This essay is about debt. As background for this presentation I will provide a brief summary of the conclusions of the first essay in this “Invisible Hand” series which examined the physical object nature of our money and some of the unfortunate consequences of that nature. I will be concise so if you have already read one or more of the earlier essays don’t worry, this review won’t take long.
All money in history (and pre-history) has been considered to be or to represent physical objects such as a basket of grain, a cow, a coin, or a paper bill. Today most money is in computer accounts and though it zips around the world from account to account at almost the speed of light, it still is treated as if it were a physical object of some sort. Because we treat money as if it were a physical object, anything which is true of physical objects in general will also be true of money. This obvious point is ignored by economists and others who talk and write about money even though it is the most important truth about money. The importance of the physical object nature of money cannot be overstated. What follows are some of the consequences of that physical object nature.
First, money is like other physical objects in that it can be taken from its owner against that owner’s will; by force, fraud, or stealth and it can also be lost or destroyed. This means that you need to suspect almost everyone of trying to get your money by fair means or foul.
Second, money must be amoral because all inanimate physical objects are amoral. Even animals are amoral, in that they have neither an ethical sense nor morality, especially when they are used as commodity money. You can use your physical object money for anything, good or bad.
Third, the money supply is independent of the supply of goods and services for sale because the supply of one physical object is independent of the supply of other objects.
Fourth, money falsely simulates a zero-sum game in monetary transactions because the money gained by one party must be lost by some other party or parties. Money makes us think that other people can gain money at our expense and that we can only gain money at their expense. It makes us treat others as if they were competitors, rivals, opponents, or even enemies.
Fifth, money is almost impossible for a society or nation to control. In every nation that attempts to limit, regulate, or tax trade a black market comes to exist; and organized crime flourishes in all nations.
Sixth, money transactions are two-party interactions. Two-party interaction is inherently unstable because if one party gets an advantage in power such as having more money, the stronger party can use that power to gain still more advantages. This is particularly true of money. The old saying “them as has, gets” is true. Possession of money does make getting more money quite a lot easier. Naturally, the weaker party in such two-party interaction will eventually want to end the interaction. Thus the relationship is unstable.
Keeping that review in mind, let’s consider several issues concerning debt.
I’d like to start with the FED, the Federal Reserve System, both because there are a lot of people who are emotional about the subject but also because when it comes to debt there are few debts larger than those with which the FED deals. First, a little history: Wikipedia says that QUOTE “The primary motivation for creating the Federal Reserve System was to address banking panics.” UNQUOTE. Now there are those that believe that the real motivations were greed on the part of a few powerful bankers, but the justification given at the time for creating the FED was to deal with banking panics. In fact, QUOTE “The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates.” UNQUOTE. But though these and several other purposes were mentioned in the act, such as this QUOTE from the Act “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes” UNQUOTE the prime motivator was the panic of 1907; concerning which panic Wikipedia notes QUOTE “The panic was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company – New York City’s third-largest trust. The collapse of the Knickerbocker spread fear throughout the city’s trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.” UNQUOTE.
