Lawson for Congress

Finally, tonight, as we sail towards economic catastrophe, a glimmer of hope. Honesty:

The U.S. Congress is unlikely to pass new legislation to overhaul financial regulations this year because “no one knows what to do,” Senate Majority Leader Harry Reid said today.

Well, that’s not exactly true. Ron Paul knows what to do. Michael Shedlock knows what to do. But at least we’re finally at the place where Congress is ready to admit its relative ignorance.

Not only do they not know what to do, they don’t even know what the problem is.

First, it’s time to admit the real problem — fractional reserve banking (where banks lend out more money then they have on deposit for lending) and debt-based money (where money is created through loans that must be paid back with interest). These two ingredients are amphetamines for our economic system.

Read that again — amphetamines. Easy credit is a dangerous, addictive drug. Our economy becomes hooked on easy credit. When we first get access to cheap credit the economy accelerates, but eventually we develop a tolerance. Eventually we need more and more cheap credit to get the same stimulatory effect.

But since credit equals debt  (for every lender there is a borrower), more credit equals more debt. And since debt must be paid back with interest, as borrowers take on more debt, the burden of compound interest continues to grow.

In fact, you can think of interest payments as a one reason we develop “tolerance.” Cheap credit initially leads to economic stimulation, which fees good. But assuming more debt by creating more money causes more interest payments, thus increasing future costs.

Where do we get the money for additional interest payments? We need to create it through yet more borrowing. More of the new borrowing goes to pay interest, not to pay for real growth — so we need yet more borrowing.

Do you see the problem yet? It’s a system that is inherently unstable, and tends to grow exponentially as we seek bigger and bigger “hits” of credit to keep the growth machine humming. Until, finally, one of two things happen. If we can’t get a big enough hit, and credit starts to contract, we crash. Hard. Or we might be able to arrange just one more massive hit, which we hope will satisfy our craving, but which simply kills us.

This problem is ancient, yet our elected representatives are either ignorant or unwilling to learn.

At the showing of I.O.U.S.A. last month, we distributed the following handout:

We cannot borrow our way out of debt.
We cannot borrow our way to prosperity.
Collectively, we have borrowed so much that by 2016, the interest on our debts at 6% interest will be greater than the total consumer income.

Debt on this chart is defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, including households, business and financial sector debts, and federal debt to trust funds).

Most people don’t understand the sinister nature of interest. Many understand they pay interest directly when making house, car and other installment plan payments. Very few, however, realize that is only a small part of the interest bill they pay. They don’t realize that most businesses have huge debts, and the interest on those debts is passed on to the consumer though higher prices. They don’t realize that the federal, state, county, city governments and school districts have huge debts, and that the interest on those debts is passed on to the consumer though higher taxes and fees.

“If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
- Robert Hemphill, Federal Reserve Bank of Atlanta.

The defect in our money system is that “The actual creation of money always involves the extension of credit by private commercial banks”  (Russell Munk, U.S. Treasury). Therefore, when banks create new money through new loans, there is no way to create the money needed to pay the interest charged on those extensions of credit.

As this debt and its accompanying interest grow, it is obvious that the consumer has less and less discretionary income, businesses have less profit, and more individuals, businesses, state and local governments will be forced into filing bankruptcy.

Sources:
http://www.wealthmoney.org/
http://mwhodges.home.att.net/

We are living through the unwinding of this system. The compensatory measures being proposed by Congressional leaders and presidential candidates to keep this system afloat are entirely insufficient, and will do nothing to remedy the system’s inherent injustice and instability.

What to do?

Return our money to the people, for starters. Do people want to exchange and transact in gold and silver? Great. Do people want to do business in private local currencies that build self-sufficient communities? Great. Affirm that all barter transactions between individuals are tax-free, and let individuals build wealth by helping each other.

Eliminate fractional reserve banking, eliminate legal tender laws, and eliminate our private money monopoly. Our government can use its sovereign power to create currency that is not based upon debt, and based upon how responsibly our government creates that currency, people can choose to accept it or discount it appropriately.

This idea is not new, it’s in fact how we originally grew into a prosperous nation — colonial scrip. Scrip is fine for domestic trade, and specie or other commodities can be used for international trade. Competition between different money systems keeps people honest, and elimination of fractional reserve banking and fraudulent “deposit insurance” keeps banks honest.

Relentlessly seeking another hit of debt will not cure our unsustainable addiction. The poison is not the cure.

This entry was posted on Thursday, September 18th, 2008 at 12:27 am and is filed under banking, debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.