Topic: Economics
The Degenerative Nature of Keynesian Economics The last seventy years or so have proven the massive flaws in the official economic and monetary policies which are promoted by this government, but it appears that there are few who are either capable or willing to view these flaws regarding the solutions that are available to resolve those flaws.by Republicae
(libertarian)
Sunday, February 1, 2009
The last seventy years or so have proven the massive flaws in the official economic and monetary policies which are promoted by this government, but it appears that there are few who are either capable or willing to view these flaws regarding the solutions that are available to resolve those flaws. Evidently, during this latest economic dislocation, we will see yet another round of flawed economics and monetary policy emanating from the Keynesian mentality that permeates the official realms of our government.
Keynesian Economics was created to create problems and not offer solutions. That seems to be a radical statement however, when you judge that statement in the light of the writings of those who knew John Maynard Keynes and his economic theories, it becomes apparent that they were well aware of the effects that Keynesian Economics would have on the well-being of the economy and that those effects would create the need for an ever-increasing amount of government intervention. Perhaps the clearest explanation of the effects of Keynesian Economics can be found in the writings of Keynes' contemporary and Socialist Comrade John Strachey. Strachey stated that Keynesian Economics was "an indispensable step in the right direction. The fact that the loss of objectivity, and the intrinsic value of the currency which is involved (i.e., inflation) will sooner or later make necessary, on pain of ever- increasing dislocation, a growing degree of social control . . . for the partial character of the policy will itself lead on to further measures. The very fact that no stability, no permanently workable solution can be found within the limits of this policy will ensure that once a community has been driven by events to tackle its problems, in this way, it cannot halt at the first stage, but must of necessity push on to more thorough going measures of re-organization."
It should be very obvious, and irrefutable, that the real purpose of Keynesian Economic Theory was to completely undermine economic stability, thus creating a constant and steady need for government intervention that would eventually destroy the actual free market, leaving no alternatives but a government centered Socialist market economy.
In the book "The Failure of the New Economics", Hazlitt stated, correctly, "Keynes's plan for 'the socialization of investment' would inevitably entail socialism and state planning. Keynes, in brief, recommended de facto socialism under the guise of 'reforming' and 'preserving' capitalism." That statement, of course, is in agreement with Strachey's assessment about what effects Keynesian Economics would have on the substructure, and eventual superstructure of economics.
Strachey again, referring to Keynesian Economic Theory, said: "If once it were admitted that capitalism could be regulated and controlled in this way, might not the wage-earning majority of the population come sooner or later to the conclusion that the thing to do was neither to put up with things as they were nor to go through the fiery furnace of social revolution, in order to establish a wholly new system, but to harness - to bit and to bridle - capitalism in its own interest? Was it not apparent that Keynesism had only to be pushed a little further and a state of things might emerge in which the nominal owners of the means of production, although left in full possession of the legal title to their property, would in reality be working not for themselves, but for whatever hands had grasped the central levers of social control?"
Additionally, Strachey stated: "It is impossible to establish communism as the immediate successor to capitalism. It is accordingly proposed to establish socialism as something, which we can put in the place of our present decaying capitalism. Hence, communists work for the establishment of socialism as a necessary transition stage on the road to communism."
Thus, according to Strachey, the goal has been to gradually introduce Socialist mechanisms within the capitalist market systems through degenerative measures [such as Keynesian Economic Theory] that would increasingly promote government intervention in the markets. This has indeed happened over the last seventy-some-odd-years, and today we are seeing an even greater push by government in a response to this latest dislocation in the economy, as predicted by Strachey, as well as other Socialists.
It becomes apparent that one of the goals of Keynesian Economic Theory is the transformation of a free market economy into an official government economy. Indeed, if we look at the effects of Keynesian Theory on the actual monetary and economic policies executed in this country over the decades it becomes easy to see that this particular theory has eliminated the normal market mechanics for artificially induced and managed market mechanics. You will notice that over the years the savings rate in this country has gradually deceased, consumption, driven by debt, has increased and during this process the government has drastically increased its power over the economy. Due to various mechanisms within Keynesian Economics, in particular the enforced use of Fiat Money, private monies for investment has gradually dwindled while government monies have increased. Without private monies there is no other way for the markets to be maintained other than through public funding, thus the government must intervene and provide capital in the markets, as we have seen. At this stage, once the government infuses public funding, it has the power, as we see, to dictate not only conduct within the market, but also the various processes involved in business decisions.
John Maynard Keynes was closely associated with various Socialist groups; in fact Keynes once described himself as a Bolshevik and was well aware of Socialist doctrine and theory. Keynes, in his book "Economic Consequences of the Peace", stated: "By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some.... The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose."
Indeed, Nikolai Lenin spoke before the Second Congress of the Communist International and declared of Keynes: "I will quote another economic source which assumes particularly great significance, the British diplomat Keynes, the author of The Economic Consequences Of The Peace, who on the instructions of his government, took part in the Versailles peace negotiations, watched them directly from the purely bourgeois point of view, studied the subject step by step, and took part in the conference as an economist. He arrived at conclusions which are stronger, more striking and more instructive than any a Communist revolutionary could advance, because they are conclusions drawn by an acknowledged bourgeois...."
The political economic nature of Keynesian Economics cannot be denied, nor can the effects of those theories on the entire economic and social structure of our government. Keynes, in a letter to fellow Socialist George Bernard Shaw, said: "I believe myself to be writing a book on economic theory which will largely revolutionize ... the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can't predict what the final upshot will be in its effect on actions and affairs. But there will be a great change, and in particular the Ricardian foundations of Marxism will be knocked away."
Geoffrey Pilling, a Marxist, wrote of the effects of Keynesian Economic Theory on the Western Capitalist Societies saying: "It [the West] accepts Keynes' own belief in the primacy of ideas in the shaping of state economic policy. An examination of the development of the role of the state indicates that there is an organic trend towards ever-greater state involvement in the attempted regulation of economic and social matters. It concurs with Keynes' own judgment about the significance of his work: namely that it did in fact constitute a revolution in economics. We have already noted that there is little if any agreement amongst those who would wish to be labeled Keynesians about the nature of this revolution."
The "Keynesian Revolution" has effectively created a continual increase in the levels of involvement by the government in economic markets, in fact if you look at the latter half of the Twentieth Century you will see that capitalism, not only in the United States, but internationally, has been negatively influenced by this Socialist Keynesian Revolution. It is also important to understand that the works of Keynes was not only lauded by various Socialist groups, including Marxists, but the Fascists and even National Socialists [Nazis] equally held Keynesian Theories in high esteem. In writing the "Forward" to his German Edition of the General Theory, Keynes stated: "The theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under the conditions of free competition and a large measure of laissez-faire."
In the Journal of Political Economy, you will find: "German economists in the early 1930s were well aware of Keynes's work, and were developing theories along parallel lines. These involved the now-familiar prescription for economic depressions of large budget deficits, public-works programs, and easy credit."
Of course, there can be no doubt that government involvement in the markets and the regulatory state reached its height under Fascist theory and execution; likewise Keynesian Economic Theories lead to the overwhelming necessity of such intervention. The Fascists, in particular the National Socialist Party [Nazi], were the first to put into practice the economic theories found in Keynes' General Theory; the Nazis implemented truly massive public works projects and increased deficit spending seeking to encourage full employment of the German peoples. The Nazis also created what amounts to an inflationary boom, this naturally increased productivity, but as we know it was based on the assumption that an inflationary boom can be permanent when in fact they are artificially induced and will eventually deflate.
The fact is that inflationary booms are nothing more than the conscious application of Keynesian policies, which naturally lead to even more government intervention due to the effects brought about by the collapse of such inflationary booms. Whether Marxist, Socialist or even Fascist, Keynesian Economic Theory provides the necessary economic system to achieve government involvement in the social relationships of economic production.
When a government employs Keynesian Economic Theory there is the inexorable tendency toward more and more government intervention into every area of economic functioning within the market. Actual regulation of the capitalist economy has little to do with what is finally arrived at through the policies employed and are only the medium by which greater intervention becomes necessary. The theoretical work of Keynes, as well as others, cannot be underestimated and should not be confused in judging cause and effect; hearkening back to the words of Strachey, there is an inherent process within the mechanics of Keynesian Economics that promotes the implementation of Socialist Political Economics, thus replacing free market capitalism with government intervention. Generally speaking, while there appear to be contradictions engendered by the apparent growth in economic production during the various business cycles, particularly in the boom portions of those business cycles, the gradual increase of the degenerative effects associated with the bust of the booms cycle provided the material foundation for increasing government activity and intervention in the markets.
In looking at Keynesian Economic Theory, it should be apparent that Keynes has become one of the central forces behind government regulation of the markets and the increasing degree of intervention into those markets. The ideological importance of this aspect of Keynesian Theory is the basis of the growing role of government and has not only transformed capitalism, but has basically negated the effects of capital markets in favor of government control. In this respect, which is of extreme importance, Keynesian Economic Theory has provided the government with a central function within the economy. Since his theories tend to implement the need for such intervention, the question then arises concerning the effects such intervention have on the lives of the individual and the degree to which the individual becomes dependent on the government for his economic, and therefore social well-being?
Keynes' criticism of unregulated capitalism rest primarily in his belief that social stability could not be achieved or maintained and therefore he saw the need of a highly centralized economic plan be administered by government intervention; thus, this belief lead him to a rather utilitarian view of the necessity of ad hoc government intervention in economic markets. This idea or belief however, did not originate from Keynes' himself, but came from the Fabian Essays, published in 1889, by Sydney Webb, Bernard Shaw and others. Like Marx, the Fabians, including Keynes, believed that it was necessary for governments to gain control over capital markets, the monetary systems, credit and the implementation of a progressive income tax system to achieve the goals of Socialism. Indeed, Keynes, in pure Fabian form, thought that it was absolutely necessary to end laissez-faire policies in order to end capitalism, for without free markets; capitalism would then be prone to crisis after crisis under the guise highly regulated economy while retaining the capitalist label. Free market capitalism died in the Twentieth Century, thanks in a large part to the policies promoted by Keynesian Economics.
President Bush recently said: "I've abandoned free-market principles to save the free-market system, to make sure the economy doesn't collapse." Now, if you look at that quote from President Bush in the light of Keynes' General Theory, you will find a more eloquent statement bearing the same meaning: "Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative."
Bush, in short, reiterated what Keynes stated, advocating further government intervention into the markets to save the capitalist system; nothing could be further from the truth however. As Keynes stated: "Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live." In concrete terms, Bush, like Keynes, meant that there is a necessity to select as many variables within the economic system as possible, at this point, to achieve effective and applicable controls in preserving the existing economic form while allowing for even greater government management. Under the continuing guise of preserving the capitalist market system, Keynes, and it appears that Bush, believed that the operations of the government intervention would be crucial to "save the free market system", even though it involves a complete abandonment of free market principles, essentially destroying the last remnants of free market capitalism.
For decades the American People, and even most of our politicians, have lived under the illusion that our economic system has retained its free market capitalist nature; the fact is that there has been a hybrid system that is so far removed from free market principles that it can no longer be defined as a free market. Keynes' views have prevailed and today we see that the government has taken an extensive and growing responsibility over economic functions in our society.
Like Keynes, most of our politicians believe that the government must not only regulate the economy to provide price stability and "full" employment, but that it is also obliged to promote any and all measures that generate sufficient investments to compensate for the shortfall of private capital in our system due to various economic drains brought about by the policies of Keynesian. Thus, in the Keynesian view, the government should employ what amounts to national income to achieve various economic and corresponding social goals; this is exactly what has taken place in this country over the last seventy years as we have seen the rise of the government as the central component of our economic system and not merely an external force. Essentially, the government has promoted what amounts to "welfare capitalism", which in realistic terms is nothing more than Socialism where a government "supra-class" of administrators who manage the economic and social welfare of all members of our society regardless of their social status or economic position.
It should be evident in our current state of government involvement in economic relationships in the market that Keynesian theories have become the primary driving force behind economic and monetary policies in this country. Additionally, it is evident that the degree of income redistribution that takes place in this country has proved effective in producing a stratified social structure where a hierarchy of wealth is concentrated in those who are politically connected and enjoy the benefits of those connections with government. Along with the upward redistribution of income, Keynes proposed that the wages of the masses be reduced covertly through the government-regulated process of inflation or monetary depreciation.
Keynes stated: "A movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices." Thus, as we have seen, particularly since 1971, the government use of controlled inflation would allow for an increase in the nominal wages or face value wages of workers while actually affecting a simultaneous reduction in real wages or purchase value wages through price inflation. This would not only achieve the goal of providing government with needed revenues for its expansion, but would continue the illusion that more money is being put into the pockets of the working man and it would also allow for the illusion of greater profits for business; the reality, of course, is just the opposite. Regarding this effect Keynes stated: "It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that it is necessary."
Essentially, Keynes proposed that the government, and only the government is responsible for the determination of the rate of reward a person can achieve by productivity; thus the functions of market forces are no longer determinant factors. One should make no mistake about what has taken place in this country or in the effect of Keynesian Economics have had on the entire economic structure upon which this country depends. There has been a very definite and intentional control over income policies in this country, all under the disguise of ensuring price stability and social equity. What most people don't understand is that these policies create numerous distortions within the economy and have untold unintended consequences that promote the need for ever-increasing government intervention. Consequently, there has been a gradual move toward government-centered arrangements within the economy, and those developments have rapidly increased over the last couple of decades which have essentially lead to the creation of a type of Socialist Corporatism, which, by the way, is not inconsistent with the ideals of Fabian Socialism.
Keynesian Economic Theory, in particular The General Theory, paved the way for the ideology that free market capitalism is incapable of being maintained and could not regulate itself or function without government intervention. It is therefore claimed that government intervention and the ancillary spending that always accompanies that intervention is the essential precondition to achieve stability in the market, the consequences of this intervention is, of course, the increased provisions of Socialization, not only in the market, but also in society. The most prominent feature of Keynesian political thought has come in the form of the drastic rise of government spending, but apparently the vast array of economic experts fail to see or choose to ignore is that such intervention and spending is nothing less than a massive drain on surplus value and capital, thus the effects will always aggravate and dislocate the market. Keynesian-based economic and political policy made such spending acceptable and generally respectable due to the fact that such spending is presented as a means of economic growth and stabilization however, the history of the last fifty years has shown that is not the case.
The creation of a mixed economy the standard of Fabian Socialistic thinking, which Keynes obviously adhered to in his theories, can be found in the Fabian Political & Economic Policy is the foundation of the Socialist agenda: "The individualistic manufacturer and farmer will be FORCED BY EVENTS to submit to far-reaching changes in outlook and methods. What is required, if with only a view to equitable treatment of individuals, is transfer of ownership of large blocks of land - not necessarily of all the land in the country, but certainly a large proportion of it - into the hands of the proposed STATUTORY CORPORATIONS and PUBLIC UTILITY BODIES and OF LAND TRUSTS."
Historically, all public expenditures were considered basically economically unproductive however, as Keynesian Economics gained widespread acceptance, the historical and accurate historical view has been pushed out of the way by the proposition that not only was such spending beneficial, but that the massive levels of debt to fund such expenditures was of no consequence. According to the theory, at least, the vast amount of borrowed funds would be recouped by higher taxation on the production stimulated through such expenditures, of course that is not quite how it worked out.
Alvin Hansen, one of the leading Keynesian Economist during the 1960's stated: "the long-standing lesson of history that growth requires an increase in money, credit and debt. And in the public-private economy of today, a well-balanced growth suggests an increase of debt at all levels business debt, consumer debt, state and local debt, and federal debt." While, on the face of it, such a statement seems to be correct, indeed there appears to be a general expansion of economic growth, but the nature of that growth should be called into question. The fact is that such an expansion, both of the money supply and credit, both of which are debt instruments, have a long-term detrimental effect in the markets, creating unhealthy distortions and eventual economic dislocations which always require an increasing degree of government intervention.
Under the prevailing winds of policy, based largely upon Keynesian thought, all government expenditures is financed through borrowing, thus pushing the growing burden into the future and thus, regardless of the political will, it will always drain future surplus value, or as we have seen over the last few years, hope-for surplus value. The reality of our economy, disguised as capitalism, still produces surplus value in the private sector only to have it drained away by the public sector. The resources devoted to the public sector always come at the expense of the private sector. The presumption that government spending can actually be a means to the creation of productive and therefore surplus value is to indulge in an illusion, yet our politicians seek to engage in such illusions on a regular basis. Eventually however, the future becomes the present and the effects of previous economic policies, government interventions and expenditures prevail. We are seeing distortions on a number of fronts, many of which have not revealed themselves as of yet, but will press upon our economic reality in ways that the government will not be capable of providing solutions, even temporary ones.
Even Marx was well aware of the illusions behind such government expenditures: "The sum that was lent to the state no longer has any kind of existence. It was never designed to be spent as capital to be invested, and yet only by being invested as capital could it have made itself into self-maintaining value . . .. No matter how these transactions are multiplied, the capital of the national debt remains purely fictitious, and the moment these promissory notes become un-saleable, the illusion of this capital disappears."
The charade can only be maintained as long as the growth of government expenditures is at a rate below the accumulation of capital, when the equilibrium shifts and the distortions present themselves the dislocation is no longer containable and there is a growing threat of consumption of a far greater proportion of productivity and thus the extraction of surplus value increases. The inclination of those in government however, is to increase expenditures, as we are currently witnessing; this action, particularly under the already burdened system, will only exacerbate the problems. The parasitic claims of the government continues to fasten onto flesh of this country, it lives and thrives on the backs of the people by passing the burden of debt for the various spurious programs onto the working class of this country through increasing reductions of their living standards, the depreciation of the labor value of their wages and the increase of social controls.
As with former Administrations, the new Administration will continue to press forward with exactly the same policies that created this growing and chronic economic dislocation in the first place. The point will come however, when the government must institute severe cuts in every area that it has assumed responsibility in its expansion of the welfare/warfare state. The conundrum will come when those who have lambasted free market capitalism run out of scapegoats and must admit that the malfunctioning within the economy is due to the character of the policies of government intervention and Keynesian-based economic theory.
'Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed.' -John Maynard Keynes
'If all the bank loans were paid up, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial banks for our money. 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 upon the picture, the tragic absurdity of our hopeless position is almost incredible - but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.' - Robert H. Hemphill, Federal Reserve Bank of Atlanta
In Liberty and Eternal Vigilance,
Republicae
Did you like this article? If you did, Thumb It! 74 thumbs so far
The views expressed in this
article are those of Republicae only and do not represent
the views of Nolan Chart, LLC or its affiliates. Republicae is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Hi Republicae, excellent article! If i am getting the gist, you seem to be hinting that Keynes was a socialist? Keynes believed the markets were flawed and needed to be corrected by government action. He was against government debt and recommended taxation to fund stimulus spending. He recognized the negative effects of inflation and was adamantly against "debauching" the currency.
Although others, as you mentioned, have said implementation of his theories could lead to socialism, he referred to the marxist theory as "obselete", with no connection to the western world, and never condoned or supported socialism.
The use of stimulus spending and growth of government have not led us to socialism although we have had socialization. It seems to me, the corporations receive the benefit of a large part of the spending and have ownership of the "means of production", which in Socialism would be in the hands of the state. Shouldn't we have a correct name for the "enemy"?
Don't take this as a criticism of a fine article, but instead I am pointing out the common misuse of a term that fails to precisely define the situation we are in.
Let me say that if he wasn’t a Socialist then he certainly fooled a great many of his Socialist associates. If he were against debauching the currency then he definitely had his associates, such as John Strachey fooled since they stated very clearly what the effects of Keynesian Economics would be on the economy of a country and on its currency.
Indeed, he did feel, like many of his Fabian associates, that Marxism was obsolete thus as he said in his letter to Shaw that his new theory would knock away the Ricardian foundations from Marxism, but he never mentioned that his theories would knock Marxism away only the portion of it that he found obsolete, which is the Ricardian theories.
As you know, the main criticism about Keynes was his complete inconsistency on just about every subject. Once again, if Keynes was adamantly against debauching currencies then it is certainly not when he heaps praises on certain national currencies, such as India’s “money standard” for having “elasticity” which is another way of saying monetary inflation or what amounts to depreciation. If you look at many of his writings you will find that he explicitly viewed gold as a barbaric metal and looked forward to the day when a “scientific monetary system” would be employed. Now, if he viewed gold in such a way and sought to replace any gold standard with what he called a “scientific money”, what do you think that type of money was, it was certainly not sound, but elastic or inflationary.
Keynes wrote that “A preference for a tangible reserve currency ,a relic of a time when governments were less trustworthy in these matters than they are now.” Certainly, he is speaking about a fiat currency and he was definitely aware of the propensity of such currencies to be debased over time, but obviously believed in managed inflation, which is not possible in the long-term.
Keynes believed, or at least he certain gave the impression that there needed to be “a somewhat comprehensive socialization of investment”, it is interesting don’t you think that if he were not a Socialist he certainly advocated Socialism by controlling consumers through progressive taxation and manipulating interest rates toward the zero bound. Additionally, as I pointed out in the article, Keynes said: “it is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.” Whether it is overt Socialism or Stealth Socialism, it is still Socialism and that is exactly what Keynes advocated. While Keynes expressed disagreements with the tactics of doctrinal State Socialism, he didn’t disagree with them on principle.
In his book The End of Laissez-Faire, Keynes advocated concepts of not only various political and economic controls, but he also advocated political controls over the number of children allowed in families. Strange, but that sounds Socialistic to me.
Clarence W. Barron, the American Publisher, met Keynes in 1918 described him as '"a Socialist of the type that does not believe in the family."
It appears that even Mussolini approved of Keynes and Keynesian Economic Theory: "'Fascism entirely agrees with Mr. Maynard Keynes, despite the latter's prominent position as a Liberal. In fact, Mr. Keynes' excellent little book, The End of Laissez-Faire might, so far as it goes, serve as a useful introduction to Fascist economies. There is scarcely anything to object to in it and there is much to applaud."
John Strachey’s book A Programme for Progress is considered the handbook for teaching the meaning of Keynes’ General Theory to the rank-and-file Socialists and is viewed as the basis of a practical policy for the evolution of a Socialist government.
Strachey went on to say of his friend Keynes: “Keynesism, as Keynes understands it, that is to say as a method of carrying on capitalism indefinitely, or at any rate for a generation, is completely fallacious. I would say that an expansionist program must break down or lead to full Socialism.” Again, he said: “Every genuinely independent State will set up a more or less controlled economy which will work more or less well, will be more or less reactionary [as with the Fascist Model] or more or less progressive [on the New Deal Model]. This is what will happen: whether we like it or not. And nothing could be so hopelessly un-Marxist as not to see that once this has become possible it has become inevitable.”
In terms of the ownership and means of production Hazlitt writes of Keynes and Keynesian theory: “Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism.”
Keynes promoted, just like his friends in the Fabian Society, private ownership, but with heavy central planning and a comprehensive government control over that so-called “private ownership”. Again, this can be found in the Fabian Political & Economic Planning Committee writings, thus is becomes difficult to distinguish between the policies put forth by the Fabian Socialist and Keynes himself. Like the Fabians, who were equally accepted among the Socialist left and right, Keynes also seemed to have an affinity for Fascism as well and was a supporter of the head of the British Fascist Party Oswald Mosley. Mosley had been a member of the Fabian Society, but left the Fabians and became a Fascist. Keynes met Mosley at the Fabian Society during the late 20’s. If Keynes was not a Socialist he maintained very close and long-term relationships with numerous Socialists of several strips.
While it is true that Keynes showed no particular enthusiasm for Communism, particularly the Soviet brand after his visit to Russia in 1925, he nevertheless seemed to promote and have the support of those within the Socialist camp, particularly the Fabians. In fact, many of the tactics used by Keynes were exactly the same as the Fabians, particularly in terms of political subterfuge and disinformation.
Harry Dexter White, heavily influential in the FDR Administration, as well as the Truman Administration was considered by Keynes as America’s principle Keynesian Economist. Well, as you may or may not know, Dexter White was an avowed Socialist, in fact some called him Communist. He was recommended by Keynes to be a part of the Breton Woods conference and later become the head of the IMF under Truman, to the horror of the FBI who told Truman of White’s Socialist/Communist connections. White and Keynes discussed the creation of a global fiat currency, but came to the conclusion that the same thing could be accomplished by transforming national currencies into total fiat currencies.
At Harvard, V. Frank Coe and Lauchlin Currie became avid proponents of Keynesian Theory, both Coe and Lauchlin were avowed Socialist, in fact, you will find numerous economists who were Socialists who took on the mantle of the Keynesian brand of economics, especially in the London School of Economics, which was founded by the Fabian Socialists. Schumpeter, another Professor of Economics at Harvard also believed that Keynes’ General Theory was “a brilliant political tactic designed to advance socialism under the guise of saving capitalism.” Schumpeter also said of Keynesian Theory: "The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and 'expropriates' its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income - but also what is infinitely more important, its function."
In his book Contemporary Capitalism, Strachey exposes the falsity of the claim that Keynes was concerned with "saving capitalism." "But the capitalists have really had good reasons for their reluctance to be saved by Keynesian policies. If we look more closely at the remedies proposed, their implications are much more drastic than they seem to be at first sight. And when we come in later volumes of this study to consider the results of the application of Keynesian measures in America, Germany and Britain, respectively, we shall find that in fact the changes effected by them have been subtle, but nevertheless far-reaching."
H. G. Wells made the following statement, by the way, he was also an associate of Keynes: "Big business is by no means antipathetic to Communism. The larger big business grows the more it approximates to Collectivism. It is the upper road of the few instead of the lower road of the masses to Collectivism."
Thus, as you can see, it is relatively easy to make such connections between the theories and beliefs of Keynes and those of Socialists.
The H.G. wells quote in the next to last paragraph is exactly what i meant! and you can approxamate it to collectivism for the few. i think sometimes when the word "Socialism" is used it defers the blame from the "owners" of the means which are the corporations to the state[which certainly should also share the burden of guilt but has not ownership but instead debt]. Socialism in the Euro sense can certainly be shown to bestow some benefit on the masses whereas here it only benefits the corps, so I think they are entirely different systems that seem to get called the same name yet the end product is much different [i am not saying they don't also engage in Corporate Socialism, which they do]. anyway, excellent article, keep it up.
I would like to add some of my own views to what I believe is a very fine article.My views are not as learned as the comments that preceeded me but never the less there is certain amount of down on the street ,earthy wisdom in them.Firstly let me say that I believe that in the next few months a great economic catastrophe will descend upon the world which will sweep away large segments of the various elites in power,the Socialists among them! This catastrophe was caused in large measure by the policies of various leftist groups & individuals (Gramsci,Adorno,Marcuse,Keynes among others).If they succeed in destroying what is left of the capitalist system they will also destroy themselves.The Marxists are great agitators but once in power they are clueless as to how to produce wealth themselves! In the U.S.A , the economic tidal wave that is rolling in will destroy much of the nations wealth & the Democrats can't redistribute wealth to their Welfare clients if that wealth no longer exists. If the wealth runs out & the entitlements cease,the mobs will be out on the streets,burning & looting .At this point the Democrats (Socialists) will be discredited & out of power.They cannot continue to print money because the money would be debased to the point where it would almost be worthless & hyperinflation would run wild.In the end they would have to go,on bended knees, to the hated & despised capitalist for the only help available.To sum it all up,the capitalists can create the wealth society needs to function & the Marxists can't.
I would like to add some of my own views to what I believe is a very fine article.My views are not as learned as the comments that preceeded me but never the less there is certain amount of down on the street ,earthy wisdom in them.Firstly let me say that I believe that in the next few months a great economic catastrophe will descend upon the world which will sweep away large segments of the various elites in power,the Socialists among them! This catastrophe was caused in large measure by the policies of various leftist groups & individuals (Gramsci,Adorno,Marcuse,Keynes among others).If they succeed in destroying what is left of the capitalist system they will also destroy themselves.The Marxists are great agitators but once in power they are clueless as to how to produce wealth themselves! In the U.S.A , the economic tidal wave that is rolling in will destroy much of the nations wealth & the Democrats can't redistribute wealth to their Welfare clients if that wealth no longer exists. If the wealth runs out & the entitlements cease,the mobs will be out on the streets,burning & looting .At this point the Democrats (Socialists) will be discredited & out of power.They cannot continue to print money because the money would be debased to the point where it would almost be worthless & hyperinflation would run wild.In the end they would have to go,on bended knees, to the hated & despised capitalist for the only help available.To sum it all up,the capitalists can create the wealth society needs to function & the Marxists can't.
Gene, you hit it on the head. Risk is the hinge of Capitalism and when risk is taken out of the equation then you slide into the abyss of socialized risk, destroying the foundations of capital and thus capitalism. Corporatism, as we have been seeing in this country, is very close to the Fabian ideal, of which H.G. Wells was an early proponent. It is perhaps one reason that the Fabian ideology, as well as Keynesian theory, was accepted by both Socialists and Fascists. If you read the Fabian P.E.P. you will quickly see that those plans have been followed by our government over the last 70 years almost exactly, the results are evident in our society today. Unlike Europe, which I would question the actual benefits the people have under that so-called democratic socialist system, America is a very different animal and had to be approached differently in order to achieve the Socialist ideal. Socialism tends to conform with the underlying structure that is already in place in a country, but the methodology is basically the same and no matter what methodology is used the final form taken will be one of an elite group of Socialist Administrators, Europe is no different, you have a ruling class and a working class.
Indeed Sid Weiner, you too have hit on some very important points regarding the effects of the destruction of capitalism. I made the following comment on another article concerning Statism, but it is equally applicable here as well.Statism is, after all, just another name for Socialism, whether it be in the form of Leftist Democratic Socialism, Corporate Socialism or Fascist Socialism, the eventual outcome is essentially the same.
“The problem with Statism is The State itself. Fortunately for those of us who crave Liberty, The State can only reach a certain proportion before it consumes itself; the sad fact about that is that usually it is the People who suffer. The State, once it becomes the largest employer in a country, always saps the productivity from the economy. As we have been seeing, our government has become the largest employer, not only in this country, but in the world. The amount of productivity that is siphoned off of the economy of this country is enormous and cannot be completely comprehended or calculated due to the very nature of The State.
Eventually, there forms a high degree of absurdity produced by The State especially when it comes to regulatory edicts and the execution of those edits. The shear volume of legislation emanating from The State eventually becomes unmanageable and, as I said, absurd since there reaches a point when it is not mentally or physically possible to know what all the laws are, how they are applied and when they are violated.
