Money And Change

An Honest And Easy Solution To Wealth Inequality

Authored by MN Gordon via Economic Prism,

Here we are, less than one month into the New Year, and absurdity levels have broken above 120 decibels.  Society, it seems, has spun itself up to a fever pitch.  The common culture is working towards a common freak-out.

This week, for example, we discovered, courtesy of U.S. Representative Alexandria Ocasio-Cortez, that: “The world is gonna end in 12 years if we don’t address climate change.”  This gifted insight was mixed between meticulous news analysis of a peaceful exchange between a smirking teen wearing a MAGA hat and a drum beating Native American wearing a costume.  But this ain’t the half of it…

The annual hootenanny for the elite, the World Economic Forum in Davos, Switzerland, took place this week.  The gathering successfully delivered many high-volume absurdities.  An impartial program listing includes:
Globalization 4.0, how cities can fight back against climate change, radically reinventing social systems, plastic pollution, safeguarding our planet, the rise of techno nationalism, media freedom in crisis, averting peak Europe, escaping extinction, when global order fails, a new deal for nature, shaping the future of democracy, and much, much more.

No doubt, the best and the brightest at Davos see these constructed ails as opportunities to provide technocratic solutions – at your expense.

Amongst all this noise, however, we’re after something different.  Our aim today, first and foremost, is directed at the valuable commodity of silence.  We don’t get enough of it.  We need more of it.
One area more silence is needed is the federal government.  In contrast to the small and quiet government envisioned by the nation’s founders, today’s gigantic federal rule is full of much clatter and racket.  Yet some progress is being made.

The government shutdown is a good start for ever so slightly quieting Washington.  At the moment, roughly 800,000 federal workers – through no fault of their own – are furloughed or working without pay.  And should the government shutdown extend for several more pay cycles, many of these workers will look for private employment.  This, in effect, will reduce the number of workers on the federal payroll.

Still, this is only a start.  You see, real silence takes real silence.  The real silence we’re referring to is the real silence of nearly 100 years ago…

Silent Cal

Calvin Coolidge, the 30th president of the U.S., was a man of few words.  As Vice President, under Warren Harding, Coolidge attended, but hardly participated in cabinet meetings.  He was actively practicing his position that government should interfere as little as possible with businesses and individuals.  This silence earned him the nickname “Silent Cal.”
When he succeeded to presidency after Harding’s untimely death, Silent Cal did his part to make America great by doing little.  He told the republic to “Keep Cool with Coolidge.”  The populace rewarded him with victory in the 1924 presidential election.

Silent Cal, like the current president, reduced taxes.  However, he also did something quite uncommon.  He simultaneously reduced spending…and he did so by uttering one single word: “No.”

He said no to Veterans appeals for bonus payments.  He vetoed the Soldiers’ Bonus Act.  He said no to farmers.  He vetoed the McNary-Haugen Farm Relief Bill, which proposed government intervention into food markets to artificially inflate agriculture prices.  In total, he vetoed 50 pieces of legislation during his presidency.

On the uncommon occasion where Silent Cal opened his mouth, like when addressing the topic of The Press Under a Free Government, it was to clarify that:
“After all, the chief business of the American people is business.  They are profoundly concerned with producing, buying, selling, investing and prospering in the world.  I am strongly of opinion that the great majority of people will always find these are moving impulses of our life. […].  Wealth is the product of industry, ambition, character and untiring effort.  In all experience, the accumulation of wealth means the multiplication of schools, the increase of knowledge, the dissemination of intelligence, the encouragement of science, the broadening of outlook, the expansion of liberties, the widening of culture.”

An Honest and Easy Solution to Wealth Inequality

Naturally, Silent Cal didn’t have much tolerance for government intervention into schools, healthcare, agriculture, industry, toothpaste producers, or any other segment of the economy.  He was also opposed to policies of taxation and forced philanthropy.  He recognized that government doesn’t create wealth.

Were Coolidge alive today, would he discern that the source of the current massive wealth inequality is the Fed’s fake money?

He most likely would.  Because he’d already witnessed the wealth disparity blowout resulting from New York Federal Reserve Bank Governor Benjamin Strong’s “coup de whiskey to the stock market,” which occurred while Coolidge was President during the roaring 20s.

Certainly, Coolidge would disparage today’s system of central bank generated credit creation, and the great wealth disparities that it inflicts.  Moreover, his solution to the wealth gap wouldn’t be to tax the rich so that Washington could redistribute the spoils back to crony insiders, while handing out small crumbs for the masses.