So the FED was created to solve and prevent problems associated with debt and credit, the two sides of the lending coin. Such financial panics were very common in the U.S. in the 19th century. There have even been several famous panics in world history which you may have heard of such as the Dutch Tulip manias in the 1630s, the British South Sea Bubble of 1717, the French Mississippi Company also in 1717, and the world’s Great Depression of 1929-1939. These times of economic unpleasantness (recessions) were quite common in the 1800s in the U.S. occurring in the years 1802, 1807, 1812, 1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1857, 1860, 1865, 1869, 1873, 1882, 1887, 1890, 1893, 1896, and 1899. Of these recessions, the worst seem to have been caused by financial panics. The 1815-1821 depression involved the Panic of 1819 with widespread foreclosures and bank failures. The Panic of 1825 involved a stock crash following a speculative investments bubble. Bank failures, over 600 of them, created the 1836 recession. The 1839 recession was one of the worst depressions involving pronounced deflation and massive default on debt. Business declined by a third during this four year depression. A financial crisis in Great Britain was echoed in the U.S. in 1847 since Britain bought so many of our products like cotton. The Panic of 1857 was due to another bubble bursting. This one in U.S. railroads causing funds to be taken from U.S. banks. The 1869 recession involved a major financial panic. Then there was the Panic of 1873 which resulted in the so called “Long Depression” of about five years and may have depressed the economy for over twenty years. In this one Jay Cooke & Company, the largest bank in the U.S. failed. One of the major contributory factors was the Mint Act of 1873 which made gold the only monetary metal, the gold standard in effect. So the gold standard does not appear to fix all economic ills. Next, the 1882 recession was made worse by the Panic of 1884, a panic in Britain in 1890 hurt American exports in the 1890 recession, and the Panic of 1893 involved a banking collapse and a run on the gold supply of the Treasury.
So you can see that every member of Congress and every bank executive had personal memories of financial panics and banking disasters that had occurred during their lifetimes. The desire on the part of the public and especially the bankers to end such disasters precipitated powerful sentiment favoring some governmental action. The result was the 1913 creation of the Fed.
Now that we have the FED what does it do? In order to make the money supply QUOTE “elastic” UNQUOTE the FED has to be able to create and destroy money. In creating money the FED creates debt. (See, I told you we were talking about debt this time.) It does this in several ways. The FED buys government bonds using electronic credits to the sellers’ banks. Those credits are just magically created out of nothing. They are a simple increase in computer account totals. Bonds are a form of debt, of course. Those banks have that new money added to their reserves so they can loan out more money.
A second way the FED can create more money is to reduce the reserve requirements that limit the money the banks can loan out. More bank loans create more money, again from nothing.
A third way the FED can create more money is to make direct loans to banks. The interest rate on those loans is lower than the interest rate the banks can get in loaning out that money.
All of these ways of creating money from nothing involve debt. The FED creates money by going into debt and by encouraging others to go into debt. You will note that all this debt pays interest to banks because in every case the money which the FED provides is loaned out at a profit by the banks. So the FED is essentially a welfare program for banks, and the larger and more powerful the bank the greater the welfare payments to the bank; the entire federal deficit is money given to banks. In the fiscal year 2014 that deficit is about 650 billion dollars. All of welfare spending is less than 400 billion. So the major banks get more welfare than all the rest of the citizens of the U.S. combined. And when we consider that those banks loan out that money several times for each dollar given them, the welfare is quite a lot larger than the 650 billion would appear. The U.S. government also pays over 200 billion dollars each year in interest on the money given to the banks. Of course, lots of that interest goes to the banks. So the figures I have just given you are a very conservative under-estimate of the amount of government welfare that goes to the banks via the FED.
You will note that the FED attempts to be very careful about how much money it gives to the banks because if they give too much all at once it could upset the system through rampant inflation. So the banks must be patient and not too greedy or things fall apart. But it seems to me that being “not too greedy” goes against human nature, so the banks tried much larger frauds – as we saw in the mortgage debacles of the last decade. They almost managed to completely destroy the whole system with that one. But the FED gave the banks lots more (imaginary) money and saved the system.
This is a good lead-in to the national debt, which is created and managed by the FED upon instructions from Congress. The FED is the means or the tool used by Congress to create and maintain the debt. Just now the national debt is approaching $18,000,000,000,000. In other words, since the creation of the FED about 18 trillion dollars have been given to the banks created out of nothing.
What if the federal government repaid the national debt? What would happen? Would that be a good thing or a bad thing? Well, if you paid off your credit card debt and paid off your home loan and paid off your bookie would you be better off? Most people would say yes. But then, you aren’t a government and you aren’t a bank. You can’t legally create money out of nothing. When you loan money you cannot spend that same money until it’s returned. You can’t loan out the same $100 to ten different people. Banks can do that. So it really doesn’t make sense to treat the government debt as if it were the debt of a private individual.
