Thursday, November 18, 2010

NO-MONEY ECONOMY?

Many people have been looking at our current monetary and financial woes, and wondering if money is necessary at all. While money may not be a part of a perfect Zion society. I think most of the current discussion concerning a "no-money" system is an example of the pendulum swinging way to far to the other side. Remember Aristotle's lesson of the "golden mean".

MONEY IS IN THE CONSTITUTION
Interesting ideas about a resource-based economy. As far as money is concerned. The Constitution is Article 1 Section 8 says that Congress should coin the the money and regulate its value. Since we know the Constitution is inspired by God, then I conclude that at this time, God still intends that we uses money. Money was also used in the Book of Mormon. I don't think we should forget money just because there is potential for abuse. Money is not inherently evil. It is the "love of money" that is evil. Resources can be hidden and hoarded like anything else.

RESOURCE BACKED MONEY
I do like some of your ideas of a commodities/resource-based system. I think that is the key to a proper monetary system. The problem with money is that is can become a limited resource (like during a depression and deflation). That I why money should be be backed by a basket of commodities and resources. In the Book of Mormon, it reads that a certain measure of gold equated to a certain measure of silver equated to a certain measure of grain.

BARTER VS RESOURCES VS MONEY
The efficiency of money allows people to live in cities and specialize in specific areas of production and services. In a barter system, families had to produce almost everything themselves and barter for just the few things that they lacked. There really is no time to barter for everything that was possibly needed. Also, in a resource system, resources could be hoarded and cornered or hidden easier than money. Just look at what China is doing with Rare-Earth Metals.

DEBT-BASED CURRENCY
Currently money creation is done by the sales of Bonds (bondage). It is a misconception that the FED or the US Treasury just prints money. Even with QE2, the US Treasury still doesn't just print money. What happens is the FED sells bonds to the ultra-elite FED members and then injects currency into the system based on those bonds. The FED/US Treasury never just prints money. Money is always backed by something. And in our current system, that backing is by debt/bonds. That is why economists name our monetary system the "debt-based monetary system."

FRACTIONAL RESERVE SYSTEM
The FED then lends this new debt-based money to banks which then due to fractional reserve rules, can make loans equaling 10X the amount they received from the FED. So, when the FED produces 600 billion in QE2 to give to the banks free of charge. The banks turn around and lend 6 trillion/ 10X the money back to the US Treasury at 2% interest by purchasing TBills. And so the Ponzi scheme goes on for a while longer.

RESOURCE/COMMODITY BACKED MONEY
So, instead of debt, we need to back our currency with real assets. Because there really isn't enough gold and silver available to create the kind of money we need, we apply the principles that you have been discussing and base money on a basket of commodities and resources.

LOCAL BANK FULL RESERVE NO-INTEREST LOANS
Then, you allow local non-profit banks liberal access to this capital interest free. Local banks would have the task of verifying credit worthiness of the borrower. Then they would issue no-interest loans to local borrowers for non-depreciating assets such as land, homes, and buildings. Revenue to cover costs would come from a loan-origination fee, and monthly service fee/tax associate with the monthly repayment. In fact, I think at just a 1-2% flat fee, the Federal government could generate sufficient revenue that we could get rid of the income tax. Local banks always just made money on loan origination fees so they should be fine.

SAFETY SOCIETY BANKS
These local non-profit "safety society" banks would operate on full reserve banking and therefore be immune to contractions in the money supply, bank runs, and stock market crashes. In this system, people begin accruing equity immediately and that would prevent significant inflation. This is in contrast to our current amortized loans where you pay interest up front so making equity in the first 10 years depends on the price going up. (HOUSE FLIPPING DRIVER). If a person misses a monthly payment, that payment is deducted from the person's equity, thus becoming a reverse mortgage at any time. Foreclosure wouldn't occur until the person had lost all equity in the property.

CAPITALISM = WEALTH DISPARITY = INEQUALITY
Our current Capitalist system is based on the assumption that certain people should get very wealthy so that they have capital to invest in things. But that is the whole problem. A system that makes certain few people wealthy, consolidates power in those individuals to decide what they will or will not invest in. And that consolidation of power is where the corruption comes in.

COMMUNITY SAFETY SOCIETY = EQUALITY
In this system of community Safety Society, the community can come together and decide that they would like a public swimming center. They can be approved for a loan of X million dollars for that swimming center by proving they can repay the no-interest loan and fees based upon a 1% sales tax. The community can vote and approve the 1% sales tax, and the community can build and enjoy the new swimming center. In this system, there is no limit to what the community can have except what they are willing to pay for. Because the community can be approved for whatever they want, whenever they want or need it based on their ability to repay, this could eliminate Legislative Pork. In this system, a larger city would have more power, because it has more people, and more credit based on a greater ability to pay. But remember, that in Zion, cities were to be capped at 1000 families only and stop there.

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Here is a suggestion for fixing the money and economic system in America. Milton Friedman knew what to do. But what is required is to replace the current system entirely with a locally managed and controlled system. And, as a side-effect, if you take away Satan's power to get our gold and silver, then many other problems vanish away along with it.

FRACTIONAL RESERVE LENDING
The power that the banks have to create money out of nothing based on the private equity of the super elite is called Fractional Reserve Lending/Banking. This allows banks to lend 20X the amount that they have in deposit (left hand side of ledger). This is assuming a 5% Fractional Reserve requirement. (If you don't know how private banks have the power to create money out of nothing, please read more about FRACTIONAL RESERVE LENDING and the MONEY MULTIPLIER.).

INHERENT INSTABILITY
Fractional reserve banking in an inflationary system is very unstable because if a bank loses its small fractional reserve nest egg via a stock market crash, then it can't operate, can't lend, can't pay depositors. Inflation is why banks cannot hold fractional reserves as cash, and why they hold reserves as paper (AAA Corporate Bonds for example). Banks crashed in 2008 when fraudulent Toxic Assets became worthless because they lost their fractional reserves. Fractional Reserve Banking explains our long history of bank failures in the US.

FULL RESERVE LENDING
So, what Milton Friedman suggested is that the US Government switch to FULL RESERVE BANKING. When you do that, it creates a huge requirement of liquidity because banks need to borrow 100% of what they lend. Then you give back the power to create money to the US Treasury. So, what FULL RESERVE LENDING allows the Federal Government to do is create 14 Trillion dollars and pay off all our debts without causing significant inflation. (this would be a 1-Time opportunity to get out of debt once and for all). The Chinese shouldn't get mad because they get their money which still has retained its value.

AMORTIZED LOANS DRIVE INFLATION
But that is not all:What you need to do next is get rid of the the FHA/HUD amortized loan. This is all our home mortgages that represents our greatest source of debt. This loan collects 95% interest up front for the first 20 years on a 30-year loan assuming minimum payments. This is the greatest driver of inflation in the system because for a family to gain equity in their home for the first 10 years, (assuming minimum payments), the price of the house needs to go up. And when that happens, you stick the next home owner with $20,000 more debt burden for a house that is 5 years older.

NO-INTEREST LOANS
Instead what you do is allow local banks who now only service loans, to borrow directly from the US Treasury. And then you allow local banks to make no-interest loans to individuals and companies. Banks would then go in with the borrower, who brings the first month's payment, and the loan origination fee. No down payment is required to make an asset purchase. The Banks would supply the capital from the US Treasury to complete the purchase. The local bank and the borrower than purchase the property together. No interest is collected. How the bank covers its costs is by charging administrative fees to service the loan as they do now. The borrower than starts into repayment and begins building equity from day one becoming a bigger part-owner of the property until he has paid for the property and is 100% owner.

MISSED PAYMENTS = PROFIT
If the borrower fails to make a monthly payment on the property. Then that monthly payment is deducted from the equity that the borrower has in the property. The borrower divests himself of ownership of the property by the value of the missed payment. But foreclosure/bankruptcy would not occur until the borrower lost all equity in the property. So, the no-interest loan becomes an immediate reverse mortgage which at any time can become a source of emergency credit. Missed payments then become profit for the bank.

GOVERNMENT REVENUE
Full Reserve Banking could mean increased revenue for the federal government. Currently the federal government only collects prime interest on a small fraction of the money that is created. This amounts for about less that 50 billion/year. Imagine if the Federal government could collect a fee based on all the (no-interest) money that was created and injected into our economy? And now that we have paid off our debts, that would mean we could balance our national budgets and have plenty of cash to cover our expenses.

SELF-SUFFICIENCY
One main problem that stands in our way of doing this today is the fact that our country has out-sourced so much of our manufacturing base to multi-national companies. This dependence on foreign corporations could be used as leverage to prevent the US from taking back the power to create and regulate our own money.


2 Ne. 9: 51 Wherefore, do not spend money for that which is of no worth


STOCKS AND VENTURE CAPITAL
I am thinking about it stocks have any place in a no-usury/full reserve system. And I think they do have some part. I would like a system that shields banks from as much risk as possible. Therefore, they would only extend these no-interest loans for assets that have permenant value like land, buildings, houses that dont depreciate necessarily. But for R&D, and business loans for capital investment I think businesses could get credit based on prior and current sales. But for new ideas, private venture capital could be used and stocks for this kind of thing due to the inherent risk yet importance of research and new business creation.

NO-INTEREST LOAN EXAMPLE
If you wanted to purchase a $200,000 home, and pay $1000/month as a monthly payment. At no interest, it would take 200 months to pay back the money. That would be less than 17 years. Borrowing $200,000 would be "no interest", but it wouldn't be free. To cover the administrative costs of our "Community Safety Society Anti-Bank" you would bring your first month's payment and a a "loan origination fee" of say 1-2% or $2-4,000. I'd have to think how much it would cost and how many home loans would need to be processed to cover the bank overhead. There would also be an administrative fee associated with the monthly payment of 1-2% of the payment which would be about $1-200. Fees would be just enough to cover the cost of business. No down payment is required.

NON-PROFIT STATUS
The Bank would operate as a non-profit. So, the purpose of the bank is not to amass capital as it would have access to all the capital it needed from the US Treasury. Its role would be to assure the credit-worthiness of the the borrower.

INFLATION EFFECTS
Inflation wouldn't be such a big deal for the bank. The bank gets the money no-interest from the US Treasury. It passes the borrowing fee on to the borrower and adds on some extra to cover administrative costs. If there is inflation, housing prices go up, salaries go up, which only benefits the borrower. But in this system, inflation doesn't hurt the US Government or the Bank. But my hunch is without the amortized loan, the US wouldn't experience the kind of inflation that it does now.

2 comments:

jdat747 said...

I really like your ideas for having the Fed lend directly to local banks, who then do the due-diligence to make the loans.

It's all about cutting the middle men, and everyone is better off except them (BoA, Citi, Chase, etc.)

The instant reverse mortgage is a good idea too.

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