never heard anyone say: "Is this the Federal Government's business?" If you take a literal interpretation of the Constitution, organizing dogfighting should not be a Federal crime.
Posted by FSK at 6:34 PM
Thursday, August 23, 2007
I originally wrote this article for the Ron Paul wiki, and I broke it up into several pieces and copied it here.
How Deficit Spending Works
Suppose the government needs $1B. Before the Federal Reserve Act, the government could have just printed the $1B directly and spent it itself. This was what President Lincoln did with his greenbacks.
Under the Federal Reserve System, the government prints a bond with face amount $1B. The government prints $1B in physical currency. The government sells the $1B of physical currency to the Federal Reserve at the printing cost, say $10,000. The government then gives the $1B bond to the Federal Reserve and takes back the $1B of currency as payment.
Physical bonds and bills do not need to be printed. It can be done purely electronically, via a bookkeeping trick.
That seems kind of silly, doesn't it? Why doesn't the government just print the money and spend it directly? The superficial reason is that the government has ceded its money printing authority to the Federal Reserve. The actual reason is that if Congress directly printed and spent its own money, this would run contrary to the Federal Reserve's goal of fixing interest rates at an artificially low level. More details are given below and in my next post "Reasons for Abolishing the Federal Reserve".
There is an interesting exception. For paper money, the government gets reimbursed only for its printing costs. For coin money, the government gets credited for the face amount of the coin. Maybe that's the reason for resistance to the use of a $1 coin; that increases seignorage revenue for the government at the expense of seignorage revenue for the financial industry. In theory, the government could mint a $100 trillion coin and deposit it in its account at the Federal Reserve.
Did you ever notice that? A Federal Reserve Note says "This note is legal tender". Treasury-minted coins do *NOT* say "this is legal tender". Federal Reserve Notes and Treasury-minted coins have different legal status. Coins still have a face amount greater than their metal value, except for pennies and nickels. Ironically, pennies and nickels have a face amount close to their metal value. Pennies and nickels are the only true money currently in circulation. The government can't abandon minting pennies and nickels, because that would be tantamount to an admission that inflation exists.
There is another reason why the government can't be allowed to directly print and spend money itself. Money counts as reserves for fractional reserve banking, whereas government bonds do not. Fractional reserve banking would cause any money directly printed and spent by the government to be multiplied by the reserve ratio factor, causing inflation. That's why government deficit spending is preferable to directly printing and spending money. The real culprit is the fractional reserve banking system combined with government-subsidized artificially low interest rates. If either of these were removed, there would be no difference between government debt and directly printing and spending money.
How the Federal Reserve Increases the Money Supply
Suppose the Federal Reserve decides that it wants to increase the money supply. It buys Treasury bonds that are nearly expired, and the cash paid for them has the effect of increasing the money supply. However, the Federal Reserve just creates the money it used to buy the bonds. Suppose that $1B of Treasury bonds need to be bought. Since these bonds are nearly expired, their face amount is $1B and their market value is something like $999M. The Federal Reserve creates a credit of $999M in the account of whoever sold it the bond. The Federal Reserve has a debit of $999M in its own account. The Federal Reserve now has bonds with a market value of $999M in its account.
A few days later, the bonds expire, and the Federal Reserve redeems them with the government for $1B, the face amount. The $999M debit cancels out, leaving a $1M credit. The Federal Reserve made a profit of $1M. However, it didn't do any work at all. The Federal Reserve was guaranteed a profit as long as interest rates are positive.
This trick is called "monetizing the debt".
Notice that this trick allows the Federal Reserve to subsidize artificially low interest rates and show a bookkeeping profit at the same time. The fallacy is that the Federal Reserve has no cost of capital. It just created the $999M it used to buy the bonds out of thin air. Nobody notices, because the $999M it created disappears when it redeems the bonds.
The Federal Reserve is exchanging bonds for cash. The reason this trick increases the money supply is that government bonds don't count as bank reserves, but cash does. Due to the Federal Reserve's market manipulations, banks have more reserves. This means they have a greater ability to issue loans. The reserve ratio, typically 10x, can be used to amplify this new money by a factor of 10x. With a 10x reserve ratio, each dollar put into circulation this way leads to ten more dollars of actual money after fractional reserve banking. Government bonds don't count as reserves and don't have the multiplicative money effect. Since interest rates are held at an artificially low level, banks are always able to loan out all the extra reserves they have.
If fractional reserve banking were forbidden, this trick would have no effect on the money supply. With fractional reserve banking, the cash can be lent out up to 10 times.
There is a cost to the Federal Reserve's market manipulations. They are paid by everyone else in the form of inflation.
This "monetizing the debt" trick is one of the dirtiest financial scams ever invented. The word "monetizing" means "profiting off". When the Federal Reserve "monetizes the debt", it is simultaneously showing a profit and subsidizing artificially low interest rates. The Federal Reserve itself shows a bookkeeping profit. The financial industry profits from government-subsidized artificially low interest rates.
The Federal Reserve repurchases enough debt so that the Fed Funds rate equals its target.
The Compound Interest Paradox
In the Federal Reserve System, whenever money is created, an equal debt is simultaneously created. However, the money required to pay that interest is not also simultaneously created. This insures that the total debt in the economy increases exponentially over time.
For example, the government borrows $1B from the Federal Reserve. Suppose it issues a 1 year bond at 5% interest. The government receives $1B, which is put into circulation when the government spends it. However, that bond needs to be repaid with $1.05 billion a year from now. The $50 million needed to pay the interest was never created or put into circulation. A similar process is followed when the Federal Reserve loans money to banks.
