Friday, January 13, 2012

Safety Society System

Many people want to "End the FED" but most don't know what to replace it with. This paper discusses an alternative. First to understand what to change, we need to understand exactly what about the FED is a problem. If you "End the FED" and do not address the financial instruments the FED and traditional banking has put in place over the last hundred years, then nothing will change much. Some just want to go back to gold like before, but I want to also discuss why this is not a good idea either. FED vs Gold is a false dichotomy.

FRACTIONAL RESERVE BANKING: this started when Templar Houses issued more gold certificates than the gold they had in deposit (reserve). Today, FED-member banks issue loans of $1000 for every $100 they borrow from the FED. And through derivatives, banks can leverage reserves, by lending up to 50x or 100x. The degree of leverage is called the MONEY MULTIPLIER. This is money the FED-member, to-big-to-fail, bank prints out of thin air. Other than being a total fraud, if there is a contraction in the money supply (like when the FED instituted the Bank of International Settlement Basil 2 Accords in 2007 doing the same thing to American that Basil 1 did to Japan resulting in its “Lost Decade”), a stock market crash, or a run on the bank; the bank becomes insolvent , the bank can't make loans or pay depositors and goes bust. 

GOLD REDEEMABLE CURRENCY: money is just a contract that is used as a standardized certificate of exchange. It doesn't necessarily have to have value of its own, but it must be tied to something of value. But you don't want to be able to just pick up money off the ground, or counterfeit it. Gold has historically been used as money because it is rare, inert, shiny and sufficiently difficult to find. However, the drawback to gold is that is rare enough that there is usually not enough of it to provide an economic engine enough liquidity (Protocols of Zion 20:22). Gold can be horded and gold production can be manipulated just like De Beers does with diamonds. Artificial scarcity of resources opens the doors for all kinds of corruption (black markets, bribery). Gold is so rare, countries have gone to war, conquering their neighbors to get more of it to drive their economies.

INFLATION: inflation and devaluation of the currency is a hidden tax on the people, and slowly robs the laborer of the value of their savings. According to the Milton Friedman's Chicago School, monetarist theory of money; inflation is produced when the money supply exceeds the real output of the economy dM/dt (money supply) + dV/dt (velocity) = inf (inflation) + dRO/dt (real output). Also, inflation means that banks cannot hold reserves/deposits in money, and are forced to invest in financial instruments such as stocks, bonds, and derivatives that will keep pace with inflation. Consequently, stock market crashes usually trigger banking failures. 

AMORTIZATION: When an individual takes out a loan to purchase a house. Even though the loan may claim to offer a 5% interest rate, this 5% seems like a very low number, but it is totally deceptive. Over the 20-30 years of the loan, the borrower will end up paying close to 2X the original price of the home. What is more, Amortization means that the bank collects all this 5% compound interest over the 30-years up front. That means the borrower builds close to ZERO equity for the first 10-20 years. Consequently, the borrower is tempted to charge the next home borrower an inflated price. If the initial home borrower can convince the next guy to take out a loan for the exact same house at an inflated price, then that additional money becomes equity or profit that can be applied to the next home mortgage. Because loans are the major moment of money creation, by definition, charging an inflated price for the same house means that the Money Supply > Real Output = Inflation.

COMPOUND INTEREST: Not all interest is bad. The Catholic Church's miss-interpretation of interest = usury and its prohibition of all interest made it so that banking and money lending was not a sustainable profession. However, in economy where inflation is controlled, compound interest is totally corrupt. Compound interest adds the interest accrued to the initial principal. This results in a hyperbolic curve where initial investments continue to compound at an exponential rate. This means, that initial investments years later can be worth many times their initial value. The problem with this is that it treats money as having intrinsic value which it does not. Additionally, compound interest can result in debt that never can be repaid. Furthermore, elite families have established Joint Stock Trusts which are owned by the family and no one individual. These Joint Stock Trusts (still legal in the City of London), are highly invested in US and other Government Bonds, and have passed down these investments from generation to generation resulting in unimaginable wealth for these elite families and totally unsustainable debt for the G20 nations. We are fooled into thinking in terms of how much our personal investments could make over 1 lifetime, in comparison to the elite who are using their family Joint Stock Trusts to generate incredible wealth from Bonds purchased a hundred or more years ago.