Instead, to address today’s vast wealth inequality we think Silent Cal would find a far different approach to be far more agreeable.  Bill Bonner, writing in his daily diary, recently offered an apt alternative to big government taxation and redistribution:
‘“Inequality’ could be solved easily and honestly.

“Stop rigging interest rates.  The free market can decide what rates should be.  Most likely, it would discover rates that were much higher – probably over 5 percent.  Then, in a flash, like champagne at Hiroshima, the post-2009 gains of the super-wealthy would evaporate.

“So far, neither AOC [Alexandria Ocasio-Cortez] or DJT [Donald John Trump] has suggested such an elegant repair.  And don’t hold your breath.”

To this we’ll add one very specific and uncompromising provision: There will be absolutely, unconditionally, categorically, no government funded bailouts.

Government Spending Doesn't Create Economic Growth

Authored by Frank Shostak via The Mises Institute,

According to many commentators, outlays by government play an important role in the economic growth. In particular, when an economy falls into a slower economic growth phase the increase in government outlays could provide the necessary boost to revive the economy so it is held.
The proponents for strong government outlays when an economy displays weakness hold that the stronger outlays by the government will strengthen the spending flow and this in turn will strengthen the economy.

In this way of thinking, spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual's earnings.
So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the flow of spending. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.

Following this logic, in order to prevent an emerging slowdown in the economy’s growth rate from getting out of hand, the government should step in and lift its outlays thereby filling the shortfall in the private sector spending.

Once the flow of spending is re-established, things are back to normal, so it is held, and sound economic growth is re-established.

The view that an increase in government outlays can contribute to economic growth gives the impression that the government has at its disposal a stock of real savings that employed in emergency.

Once a recessionary threat alleviated, the government may reduce its support by cutting the supply of real savings to the economy. All this implies that the government somehow can generate real wealth and employ it when it sees necessary.

Given that, the government is not a wealth generator, whenever it raises the pace of its outlays it has to lift the pace of the wealth diversion from the wealth-generating private sector.

Hence, the more the government plans to spend, the more wealth it is going to take from wealth generators. By diverting real wealth towards various non-productive activities, the increase in government outlays in fact undermines the process of wealth generation and weakens the economy’s growth over time.

This way of thinking follows the ideas of John Maynard Keynes. Briefly, Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy.

In the Keynesian framework of thinking an output that an economy could generate with a given pool of resources i.e. labor tools and machinery and a given technology without causing inflation, labeled as potential output. Hence the greater the pool of resources, all other things being equal, the more output can be generated.

If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. (Inadequate demand for goods leads to only a partial use of existent labor and capital goods).

In this framework of thinking then, it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump.

The Importance of Real Savings

What is missing in this story is the subject matter of real savings. For instance, a baker out of the production of ten loaves of bread consumes two loaves, saves eight loaves, and exchanges them for a pair of shoes with a shoemaker. In this example, the baker funds the purchase of shoes through the saved eight loaves of bread.

Note that the bread maintains shoemaker’s life and wellbeing. Likewise, the shoemaker has funded the purchase of bread by means of shoes that maintains bakers’ wellbeing. Now, the baker has decided to build another oven in order to increase the production of bread. In order to implement his plan the baker hires the services of the oven maker. He pays the oven maker with some of the bread he is producing. Again, what we have here is a set-up where the building of the oven is funded by the production of final consumer good - bread. If for whatever reasons the flow of bread production is disrupted the baker would not be able to pay the oven maker. As a result, the making of the oven would have to be aborted.

Now, even if we were to accept the Keynesian framework that the potential output is above the actual output, it does not follow that the increase in government outlays will lead to an increase in the economy’s actual output.

It is not possible to lift overall production without the necessary support from final saved consumer goods or from the flow of real savings.

We have seen that by means of a final consumer good — the bread — the baker was able to fund the expansion of his production structure.

Similarly other producers must have final saved real consumer goods – real savings – to fund the purchase of goods and services they require. Note that the introduction of money does not alter the essence of what saving is. (Money is just a medium of exchange. It is only used to facilitate the flow of goods it however cannot replace the final consumer goods).

The government as such does not create any real wealth, so how can an increase in government outlays revive the economy?

Various individuals who employed by the government expect compensation for their work. The only way it can pay these individuals is by taxing others who are still generating real wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery.

The fiscal stimulus could “work” if the flow of real savings is large enough to support i.e. fund, government activities while still permitting a positive growth rate in the activities of the private sector. (Note that the overall increase in real economic activity is in this case erroneously attributed to the government's loose fiscal policy). If, however, the flow of real savings is not large enough then regardless of any increase in government outlays overall real economic activity cannot be revived. In this case the more government spends i.e. the more it takes from wealth generators, the more it weakens prospects for a recovery.

Thus when government by means of taxes diverts bread to its own activities the baker will have less bread at his disposal. Consequently, the baker will not be able to secure the services of the oven maker. As a result, it will not be possible to boost the production of bread, all other things being equal.

As the pace of government, spending increases a situation could emerge that the baker will not have enough bread to even maintain the workability of the existing oven. (The baker will not have enough bread to pay for the services of a technician to maintain the existing oven in a good shape). Consequently, his production of bread will actually decline.

Similarly, other wealth generators because of the increase in government outlays will have less real savings at their disposal. This in turn will hamper the production of their goods and services. This in turn will retard and not promote overall real economic growth.

As one can see the increase in government outlays leads to the weakening in the process of wealth generation in general. According to Ludwig von Mises, there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of it quantity.

These New Numbers Prove The Global Economic Slowdown Is Far More Advanced Than We Thought
 
ZeroHedge.com       Tue, 01/15/2019 - 11:50
 
Authored by Michael Snyder via The Economic Collapse blog,
We continue to get more confirmation that the global economy is slowing down substantially. 
On Monday, it was China’s turn to surprise analysts, and the numbers that they just released are absolutely stunning.  When Chinese imports and exports are both expanding, that is a clear sign that the global economy is running on all cylinders, but when both of them are contracting that is an indication that huge trouble is ahead.  And the experts were certainly anticipating substantial increases in both categories in December, but instead there were huge declines.  There is no possible way to spin these numbers to make them look good…

Data from China showed imports fell 7.6 percent year-on-year in December while analysts had predicted a 5-percent rise. Exports dropped 4.4 percent, confounding expectations for a 3-percent gain.

China now accounts for more total global trade than the United States does, and the fact that the numbers for the global economy’s number one trade hub are falling this dramatically is a major warning sign.

And of course it isn’t just China that is experiencing trouble.  In fact, we just witnessed the worst industrial output numbers in Europe “in nearly three years”…
Adding to the gloom were weak industrial output numbers from the euro zone, which showed the largest fall in nearly three years.

Softening demand has been felt around the world, with sales of goods ranging from iPhones to automobiles slowing, prompting profit warnings from Apple among others.
If we were headed for a major global recession, these are exactly the types of news stories that we would expect to see.

We also continue to get more indications that the U.S. economy is slowing down significantly.  For example, sales of new homes in the U.S. were down 19 percent in November and 18 percent in December…

Sales of newly built homes fell 18 percent in December compared with December of 2017, according to data compiled by John Burns Real Estate Consulting, a California-based housing research and analytics firm.

Due to the partial government shutdown, official government figures on home sales for November and December have not been released.

Sales were also down a steep 19 percent annually in November, according to JBRC’s analysts.
Those are horrific numbers, and they are very reminiscent of what we witnessed back in 2008.
And we also just learned that employers are cutting back on hiring new college grads for the first time in eight years…

A new report from the National Association of Colleges and Employers (NACE) shows that for the first time in eight years, managers are pulling back the reins on hiring college grads, with a projected 1.3 percent decrease from last year. Additionally, a survey from Monster.com found that of 350 college students polled, 75 percent don’t have a job lined up yet.

I feel really bad for those that are getting ready to graduate from college, because I know what it is like to graduate in the middle of an economic downturn.  At the time, many of my friends took whatever jobs they possibly could, and some of them never really got on the right track after that.
But the economic environment that is ahead will be much worse than any of the minor recessions that the U.S. has experienced in the past, and that means things are going to be extremely tough for our college graduates.  And the total amount of student loan debt in this country has roughly tripled over the last decade, and so a lot of these young people are going to enter the real world with crippling amounts of debt but without the good jobs that they were promised would be there upon graduation.

As economic conditions have begun to deteriorate, I have had more people begin to ask me about what they can do to get prepared for what is coming.  And I always start off by telling them the exact same thing.  Today, 78 percent of Americans are living paycheck to paycheck, but when an economic downturn strikes that is precisely what you do not want to be doing.