The confiscatory nature of The State always distorts the economic health of a country, wealth is transferred from the productive sector of the economy to the un-productive public sector of The State and the machinery necessary to keep it running. At some point The State reaches that critical point where it consumes the vast wealth being produced in the country, dislocations are created not only by government policy, but also by the requirements of the government itself. The larger The State becomes the more it consumes and the more distortions are exposed within the economy. The exploitative nature of The State combined with the non-productive structure of its operations will always prove to be the bane of economic health. The State becomes the ideal employer, providing the best services, benefits and at times the best pay for the least productive form of employment: Bureaucracy.
As The State becomes larger and larger, it ultimately destroys the very system of productivity that it depends upon for its power. Since it must, over the long term consume more and more of the productive economy to sustain its own growth it naturally lowers the productive incentives in the country to the point that it can no longer fuel itself. The “Monster” eventually eats itself.
History is filled with such examples and I have no doubt, given the direction our dear State is taking, that we shall see a relative quick demise of The State Machine as we now know it.”
I appreciate your comments and you are correct in your assessment.
Neither Austrian nor Keynesian theories are sustainable - both share a common terminal flaw that is degenerative. The problem is that both theories cause an exponential growth of interest/debt - which is irreversible - and terminal.
With both theories, there will always be more debt than money since only the principal, none of the interest, is ever issued as money. Both systems require that the amount of new debt must continuously grow.
Both theories contend that the banks and various other lenders spend the interest charges collected back into circulation. No doubt some of the interest charges collected will end up back in circulation - but that misses the problem.
Let me give an example; a $100,000, 30 year, 7.5% amortized home mortgage will end up costing the home owner $251,717 to fully retire the loan. $100,000 in principal and $151,717 in interest. Austrians claim that the interest collected will be spent back into circulation - ok, let's see how that works out.
The principal amount, $100,000 is retired from circulation as it is repaid - that's fine. And the interest, $151,717 will be spent back into circulation. What a deal, we borrow $100,000 principal and repay it, and we get a bonus $151,717 put into circulation! We will all be rich in no time!
But as you can see, only $100,000 was ever created (and retired) - the interest payments must come from future debt - this is the point and the real degenerative problem. The amount of debt must perpetually grow - sooner or later there will no longer be enough willing and worthy borrowers to sustain the constant growth requirements. This is exactly what we are seeing now in our economy.
What is interest? I realize that based on your understanding of it that you associate it with money, but the fact is that interest has nothing to do with money, but with the preferences of people, once you deny that preference you destroy all economic functionality. You have already shown, time and again, that you don’t understand how interest works, much less what it is and the vital functions it performs in a viberant economy.
Your nonsensical theory rest on several, not just a few, but numerous false assumptions. Now, while I am totally against the current fractional reserve system and the fiat currency that fuels it, I will attempt, once again, to explain to you the fallacies associated, and apparently so engrained, in your thinking.
At this time I will restrict the subject to the current banking system for simplicity sake. You assume that because new money is created when a banker issues a loan that only the amount of that loan is created and, according to your theory, the interest that is associated with the amortization of that loan is not created. Thus, based on your linear logic, the interest must therefore come from somewhere, otherwise the entire system will collapse because there is not enough money in circulation to pay both the increasing amounts of loans and the interest to retire those loans. Thus, your theory assumes that there is an exponential multiplication of debt and interest that consumes the amount of money in circulation eventually leading to a collapse.
Unfortunately, you neglect, once again, several factors involved in monetary mechanics that you neither address or are capable of explaining through your linear, and generally irrational theory. So, where does the money come from to pay the interest? According to you it wasn’t created when the loan was created so there is not enough to retire the loan, or all the loans in existence and collapse of the system is due to that fact. So, based on your understanding, when the bank lends $1,000.00 to a client at 10%, it expects to be repaid $1100.00, that is the original $1,000.00 principle and another $100.00 in interest. Essentially, based on your theory there is a 1:1 ratio involved in the creation of debt/interest, since the interest is not created by the loan itself, but required in the repayment of the loan. Based on your theory there is not enough money to service both the principle obligation and the interest obligation. The fact is that you must completely ignore the fungibility of money to maintain your theory and that is simply ignorant.
First, money is not stagnant as your assumptions must conclude to maintain your theory, money is simply a means of exchange and its constantly moving throughout an economy, thus is may serve one purpose today and the same money flowing through the economy will serve yet another purpose tomorrow. The only way your theory could be possible is if money never exchanged hands. Under our fiat monetary system every dollar is loaned into existence, but not at the same rate nor with the same terms of repayment, thus the time value of money varies based on the type of loan that is processed. In terms of reality, since money does not remain in a stagnate state, but is in constant flux within an economy it does not take new money to pay off interest bearing loans, even though the interest was not created at the same time as the original loan itself. Now if you really want me to break it down for you in economic terms I would be more than happy to do that for you, but hopefully this time around you will crawl out of that little box you have created for yourself by these nonsensical theories and actually study for yourself. I believe I have recommended you several books that would completely enlighten you not only in monetary mechanics, but also in the functions of capitalism, including the necessity of interest.
Now, to make this simple and show you that interest is essential and not associated with money, but is a time preference that functions within an economy and is necessary for economic health, I will give you the following example to ponder. Interest began prior to the use of money, it began in the barter economy.
Say there was a baker who made bread everyday and because this little story takes place in a society prior to the use of money, the baker barters his bread for other products he may need. One day an apple grower came to the baker and wanted 10 loaves of bread, but the problem was that while the baker was willing to barter 10 loaves of bread today for 6 baskets of apples today, but the apple grower would not have a crop for 6 months. The apple grow said he was willing to “pay” 6 baskets of apples to the baker, but that he wouldn’t have those apples until a point in the future. Why should the baker accept 6 baskets of apples in the future when he could easy barter those 10 loaves of bread today for something he needed today, say like 6 dozen eggs, or some other commodity that was ready today for barter? He has a preference, based on the barter price today, but he is willing to consider his time preference in the future and since the apple grower cannot “pay” him today the baker is willing to barter the 10 loaves today to the apple grower if the apple grower, who needs the bread today, is willing to “pay” 8 baskets of apples in 6 months to the baker for the 10 loaves today. It would not be prudent for the baker to simply turn over 10 loaves of bread to the apple grower today while losing the present value he has to barter that same 10 loaves today to someone else for a product, like 6 dozen eggs which have present preference over waiting for 6 months for the apple grower to barter him 6 baskets of apples for those 10 loaves because it would not be worth it to the baker to lose the ability to “profit” today by waiting for the same number of baskets of apples in the future. It would however, be a potentially good barter, based on time preference, for the baker to barter those 10 loaves today for 8 baskets of apples 6 months into the future.
Now, to put that in modern terms, outside the Exploitation Theory, which you adhere to concerning interest. I will take this further. Money resulted from the uncertainty of human action and preferences. Interest came about based on several preferences found within humans, and it came about in the barter stage of economic development prior to the development of money. The various preferences that brought about the need for interest was not only time preference, which happens to be an essential element of economic exchange based upon uncertainty, but also as a means of determining risk, which is the hinge of a capital economy, as well as a barter economy for that matter. Like the baker, a person must determine risk based upon both present need and availability verses future need and availability. Without this mechanism the potential for exchange cannot exist. Additionally, the baker had to determine if the future price of 10 loaves of bread would indeed still be worth 8 baskets of apples in the future, it might be that his risk of bartering those 10 loaves today to the apple grower will not actually cover his cost of 10 loaves in the future with only 8 baskets of apples. The baker must also be aware that he is also taking risk by giving 10 loaves of bread to the apple grower today and the apple grower loses his entire crop of apples in 6 months; thus he must once again determine the risk associated with his willingness to give over those 10 loaves today for 8 baskets of apples 6 months into the future. Now, had the apple grower had 6 baskets of apples today then there would be no risk and the voluntary exchange for 10 loaves of bread today would have taken place with no questions of risk asked about the transaction.
Likewise, with money, no different that the bread or the apples, both are mediums of exchange in a given economy. Now, with money there are also other factors concerning a persons goals, whether personal or business, and how those goals will be reached. Additionally, there is the risk, with money, like the risk with the bread and apples. Essentially, there must be a consideration which demonstrates a preference for present value over future value. Present goods, or money is always more preferable to future goods, or money. If you can exchange your money today for something you need today then you will do so. If however, you need something today without the ability to pay for it you either must wait until you earn the money or you must intervene on the time preference of someone else, such as a lender. Now, a lender, whether institutional or a personal associate, would rather use their money today if it brings about a fulfillment of present preferences, however if they lead it out and assume the risk associated with that act, then they must also assume the difference in time value. Since taking present money and lending it renders that money void of both exchange and investment, the risk of lending must take into consideration all the preferences between present and future values. Essentially, interest represents the constraints of time preferences, thus a man will exchange a present good, such as money against a future good, such as money loaned, only if he can anticipate that the future amount will be of a greater value to him. Without this time preference function, the economy would not function because there would only be present consumption without regard for any future return, the reason for that is the risk would simply be too great to assume a loss today for a potential future repayment without that risk being accounted for in the equation of a loan.
Now, in a free market, the rate of interest is basically nothing more than the complete sum of all time preferences within a society. Thus the supply of goods or money offered in exchange against future goods and services are determined by market movements as individuals determine their needs, their desires, their goals and whether they are willing and able to pay for those things today or, if not, then are they willing to assume the premium of someone else’s time preference to lend them the money to buy the goods today, but repay over time. Thus the demand for present goods must be capable of yielding future returns, if not then there is no reason for the borrower to borrow and there is no need for the lender to lend since there would be no just exchange between the two time preferences of each person, the borrower and the lender.
I could go deep into interest and savings, the essential conjunction between the two, but that would complicate matters beyond your willingness to consider, that based on my past discussions with you. However, I will say that in a free market, sound money economy, no supply of loanable funds could exist without there being previous savings. What are savings? Basically, it is the excess of current production over current consumption and is based again on time preferences and as well as, other preferences including a person’s present and future needs, desires and goals. Indeed, there would be no demand for loanable funds if a person, judging his time preferences, did not perceive some opportunity to employ those funds in hopes that he would be able to both repay those funds and benefit from the funds he borrowed.
Without interest, which is simply a measure of time preferences in our society, there would be no measure of risk that a person or business would be able to use to determine the degree of his preferences. I realize you can’t understand this next statement, but without interest we would consume our goods because there would be no measure to utilize to determine either present value over the risk of future value. What you are asking for would lead to a primitive subsistence existence because no one would lend without the ability to determine risk and protect themselves against any possible risk. Business would not exist, whether it was a money based exchange system or a barter exchange system, no business would extend present goods without the measure of risk associated with future time values. Without interest, there would be no excess production over present consumption, there would not only be no need for it, but no mechanism to bring it about. There is always a price paid for buying time, either in terms of risk, in terms of need or in terms of desire. To think otherwise simply indicates a economic and monetary naiveté that borders on willful ignorance.
Time preferences, as expressed in interest, are also directly associated with employment and income, yet it has nothing to do with money, as I said the money represented by interest is just the medium of exchange for time values between present value and future value. Once again, I understand that you don’t understand what I am saying or how these functions interact within an economy, especially a free market economy, but the fact is that interest and money are independent and is not a monetary phenomenon, but a human phenomenon based on numerous preferences found within human beings.
In contrast to money, time preferences expressed and measure by interest, brings about a particular equilibrium within the economy that could not be attained without it even if there were no money used as a medium of exchange. Again, I realize that you are, based on your comments here and on other forums, incapable of wrapping your mind around a multi-dimensional logic, but I sure hope you try to escape that box you have enclosed yourself with.
You see, without interest there would be no ability for the economy to maintain the equilibrium necessary to function properly. In fact, without interest there would be no savings, no investments, no reinvestments because without interest there would be no positive rate or hope of return on risk. As we are now seeing, even in this artificially managed economy, when the rate of interest is lowered to the Zero Bound, capital consumption is resulting and the entire system is being thrown out of equilibrium.
Interest brings and allows a certain degree of certainty over uncertainty, in other words there is a degree of trust associated with interest, both on the part of the lender and the borrower. Interest is the bond of agreement on the value of time, without it there would be, there could be no agreement on time value or the risk associated with that value. All consumption and investments are determined by time preference and time preference is what created interest, whether in a monetary exchange system or a barter exchange system, time preference an essential function for an healthy economy that will produce prosperity, if that economy is allowed to function as it should.
In a real economy, the level of the actual money stock has no effect at all on interest. This is evidence of the fact that money does not determine the rate of interest, time value determines the rate of interest in a free market economy. As I said, money and interest are not associated, but are independent of each other in their functions in an economy. Since interest has nothing to do with money, interest never causes inflation or deflation, only the supply of money causes those or in the case of supply and demand, you will find inflation or deflation being effected, but never interest since it has nothing to do with money, but time preferences. That is why it is so damaging when the Federal Reserve manipulates interest rates, they are actually manipulating time preferences which will always, without exception, cause booms that are always characterized by mal-investments leading to economic dislocation. While it is true that the supply of money can effect time preferences within a society, as we have seen in this latest round of boom/bust cycles, it is not the determinate factor of those preferences. The artificial increase or decrease in the money supply can and does distort the equilibrium within the economy, as we have seen.
It is important to understand that in a free market economy, the rate of interest is completely determined by the market rate of time preferences and that is why the market will always seek that equilibrium, even under the pressure of artificial influences such as the FED.
Now, tell me how you have arrived at the opinion that Austrian Economics would not allow for a sustainable economy? Remember money is fungible not stagnate, nor is all debt irreversible. In fact, I while at one time I considered the “national debt” as irreversible I no longer do, the reason for that is that just like the fiat currency system the debt is also fiat. While it is true that it can never be paid down or off in terms that we would normally recognize as debt retirement, the fact is that under a fiat monetary system it can be paid off using a number of fiat tricks that have been used before in history. Basically, it would be rather easy for the government to inflate the debt away, that could be accomplished by debasing the U.S. Dollar against a foreign currency and paying the debt in that foreign currency. In an extreme example the U.S. Government could debase the Dollar to the Yen, or the Euro, say a half Billion Dollars to 100 Euros, it would not take much for the debt to then be paid off under those exchange values, but you don’t understand that do you?
Additionally DrKrbyLuv....there are two substantial differences between Keynesian Economics and Austrian. Austrian Economics calls for sound money, gold being a double asset does not act like fiat money which is a double liability. Also, Austrian Economics, since it calls for sound money also calls for balanced budgets and the restrictions of sound money make that imperative on a government. The entire fiat system is debt based, a sound monetary system is asset based, substantial differences. Asset based system always encourage savings, debt based systems, like this fiat system always encourages debt.
You must address those distinctions, which are extremely important, if you are attempting to make such a broad statement that both Austrian and Keynesian Economics have a degenerative nature. The two operate under totally different laws of monetary mechanics and thus they function within the economy on totally different levels.
Your statements take none of these things into consideration, the reason for that is that you simply cannot adequately make any of these distinctions because your theory is linear in conception and has not reach economic principles behind it.
Thank you for the response and congratulations on moving up in becoming a notable Austrian disciple.
I was disappointed that you neither endorsed nor refuted the validity of my mathematical example. So what are you saying - is my math wrong? Or is my math correct, but through some double shuffling of money, the exponential growth of debt/interest doesn't matter? It would be most helpful if you would explain your position.
Republicae said:"What is interest? I realize that based on your understanding of it that you associate it with money, but the fact is that interest has nothing to do with money, but with the preferences of people, once you deny that preference you destroy all economic functionality.
Say what??? Interest has nothing to do with money? Every bank that I know of demands that interest is paid with MONEY. I know you like to use scenarios where interest and debt are repaid with apples, bananas and loaves of bread but this is the real world and yes, interest is paid in money.
Republicae said: "You have already shown, time and again, that you don’t understand how interest works, much less what it is and the vital functions it performs in a viberant economy."
No I totally disagree - interest does not serve any "vital function" and it does not contribute to a "viberant economy" - it is just a way for people to make money off others, usury that is neither earned nor deserved. Let me explain this in detail, as it is something you really need to understand:
A big misconception is that banks lend theirs and/or depositor’s money. They don’t. Until recently, over 97% of all borrowed money was created on the spot through account entries, by banks and lending companies. They are charging interest on newly created money simply because they have a monopoly to do so.
And, the Emergency Economic Stabilization Act/TARP of September 2008 changed the reserve requirement to 0%, immediately making the potential money supply infinite. Absolutely no reserves are required - 100% of all borrowed money may be created on the spot.
If the banks are not lending their own or depositor’s money, then whose money are they lending? It is money that is issued by the lone authority and backing of the people, their assets, and the assets of the United States.
Why should anyone pay continuous interest charges to private banks for money they are neither lending nor backing? Private banks add nothing that could not be profitably compensated through service and transaction fees. All interest charges should rightfully be eliminated as they are usury pure and simple. And as I explained above, interest charges are not sustainable.
Republicae said: Without interest, which is simply a measure of time preferences in our society, there would be no measure of risk that a person or business would be able to use to determine the degree of his preferences. I realize you can’t understand this next statement, but without interest we would consume our goods because there would be no measure to utilize to determine either present value over the risk of future value.
Now you are starting to lose it...interest is a measure of time preferences?? You naively believe that banks are taking risks in lending their money. They are not and furthermore in many cases, the lender simply bundles the loans and dumps them on Fannie or Freddie or, they dump them on unwitting foreign investors who believe the AAA credit ratings. I urge to stop being an apologist for banks or the system and start examining things more critically.
Republicae said: While it is true that it can never be paid down or off in terms that we would normally recognize as debt retirement, the fact is that under a fiat monetary system it can be paid off using a number of fiat tricks that have been used before in history.
Thank you for that admission. But you misunderstand an important concept - that is that the specie of currency has nothing to do with the accumulation of interest debt. We may use gold back dollars, or fiat dollar, or coconuts as dollars, it doesn't matter as the multiplication of debt will eventually and inescapably result in the collapse of the system as long as INTEREST is charged but never provided for. And, neither Kenysian nor Austrian theories address this fatal flaw.
Republicae said: your theory is linear in conception and has not reach economic principles behind it.
Unlike you, I am not prescribing to theories, what I am suggesting is a mathematical certainty.
Republicae said: Austrian Economics calls for sound money, gold being a double asset does not act like fiat money which is a double liability.
I’m sure that you are familiar with the excellent video entitled the “Money Masters.” One of the most important quotes of the video occurs close to the end when Mr. Still suggests the following:
“Our country needs a solid group who really understand how our money is manipulated and what the solutions are, because if a depression comes, there will be those who will come forward advancing solutions framed by the international bankers.
Beware of calls to return to a gold standard. Why? Simple. Because never before has so much gold been so concentrated outside of American hands. And never before has so much gold been in the hands of international governmental bodies such as the World Bank and International Monetary Fund. In fact, the IMF now holds more gold then any central bank.
The Swiss are under intense pressure from the Money Changers to dispose of their gold. This is most likely either a prelude to the complete demonetization of gold (like silver before it), or to its monopoliation and remonetization by the Money Changers.
Therefore, to return to a gold standard would almost certainly be a false solution in our case. As was repeated in the Great Depression: "In gold we trusted; by gold we're busted."
Likewise, beware of any plans advanced for a regional or world currency - this is another international banker's Trojan Horse - a deception to open the national gates to more international control.”
This is a stunning warning that should be shared with all who are calling for a return to the gold standard - through central and/or private banks. Let me add some facts that further support the allegation.
I gleaned the following information from the "World Gold Council" [link edited for length] Gold Investment Research and Statistics:
- There are approximately 30,000 tonnes of gold reserves held globally
- Central banks hold the most reserves, combined at over 13,000 tonnes
- The IMF holds over 3,300 tonnes that we know of (many suggest they hold more)
- The United States holds more gold than any other country - 8,100 tonnes (at least half this amount may actually belong to the private Federal Reserve)
Things get a bit more interesting as these numbers alone don't tell the story. According to the US Gold Commission, the United States held just over 8,000 tonnes of gold in 1982. The report includes gold held by the US government and by the separate and private Federal Reserve. This is misleading as the gold held by the private Fed should not be included as US gold.
Regardless, it should suffice to tell us that moving to a gold standard is both impossible and undesirable as we simply do not have near enough gold to accomplish such a thing. Would proponents suggest that the United States entangle itself with the central bankers and the IMF in order to "borrow" enough? The entire "gold standard" debate is a waste of time and only serves as a distraction - or worse.
The reason I didn’t address your mathematical example was because it was a completely insignificant example that doesn’t reflect the reality of the fungibility of money in an economy. Like any mathematical formula, it is only as good as the assumptions upon which it is based, if the assumptions are incorrect then the results of the math will reflect that fact. To prove that all one needs to do is look at the numerous algorithms employed by economists and statisticians in government and in universities to see that if you start with incorrect assumptions you will always arrive at incorrect mathematical formulae, thus the predictive power of math is only as good as the assumptions the equations are based upon. As I have said before, if it were true that economics should be mathematically predictable then we would all live in a very efficient economy without booms and bust and panics, without recessions or depressions.
The most complex mathematical algorithms that are employed and have been employed by government economists for years have not been able to predict economic movements. The most sophisticated computers that government money can buy are used in such mathematical algorithms that focus on the Finite-Sample Accuracy of Nonparametric Re-sampling Algorithms for Economic Time Series, Computationally Efficient Algorithm for Imposing the Saddle Point Property in Dynamic Models, Accelerating Non Linear Perfect Foresight Model Solution by Exploiting the Steady State Linearization, Symbolic Algebra Programming for Analyzing the Long Run Dynamics of Economic Models: An Investigation of Overlapping Generations Models, Exploring Dynamic Properties of Nonlinear Economic Models Through Asymptotic Linearization, Continuous Time Application of the Anderson-Moore (AIM) Algorithm for Imposing the Saddle Point Property in Dynamic Models, and many, many more and yet they still cannot get it right. Why not? There is a very good reason, not only are the assumptions incorrect upon which they are based, but the economy and monetary systems are made up of far more than mathematical elements. Thus, when you blithely make statements about mathematical certainty, you do so without actually having proofs, only assumptions of correct data. In other words, you have nothing more than an opinion and if that opinion is not based on more than a simplistic form of logic then it too is no better than the mathematical equations you use to support your claim. That is, after all, all you have is a claim without a sound basis of either monetary or economic mechanics and I can say that based on your own words and the examples you have used. Thus far you have shown a very, very shallow understanding of either monetary or economic systems and have relied on something that is extremely narrow. So, it appears that you place a great deal of faith in a theory based on an Excel Spreadsheet and think it is actually predictive when the most sophisticated supercomputers with the most complex mathematical algorithms have failed to be predictive in terms of our economy.
The total public debt of the United States is not a static debt, but is traded within primary and secondary markets and is owned by States, Corporations, Individuals and Foreign Governments. Some of the debt is even Intra-governmental debt obligations where one agency owes another, and then there is the Social Security Trust Fund, which is also accounted in the debt as an asset (empty asset). So, what is the national debt made up of? Well, it should be apparent that it is made up of Treasury Bills, Treasury Notes, Treasury Bonds, TIPS and Savings Bonds, etc. How do these securities work, certainly not like normal debt that you and I would normally associate with the word debt? The national debt is a dual monetary instrument that is both a debt and an asset.
You don’t seem to take many factors into consideration when making your assumptions about the exponential growth of debt, such as the fact that The Public Debt Outstanding decreases when there are more redemptions of Treasury securities than there are issues. T-bills, for instance, are sold in terms ranging from a few days to 52 weeks. Bills are sold at a discount from the par amount. So, if you bid on a T-bill, you may pay $900.00 for a $1,000 bill. Only when the T-bill matures are you paid the $1,000.
The difference between the purchase price and face value is interest. It is also possible for a bill auction to produce a bid at a price equal to par, which means that Treasury will issue and redeem the securities at par value, in other words no interest would be paid on that money that the government borrowed. Now, if you sell the T-bill prior to maturity then the amount at redemption will naturally be less.
Treasury note pay interest every six months until they mature, the yield is determined by the auction bid. The price of Treasury notes may be greater than, less than, or equal to the face value of the note depending on the auction bids. What Montagne also seems to avoid is that government revenues on these securities clearly made up for government outlays in interest payments. The interest fluctuates based on issue and redemptions, but you do not account for such fluctuations and simply use a blanket statement about the national debt and interest obligations, along with all consumer and commercial debt, as well. You don’t address these issues and there is a reason for that, you can’t address them in the framework of your narrow understanding of the subject of debt, interest or, for that matter money.
The fact is that since October 1980 through November 2008, the monthly receipts verses outlays on the debt, based on Monthly Treasury Statements, show that there were 243 of those months where there was a surplus verses 93 months when there was a deficit. What that means is that during 93 months there were more government securities issued, driving up the debt while there were 243 months when there were redemptions driving down the debt. Thus during these surplus or receipts the government was paid money on securities and during the deficit months it paid money on the securities.
DrKrbyluv said: "Say what??? Interest has nothing to do with money? Every bank that I know of demands that interest is paid with MONEY. I know you like to use scenarios where interest and debt are repaid with apples, bananas and loaves of bread but this is the real world and yes, interest is paid in money."
Once more, you have allowed the narrowness of your understanding to slather over the content without actually making a substantial point to support your position. You don’t get it do you? You don’t understand one word I said, otherwise you would have been able to make a far more engaging comment, but you didn’t and chose to divert the issue. That seems to be typical of your rebuttals unfortunately. Thus you have shown that you didn’t understand anything, just as I anticipated.
Concerning the vital role of interest, I am sure you totally disagree, you must in order to maintain your dogma, but if you actually understood that interest is not “just a way to make money off of others” but the essential means of judgment and risk assessment in the economy, along with the fact that interest is the expression of people’s time preferences.
I would assume that you would readily realize that I am completely familiar with the way the banking system operates in this country. Additionally, I think you will find in my writings the fact that I am aware of the banking mechanics, particularly fractional reserve banking. Yet, even so, that does not dismiss the fact that interest is a vital part of economic functions. Whether that interest is abused or not is, of course, a concern, but the fact remains and you have yet to show otherwise, that interest does perform a very specific economic function and without that function the economy would not function, whether that economy is fiat based or sound money based, because, as I said, interest has nothing whatsoever to do with money. Money is only an exchange medium that is purely utilitarian in its mechanism. Interest is formed, not from money, but from the numerous preferences in our society, both present and future. As I said, I already knew you wouldn’t understand what was being said.
Now, I am in complete agreement with you concerning the manner in which the fractional reserve system works, it is fraudulent, and of that there is no question. The question I raise is the principle of interest in the economy, particularly in a free market sound money economy. It is an essential element. Indeed, again, I have railed against the ability of the Federal Reserve to create money “out of thin air”, that is why I am a proponent of sound money, it can’t be created out of thin air and is very difficult to abuse.
Gosh, you have such tunnel vision that I am astounded. You are so locked into this flawed ideology that you can’t see the forest for the trees. As I said, you don’t understand interest do you? You have just proved it again. Am I talking to a poodle? That’s what it is beginning to feel like, honestly! Far from being an apologist for the banking system, I think you will find ample evidence in my writings that show your assumption is totally off base. I know you don’t understand time preferences, no more than you understand property rights, private contracts or even money. You have shown that fact by what you have said and don’t see the connections between all of these principles with what we are talking about. Here again, you have diverted the issue away from what interest and what it does in an economy back to the banking system. You act as though I am supporting the fractional reserve banking system, but the reality is that I am completely against that system, yet I am definitely for free market freedom. You are not. You can’t be if you espouse the same doctrine found in the PME, which advocates government banks, fiat money, government regulation and control over people’s money, forced savings and bank account management. How utterly anti-freedom, anti-free-market, anti-sound money.
Republicae said: While it is true that it can never be paid down or off in terms that we would normally recognize as debt retirement, the fact is that under a fiat monetary system it can be paid off using a number of fiat tricks that have been used before in history.
DrKrbyluv said: "Thank you for that admission. But you misunderstand an important concept - that is that the specie of currency has nothing to do with the accumulation of interest debt. We may use gold back dollars, or fiat dollar, or coconuts as dollars, it doesn't matter as the multiplication of debt will eventually and inescapably result in the collapse of the system as long as INTEREST is charged but never provided for."
You must completely ignore the very thing that money does in an economy to actually stand by your statement? You ignored the latter part of my statement, and I realize you had no other option but to ignore, didn’t you? Thus you made an assumption that I was making some sort of admission that you are correct when I made no such admission. I simply said that the national debt could not be paid down or off in terms we would normally recognize as debt retirement. There is a substantial difference; too bad you don’t have the ability to grasp the difference. First, you have already proven that you don’t even know what the national debt is made up of or how if functions. You have a lumped-sum mentality that is so linear that it is scary to believe that someone could actually function in life with such a low level of logical construction. Your entire theory rest upon the assumption that the national debt, in particular, cannot be paid off or down because there is simply not enough money to do so. You fail; utterly fail once again, to grasp the fact that our debt has been inflated down (paid down) twice during the last century. During the FDR Administration and then again during the Nixon Administration. FDR did it by simultaneously debasing the dollar while inflating the dollar value of an ounce of gold, thus when foreign debt was paid it took far less gold to pay it at the newly valuated sum of $42.00 an ounce. Thus, with a stroke of a pen, FDR paid the national debt by 48% by that simple act. Nixon when even further since he cut all ties between gold and the dollar, thus all debts were paid to foreign creditors in fiat money. Like several kings of old, especially French and English Kings, our government is perfectly able to pay down or off the national debt in a similar fashion. If that is the case then you complete theory falls apart, even though it already has so many holes in it I can’t believe you hold on to it.
Drkrbyluv said: “Unlike you, I am not prescribing to theories, what I am suggesting is a mathematical certainty.”
You are not suggesting a mathematical certainty, you are doing absolutely nothing but basing your opinion on something that you assume is correct based on a mathematical assumptions entered on an Excel spreadsheet…hardly what I would call certainty."
Yes, I am very familiar with the video and it, like many other of your “proofs” fail to either address or obviously understand the numerous factors involved with either economics or monetary mechanics. You have proved nothing thus far but that you spend most of your time on a few websites that offer some “dog and pony shows”, but little in the way of actual, or factual information. First, the primary holders of gold in this country is in private hands, whether it is in the form of gold coin, bullion or jewelry. Not the government, not the banks, but the people. By the way, it is estimated that when FDR illegally confiscated American’s gold that only 30% of all the gold in this country was actually turned over to the government. Think about that for a minute.
Apparently you also don’t have a firm grasp of what happened during the Great Depression either. If you actually think that gold was the problem then I suggest you read a few books on the subject. That is perhaps one of the most idiotic assertions you have made. If you recall, FED Head Bernake finally admitted that the Great Depression was caused, not by gold, but by the monetary policies of the Federal Reserve. To think otherwise is not only showing a willful ignorance of the facts, but a willingness to remain intellectually stagnate.
DrKrbyLuv said: “Regardless, it should suffice to tell us that moving to a gold standard is both impossible and undesirable as we simply do not have near enough gold to accomplish such a thing. Would proponents suggest that the United States entangle itself with the central bankers and the IMF in order to "borrow" enough? The entire "gold standard" debate is a waste of time and only serves as a distraction - or worse.”
That statement, once again, shows your ignorance of what money does, how it operates and it fungibility. I have offered you the writings of David Hume several times, a man who studied gold monetary systems for decades. He proved, not just supposition, but proved that the fungibility of gold in an economy, unfettered by government would function regardless of the supply, but you once again ignore that information. You don’t understand money, you don’t understand interest, and you obviously don’t understand economics. If you did you would not dream of suggesting that there is not enough gold to function as money in an economy. You ignore the fact that our economy has been extremely inflated by the fiat monetary system, so much so that it forms an illusion that it is much bigger than it actually is, that is, of course the nature of the fiat monetary system. Since the Fiat Dollar has the real value, or effective purchase value of about 3 Cents each what does that translate into the GDP…come on now, you are the one who places so much faith in mathematical certainty, tell me what you come up with. You have once again shown your willingness to be controlled by fallacies.
Aside from the fungibility of money, the advantage of gold monetary systems is that government cannot control it, it cannot be tracked, or artificially manufactured and the quantity of gold money does not depend on either the banks or the government. While it is not perfect money, it is closer to perfect money than any other form that has been used over the last 6000 years. The supply of gold is independent of government, independent of banks, independent of central planning bureaucrats. Why do you think that the Federal Reserve, Keynes and politicians hated gold? In fact, most governments in history hated gold because it doesn’t allow them to function outside limitations. Expenditures, or the desire for expenditures by government cannot influence gold money. Also, once gold is used as money in an economy, those who have held control over masses amounts of it under the fiat monetary system would not longer have an incentive to do so. In fact, once the flood gates are open and gold is once again placed in the hands of the People, the government, the banks, the corporations loose a great deal of control over society. The reason for that is, unlike fiat money, gold money is real property and as real property it empowers the People in ways that I know you can’t understand.
Unlike fiat paper money, whether that money is created through the fractional reserve system bearing interest at its creation or not, gold cannot be debased. When you have a $1.00 Dollar receipt for silver in your hands, or a $20.00 Dollar receipt in gold, then you know that the purchase value behind the face value is there and those receipts are redeemable for real money, the same is not true with any kind of fiat money. Fiat money is nothing more than an IOU for nothing!
Governments have tried time and again to find some adequate substitute for the qualities that gold money provide to an economy, but they have never been able to approximate just how gold operates as money in an economy. There are no substitutes. As long as the governments of this world claim the right to print money, tax people under a fiat system just to enforce the fiat money and simply inflate at the drop of a hat, then the People will always be relegated to second-class citizens under the lordship of government officials.
Now I realize that you adhere to the doctrine that there is just not enough gold to be money in our modern economy, many people hold such views, but I have to wonder why? It is certainly not based on a firm understanding of how gold money functions in an economy. You side with the critics of gold because of the belief that the quantity of money must be constantly increased to adjust to economic growth or create economic growth. The problem with such beliefs is that they do not take into consideration the functions of money within an economy; in particular gold money, which adjust itself through prices to the demands of the public in an economy. Once again, I suggest you read the works of David Hume on the subject. Thus, the argument that there is not enough gold to function as money ignores that those questions have already been answered and it is completely false to simply assume there is not enough gold.
Posted By: Jake, the champion of the constitution
Date: 2009-02-04 03:11:28
Republicae -
Thanks for this article. Curious in your take on this statement from Dr. Fekete's latest interview as I am thinking way too deeply trying to figure it out. I think he's on the right track.
Q.:What are the main roots of the present economic and financial crisis?
A.: There is only one main root, the same as that for the Great Depression in the 1930’s: destruction of capital. Erosion or consumption of capital has been going on unnoticed for decades. The process ends when there is no more capital left to consume. After the seven fat years, a period of seven lean years must commence.
Capital erosion is not natural nor is it inevitable. Rather, it has been inflicted upon the world economy by the unmindful and irresponsible monetary policy of the United States in deliberately driving the rate of interest to zero.
Falling interest rates, which are lethal, must be carefully distinguished from low butstable interest rates, which are salutary. A falling interest rate structure, foisted upon the world by the Americans obsessed with the idea of preserving the hegemony of the dollar, works insidiously and unobserved. As the rate of interest falls, the liquidation value of debt rises. Far from decreasing it, fallinginterest rates increase the burden of debt. Economists, chartered accountants, and bank examiners do not recognize the concept of liquidation value of debt, let alone its inverse relationship to the rate of interest, although it is exactly the same inverse relationship that is well-recognized to exist between the market value of a bond and the rate of interest. As the interest rate falls, creditors refuse to accept the face value of the bond in settlement of debt. At the lower rate the income stream of coupons falls short of amortizing the face value of the bond. To compensate for the shortfall the market value of the bond must be increased. Accordingly, creditors bid up the market price of the bond. If debtors want to get out of debt before it matures, then they will have to pay the market price exceeding the face value of the bond. This conclusively proves that the fall in the rate of interest increases the liquidation value of debt.
As soon as the liquidation value of liabilities less assets surpasses capital, the firm becomes insolvent. Its capital is gone. It can no longer attract credit. This is what has happened to the banks in the U.S. and the U.K. This is what has also happened to the American auto industry, and all the other American industries now extinct.
Those who dismiss my analysis of the present crisis in terms of capital destruction as an improbable single- cause explanation of a complex phenomenon must answer the following question. What are the statistical odds that the banks, financial institutions, as well as the three big automakers go bankrupt all at the same time? Well, the odds are virtually zero, unless they fail due to a single cause.
Posted By: Jake, the champion of the constitution
Date: 2009-02-04 06:02:03
Dear Dr Kirby Luv,
You brought up 2 points above that I would like to take a short stab at. I will try to keep it shorter than Republicae :)
1) There is not enough gold in the world
Absolutely false! Gold is physically scarce and along with silver meets all of the requirements for sound money. In fact, even in the 1800s when the gold supply was much, much smaller than it is today (and much fewer people) there was an unbelievably small amount of gold in the world. Now, with respect to the amount of property, capital, and savings in the world, gold would probably assume a much higher amount of purchasing power per gram or ounce.
Check my COIN's reference in this article
http://www.nolanchart.com/article5832.html
2) The "powers that be" will control any new gold standard system anyways
Yeah, like they don't have 100% control over it right now? Or any other new magical fiat system? I think Jim Sinclair's Fed Reserve Gold Certificate Ratio theory is actually a likely scenario, but this will be a big step in the right direction since gold can not be controlled so easily and will not be wholly subjectable to the whims of governments and central bankers, which is its par excellence.
Plus there is something strange at work in the world today, much different than 35+ years ago. Information spreads like wildfire on the internet, and I am very sure once an earnest debate starts between sound money and inflationary fiat, sound money will carry the day. The only question is WHEN that debate will be!
“Q.:What are the main roots of the present economic and financial crisis?
A.: There is only one main root, the same as that for the Great Depression in the 1930’s: destruction of capital. Erosion or consumption of capital has been going on unnoticed for decades. The process ends when there is no more capital left to consume. After the seven fat years, a period of seven lean years must commence. “
Thanks Jake:
Absolutely, we have been living under a “Vampire Economy”, not only has productive capital been destroyed, but the increased size of The State machine has siphoned off more and more productivity from the general economy. Additionally, there are numerous distortions which occur when you have a Centrally Planned Economy, not to mention the distortions that take place with interest rates, the barometer of economic health, are manipulated. Interest rates, as I attempted to explain to DrKrbyLuv, are not a monetary phenomenon, but a human phenomenon that arises to gauge time preferences, risk, and future goals as well as needs. When interest rates are artificially managed the entire market it thrown into an ever-increasing dislocation, numerous areas are affected and there eventually is no determinant valuation on which to depend. Trust is eventually lost because you cannot have confidence in the economic signals you are receiving from the market since it is not allowed to operate naturally, but is distorted through the manipulation of the Central Banking system. The problem is that such manipulation can only last temporarily, the market forces will “revolt” against such artificial forces and the market will always win as it seeks to readjust and regain equilibrium.
David Hume proved that: “the greater or less plenty [supply] of money is of no consequence since the prices of commodities are always proportioned to the plenty [supply] of money.” Thus, the increase in the supply of money corresponds with a proportional the increase in prices, likewise, the decrease in the supply of money with a proportional decrease in prices. The fact is that the actual quantity of money has no real significance since prices will always reflect the amount of the money supply.
I realize that is hard to grasp, especially since you can’t wrap you mind around the idea that there is enough gold to serve as money in our economy, nevertheless, that does not negate the fact that the quantity of money does not matter. Very few people get it because they look at the economy in a very linear, one-dimensional way when the economy is neither. Now this fact is nothing new, it has been around for at least 300 years, but it has become easy for people to willingly accept the tripe that floats around as “factual information” for so long that they simply cannot stretch their minds beyond the preconceived conditioning that plagues them.
Thus the greater or smaller circulation, under a gold monetary system, is of no importance. However, when there is a change several things take place in the economy, things that cannot happen in a fiat monetary system. Now, prices don’t increase immediately when the supply of money is increased nor do they decrease immediate when the supply is lowered. Remember, in a fiat system, the money supply must continually be expanded otherwise you will see an economic dislocation, the problem is that since the Federal Reserve controls the money supply and they don’t have a crystal ball, they cannot determine how much to increase the monetary base, the effects of that, along with artificially manipulated interest rates cause booms which are always characterized by mal-investments that in turn lead to an eventual bust. There is no mechanism in any fiat monetary system to maintain balance in the system therefore the central banking system must, out of necessity, intervene.
It is difficult to explain all the intricacies of monetary action in an economy, but if you are going to make broad statements regarding monetary mechanics then you must be prepared to accept the need to explore the concepts, once such principle can be found in Hume’s writings:
“Were all the gold in ENGLAND annihilated at once, and one and twenty shillings substituted in the place of every guinea, would money be more plentiful or interest lower? No surely: We should only use silver instead of gold. Were gold rendered as common as silver, and silver as common as copper; would money be more plentiful or interest lower? We may assuredly give the same answer. Our shillings would then be yellow, and our halfpence white; and we should have no guineas. No other difference would ever be observed; no alteration on commerce, manufactures, navigation, or interest; unless we imagine, that the color of the metal is of any consequence.”
Thus supply does not limit commerce under a gold monetary system, contrary to the meager understandings of the detractors of monetary gold. Once again, Hume states: “Now, what is so visible in these greater variations of scarcity or abundance in the precious metals; must hold in all inferior changes. If the multiplying of gold and silver fifteen times makes no difference, much less can the doubling or tripling them. All augmentation has no other effect than to heighten the price of labor and commodities; and even this variation is little more than that of a name. In the progress towards these changes, the augmentation may have some influence, by exciting industry; but after the prices are settled, suitably to the new abundance of gold and silver, it has no manner of influence.”
Hume basically gave proofs that an effect will always hold proportion with its cause. Thus, prices will always proportionally react to the effect of an increase in the supply of money. While the same holds true with fiat money to a degree, the problem is that there is no mechanism that restrains the artificial fluctuations in the money supply because it is controlled by the Federal Reserve. You will also find that the artificial manipulation of interest rates by the Federal Reserve has extremely detrimental effects within the economy by distorting the normal forces within the market. Under a gold monetary system interest is not manipulated by anyone, but is the result of the various preferences within the market itself, thus interest is always adjusted naturally. Now, if interest were not a naturally occurring phenomenon it such natural adjustments would not occur, would they? However, since interest is not simply a creation of man, his greed, government or banks, it can adjust within no assistance or manipulation within a free market gold monetary system. Again, along with that thought, the rate of interest therefore, is not derived from the quantity of money, but, as I have said, preferences within the market itself. Without understanding the workings of such forces it is utterly impossible to understand interest and how is functions.
Thus money has a “fictitious” value therefore; the supply of it is of no consequence. Under a gold monetary system interest, which is a natural adjustment mechanism, will rise is there is a larger demand for borrowing, if there is less capital to supply that demand and at times if there is greater profits arising from commerce. Thus, it is not a low supply of money that causes a rise in interest rates, nor can government make such adjustments, nor could rates be controlled by banks. Lower rates of interest proceeds from a small demand for borrowing, an ample supply of capital in the economy and smaller profits within commerce. All of these factors are connected from the increase or decrease in industry and commerce, not in the supply of money, whether high or low. Now, concerning interest rates, under an unfettered free market system, the balance of trade between countries is maintained by the natural adjustments of interest rates. Hume also wrote an extraordinary study on how rates balance the trade between countries, thus the trade is really free, not controlled by governments or government agreements, but through free commerce, regulated by naturally interest rate adjustments which will always maintain a balance.
Republicae said: The reason I didn’t address your mathematical example was because it was a completely insignificant example that doesn’t reflect the reality of the fungibility of money in an economy. Like any mathematical formula, it is only as good as the assumptions upon which it is based, if the assumptions are incorrect then the results of the math will reflect that fact.
My example is vitally important if one is to understand the nature of interest that is never created but collected. Let me take it one step further so that you may grasp the degree of damage interest does to our economy.
At the end of 2007, the private mortgage debt outstanding was around $14.5 trillion. This amount is just the principal; the interest will probably add another *$21 trillion for a total cost of around $35 trillion to retire the loans.
So, while only 14.5 trillion was ever created, $35 trillion must be repaid. That means that $21 trillion must be taken from the future circulation. These numbers are alarming when one considers that the entire United States GDP was around 14.3 trillion dollars last year.
What I have just described to you is the inherent and terminal flaw in the system. Our circulation and thus the economy, cannot sustain the parasitic load of interest unless it perpetually grows. Sooner or later there won’t be enough willing and worthy borrowers to adequately grow the debt – this is exactly how depressions are made.
When one comes to grasp this phenomenon; a mathematical certainty, then it becomes easy to understand what is happening today, in our economy. The circulation is being consumed by past interest obligations that were never funded – we are witnessing dangerous deflation which is caused by a contraction of available circulation.
The inherent and terminal flaw in the system is not caused by, and it cannot be cured by changing our currency (you gold backed favorite for example does nothing to solve the problem) or changing the required reserves – the problem is interest!
Our system of usury system must be replaced with a sustainable and reliable interest free borrowing system. I suggest you look at an excellent example:
DrKrbyLuv said: “My example is vitally important if one is to understand the nature of interest that is never created but collected. Let me take it one step further so that you may grasp the degree of damage interest does to our economy.”
"Vitally important?" It totally lacks in any viable explanation of the nature of interest and is completely empty of logic. Hell, you don’t even know what time preference is? How can you explain the nature of interest by such an extremely simplistic example that doesn’t show anything about the nature of interest, how it operates in terms of dealing with the preferences or judgments within an economy.? The point is that you can’t and you didn’t provide anything that remotely approaches an example that comes close to vitally important. That is perhaps one of the more ridiculous statements you have made among all the other ridiculous statements you have made on this and other forums.
DrKrbyLuv said:”At the end of 2007, the private mortgage debt outstanding was around $14.5 trillion. This amount is just the principal; the interest will probably add another *$21 trillion for a total cost of around $35 trillion to retire the loans. So, while only 14.5 trillion was ever created, $35 trillion must be repaid. That means that $21 trillion must be taken from the future circulation. These numbers are alarming when one considers that the entire United States GDP was around 14.3 trillion dollars last year.”
What gives you the indication that $21 Trillion must be taken from future circulation? Tell me how you arrive at that besides the simplistic and elementary subtraction that you did to arrive at the figure of $21 Trillion and the preconceived ideas that have been placed in your head by certain dogmatic doctrines that have absolutely nothing to do with economic theory, such as the fabled and seriously flawed Mathematically Perfected Economy.
What formula shows that the fungibility of money in circulation is not capable of moving through the economy in order to pay interest? You don’t have such a formula because even if you did it would show that the fungibility of money is completely adequate to make both principle and interest payments, besides such a formula would entail thousands of interconnectivity variables in order to arrive at such a conclusion and honestly, based on the comments that you have made, you simply don’t have the ability to come up with such a formula. You will have to do much better than the feeble and feckless examples you have given to even bring your argument up to the level of acceptable logic.
DrKrbyLuv said: “What I have just described to you is the inherent and terminal flaw in the system. Our circulation and thus the economy, cannot sustain the parasitic load of interest unless it perpetually grows. Sooner or later there won’t be enough willing and worthy borrowers to adequately grow the debt – this is exactly how depressions are made.”
What you have described is nothing more than your opinions based on some very flawed assumptions; you have offered nothing that could even be considered factual. Indeed, you must ignore a vast amount of information to consider such information factual. One primary piece of information is the very nature of the entire system which has been imposed upon this and other countries. That system is fiat, another name for it could easy be called fictitious, not only is the money system based upon certain fictions, but the entire debt system is equally as fictitious and completely rest upon the confidence of people. Once that confidence is eroded to a point the entire system will fall apart, including the massive debt fiction. There are only two things holding this entire system together, one is the confidence bestowed upon it by the people, the other it the ability of governments to tax, but even the ability of governments to enforce taxation rest upon the confidence the people have in the system. All debt in such a fictitious system will be completely repudiated as the confidence of the people wanes, as it is doing now. The only thing, as the past has shown time and time again, that can restore economic confidence is a sound monetary system which employs gold specie as the medium of exchange. Nothing else has been show to revive an economy that collapses due to the fictitious nature of the fiat system.
Additionally, we have seen the massive damage of the debt standard of the fiat money system; interest is the least of the problems within this economy. The entire monetary system is based upon a coercive fiction that cannot be maintained, not because of the interest, but because the people will rapidly loose confidence in the money itself and all that is built upon that monetary system. You think it is the interest that is the problem, its not, the problem is the money itself and the complete fiat economy that has been built upon that monetary system.
DrKrbyLuv said: “When one comes to grasp this phenomenon; a mathematical certainty, then it becomes easy to understand what is happening today, in our economy. The circulation is being consumed by past interest obligations that were never funded – we are witnessing dangerous deflation which is caused by a contraction of available circulation.”
The problem is that you have not shown a mathematical certainty in any of your examples, nor has Montagne shown any mathematical certainty to purport proofs to substantiate such claims, all that has been offered thus far is assumptions, baseless and outside the realm of monetary and economic mechanics. You have not shown the mechanisms of which you speak and yet you consider your examples as proof then that is simply not the case. You must show the exact mechanisms that are involved in how interest effects the circulation from one point to the next, whether that be on a month to month or annual basis. You must show the exact means in which circulation is being consumed by past interest obligations that were never funded. Thus far you have done nothing but provided a blanket statement that carries no such explanation. Montagne spreadsheets also are not conclusive since they also do not provide actual indicators in the real economy nor are his spreadsheets based on factual data that shows the detrimental effect of the process, the definitive effects on real economics or on the debt itself. Until you can show such things you are simply expressing opinions based on assumptions which do not rest on anything that remotely resembles proof.
DrKrbyLuv said: “The inherent and terminal flaw in the system is not caused by, and it cannot be cured by changing our currency (you gold backed favorite for example does nothing to solve the problem) or changing the required reserves – the problem is interest!”
Once again, you are making assumptions based on your particular brand of anti-interest ideology, show me why it cannot be cured by changing currencies from a fiat liability currency system to a sound money asset system. Now in order for you to do that you must first understand the differences between the two, how both react within the economy and the effects that both have on an economy. Since I doubt seriously if you understand those differences or the reactions of economic forces between the two types of monetary systems you will, once again, fall back on simplistic blanket statements as you always do without saying anything at all that supports your position with factual information. Again, you fall back on what you consider factual information, such as the websites you provide, yet I have, on another forum already addressed both of those websites when you presented them before. How long will you weary me with useless information that bears no factual proofs to substantiate your claims and that’s all you have so far is claims. When you begin to do that I will begin to take what you say a little more serious.
Want to comment on this
article? Leave your comment here. Your email address is
required to track your comment. However, we will neither
publish your email address nor distribute it to other
organizations or persons. The only reason we might use
it would be if we needed to contact you regarding your
comment. All comments are subject to our
terms of use policy.
