Hi everyone,
This is my first post here. I'm puzzled by the problem of interest. It seems to me that since money comes about through the creation of debt plus interest, there is always a greater amount of debt in the system than there is money. This creates an organic need in the system for defaults, and gives excessive power to the holders of money, not because they are productive, but simply because they hold money. As a system founded on this basis expands, it inevitably creates an unequal distribution of wealth. I raised these concerns to Tom Woods and he recommended this article by Robert P. Murphy - http://mises.org/daily/4569 .
In the article, he states that "my modest point in this article was to correct the widespread misconception that in a system of 'debt-based money,' further rounds of inflation are mathematically necessary to avoid default on previous loans. In general, this simply isn't true, because the bankers can spend their interest payments on real goods and services, thereby returning that money to the public, which can then use it again for further debt payments." But isn't it extremely unlikely that bankers would spend 100% of their interest payments back into the economy? They are more likely to save a large amount, or re-invest in some interest-bearing asset. So this doesn't really address the basic problem. Am I missing something here?
Thanks for your help,
Joe
That's an interesting point. So how would you see this playing out? Our natural resources and skills/human capital would be unchanged, so how would this change of mindset affect society? Do you imagine that the overall standard of living would drop in a sound money system due to this scarcity no longer being masked by artificial credit creation?
Temporarily, yes, there would have to be a dramatic reduction in standard-of-living as credit contracts and businesses, households and, yes, even the government, are forced to balance their budgets. This will lead to a cascade of bankruptcies, defaults, etc. We actually agree with the Keynesians on this. Where we disagree is on their claim to be able to indefinitely defer the Day of Reckoning. It's coming sooner or later and the sooner the better. The longer we defer it, the more out-of-balance the system will become.
Trying to wrap my head around the psychology of it. I'm always amazed when people talk about a "crisis of confidence" as if our economy was more about psychology than anything concrete. But in our current system, if this confidence stalls for even a moment, the whole thing comes crashing down.
Well, it is all about confidence ... because it's a con game. One of FDR's most famous quotes, "The only thing we have to fear is fear itself", is a reference precisely to this fact. If the public loses confidence in the fractional reserve system, it will collapse. The FRB system can withstand a run on one or even a handful of banks. But if everybody loses confidence in the whole damn thing, the gig is up. The value of the dollar will begin to collapse to zero and the entire house of cards comes crashing down.
Austrians consider a precipitous loss of confidence every bit as much of a nightmare scenario as Keynesians do... it's something that we should not allow to happen. However, following the Keynesian prescriptions for the economy is a kind of brinkmanship with the confidence of the public. These bailouts and quantitative easings have significantly eroded public confidence in the dollar far more than any speech or book by Ron Paul ever could have. The correct solution is to end the legal tender monopoly and repeal the capital gains tax on monetary commodities (gold, silver, platinum, etc.) This will force the Federal Reserve to compete with private money producers.
This would strengthen confidence in the US dollar even as the public is given the option to move out of the dollar to something else... the reason is taht the Fed would have no choice but to rein in the inflation in order to compete with private money producers. In the long run, we believe that this would result in a gradual shift away from fiat money and back to sound money but it wouldn't happen overnight.
Clayton -
"Temporarily, yes, there would have to be a dramatic reduction in standard-of-living as credit contracts and businesses, households and, yes, even the government, are forced to balance their budgets. This will lead to a cascade of bankruptcies, defaults, etc. We actually agree with the Keynesians on this. Where we disagree is on their claim to be able to indefinitely defer the Day of Reckoning. It's coming sooner or later and the sooner the better. The longer we defer it, the more out-of-balance the system will become."
But here you are referring to a scenario where we suddenly switched to a system of only sound money, right? Whereas if we repealed the legal tender laws and legalized competition, then the transition could take place more gradually and peacefully?
-Joe-:So why do you think there is such strong resistance to sound money? Among those who have access to the cheap money the reason is obvious, but what about everyone else? How did mainstream economists become so clueless? Are they all just bought and paid for by the establishment - i.e. speaking fees, consulting fees, etc.
That's a large part of it. It's not unlike the global warming industry. When your paycheck is signed by an organization that not only has a preferred conclusion for you to reach, but also has the power of force behind it, it's a lot easier to just fall in line.