VALUE OF MONEY: Because money (which should just be a standardized contract), is artificially scarce, money itself has developed its own independent value. This development results in the wealthy having power over the laborer just though the possession of money. Because of scarcity, wealthy can use their money, to lend to others, on their own terms. Wealthy are given unelected economic power to decide to invest in whatever increases or maintains their wealth, position and power. If there is an invention or idea that threatens their position or power, that idea is suppressed.

DEBT-BASED FIAT CURRENCY: Paper currency is not necessarily a bad idea. Money is just a standardized contract of exchange, and shouldn't necessarily have intrinsic value in an of itself. In the FED System, fiat currency is based on its demand for bonds. Every dollar is tied to the sale of a bond. Every Federal Reserve Note is a certificate of debt that is not tied to anything of value, but it is tied to someone else's IOU. If people buy US bonds, the value of our currency increases relative to other countries. If instead, the FED just prints the money, the value of our currency falls. However, the FED only deals with a fraction of the total money supply. Additionally, all these bonds must be paid back with interest. So, even if all the Federal Reserve Notes were turned in that were ever created, the US would still owe interest to the bond owners.

It seems as we all learn more about the FED, Petro-Dollar, System, we are all waking up to the reality of what a huge Ponzi scheme it all is. The value of our currency is tied to the demand for our US Bonds. The demand for US Bonds is currently tied to countries like China and Japan who we have a trade deficit with, and who are interested in using their excess dollars to get the best price on imported oil, and other commodities that are priced in US Dollars. This Ponzi scheme falls apart when countries like Iraq and Iran decide to sell their oil to China in currency other than the USD. If China can buy oil in Euros (Iraq) or Yuan (Iran), then they no longer need to prop up the USD.

Turns out the most of our economic system is not Constitutional. Even before the FED, how we run our economy is more according to the "wicked traditions of our forefathers". The Constitution of the United States actually holds the secrets of how to fix our economic system. Most people don't like centralized control, but the Constitution is inspired, and there are a few powers God actually saw in his wisdom that the Federal Government should be granted.

US Constitution, Article 1, Section 8: The Congress shall have Power To lay and collect Taxes, Duties, Imports and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; To borrow money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. To establish an uniform Rule of Naturalization, and uniform laws on the subject of Bankruptcies throughout the United States; To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.

ISSUING THE CURRENCY: The Constitution clearly says that the Federal Government must "Coin the money". And in case you are tempted to think "this just applies to weights and measures" and to "to make sure gold is pure and of the proper weight", the next part says that the Congress has the power to punish counterfeiting the "current coin" of the US. If there is a "current coin", then that means that the US is the one "coining" it.

I don't believe that the US money needs to be gold. Gold, copper, silver are always in limited supply and are better used as building supplies. However, using technology the US government can print money that is nearly impossible to counter-feit, also, the government using quantum encryption can use digital currency that cannot be hacked.
The key here to "coining the currency" is that the US Government via the Congress create all the US Currency in the Money Supply, and not abdicate that duty to the FED, or allow the Banks to create most of the money in the money supply via Fractional Reserve Banking.

SAFETY SOCIETY SYSTEM: Instead of protecting the currency itself by making it redeemable for a warehoused item, the Safety Society System is focused on creating a locally administered banking institution that is immune from the expected economic shocks that historically topple other banks. Full Reserve Banking, makes a bank resistant to banking runs, stock market crashes, and contractions of the money supply. I believe that if a system protects the banking institution, that system will protect the people and the value of their money.