How would the government pay off the debt? It would do so by bringing in more money by taxes than it spent. In other words, the money would come into government and be used to retire government securities. This would reduce the money supply indirectly. As treasury bonds come due the government would pay them off but not buy other bonds to replace them. The banks which held those bonds would have cash instead. That seems benign enough. The treasuries were the next best thing to cash anyway so the banks don’t lose. But the reduction in federal debt reduces the reserves held by the banks which reduces what the banks can loan. Since bank loans increase the money supply, a decrease in loans would decrease the money supply. The FED could counter that by decreasing the reserve requirement for the banks.
But with the government not creating more treasury bonds, the total amount of treasuries out there is reduced as they reach maturity. If the federal government is no longer borrowing and if the supply of treasuries out there is diminishing the cost of loans should go down and the cost of stocks should rise; the cost of loans going down because there is more money available to be invested in loans. Some of those dollars would be shifted to investments in the stock market thus driving up prices there as well.
These sound like pretty good consequences. But remember that the government is also spending less or tax money is increased or both. In either case, that’s less money in the economy because the taxpayers are spending less and the government is spending less. That’s a sure way to produce deflation. Deflation dramatically reduces the money supply. Loans default in deflation, business activity slows with deflation, unemployment rises and consumer spending drops, banks fail or become shaky; all the things associated with the lingering recession we are slowly escaping (2014) – only worse. If government spending matches government revenue or taxes, money removed from the economy in one place (taxes) is returned to the economy (spending). That keeps things in balance. If the government takes in more money than it spends, that upsets the balance.
The FED is supposed to maintain that balance but the FED works for the banks. So the FED allows the banks near free reign… as was revealed by the bad loans made in the last decade.
The next kind of debt I would like to address is consumer debt: mortgages, student loans, credit card debt, and car loans. Most people and families are in debt. As of April 2014, the average household that owes credit card debt in the U.S. owes over $15,000. The average mortgage debt is over $150,000. The average student loan debt is over $30,000. In total, American consumers are in debt by over 11 trillion dollars, and most of that is in mortgages. This means that the American consumer is paying a rather large amount of interest each year. Now if we get a recession, many are unemployed and their debts are not repaid. When loans default, the money supply shrinks, and banks which have loaned to their reserve limit are forced to borrow to increase their reserves: This tends to make banks fail. When banks fail they cannot repay their loans, and this state of affairs further reduces the money supply. This happens even though their depositors are partially insured for up to $250,000 per account.
These factors explain why national economies are unstable: There are positive economic feedback loops which tend to exaggerate any trends in the economy – this is especially true with the money supply.
But this is all at the macro level in the economy… What about at the individual level? Look what the kinds of debt consumers have does to their situation: If one has the average credit card debt of some $15,000 and one pays only the 20% interest on that loan, one is reducing one’s yearly money supply by some $3,000. For the average family that’s a substantial amount which noticeably affects their life style. If we throw in a mortgage of $150,000 at 5% interest that’s another $7,500 unavailable for a total of over $10,000 of after-tax income which is now not available to spend. For the average family, that’s a really big difference in life style. That’s college funds for a couple of children, or really good health insurance; money for summer camp for the kids, or money to save for retirement. For working class families, that’s the difference between poverty and the middle class. In other words, paying interest is a major problem for the average American family.
So why do families live in debt? Why don’t they just wait until they have the money and pay cash? Some of us did exactly that. But if you want to buy a house it’s really difficult to pay rent, which usually includes paying off the landlord’s loan with interest and his property tax – plus maintenance on the residence and a little profit for the landlord – in addition to saving to buy one’s own house. One might as well be paying the same amount as the rent would be and gaining some equity in a home which can be borrowed against in an emergency. But once one gets beyond a house, why do people go into such debt? Especially, why do people charge so much on their credit cards and pay the huge interest rates such credit entails? Of course, not everyone does that, some of us pay off that credit card debt to the penny every month for years and years… But that takes a steady income, reliable employment and a pretty strong ability to defer gratification. Not everyone is economically and mentally well off enough to do that. And you’ll notice that once one gets behind, it becomes even harder to catch up.
