Thursday, May 17, 2012

Constitutional Money: Safety Society System

Many of our current problems in the US stem from our economic system. The surprising thing is that, in addition to repentance, our inspired Constitution may hold the answer to how to heal our countries economic difficulties. Most people don't know that neither the gold-based nor the Federal Reserve System are absolutely Constitutional. Both were based on fractional reserve banking which is a wicked tradition that goes back to the Templar Gold Houses in the Middle Ages, the DeMedici Banks in Florence, and the Rothchild Banks in Europe.

Constitution on Gold. Gold and Silver is not all bad. If fact, the Constitution specifically says that States shall only pay their debts using gold and silver specie (not Chucky Cheese Tokens). This suggests that federal "current coin" could be backed or made of something else (currency vs specie). Adam Smith in "Wealth of Nations" explains the limitations of a gold system. A country either has too much or too little to match economic output. If a country has too much, you have inflation, too little equals deflation. Over the millennia, Countries have gone to war to get more gold to save their economies.

This too much money supply = inflation, and not enough money supple = deflation is expressed in the Milton Freidman Monetarist equation on money. dM/dt (money supply) + dV/dt (velocity) = inflation rate + dRO/dt (economic growth). The secret in the Friedman equation is that preventing inflation requires a self-sufficent country to balance the money supply with the economic output for their country.

This allows banks to lends 10x the gold they have in the vault, or 10x the money that the megabank borrows from the FED. This means that the megabank and not the Federal government is creating the money. The Constitution Article 1, Section 8 says the Congress alone should create the "current coin" and prosecute counterfeits while states issue nothing but gold and silver.

The problem with Fractional Reserve Banking is that because of inflation, banks don't keep their 1/10 reserves in cash but invest in stocks and derivatives to keep up with inflation. If there is a stock market crash, then banks cannot lend. Also, if there is a run on the bank, banks dont have enough to pay everyone, the banks become insolvent, and the banks fail.

This is a major driver of inflation. Think about it. The point of banking money creation is the point of loan approval. Because amortized loans collect interest all up front, mortgage holders rarely build any equity in the property unless they sell the same asset (business, or home) to the next guy for more money. According to the Freidman equation, when Money Supply >> Real Output == Inflation. The Housing market is a perfect example that proves the Freidman equation. When each US citizen sells our starter house to the next young family for $20,000 more than we paid for it, that puts another $20,000 burden on that family that will have to be made up in terms of a cost of living increase. (inflation) More money supply for the same house.

US History seems to be one economic bust, and banking crisis after another. The Safety Society system proposes to set up a system of locally administrated lending and banking houses that are immune from failing. They are based on Constitutional money, they protect the depositors from the risks of the borrowers, and they are full reserve.

True Constitutional money would be created 100% by Congress via the US Treasury. A borrower (individual, coorporation, community) would go to their local Safety Society Bank, and request a loan. The borrower would prove their credit worthiness by providing evidence of employment and a steady paycheck, evidence of monthly sales and profits, or evidence of monthly government proceeds from the passage of a 1% sales tax. The local bank would then borrow money directly from the US Treasury, and pass the money on to the borrower. The US Treasury would charge a Simple Rate of Interest which would be used to control the money supply, and control inflation, control the value of money. The local bank would make its money by charging a loan origination fee and a monthly servicing change.

Safety Society System Banks would only ever lend and create money for real assets. SSS would not lend for stocks or bonds, or derivatives where there is not anything of value to be redeemed. SSS and the US Treasury would only create money for real output. This would include building houses, building buildings, but also could include loans based on how much it would cost to mine a certain mineral out of the ground and the value of the mineral deposit. All of this is real, all of this can be repossessed by the bank if the borrower defaults. This protects the depositors from the risk taking of the borrowers.

This Constitutional money is not without backing. But unlike gold which backs state money, federal money is backed by the real asset the money was created for.

When people deposit their money in a SSS Bank, that money stays 100% at the bank. SSS does not use that money to make new loans. In SSS, the US Treasury creates money "on-demand" as the economy requires and qualifies for it. In this way SSS is truely "Free Market" and "Free Enterprise". If you qualify for a loan, you can get the money you need. You don't need a "vulture capitalist" or a "socialist bureaucrat" who will only give you money if he can profit off your idea, or if your idea doesnt threaten his power. Because SSS creates money "on-demand" dM/dt never outpaces dRO/dt. Therefore, there is no inflation or deflation. The US Treasury charging Simple Interest adjusts for inefficiencies in the system by drawing extra money out of the system and generates revenue for the Federal Government on ALL THE MONEY created and not just a fraction of the money created in the system.

If a person loses their job and cannot repay their bank for several months, in SSS, the borrower already has equity in the real asset. So, the loan instantly becomes a reverse mortgage and the monthly payments are deducted from the equity (+/- a penalty). Repossession occurs only when an individual, corporation, or community has lost all equity in a property or asset. The Bank then has something of real value that they can manage or resell.

Although, SSS is influenced by Milton Friedman, it is not a "Monetarist System" where the government controls the amount of money in circulation. In SSS, the people control the amount of money in circulation by qualifying for it and asking for it (on demand, ask/qualify and receive economy).

In SSS there still is gold and silver issued by the states. You can still barter. But in addition, there is a federal paper/digital currency backed by whatever real durable asset/commodity you are borrowing the money to buy or create or farm or mine. With SSS you don't need the real durable asset/commodity in a wearhouse first. You can create the money and be approved for a loan to purchase land and build a house on that land. The prospective future house backs the paper/digital money.

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