Under the Federal Reserve System, the total debt in the economy can only increase exponentially over time. The scam has been running for so long that the amount of the total debt is starting to reach ridiculous proportions.
The Federal Reserve is not a Check on Federal Budget Deficits
Even though the government ceded its money printing authority to the Federal Reserve, it does not effectively prevent the government from deficit spending. All the government has to do is ask and it gets a loan. Due to the Compound Interest Paradox, a federal budget deficit is necessary in order to allow anyone else to have any money at all. The current state of affairs is kind of silly. The accumulated federal deficit is larger than the M2 money supply. How can the Federal government be in debt by more money than actually is in circulation? That's because of the Compound Interest Paradox.
Federal Budget Deficits and Inflation
When the Federal government runs a deficit, it prints more bonds to raise money for its deficit spending. These additional bonds are sold to the public. The presence of more government debt means that the price of government debt falls. The supply has increased, so the price drops. A drop in the price of a bond means that the interest rate goes up. In other words, deficit spending by the government via debt causes interest rates to rise.
The Federal Reserve's goal is artificially low interest rates. As the supply of government debt increases, the Federal Reserve must repurchase more bonds to achieve its target interest rate. The act of repurchasing government debt is inflationary, because it increases the amount of reserves banks have available for fractional-reserve banking.
Notice that if the government directly printed and spent money, it would have the opposite effect on interest rates. There would be more money in circulation, so it would be easier for banks to acquire reserves to lend out. Interest rates would drop.
The regulated fractional reserve banking system is the primary culprit. It is the primary reason for the distinction between government deficit spending via debt and government deficit spending via directly printing and spending money.
Posted by FSK at 4:22 PM
Tuesday, August 21, 2007
I originally wrote this article for the Ron Paul wiki, and I'm copying it here.
HISTORY OF THE GOLD STANDARD
Before the advent of the Federal Reserve, the US was on a gold standard. Each dollar represented a certain amount of gold. You could even take your paper dollars to a bank and demand they be redeemed for gold. The government exerted discipline and only printed as much paper money as it had gold in its vaults. For example, Lincoln's greenbacks were not directly convertible to gold, although they were later converted to regular money.
People have forgotten that "dollar" was originally a unit of measurement. A dollar of gold meant a certain amount of physical metal.
The Federal Reserve was allowed to print more dollars than physical gold the US government had. This allowed it to inflate the money supply. Dollars were still redeemable for gold. People hadn't caught onto the scam yet, and people didn't demand their paper dollars be exchanged for gold.
Before the Federal Reserve was created, gold was required to pay taxes. Almost all the gold was under the control of banks, and the banks acted as a cartel. Government force meant that people needed gold to pay taxes, artificially raising the demand for bank-controlled gold. This kept interest rates above the free market interest rate, and the banking cartel used the Compound Interest Paradox to confiscate the wealth of the rest of society. With interest rates determined by the free market, a bank's interest income equals its expenses and there is no paradox; the existence of a cartel was required to raise prices. However, there were some banks that didn't follow the cartel's rules. Fortunately for the banking cartel, government regulation of banking limited the non-cooperating banks' power. Without government regulation of banking, non-cartel banks could use very aggressive reserve ratios to multiply the gold that wasn't under the cartel's control.
With the creation of the Federal Reserve, the Compound Interest Paradox now had the full force of law. The Federal Reserve meant that non-cooperating banks had to follow the cartel-set interest rates, even if they weren't members of the cartel.
The Federal Reserve System, by its very nature, guaranteed that total debts would always increase faster than the supply of money. Since there's only a certain amount of gold, this guaranteed that the US would eventually be forced off a gold standard.
In 1933, due to mounting debt generated by the Federal Reserve, President Roosevelt said that US citizens could no longer redeem their dollars for gold. He even outlawed private citizens from owning gold, requiring them to turn in their gold for paper money. The reason it was necessary to outlaw gold ownership by private citizens was that they would have started trading using physical gold rather than worthless paper money. At that time, there were enough knowledgeable citizens who would have objected to the requirement to use paper money, if the government didn't force them to use worthless paper as money. Foreign banks were still allowed to redeem their dollars for gold, so the US was nominally on a gold standard.
Instead of allowing the Federal Reserve System and the fractional reserve banking system to fail, President Roosevelt bailed them out. What should have happened was that the Federal Reserve and insolvent private banks should have been forced into bankruptcy. Then, the money in circulation would have been reduced to the amount of physical gold. Depositors would become creditors for the remaining gold in bankruptcy court.
Shortly after confiscating everyone's gold, President Roosevelt devalued the dollar, decreasing the amount of gold each dollar represented.
After World War II, the US economically dominated Europe. The US forced the following terms on Europe. It was not necessary for every country to have a gold standard. Other countries would peg their currency to the dollar, and the US would still honor its gold standard. Other countries could still redeem their dollars for gold, if they wanted to. Besides, wouldn't it be better to hold US bonds instead of physical gold? If you hold bonds, at least you're earning interest.
This led to the custom of other countries holding dollars as their reserves. Such a practice is kind of silly nowadays, because the dollar isn't backed by something tangible. Quite frankly, I don't understand why foreign countries still hold dollar reserves. They'd be better off converting their dollars to gold or silver or oil.
As US government debt increased, as it was guaranteed to increase by the Federal Reserve System, foreign governments started getting nervous about their dollar holdings and started asking to convert them to gold. Obviously, all their requests could not be honored. In 1971, President Nixon announced that he would no longer honor the US government's promise to redeem dollars in gold.
THIS WAS THE BIGGEST CREDIT DEFAULT IN HISTORY!
People say "The US Government has a perfect credit rating", but they forget this huge default, several times, on its promise to back paper dollars with gold. Now that dollars are just a piece of paper, why would the government default again? It can always print more dollars.
In retrospect, holding dollar bonds instead of physical gold was a mistake by the foreign central banks. The spike in the price of gold more than offset any interest they had earned on their bonds. I don't understand why foreign central banks still hold dollar reserves. I guess it's just a bad habit.
THE INCOME TAX AND THE ABANDONMENT OF THE GOLD STANDARD
One reason why the dollar is not completely worthless is that the US government demands income taxes be paid in dollars. Even if people abandoned the dollar and returned to a barter system, they still would need to pay income taxes in dollars. According to the IRS, a barter transaction counts as taxable income based on the dollar-equivalent value of the transaction.
The income tax guarantees a certain base level for the value of the dollar. The government demands that taxes be paid in dollars. Even if you did all your business in gold, you would still need to acquire some dollars to pay taxes. If you don't pay taxes, the government will use violence to take away your stuff or send you to jail.
The dollar, even though it's intrinsically worthless, is backed by something. The dollar is backed by the government's willingness to use violence against people to force them to pay income taxes.
Also notice that income taxes make *EVERY* economic transaction subject to taxation. This effectively makes the dollar backed by all economic activity in the US. If only certain activities were subject to taxation, the dollar would not be backed by things that aren't taxed.
HOW TO RETURN TO A GOLD STANDARD
There are several problems with unilaterally returning to a gold standard. First, what should the price of gold be? Second, the total value of the economy is far greater than the total amount of gold.
Fixed Conversion Rates
One method is to fix the price of gold based on the current amount of dollars in circulation and the amount of gold currently in the US treasury. This would be a huge jump in the price of gold, which would be a huge windfall for anyone currently holding gold.
Another method is to fix the price of gold based on the current spot price of gold, around $650. This is a problem because there wouldn't be enough gold to go around if everyone holding dollars simultaneously demanded conversion to gold. It's kind of pointless to have a gold standard if people can't redeem their dollars for physical gold.
In other words, any fixed conversion rate between gold and dollars would not be fair. Further, futures markets have evolved for gold and it wouldn't be fair to destroy those markets by returning to a fixed conversion rate between dollars and gold.
Variable Conversion Rate
Another method is to allow gold coins to circulate, but not to print a fixed value on the coin. The coin would just say "1 ounce US gold coin", and it would be legal tender with its value based on the current spot price of gold. To be fair to banks, perhaps a handling fee of up to 1% would be allowed for transactions based in gold coins.
Another advantage of this method is that several different metals could be used, not just gold. Silver and copper coins could be minted.
People who owned gold, silver, or copper, would be allowed to take their metal to the Treasury, pay a minting fee, and convert them to official money. It would be legal to melt down the coins for their metal for industrial purposes. Currently, it is illegal to melt down pennies or nickels for their metal; the metal value of those coins is greater than their face amount. You could argue that pennies and nickels are the only real money currently in circulation, because their face amount is close to their metal value.
If the Federal Reserve were abolished, and the fractional banking reserve system abolished, the government might earn enough money with its seignorage privilege and other taxes to allow it to eventually retire all paper money. Eventually, only coins would be circulating, with their value floating based on the spot price of metals.
People could even be allowed to have bank accounts denominated in gold or silver instead of dollars. If fractional reserve banking were outlawed, the bank would be required to have physical metal in its vault equal to the customer deposits. Customers would pay a storage fee to the bank.
On further reflection, fractional reserve banking is not the problem. It is government regulation of banking that is the problem. Either the government should outright forbid fractional reserve banking, or it should allow completely unregulated fractional reserve banking.
Total Currency Default
It's unrealistic to think that the US government will voluntarily return to a gold standard. The Supreme Leader of Humanity would never allow that. There have been several workable proposals discussed and proposed to the President and Congress.
Another way to return to a gold standard is via a complete currency default. This would be a total collapse of the dollar via hyperinflation. In such a scenario, people would have no choice but to return to using gold and silver as money. Historically, every fiat monetary system has ended in a total currency default.
A total currency default would probably be the end of the US government. The government would not be able to move quickly enough to switch to another monetary system. Most government employees, especially policemen, would walk off their jobs once it's obvious they won't be paid. Private police forces would hire the policemen, so that order is still maintained; arrangements will probably be made before the final collapse of the government.
The US government is in a unique position relative to other countries. All of the US government debt is in dollars, a currency the US government controls. This makes it easier for the US government to prevent a hyperinflationary collapse of the dollar. Other countries that suffered from hyperinflation had a problem where their debts were in a foreign currency, usually dollars, but their income was in their local currency, which they could not easily convert to dollars.
However, there is one way to force the US dollar to collapse in hyperinflation. If enough people started using a Social Credit Monetary System, and started performing economic activity without reporting it for taxation and confiscation, then the dollar would collapse in hyperinflation. The unreported economy would be like a foreign country relative to the US dollar.
DON'T TAX GOLD TRANSACTIONS
If I exchange a $20 bill for two $10 bills, I don't owe a capital gains tax. Similarly, if I exchange $700 for an ounce of gold, that should not be a taxable transaction, even if I later exchange the ounce of gold for $800. Since gold and silver are money, transactions involving those metals should not be taxed. A gold transaction is merely exchanging one form of money for another
The tax treatment of gold and silver transactions is a strong disincentive for using gold and silver as money.
PROBLEMS WITH A 100% GOLD STANDARD
Money that is 100% on a gold standard has some problems.
First, the total value of the economy is much higher than the total amount of gold there is. If there was a pure gold standard, the price of gold would be too high to allow it to be used for any industrial applications.
Second, a gold standard is also subject to manipulation. Before the Federal Reserve Act was passed, international bankers were able to manipulate the money supply by shipping gold in and out of the country. That was how they artificially created the panics that enabled them to get the Federal Reserve Act passed.
You can have a 100% gold standard, provided you also allow unregulated fractional reserve banking. Honest fractional reserve banking expands the money supply to match the size of the economy.
Paper Money can Work
In the colonies before the Revolutionary war, there was very little physical gold available. This necessitated paper money. Originally, money was issued by each individual. A farmer would issue a receipt, "good for 1 chicken", and it could be traded as money. This is not fiat money, because it is backed by the trustworthiness of a specific farmer. Everyone would know if there was a default, and the farmer would be unable to trade if he defaulted. This was, essentially, a Social Credit Monetary System. In a small society, where everyone knows everyone else, paper money can work. Later, the colony governments issued fiat paper money, and were careful to manage the supply. As long as the issuing authority is trusted to not dilute the supply via inflation, it would work.
When Benjamin Franklin went to parliament, he naively explained to them how wonderful fiat money was. The Bank of England forced parliament to outlaw the use of fiat money. It demanded that taxes be paid in gold, rather than in goods like furs and wheat. Some people argue that this was the cause of the Revolutionary War. During the revolutionary war, England counterfeited the colonies' paper money, making it worthless.
Some people argue that the US lost the Revolutionary war, because it was on a gold standard after the war. Since the supply of gold in the world was a lot larger than the supply of gold in the US, this enabled international bankers to control the US economy. The "free coinage" law meant that the international bankers could import gold and convert it to money. Immediately, most of the money supply in the US was under the international bankers' control.
There's Nothing Intrinsically Valuable About Gold
There isn't anything intrinsically valuable about gold. Its industrial uses are limited. Other metals, like silver, copper, and platinum have more practical uses. The advantage of metal as money is that there's a naturally limited supply of metal. However, there is no reason for gold to have special status relative to other metals.
Just like paper money, the acceptance of gold as money works because most people are conditioned to believe that gold is money. Other metal coins work just as well. In fact, I would use other metal coins as the basis of a Social Credit Monetary System, because the price of gold is artificially inflated due to people preferring gold coins over other metal coins.
Posted by FSK at 12:25 PM
Saturday, August 18, 2007
I came across three interesting ideas on the Internet. They are anarcho-capitalism, agorism, and fasco-capitalism.
The economic system in the USA right now cannot be described as capitalism. Most people define "capitalism" as a "free market". The USA is not a free market; the USA is actually a communist dictatorship. Money is intrinsically worthless. Income taxes are a huge disincentive against working. Interest rates are artificially fixed rather than determined by the free market. The Federal Reserve, income tax, and government regulations prevent the USA from being a free market.
The Federal Reserve provides a massive government subsidy to the financial industry and large corporations. The Federal Reserve causes the Compound Interest Paradox to enslave everyone under a crushing debt burden. The income tax converts everyone into government slaves. The income tax forces everyone to use worthless Federal Reserve Notes instead of real money. Government regulations make it very hard for an individual to start a profitable business.
Extensive government regulations are a disincentive to small businesses. The cost of compliance with a regulation is typically fixed. For example, a $1 billion company might not be able to afford to spend $3 million on Sarbanes-Oxley compliance. A $100 billion company can easily afford it. Large corporations like regulations, because they squeeze out smaller competitors. Regulations create a government-endorsed monopoly or oligopoly.
The term fasco-capitalism describes the US economy, rather than true capitalism. There is some competition and trade occurring, but it's heavily dampened by the government. Laws are determined by lobbyists from large corporations. Corporations standardize their treatment of employees using the same defective policies. If you don't like a corporation's practices, you aren't going to see much improvement by switching jobs, because they're all pretty much the same. People say "if you don't like it, start your own business", but there are lots of legal and practical obstacles to forming your own business. A small business owner is typically forced to work really long hours, to compensate for his overhead costs and his handicap relative to large corporations.
I started thinking about the US Constitution. What amendments would I add, given the opportunity? It was a very interesting exercise. The list I came up with was disturbingly long, and I realized that I wasn't even half done. There was no way to come up with a list of amendments that could patch a fundamentally flawed system.
I was never given the opportunity to sign the US Constitution. Taking a strict view, the Constitution was only a valid contract for the people who signed it. The people alive then had an opportunity to indirectly ratify it via their state legislatures. Everyone who voted for the Constitution is long dead. How is it still a valid contract?
Of course, all the people working for the government act as if the Constitution is completely valid. They'll even use force to make you comply, if you violate one of the laws. Does that make what they're doing right? You might say "If you don't like the US Constitution, then move." The defect is that other countries have systems that are just as bad or worse. I don't have the opportunity to move to another country and then vote on what its Constitution should be. There's no unoccupied space that I can move to and set up a government that suits my desires, even if I could find some like-minded people to go with me.
What Constitution is optimal? Are there any rules that can be unilaterally imposed on everyone without their informed consent? After thinking about it for awhile, the only valid Constitution is a NULL Constitution. People can form contracts with each other, but there's no valid contract than can be imposed on someone before they are educated enough to decide.
That brings me to anarcho-capitalism and agorism. They both say that the only valid Constitution is a NULL Constitution. All that really matters is property ownership and people forming contracts. All the functions of a government could be performed better by the free market. The only valid forms of law are common law and contract law. Common law says you can do whatever you want as long as you don't injure someone else. Contract law says that when you freely enter a contract without coercion or trickery, you should keep your promise.
Why should the government have a monopoly on justice? If I don't like the government's courts, I can't shop around for a better court. There's no incentive for government courts to be efficient. Actually, the incentive is for inefficiency, because that maximizes their budgets and influence. The government courts are run by lawyers. Lawyers want the legal system to be complicated and expensive, because that's more money for them. Further, large corporations like a complicated and expensive legal system, because it discourages people from suing them. A large corporation can effectively bankrupt a smaller competitor by dragging it into a lawsuit. Red market workers can effectively bankrupt any individual by pressing frivolous criminal charges and confiscating their property without a trial. If the government files frivolous criminal charges, you still lose your time and legal fees, even if you get acquitted.
What right does a court have to use force to impose its will on me? I never consented to that. Why does the government have a monopoly on violence? Why can't a group of people hire a private police force to protect themselves? This private police force would protect them both from crime and from the government's illegitimate police force. A private police force would be much more accountable. If it didn't perform, people would start seeking alternate vendors.
As far as I can tell, that is the principle of the anarcho-capitalist and the agorist. The only valid Constitution is NULL. All governments are merely a group of people conspiring to take away my property and my rights. There is no legitimacy to the government, because I never specifically consented to it. Government is merely a mass hallucination. People use force to keep up the illusion. For individuals, all that really matters is common law, property ownership, and contracts. Individuals should be able to hire their own police force to ensure their property is protected and their contracts are enforced.
Government is a huge Distributed Costs and Concentrated Benefits scam, imposed by force on everyone else. Many government employees have lucrative salaries and pensions. Many corporations have government-endorsed monopolies or oligopolies. They wouldn't want to lose their perks if the government lost its violence monopoly.
The distinction between agorism and anarcho-capitalism is blurry. I consider agorism to be a more refined version of anarcho-capitalism. Anarcho-capitalists say that government is bad and there should be a free market without coercion. Some people with "academic credentials" as anarcho-capitalists argue for less government intervention, without coming to the conclusion that government needs to be completely abolished. I consider anarcho-capitalism to be a wimpy, watered-down version of agorism. Agorists have specific plans for implementing a new economic and political system. Most publicity of anarchists is negative, when they are shown protesting and rioting, which is a waste of time. The word "anarchist" is dirty in many people's minds. A lot of people falsely assume "not government" is "total chaos". The word "agorist" invokes a different meaning than "anarchist" in most people's minds.
The difference between the anarcho-capitalist and the agorist is implementation details. The anarcho-capitalist says that all government is inherently evil. The agorist has specific ideas for systems that replace what government currently performs. Many anarchists says that private property and contracts are inherently evil. The agorist says that private property and contracts are perfectly acceptable. It's the government monopoly on enforcement of property rights and contracts that is wrong. Any monopoly tends to behave in an exploitative manner. The monopoly of government is no different.
The agorist has a concrete plan for how to develop a stable society without government. The agorist actually has a workable plan for realizing his goal. People need to develop their own private monetary system. People need to develop their own private justice system and contract enforcement system. People should do work and not report it to the government for taxation, confiscation, and regulation. The agorist community wants to create a pool of wealth outside the control of the government. An agorist revolution would be about creating wealth, not destroying wealth via rioting or violence.
Why didn't agorism dominate instead of the governments we have now? I explain this in "History - What Really Happened". Basically, a group of people managed to use force to impose their will on everyone else. They constructed a really elaborate control system that disguised what is really happening, and called it "government". They tell people that government is a great idea, when in fact it's a humongous Distributed Costs and Concentrated Benefits scam.
Nowadays, hopefully there are enough educated and informed people to sustain an agorist economy, if only existing governments would let them. If the systems were set up intelligently, an agorist economy would be easy for the average person to use. Electronic communication allows enough information to be distributed to set up an agorist economy. Thousands of years ago, people didn't have the expectation of property ownership and enforcement of contracts. Thousands of years ago, there wasn't a system for effective information sharing. Currently, the duplication cost for information is practically zero. Property ownership and contracts are a great idea. The problem is that the government shouldn't have a monopoly on enforcement of property rights and contracts.
The hope of the agorist is that someday government would be weakened enough that several private organizations would replace it. From time to time, people have formed profitable businesses busting up monopolies. The more complacent and inefficient the monopoly is, the more there is to be gained by competing with it. I don't recall anyone trying to set up an organization whose goal is to break up the government's monopoly on violence and justice.
Imagine you're trying to start a business whose goal is replacing government. What properties would it need? First, there would have to be immediate benefits for the participants. This would allow it to begin operations with 1000 or fewer participants. Second, it would have to be a decentralized organization. A pyramidal organizational structure would be easily infiltrated. A pyramidal organization could be halted by killing its leaders. The leaders of an organization that wants to replace government would *DEFINITELY* be targets for assassinations. A distributed organizational structure would allow it to survive.
The goal of the organization would be to avoid being noticed by the red market until it was powerful enough to win a direct confrontation. Having a goal of compliance with existing laws is too difficult. The taxation system would make this organization's successes turn into government subsidies. Therefore, one goal should be to avoid taxation as much as possible. Regulation wastes resources. A second goal should be to avoid regulations. The organization should facilitate productive economic activity without having it reported for taxation, confiscation, and regulation. Avoiding taxation is something that yields concrete benefits to participants, because tax rates of 40-50% or more are so confiscatory. The ability to avoid government regulations would be a further benefit, adding another reduction of 5-45% in expenses. People could reduce their risk by only conducting some economic activity in this grey economy and conducting some economic activity in the standard taxable economy.