1. US Treasury via the Congress Creates all Money in the Money Supply and regulates its value. Sufficient money is created, upon demand, at the time of loan approval.
2. US Treasury loans money to Local Banks called a Safety Society at a variable prime simple interest rate which gets passed on to the individual borrower.
3. Local Safety Society determines loan eligibility and credit-worthiness based on previous and projected employment history, income, etc. Loan eligibility criteria would be nationally standardized but locally applied.
4. Local Safety Society makes loans only on "real" assets or on the projected building of or production of a "real" asset or the mining, farming or production of a "real" commodity.
a. Credit-worthy Individuals could take out a loan on an existing home or new home construction.
b. A community could take out a loan for a museum or community aquatics center based on the projected revenue on an approved ballot initiative for a 1% sales tax.
c. A corporation could take out a loan to purchase land and drill for oil based on the scientifically verifiable oil deposits.
5. The money created for these Safety Society loans is backed by the "real" assets, real estate and "real" commodities that the loan is being issued to purchase, produce, or mine.
6. SSS loans are fee-based. Local Banks make their money to cover overhead exactly the same way they do now by charging loan origination fees and monthly service charges.
7. The borrower builds equity from day 1. If the borrower comes on hard times and misses several payments. These payments are deducted from the borrowers equity. Repossession occurs when the borrower has lost all equity in the home, building, farm, mine.
8. Other credit and banking institutions would handle other speculative "venture-capital" banking ventures. SSS would only issue loans for non-speculate real assets that could be repossessed.
9. SSS Bank deposits are not used to issue loans. SSS operates on Full Reserves, and all deposits are kept at the bank for immediate withdrawal at any time.
10. The Federal Government generates revenue based on the prime simple interest rate. This tax/free constitutes a Constitutional uniform and voluntary tax on the use of money and extension of credit. This prime interest rate would be used to regulate the value of the currency, and control inflation by removing excess liquidity from the economy.

1. People want a gold-redeemable, or commodity-redeemable currency so that when the bank goes bust, they don't lose their money. But, really. Why not set up a system that saves the bank? What good is gold when the entire economy just fell apart? You can't eat gold when society just collapsed. Better to prevent the collapse.
2. SSS protects the bank from individual bankruptcy, by making sure each loan is backed by real assets and goods and commodities that can be repossessed so that the Bank can repay the US Treasury.
3. Again, this is not money "created-out-of-nothing." Loan approval is the point of money creation, and money is created by the SSS for real assets. The real assets back the money. The focus is on the banks being able to redeem their money.
4. Because money creation is always backed by a real asset, according to the Milton Friedman equation, the Money Supply always keeps pace with Real Output.. Therefore, there would be no inflation.
5. Because SSS banks wouldn't lend for Stocks, bonds, derivatives, the banks would never be left holding a bunch of worthless pieces of paper with nothing to repossess.
6. Because inflation is controlled, the SSS Bank can hold deposits as cash, and never has to invest in paper (stocks, bonds, derivatives) that carries the risk of becoming worthless.
7. Focus of the SSS bank is the preservation of value. The Laborer is not forced to subjugate themselves and enslaved themselves to the Wealthy to grant them credit. SSS is free market without the capitalist.
8. Wealthy can still use their wealth in speculative ventures separate from the SSS system.
9. Because of our inflationary economy instead of an economy focused on the preservation of value, companies must grow to keep up with inflation or die. This requires that companies ruthlessly compete against one another and after dominating the domestic market, are forced to expand overseas to keep pace.
10. All countries would be economically free to develop their own resources without international exploitation.
11. Wealthy are sill free to speculate all they want. But with SSS, the regular laborer class is protected from the risk-taking.
12. Both sides debate that neither government nor the unelected government should be controlling the economy and deciding where money goes. SSS is merit-based. That means if an individual, coorperation, or community is credit-worthy, they will have access to the money they need; created on demand.

Some want competing currencies in the US. But I don't see how the idea of competing currencies is in line with the Constitution's call for the Congress to "coin the currency", the "Commerce Clause", and to prosecute counterfeiting of the "current coin" How can the idea of competing currencies jive with the Constitutional call for there to be a "current coin"? How could the Congress regulate interstate commerce if every state or region had its own currency, resulting in currency wars? How could the Congress regulate the value of currency, if there were competing currencies --- well, competing.

No comments: