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Friday, January 30, 2009

More Communist Humor

I was watching the Communism Channel (CNBC) and saw another hilarious joke. They were talking about a proposed law where Congress would give judges discretion to change the terms of mortgages instead of foreclosing.

The analyst/comedian said "If Congress interferes with private debt contracts, that sets a very damaging precedent. The contract between borrower and lender is sacred, and the State must not interfere!"

My reaction was "ROFL". Can you guess what I was thinking of?

In 1933, President Roosevelt defaulted on the gold-redeemability of the US dollar and confiscated all the gold from US citizens. He then devalued the dollar/gold from $20/ounce to $35/ounce. (Even though US citizens were barred from owning gold, foreign central banks could still redeem their paper dollars for gold.)

Anticipating a default on the US dollar, many private debt contracts contained a "gold clause". A gold clause said "If Congress devalues the dollar relative to gold, then the amount of interest/principal due repaying the loan increases proportionally." President Roosevelt, Congress, and the Supreme Court ruled all these gold clauses invalid. In other words, the State breached *EVERY SINGLE* private debt contract that existed in 1933.

In the present, you don't hear of anyone using gold clauses. I don't know if they're outright illegal/unenforceable, or that individuals don't have the negotiating leverage to ask for one when dealing with a large corporation. (I tried looking up the law, but it was unclear.)

Whenever the Federal Reserve or Federal government inflates the money supply, they are interfering with *EVERY* private debt contract. As an individual, it does not make sense for me to make another individual an FRN-denominated loan. If I lend you money at 6%, I'm going to get ripped off by inflation. If I put a gold clause in my loan, I'm charging you an extortionate implied interest rate. Banks can lend at 6%, because they merely borrow from the Federal Reserve at the Fed Funds Rate (currently 0%-0.25%), pocketing the spread times their leverage ratio.

When the State manipulates the money supply, it interferes with the ability for everyone except financial industry insiders to raise capital to start a business. A corrupt monetary system means that the average person is always the slave of the bankers. Individuals don't have the magic money-printing power that banks have.

Suppose you take out a mortgage at 6%, anticipating 10%-20% inflation and a corresponding boost in housing prices. You are making a rational economic decision. The State, via the Compound Interest Paradox, causes a bust. Instead of 10% inflation, there is temporary 20% deflation. Instead of borrowing at an interest rate of -4%, you actually were borrowing at 26%. During a recession, individuals may lose their jobs, making them unable to pay their mortgages.

During a recession, individuals who load up on leverage lose everything. Insiders always qualify for a bailout. As an individual, you lose your downpayment and your house. All the labor you spent earning your house downpayment was stolen by the bankers.

The mainstream media says "Rule of law is important! If someone defaults on their mortgage, then the police should violently kick them out of their house! No exceptions!" When you realize that the financial system is one big fraud, you realize that police enforcing mortgage foreclosures are terrorists. It is a statistical consequence of the rules of the monetary system that a certain percentage of borrowers will lose their homes during each economic bust. You could argue "Those were the least efficient workers!", but a corrupt system that guarantees a certain percentage of people will lose everything.

Even if I have no mortgage, I am still subsidizing the financial industry via inflation. Suppose I maximize the leverage on my mortgage, refinancing every time housing prices rise. Then, I will lose everything during the next recession/depression.

A debt contract with a bank is not a sacred contract. It's an invalid no-interest contract. In order for a contract to be valid, both sides must contribute something of tangible economic value. When you borrow from a bank, the bank merely prints new money and loans it to you. A bank does no real work when it lends money. As an individual, you have to perform work to get money to repay the principal and interest. That money must have ultimately come from the bank. Due to the Compound Interest Paradox, there will be an occasional crunch when individuals are scrambling to raise money to pay off their debts.

There was another interesting footnote in the proposed law. The law said that the bankers may foreclose on a mortgage, *EVEN IF THERE WERE TECHNICAL IMPROPRIETIES WITH THE LOAN*. Some judges were refusing to foreclose, citing technicalities in the mortgage paperwork. In some parts of the country, some judges were reluctant to kick a large number of people out of their homes. The law was removing this discretion from judges. In other words, the law actually subsidizes the bankers.

For example, some of the mortgages had been bought and sold and repackaged several times via CDOs. It was no longer clearly documented who legally owned the mortgage. In some of those cases, judges were refuse to allow foreclosure. The bank that claimed to own the mortgage didn't have legal standing to foreclose, or perhaps they didn't have appropriate papwerwork. This law would remove judges' discretion to refuse to foreclose, if the mortgage paperwork was defective.

Whenever a policeman uses violence to evict someone from their home for not paying their mortgage, he is committing a crime. I don't advise people to borrow money and not repay it. I'm just pointing out the immorality of the US monetary system. The correct solution is to completely boycott the dollar and use real money (gold or silver) instead.

1 comment:

Anonymous said...

«completely boycott the dollar and use real money (gold or silver) instead.»

This is classic, dumb argument of those who think that automatic mechanisms are can replace vigilance.

This is a joke for two reasons...

* As an automatic mechanism, using any commodity as unit of account is completely ridiculous because it makes the unit of account worth the random ratio between its rate of production and that of everything else, and as a rule they are widely different.

Consider this case: at some point a given quantity of gold is used as unit of account and exchange for GDP. Then in 10 years GDP grows 40%, and the quantity of gold is unchanged. The consequence is that those who held gold for 10 years now are 40% richer without moving a finger, because the same amount of gold now buys a 40% greater GDP. This means that only idiots will work hard and innovate and start businesses to grow the GDP by that 40%, when they could obtain the very same effect by holding gold and doing nothing; thus there will be no incentive to grow GDP, just to hold gold.

Thus the good idea to use a unit of account with an expectation of gentle steady depreciation, so that people have an incentive to put it to fruitful use, not to hold it. Even the Parable of the Talents hints this.

Of course a unit account that can gently and steadily depreciate can be made to depreciate rather more quickly and unsteadily; but the solution is not to put in a straitjacket of an automatic regulator like gold or silver or sheep or seashells, it is to manage the unit of account well.

But this requires the vigilance of citizens, or at least of their rulers. Citizenship is not a spectator sport, and the price of liberty is eternal vigilance.

Because without vigilance all is lost; gold alloys can be debased, bullying by the rich can develop unchecked.

There is no automatic way to keep your neighbours and rulers honest: only committed, engaged, participation in public life.

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