But let’s consider another aspect of individual debt. Why should it exist at all? When the economy was a hunting-and-gathering economy, back before the history and development of money, there was no debt. Sometimes one might get a gift of food or some article of clothing from others in time of need but there were no formal loans. One was just expected to repay such a social debt when one could. If one wanted to buy something – once history began and before the industrialization of the Western world – one had to save up the money somehow; since no one would lend money to the average man, and certainly not to the average woman… all of whom were peasant farmers. One earned before one bought. Why have we gotten away from that model? Why do we have a system which encourages people to go into debt? What good does that debt do for the economy or for the people?
We have already shown above that consumer debt causes a significant loss of spendable income for ordinary people. This loss of spendable income causes a reduction in taxes for the various levels of government as well. Remember that tax deduction for mortgage interest? Remember that sales tax revenue is reduced when people spend less on consumer goods? Remember that banks pay very little in taxes because they have shaped the tax laws to avoid paying anywhere near as much as the average family? So all of that interest reduces the taxes people pay, and lowers the standard of living for the average family. It reduces the production of consumer goods because it reduces consumer spending. In other words, in almost every way you can think of, that consumer debt is bad for the economy. So why are we told that if consumers were not in debt it would be bad for the economy? If people stopped spending so much this Christmas on their credit cards it would be a big shock to the economy and the experts would be saying it’s a huge blow to the economy because demand was down so much. But that would not be because people weren’t going deeper into debt. That would be because people were reducing their indebtedness. It would be because people were paying off their loans, and because the money supply was being reduced as a result of those loans being paid off. It isn’t that people being in debt is a good thing, it’s because they are already heavily in debt that getting out of debt hurts.
But that’s really silly, isn’t it? I know. You don’t see why it’s silly because that’s the situation you have lived in all your life. But it really is silly, as I’ll now explain. You see, what we can consume depends on what we can produce. The more we produce, the more we have available to consume. That’s blatantly obvious. So why should we produce less than we are able? Why should we live at a low standard of living and have half the population in poverty (that’s the 47% you heard so much about in 2012 during the election)? We are able to produce plenty of the necessities and lots of luxury goods besides and build up and maintain our infrastructure, that’s what we are able to do… But we don’t actually do that, and why not? We have the material resources. We have the labor force eager to work. We even have the skills and technology. What we don’t have is money arranged in the proper way to let us get the job done. The FED creates money by fiat and gives it to the banks. The banks make huge fortunes lending the money to businesses and consumers. But the money does not get into the hands of the poor or the middle class, nor does that money go to the government agencies which build and maintain our infrastructure. Where does that money go? It goes to those who are already wealthy. Now isn’t that silly? The FED could give those increases in the money supply to the poor instead of giving it to the banks. The poor would spend it right away enriching everyone above them in the economic pyramid and the money would eventually wind up in the banks, but along the way it would have made everyone’s lives better. And I say that the poor deserve the money far more than do the wealthy bankers: The poor, at least, have children to care for.
Remember those consequences of the nature of a physical object money or POM? Well here’s one of the means by which those consequences are brought about. POM is taken from people against their will in the form of taxes and interest. The supply of POM is independent of the goods and services for sale so the supply of POM can increase resulting in inflation or decrease resulting in deflation. The two-party interaction of POM transactions’ inherent instability generates powerful big money interests which dominate both the economy and government. The POM zero-sum game simulation causes those big money interests to treat everyone else as rivals or competitors and thus to spend as little as possible –even though that lack of spending hurts everyone. The inability to control POM means that the FED cannot prevent inflation and deflation even if the FED were independent and not controlled by big money interests. And finally, the fact that POM is amoral means that no matter how damaging these actions are for other people, big money interests are not prevented from using their money to bring about those consequences. Debt, naturally, plays a big part in the industrial economies in generating these unfortunate consequences.
Non-POM, on the other hand as economists like to say, has no debt at all of any kind. Before one can buy anything one must own sufficient money for the total price. Therefore, there is no national debt; there is no need to increase or decrease the money supply, because with non-POM there is always just enough non-POM in people’s accounts to buy the goods and services available for sale. Inflation and deflation are both impossible with non-POM. With non-POM there is no need for money to pay for necessities, so one can save all one’s income to buy some expensive luxury without suffering want or deprivation. With non-POM there is no unemployment. If one finds something that one can do to better the lives of others, one can simply do that thing to earn non-POM. Your getting paid does not in any way reduce the earnings of anyone else. In fact, your getting paid increases the income of many others who share in the credit for benefits you have produced. After all, they helped you in some way to produce those benefits.
So with the national debt eliminated and with no consumer debt, what would happen to the relative income of the average American? That lifestyle would benefit from the increased production of the economy. One source of the increase would be all those who are now unemployed would have work. Another source would be all those who now work with debt such as the banks, insurance companies, and stock markets would be available to do other work which actually benefits people. A third source would be that production would be limited to goods and services which actually benefit people, so the quality of food, housing, and infrastructure would be greatly improved. What benefits do people gain from eating large amounts of corn syrup and other junk foods? What benefit do people gain from organized crime activities? What benefit do people gain from the tobacco industry? So those efforts and resources would be converted to activities and production which would produce far more benefit and far less harm.
But perhaps one of the greatest benefits from lack of debt would be in the reduction in stress that people experience in their daily lives. Just think how much of your time you spend worrying about money. People worry about keeping their jobs, they worry about the money their spouse is spending, and they worry about getting enough money to feed their children. People worry about meeting their mortgage payments, about losing their health insurance, and about paying their taxes. People worry about being sued, they worry about big medical bills, and about not having enough money to retire. People worry about having enough money to pay for college, they worry about paying off the loan shark or their bookie, and they worry about fines. People worry about being cheated or swindled, they worry about contracts on purchases, and they worry about… well, I’ll let you fill in what you worry about for yourself. If you’re human you must be worried about something having to do with money and debt, even if it’s the federal government creating runaway inflation.
But with non-POM none of these worries would be present. With no unemployment you would not have to worry about losing your job even if your job ceased to exist. You could always do something else to earn money, and while you decided what you wanted to do you would probably have a continuing income from previous actions, not only that, but you would not have to spend any of the money you already had. With non-POM you would not have to worry about what your spouse was spending because that money would be your spouse’s money, not yours. With non-POM you would not have to worry about getting enough money to feed your children because you would not have to pay anything for their food or your own food. With non-POM you would not have to worry about meeting your mortgage payments because you would not have a mortgage. With non-POM you would not have to worry about losing your health insurance because there would be no insurance, and you would not have to pay for medical treatment anyway. With non-POM you would not have to worry about paying taxes because there would be no taxes of any kind for anybody by any level of government at any time, ever. With non-POM you would not have to worry about being sued because there would be no lawsuits for money. With non-POM you would not have to worry about having enough money to retire, because your income would probably continue for quite a while after you stopped work and you would have no expenses, anyway. With non-POM you would not have to pay to attend college, neither room and board nor tuition and fees. With non-POM you would not have to worry about loan sharks or bookies because there would be no loans or gambling for money. With non-POM you would not have to worry about fines because they would not exist. With non-POM you would not have to worry about being cheated or swindled because there’s no way anyone could get your money by any means, fair or foul. With non-POM you would not have to worry about contracts on purchases because there would be no such thing. I can’t say what other worries about money you might have but odds are, they too would no longer exist with non-POM.
Perhaps you should consider a life with fewer worries and give non-POM some consideration.