Some people that I hear from insist that there is no possible way that they can put together an emergency fund because they are already spending everything that they are bringing in.
And yes, it is true that there are some people out there that are so financially stretched that they literally do not have a single penny to spare even though they are being extremely frugal, but the majority of us definitely have areas where we can cut back.

I realize that “cutting back” does not sound fun.  But not being able to pay your mortgage when things get really bad will be a whole lot less fun.

Right now people should be focusing on reducing expenses and trying to make some extra money.  Use whatever time we have left before things get really bad to put yourself into a better financial position.  If you have at least a little bit of money to fall back on, it will make your life much less stressful in the long run.

In addition, anything that you can do to become more independent of the system is a good thing.  On a very basic level, learning to grow a garden can end up saving you a ton of money.  I was just at the grocery store earlier today, and food is getting really expensive.  When the Federal Reserve says that we are in a “low inflation” environment, I always wonder what world they are living on.

When I got up to the register today, I almost felt like they were going to ask me what organ I wanted to donate in order to pay for my groceries.  Unfortunately, the price of food right now is actually quite low compared to what it is going to be in the days ahead.

Ladies and gentlemen, 2019 is off to quite a rough start, and things are likely to get a whole lot rougher.

As always, let us hope for the best, but let us also get prepared for the worst.

"Financial Nuclear Warheads" - The Yellow Vests Get It Right
Tue, 01/15/2019 - 00:25
 
Authored by Robert Gore via Straight Line Logic blog,
The mainstream media has degenerated irreparably. Here’s a reliable rule of thumb: if it’s important it’s not covered; if it’s covered it’s not important. Stories in the American mainstream press about Yellow Vest protests have been few. One aspect of the protests, transcendently important, has received scant coverage.

The Yellow Vest protestors have called for a coordinated run on French banks. Whether they realize it or not, they’re playing with nuclear warheads that could annihilate not just the French, but Europe’s and the entire world’s financial system. Because inextricably linked to the ends of contemporary governments―how much they can screw up the lives of those who must live under them—is the question of means―how do they fund their misrule? The short answer is taxes and debt.

Since 1971, when President Nixon 
“temporarily” suspended international convertibility of dollars for gold (it’s never been reinstated), the monetary basis of the global economy has been fiat debt. Neither government or central bank debt nor currencies are tethered to any real constraint, like precious metals (see “Real Money,” SLL). Thus, politicians and monetary officials can create as much debt as they want: debt by fiat.

Government and central bank debt is at the apex of the global debt pyramid. The next tier is commercial banks that have accounts at central banks. Those accounts are bank assets and central bank liabilities, or debts. Central banks expand their fiat liabilities to banks in exchange for banks’ fiat government debt, an exchange called debt monetization, which is a bit of a misnomer since no “Real Money” is involved. The “monetization” is the central bank’s fiat expansion of banks’ accounts with the central bank in exchange for fiat government debt, which expands banks’ assets available for loans to governments, businesses, and individuals.

In “Real Money,” money was defined, in part, as that which has intrinsic value and is not a liability of an individual or entity. This part of the definition is controversial; it invalidates everything we currently think of as money. Popularly accepted definitions are essentially: money is as money does, anything that serves as a medium of exchange, a store of value, and a unit of account (the other parts of the SLL definition) is money.

However, just because something has monetary functions doesn’t mean it’s money, anymore than using a hairbrush to brush your teeth makes it a toothbrush. While there are some metaphysical questions about the notion of intrinsic value (that term was chosen because it’s shorter and more convenient than saying, “Something to which most people would assign a value apart from its potential value as money,” every time) the important point is that by SLL’s definition, using debt as money, including the debt in your wallet known as Federal Reserve Notes, doesn’t make it money.
Except for the relatively few instances when gold, silver, or other tangible value is used as a medium of exchange in private transactions, everything that is currently used is debt, including currencies. When individuals and businesses make deposits in a bank, they are exchanging one form of debt, usually currency or endorsed checks, for another—the bank’s promise, under a specified set of conditions, to return either currency or a check drawn on the bank.

The depositor is a creditor and the bank is free to loan out the funds deposited. This is the basis of fractional reserve banking, the banking system’s ability to create debt in multiples of amounts deposited. For every $10 deposited, a bank will loan out perhaps $9 and keep $1 in reserve to meet withdrawal requests. The fraction that can be lent out and the fraction that must be kept in reserve are generally specified by government or central bank regulations.

The amount lent out usually finds its way back to the banking system, where it serves as the basis for further lending. For analytical simplicity, introductory economics classes say that within the banking system, any autonomous increase in bank deposits will expand the total loans by the reciprocal of the reserve requirement. If the reserve requirement is 5 percent of bank deposits, an increase in bank deposits will lead to a 20 times expansion of bank loans. Real life is not quite that simple, but it’s a decent approximation.

An important implication is that within the banking system, most of the deposits have been lent out, they’re not in the system. Thus, if all depositors want to exercise their claims against the system at the same time, it cannot meet those requests. The same is true for individual banks.
How does a run on an individual bank turn into a loose yarn that once pulled, unravels the whole sweater? The bank tries to increase its liquid funds, drawing on whatever lines of emergency credit it may have, and to convert its illiquid assets into liquid assets, calling in loans. This pressures other banks and financial institutions, who draw on their lines of credit and call their loans and so on until the system collapses.

Central banks are supposed to prevent runs from becoming systemic crises by providing an emergency backstop of fiat debt secured by banks‘ “high quality” but illiquid collateral. A further backstop is deposit insurance, a New Deal innovation that is now common across developed countries. In the US, the deposit insurance fund would cover only a small percentage of deposits in the event of a system-wide run.

The more indebted the system, the more vulnerable it is to such crises. We saw that in the 2008-2009, when problems in one segment of one credit market―US subprime mortgage lending―led to a global financial crisis that was only stanched by massive injections of government and central bank fiat debt. Since that crisis, government, central bank, corporate, and individual debts have all increased, leaving the global financial system and economy more vulnerable now than it was then.

The stated nominal global debt is around $250 trillion, or over three times world GDP. Add in unfunded pension and medical care promises by governments and corporations and a huge pile of derivatives, the amount of which can only be guessed (ranging from $250 to $750 trillion), and total claims on present assets and future production are probably well in excess of $1 quadrillion, a thousand trillions, over twelve times world GDP. Fiat debt has enabled to world to become more indebted than it has ever been, with the temporary increase in “wealth” that comes with any borrowing binge, but with the inevitable bankruptcy pending.

Bankruptcy is a when, not an if. One question is whether it starts in a random corner of the world’s financial system, or at the behest of its putative victims. Which gets us back to the Yellow Vests’ attempted bank run. In the present overly indebted age, any financial crisis worth its salt will result in bank runs, with depositors losing most or all of their deposits. Debt is the Achilles heel of the world’s governments. A widespread run on financial institutions will dramatically reduce credit availability and raise interest rates, and it will shut off credit entirely for some of them. Under those circumstances, tax revenues will shrink as well.

As argued in “Revolution in America,” (SLL) anyone truly interested in upending those systems should try, like the Yellow Vests, to initiate the mass withdrawal of funds from the tottering financial system. It’s effective, nonviolent, currently legal, gets those funds out before they’re frozen and then confiscated by rapacious governments, and initiates the inevitable crisis to the advantage of those who initiate it. For more particulars and supporting arguments see “Revolution.”

As noted in that article, the probability of mass recognition of the inevitable and coordinated action against it is small. Instead, we’ll have the crisis. Governments will freeze accounts and then confiscate what’s left in them. With central banks they’ll drive the value of their own fiat debts to zero. We’ll see further moves towards global governance and centralization of economic activity and finance, supposedly to address the crises created by past and present governance and centralization. Anyone advocating for individual rights and against government will be demonized, ostracized, and probably criminalized. Fiat electronic debt will replace paper fiat notes to lock the increasingly worthless fiat medium of exchange within the insolvent financial system. “Legitimate” economic activity will grind to a halt and black markets will flourish. The private ownership of precious metals and perhaps barter will be outlawed. There will be insufficient real resources for governments to pay and equip their praetorians, who will reject fiat scrip. Unprotected, the vestiges of the old order will crumble. Battle-hardened survivors will emerge and begin building decentralized enclaves. Those will have to rest on a more enduring set of principles if they are to survive.

...On present course the government will go bankrupt. The one option for those of us who have provided so much of its ill-gotten and ill-spent loot—and received so little in return—is to seize the initiative, strike at its weakest point, extract a small percentage of what has been taken, hasten the inevitable crash, and then rebuild America into the great nation it once was...
the only defense against what is surely to come is a strong offense, before our capacity to launch an offensive is stolen from us.