Right Thinking

A user called truth2u left a series of comments on my blog post on the federal reserve’s power. If you don’t see how the comments apply to my discussion of the history of the Fed, great; neither do I. I didn’t suggest anything about the President except that he lied about what he’s doing. I didn’t sit in judgement of Obama’s plan, I just laid the groundwork to show that he was lying. I also think my readers will agree that truth2u is being a little ridiculous by being upset about a 12 hour gap during which I failed to approve their comment. It wasn’t malicious, I just didn’t check.

However, since the questions are here: they’re here. One at a time:

What types of changes did you expect?

I expected exactly the kind of unconstitutional change we’re getting. The fact that I saw it coming is immaterial to the fact that I’m commenting on it now.

How do you know these changes will not turn out to be for the better?

Whether or not these plans work is irrelevant to the fact that they’re unethical. Anything in violation of the Supreme Law of the Land is bad, whether or not its effective doesn’t matter. I don’t expect it to turn out for the better, because communism has a bad historical record. But my real point is that the President was lying, with the secondary aspect of his plan’s legality in the first place.

Look around you and tell me how bad is it now? What lead us to this point?

I sincerely believe that government intervention led us to this point. The Austrian economic school and Monetarism cooincide very well on this point. The Austrian School predicts natual highs and lows. Monetarism says that government involvement causes dangerously unpredictable results. Interference with the natural business cycle brought us here.

More importantly what would you do differently?

When Hercules went to battle the Hydra, each time he sliced a head off, two more grew in its place. Ultimately, his nephew came to the rescue, cauterizing each wounded neck with a torch before it was able to respawn. Hercules had only made the situation worse by trying to fight with his sword. Likewise, the current and previous administrations are only digging the economy into a deeper rut. My basic assumption: Keynes was wrong.

            Keynesian economics has defined textbooks at the High School and even the university level for decades now and Keynesianism is so deeply entrenched in the occidental psyche that I feel the need to explain what the theory actually is before going further. John Maynard Keynes published the General Theory of Employment, Interest, and Money in 1936. He conceded the points of Adam Smith’s The Wealth of Nations for an economy at full output (laissez-faire) but then claimed that such an economy was a myth at best. Keynes believed that full employment can be sustained only with government intervention, but that the natural rate of unemployment is effectively zero. Further, he argued against saving during a recession (following the train that lower spending means lower consumption, less production and so on), rejecting the classical Say’s Law. Keynes himself spoke only of fiscal policy, never monetary (post-mortem additions were made to the theory, but they are broad and no monetary policy can be said to truly reflect Keynes’ views).

            The problem we face is recession, and that trying to fix the auto-industry, health care and toxic mortgage crises are just oversimplifications. Trying to fix a recession with Keynesian theories is like Hercules swinging at the Hydra’s head. You can’t solve the problem if you don’t know what you’re fighting. Instead, we need a mixture of the Austrian School and Monetarism. You can tell me that Keynesian economics has been proven in practice, but you’d be wrong. The only – let me repeat: only – instance of full scale Keynesian policy was the Great Depression. Look at GNP, look at employment, look at farm prices. Everything got better when FDR got everyone excited. Once the policies took effect, we see the US slip into a deeper recession that doesn’t end until World War II. Coincidence? No such thing.

            Keynes had three basic points. You need the government, you need to spend and deficit spending is God. Each of these is dead wrong. The real solution is five steps.

1.)    Abolish the IRS and switch to a flat, negative income tax.

2.)    End all social-welfare programs. With a negative income tax, we don’t need them.

3.)    Establish tit-for-tat standards and tariffs. Right now the Japanese require American cars to have higher safety standards than their own cars. We can’t compete like that, or against their unbalanced tariffs.

4.)    Require a balanced budget or better. People don’t know what deficit spending is. The CBO [Congressional Budget Office] admits on their website that deficit spending reduces liquidity in the private sector and “probably hurts long-term economic growth.” These are the people who write the budget, remember. Publicly held government debt -  not even gross government debt! - is already more than half the GDP. That’s ridiculous.

5.)    Phase out fractional reserve banking – ah! Blasphemy! But, once you get past the creating money lies, and realize that money is actually destroyed, it’s the only way to go.”

            I know what you’re thinking: “Wouldn’t eliminating the IRD needlessly reduce jobs in tough economic times?” But do they deserve to have jobs at all? Call me transcendentalist, but they’re not doing anything except pushing money around! Some of them are going to be hired to keep people from cheating the system, but the rest can get jobs that contribute to the economy for a change.

            Next, I imagine you’ll ask: “How can a flat, negative income tax possibly replace all the social welfare programs and be effective?” In fact, it would be more effective because there would be fewer pencil pushers eating up funds along the way (such as the IRS), allowing more money to be fed back into the general welfare. I’d love to see the income tax abolished and go back to the way the framers intended it- maybe add a second amendment to the list of repeals - with the federal government only taxing the states. However, the federal debt is so extreme right now that it isn’t practical. If we can consistently get a surplus, we can pay off the debt and then close the income tax shop, switching to exclusively state taxes. Maybe you think that a negative-income tax would result in reduced incentive to work. No, it won’t. Free health-care means less incentive to work. Negative flat tax means that if the tax rate is 25% and I make $40 more, I get to keep $30, even if I’m still collecting a subsidy for being below the standard of living. By rewarding more work while still helping the poorest of Americans, we have justice and success.

            I don’t know what you could possibly disagree with in my tit-for-tat tariff. So, I’ll step up to the next one. You probably think that Keynes proved that deficit spending is essential, after all. But the last two points can be combined neatly, so I will.

            The argument for Fractional Reserve Banking (FRB) is well known. Money is created as it shuffles down the system and reloaned. This can be expressed by

∞        

Σ  rⁿP

n=1        

Where r is the reserve requirement and P is the principle investment.

            The math is very clear that money is created, stimulating growth. This is a more general form of deficit spending: Keynes rested on the idea that when you borrow money, you end up with more than you started with. For the government, this was ‘priming the pump’. For individuals, its FRB. It’s all based on an elaborate lie. The idea that if I put 10 dollars in and the bank loans 8 out, then that person puts 8 in and the bank loans a little over 6 out and so on, I’m creating money is gibberish. Let’s say we stop after round 2. We have our last guy with $6.40, the second bank with $1.60 and the first bank with $2. That adds up to 10. Now tell me where the created money is. In fact, we can only spend $6.40 of it, which seems counter-productive. The economist’s trick of adding these up and getting more money than you started with is just a used car salesman’s ploy, like balancing a sanded nickel on an engine. They aren’t subtracting liabilities; they’re intentionally deceiving you to support their preconceived world view. There is no economic growth here. We’re just moving money around. People do it because it is how we’ve always done it. It’s a sacred cow, and its time Moses gave it a good toss.

I want the banks to take risks. But, like any other business, consumers should be able to pick their reserve rate and know that their interest rate will be lower if the bank can’t make as much off their money. I can see a thriving market like this, without the government rearing its ugly head.

Sources:

The General Theory of Employment, Interest, and Money by John M Keynes

http://www.federalreserveeducation.org/fed101_html/policy/money_print.htm

The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin.

The Money Answer Book: Quick Answers to Everyday Financial Questions by Dave Ramsey

“Milton Friedman, a giant among economists”. The Economist. 2006-11-23.

“Milton Friedman: An enduring legacy”. The Economist. 2006-11-17. http://www.economist.com/daily/news/displaystory.cfm?story_id=8190872.

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