If you take into account the effect of taxes and regulations, you arrive at a total taxation rate of 50-95%. With such a high cost of taxation and regulation, there would be huge benefits for participants in an agorist economy.
Most laws are designed to discourage free enterprise rather than encourage it. As long as both parties agree that the corrupt legal system is invalid, they can pursue contracts more efficiently in private.
That would have to be one of the unbreakable rules of the agorist community. No matter what happens, people may not complain to the red market. All disputes must be resolved within the agorist community.
Such an organization would be voluntary for its participants. Anyone could join or leave at any time. People could be partial members, conducting some activity in the "grey" market and some activity in the regular market. The "rules" of the organization would merely be a set of voluntary practical guidelines. Anyone who followed these guidelines would benefit.
Ironically, the agorist has the best chance of implementing a true one world government. The agorist says that all governments are illegitimate. There would be a unified world government because no governments are legitimate at all. The current path towards globalization is a global fasco-capitalist government. There will be resistance to a global government from current governments, because the current leaders don't want to give up their perks. I suspect that the huge government spying apparatus are designed to prevent an agorist movement from getting started.
There have been two implementation approaches that seem interesting. The first is a geographically distributed approach. People try to make progress in anonymity. The second is a geographically concentrated approach. A group of like minded people move to the same area and vote for the government to be less intrusive and less powerful. A geographically concentrated approach is risky, because success would make a tempting target for suppression via force. A geographically concentrated approach is useful, because if people want to trade they have to do it in person. Besides, the agorist's goal is complete independence from forced taxation. Only a group of people living together self-sufficiently can achieve this. They would also need to be able to defend themselves from invasion.
Many people say a collapse of the dollar is imminent. A hyperinflationary crash of the dollar would be both a disaster and an opportunity. During hyperinflation, the power of the government is substantially reduced. Who would be willing to work for the government in exchange for worthless paper money and a worthless pension? People might be forced to form private organizations to perform functions formerly performed by the government. If an agorist movement gets started when the government is weak, it might be able to challenge the government successfully later. Perhaps, instead of starting in the USA, the agorist should move to countries where the government is weak.
On the other hand, the USA offers more protections than other countries. The average person in the USA believes that what you do in private is none of the government's business. As long as you stay away from black market activities, such as growing marijuana, it might be hard for the red market to get a conviction in a jury trial. On the other hand, trial by jury has been pretty much completely repealed. The judge won't permit you to remind the jury of their jury nullification privilege, and biased jury selection methods weed out qualified jurors. Even if you get an acquittal, you don't get back the time spent in jail, plus the money spent on legal fees. (Of course, an agorist says that the red market has no right to forbid you from growing marijuana. On the other hand, possession of marijuana is considered evidence you have committed a crime, so growing marijuana is more risky than grey market work. You're free to do whatever you want, but if you're engaging in black market activity I don't want to know about it.)
That seems like a reasonable plan. Develop tools and guidelines that an agorist can use. The act of developing the tools and guidelines would not be a crime itself! Participation would be voluntary. If people develop better guidelines, they are free to switch. The more economic activity that is conducted without taxation, the weaker the government becomes. At some point, an efficient agorist economy might be strong enough to replace the government.
A lot of websites I read are philosophizing and speculating. I am ready to start writing tools and start using them. I would like to be a participant in an agorist economy, if only I knew other trustworthy participants! My primary skill is writing software. That's the skill I'd be offering in trade. Initially, I'll just write the code I think is needed and release it into the public domain.
Trust is extremely important in an agorist economy. You need to make sure that the people you trade with aren't going to tip off or complain to red market agents. As long as both parties to the transaction agree to do their best to protect each other from red market agents, it's workable. Unfortunately, I am in a difficult position. I don't trust anybody!
The philosophy of the agorist and the anarcho-capitalist can be summarized in one sentence. "I want to do useful work, get paid for it, and not have to report it to the government for taxation, confiscation, and regulation." The only difference between the two is that the agorist has more concrete implementation ideas. The easiest way to get such a system started is to set it up in a way that people can participate for 5-10 hours/week, until they get enough income to quit their regular jobs.
An agorist revolution would be self-sustaining, because the participants would be profiting from their activity! The productivity gains realized by the participants would cause exponential growth, once it got started.
Posted by FSK at 10:17 AM
Thursday, August 16, 2007
I can't believe that the Federal Reserve has never been properly audited. The official government story is that the Federal Reserve is audited. The criticism is that the government has never done a full audit, looking at every single transaction in the financial markets. I can't believe that. All the money it makes must go somewhere, and it isn't being returned to the government. If I was feeling more aggressive, I'd make a "Freedom of Information Act" request to get the Federal Reserve's books. However, I'm not a lawyer and don't feel like spending a lot of money tracking down the request, especially since the Federal Reserve claims that it is immune from disclosure. I want to see all the details of its "open market operations", when it buys and sells bonds to fix interest rates.
By auditing the Federal Reserve's open market transactions, it probably would be possible to determine what the free market interest rate would be if the Federal Reserve ceased its market manipulations.
That's why the Federal Reserve has never been fully audited. Only a partial audit is performed. The exact details of the Federal Reserve's open-market operations, where it fixes interest rates, are strictly confidential. The open-market operations have never been audited by Congress.
I checked the Federal Reserve website, and they claim that the Freedom of Information Act has a specific exemption for the Federal Reserve's open market transactions, so making a FOIA request wouldn't work. I couldn't find the specific law that makes the Federal Reserve's open market operations immune from the Freedom of Information Act. That seems odd. Why would currency transactions need to be protected as confidential? I suspect it's designed to prevent someone from looking at the full records and see what's actually happening. However, even though the Federal Reserve claims that exemption, I don't know if that exemption was tested in court.
Of course, I can predict what a detailed analysis of the Federal Reserve's open market transactions would show, without seeing the data. The Federal Reserve primarily acts to keep interest rates artificially low, compared to where they would be if interest rates were allowed to float. That means that most of the Federal Reserve's actions are designed to lower interest rates, which means that they are buying government bonds and issuing new money to pay for them. That money issued does not need to be reported; it is merely printed via bookkeeping. The new money cancels out when the Federal Reserve redeems bonds with the government. If you add up all that money that was printed, you would find it's a huge amount of money.
Posted by FSK at 3:24 PM
Tuesday, August 14, 2007
Is there any intrinsic legitimacy to the government? How do I know that government isn't merely a group of people conspiring to leech off my productivity and steal my property? It certainly seems that way.
The government's position is kind of ridiculous. All work must be reported for taxation, confiscation, and regulation. What honest, competent person would ever voluntarily agree to such a restriction?
Unfortunately, a lot of people are dependent on government perks. They won't give up their privileges without a fight.
The government claims it has legitimacy because of voting. However, the voting system is defective by design.
Besides, what right does a majority of the people have to confiscate the wealth of people who are more productive than average? People think that income taxes hurt the wealthy. In practice, that isn't what happens. Lies about the merits of the income tax are spread in newspapers, television, and in schools. The wealthy insiders use the government to help them steal from productive people. Wealthy insiders receive government perks that are worth a lot more than the income taxes they pay. They give token welfare payments to the average person so they vote for the current system, even though the government subsidies are less than these people could earn in a true free market.
The effective result of government is that insiders steal the wealth of productive people. Why should I support such a system?
Why is "The Constitution" revered as almost a religious document? The 16th amendment and the creation of the Federal Reserve completely subverted its original intent. Do you think the 16th amendment would be successfully ratified today? Some tax protesters argue it was never ratified properly at all. Some tax protesters say that, at the time the 16th amendment was passed, income was generally understood to mean corporate profits and capital gains. In 1913, wages were considered separate from income.
I was never given an opportunity to sign the Constitution. You could argue that the Constitution was only a binding contract for the people who signed it. The people alive at the time indirectly ratified it through their state legislatures. I don't see how those people had the right to impose a contract on me before I was born. Moving to another country is not an option, because they're as corrupt or worse. Even if a majority of the people living today would ratify the current version of the Constitution, what right do they have to impose it on me?
I'm starting to doubt the legitimacy of the government. Its demand that I must report all work for taxation and confiscation seems a bit extreme. The corruption of the voting system means that's not a productive venue for pursuing change. I don't see why the Constitution should be revered as a holy document, especially when its original principles have been corrupted.
Why should the government have a monopoly on justice? Why should the government have a monopoly on the right to use violence to impose its will? Why should the government have sole responsibility for protecting property rights and enforcing contracts? If I'm not satisfied with the government's services, can I seek alternate vendors?
Maybe government is just a mass hallucination. Some people are aware of the scam, and enjoy using force to protect their monopoly. Many government employees sincerely think they are doing the right thing.
The Constitution says that people have a right to petition their government for redress of grievances. What happens when people petition their government and their government ignores them?
If you drop the idea that the government has any intrinsic legitimacy, it opens the possibility of alternate ways of thinking. It is acceptable to question every rule, and look for creative ways to avoid the ones I think are wrong. I certainly object to the demand that I must report all work for taxation, confiscation, and regulation. When you reach that viewpoint, you start asking questions like: "Is this an effective mechanism for avoiding this rule? What is the risk of getting caught?"
Posted by FSK at 10:47 AM
Monday, August 13, 2007
On Thursday, August 9, European central banks announced they had injected $130 billion of liquidity into the European financial system. (It was 94.8 billion euros; I'm quoting prices in dollars so it's a valid comparison for US-based readers.) The Federal Reserve announced it had injected $24 billion of liquidity into the US financial system. On Friday, August 10, European central banks announced they had injected another $83.8 billion of liquidity, for a total of $210 billion. The Federal Reserve announced it had injected another $19 billion of liquidity, for a total of $43 billion.
Let's translate from economic nonsense to English. "The European central banks announced a $210 billion subsidy to banks in Europe. The Federal Reserve announced a $43 billion subsidy to banks in the Unites States."
That's slightly inaccurate. There's a fractional reserve banking system. When a central bank injects $1 billion of liquidity, and the reserve ratio is 10x, that's actually a $10 billion subsidy. The new money gets multiplied by fractional reserve banking.
Translation 2nd attempt: "The European central banks announced a $2.1 trillion subsidy to banks in Europe. The Federal Reserve announced a $430 billion subsidy to banks in the United States."
The European central banks issued their loans at a 4% interest rate, which is a further discount to the current EU target short-term interest rate. The Federal Reserve did not change its interest rate target; the $430 billion subsidy was required to maintain the current target of 5.25%. The $430 billion gift represents the amount of debt the Federal Reserve had to repurchase to keep interest rates at a level of 5.25%, plus the ability of fractional reserve banking to multiply this newly printed money. Before the Federal Reserve intervened Thursday morning, interest rates had shot up to 5.5%! How high is the free market interest rate, if interest rates can go up 0.25% overnight!? The free market interest rate is what interest rates would be if the Federal Reserve didn't fix interest rates.
Why was it necessary to subsidize the financial industry on Thursday and Friday? Banks were losing money on their subprime mortgages. Why are so many subprime mortgages defaulting? The correct answer will probably never be stated anywhere else, unless someone reads and cites my post.
The reason for the subprime lending problem is one of my favorite topics: The Compound Interest Paradox. Due to the Compound Interest Paradox, the amount of debt increases exponentially faster than the supply of money. With debt-based money, money is only created when someone borrows. When someone takes out a loan, only the principal is created. The money required to make interest payments is not simultaneously created. This guarantees that debts grow exponentially faster than the money supply. It is a statistical necessity that during the bust phase of the economic cycle, the weakest debtors will be forced into bankruptcy.
We are currently in the bust phase of the business cycle. Who are the weakest debtors? This time, it's people with subprime mortgages. They're the ones who get the shaft. Their wealth is being confiscated. The bust phase of the business cycle means it's hard for them to get money to repay their debts. The bust phase of the business cycle means that many of their houses are no longer worth what they paid for them.
Someone had to get screwed over; it's a statistical necessity built into the financial system. I wasn't expecting it to be subprime mortgage borrowers. I was expecting it to be the leveraged buyout firms. However, those leveraged buyout firms are run by billionaires; it wouldn't be proper for them to lose money. It's important to increase the money supply before they feel the pinch.
Ten million people might lose their homes. Let's see: $430 billion divided by 10 million is $43,000 per defaulted debtor. If you include the European central bank subsidy, it's $2.1 trillion divided by 10 million, which is $210,000 per defaulted debtor.
How come this wasn't the headline: "The US government announced a $43,000 credit to every homeowner who has currently defaulted on their mortgage." How about: "The European central bank announced a $210,000 credit to every US citizen who has defaulted on their mortgage." This fantasy headline would solve the subprime lending crisis just as much as a massive subsidy to the financial industry. Who cares about what happens to the average American? The US government is not looking out for them. (As I pointed out to TZ, a payment of $43,000 or $210,000 directly to the people is what "Social Credit for Wimps" advocates like C. H. Douglas or Bryan Monahan would want.)
I was watching CNBC. Someone suggested that maybe the government should provide aid directly to the people who are defaulting on their mortgages. Someone pointed out that was just encouraging irresponsible behavior. People who took out mortgages they can't afford deserve to lose their homes. However, what about the bank that issued the loan, or whoever bought the loan after it was issued? Don't they also deserve to lose money? No. They are fully deserving of a government bailout.
When banks start losing money, that's a serious problem.
How did banks wind up losing money? These mortgages are pooled into various bonds of varying degrees of risk, yielding 6% or more. The banks and investment firms were borrowing from the Federal Reserve at 5.25% and buying bonds that yield 6% or more. They use a leverage ratio of 10x or 20x or more. With a 1% interest spread, a leverage ratio of 20x translates to a profit of 20%. This type of transaction, borrowing from the central bank and buying other loans, is called "Illicit Interest Arbitrage". Profit is made, but no real work is performed. The actions of a central bank make this arbitrage riskless; the central bank will always increase liquidity (i.e. print money and give it to the banks) if there's a problem.
Many mortgage holders are already in default. However, these large banks are stuck holding these bonds. Large banks can't lose money. What's the central banks' purpose? The central banks increase the money supply. All that new money has to go somewhere, and some of it is used to purchase these struggling bonds. When interest rates are lowered, the price of these shaky bonds is raised. The default risk of the loan has increased, driving down the bond price. Interest rates have decreased, driving up the bond price. These factors offset, and the bond prices stay the same. The banks don't lose money. The financial system is set up so that large international banks never lose money.
What about the people who can't pay their mortgage? Unfortunately, they don't get the newly printed money. They'll see it in a couple of months, in the form of inflation, after they've already been evicted from their home. By the time these people think about buying a house again, prices will have started rising again. It turns out that all these subprime borrowers will have sold their homes at the bottom of the market. The banks are confiscating their homes. The banks have enough money to survive. By the time the banks sell off the confiscated homes, housing prices will be rising again.
That doesn't necessarily mean it's a good time to buy a house right now. Mortgage rates are rising. The spread between the central bank cartel interest rate and the mortgage rate is increasing. Borrowing money is risk-free only if you're a large international bank.
The large international banks can't lose. The financial system is biased in their favor. Even when they make a bad decision, a central bank bailout is always waiting for them. International banks always have an unlimited free put option. International banks can sell bad loans back to the central banks, in the form of a money supply increase.
Here's my final attempt at translating the central banks' announcement: "Due to the Compound Interest Paradox decreasing the money supply, many poor borrowers were forced to default on their mortgages. It wasn't because they were deadbeats or foolish; the default occurred because of a fundamental structural flaw in the financial system. By statistical necessity, the poorest debtors are forced into bankruptcy during the bust phase of the business cycle. This time, it's subprime mortgage borrowers; who knows who it'll be next time? A lot of banks had invested in these mortgages, and we can't let our friends at large international banks lose money. The European central banks are making a $1.3 trillion subsidy and the Federal Reserve is making a $240 billion subsidy to keep these banks in business. This subsidy isn't free; everyone else is going to pay for it as inflation. By increasing the money supply, we're increasing the price of these bonds so these banks stay solvent. The poor debtors are still going to lose their homes, but who cares about them? Those poor debtors are financing the bailout themselves, via inflation they will see in 3-6 months. Isn't debt-based fiat money wonderful!"
Do you see the fundamental injustice of the current financial system? Does anyone out there have a clue? Is anyone out there interested in setting up a fair financial system? I already told you how to do it. You have to start a Social Credit Monetary System. You have to do work and not report it to the government for taxation, confiscation, and regulation.
Posted by FSK at 11:43 PM