But another large part of the resistance is where their knowledge is coming from. Someone once said: "When government controls the schools, don't be surprised when everyone comes out thinking the government is the solution to everything." So of course there is an ever-present perpetuation of the idea that government is not only proper, but necessary. And when you're forced — children are compelled to go to school, remember...and everyone is already paying considerable taxes to support the government schools, so few parents can afford to homeschool them or send them to non-government schools — into institutions at an early age, and forced to remain there not only through your formative years, but for a good deal of your life, it's not surprising that most people become indoctrinated.
After a while, it becomes difficult to even wrap your head around the idea of a world without the government being involved in so many things. I actually had a conversation with a grown man, who served in the Navy and has children of his own, about how people would be educated without government-run schools. He literally could not get it. He's not retarded (or at least, I don't think he is). But his question kept going back to "how the fuck do you expect private schools to provide education to every single child? There aren't near enough private schools! How do you expect America to compete in an international marketplace without educating our children?"
I'm not kidding. I'm not exaggerating. That was literally his question, and he was not joking. I tried multiple times, multiple ways to explain that all the school buildings are there, all the teachers are there, all the books are there...it just wouldn't be run by government. And he literally could not get it. The closest he got was claiming that he couldn't afford private school, so where would his kids go? Never underestimate the power of indoctrination.
And of course, that leads to a different reason people don't get it...inertia. When people become so indoctrinated that they can't even begin to understand how something as simple schooling would exist if the government didn't put a gun to everyone's head and force them to pay for it and send their children to it, obviously they're not going to be able to teach children anything else either...so people grow up in a world where not only the lie is taught, but it's taught from people who don't even know it's a lie. Multiply that out a few generations and these are the people we're dealing with now. These are the people running government and running our institutions and winning Nobel Prizes.
And you may have heard the phrase "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool." That was George Orwell. Ironically it was Bertrand Russell (of all people) who said something simliar: "This is one of those views which are so absurd that only very learned men could possibly adopt them."
They were both touching on a very important point about how insane ideas even get considered. It's very counterintuitive, and most people don't realize it, but you really do have to be quite smart to deeply believe things that are really stupid. I think it has to do with needing to have the mental capacity to be able to perform the gymnastics necessary to make things work...in your head. Most people can't do that. The problem is most people are so dumb that they just defer to "their betters" in academia and government and go along with whatever they say...which is obviously incredibly stupid in its own right, and quite dangerous. But remember, when you're indoctrinated to believe the government is there to "take care of you", and that officials are to be revered and respected and praised, and that they are smarter and wiser than you, and they have armies of people who are even smarter and wiser than they are advising them, it's quite easy to not only believe what they say, but stand behind it and actually attack those who would question it.
It's tough to see here in the U.S., since you're used to it...and since you can't really recognize it, it's a little hard to believe...but just watch a documentary or two on North Korea. See indoctrination existing and operating in one of its purest forms, here, now, in 2011. That will really help. And possibly scare the crap out of you.
Is there a worry that lending would get too tight under a sound money system, and economic growth would stagnate?
I honestly don't even think it goes that far. I wish it were that thought out, but I really get the impression that they think sound money is just "an old idea" and that "this is the 21st century" and "today's economy" is just too advanced, and that we need something more sophisticated. Like one Yale Professor recently said "money can't manage itself". People just see so many things around them that have changed, that they naturally believe everything else has to change too...even laws of economics. It would be nice if they actually realized the truth but simply didn't want to admit it like Autolykos suggests, but I'm doubtful it's that advanced. I'm really led to believe a lot (if not most) of these guys truly don't get it.
And again, it certainly doesn't help that everyone around you, from teachers, to media personnel, to academics, to your all-knowing government, are saying the same thing. Like this idiot who thinks that economic growth is determined and dependent upon the size of the money supply (i.e. if the money supply doesn't grow, economic advancement cannot occur. Seriously. Watch it. O'Reilly the host is even too ignorant to even begin to argue with him.)
And most people aren't even exposed to other ideas. People have never even heard of anything else. It's all just assumed as a given. And you have to remember, most people are pretty dumb, as well as not very knowledgeable...about anything. They don't take the time to study or look into anything on their own. So the only things they might know is something they heard in their government school. But that's not everyone. There are smart people who do look into things and study. People who get doctoral degrees specifically in the field, for crying out loud. And it was tough for me to understand for a while, how people who were so smart, and spend all their time studying these things could believe such nonsense...but you come to realize all their time is spent in dark, dank computer labs running regressions and working complex models buried in high level math, which — according to one of the most recent economic Nobel Laureates — "are abstractions that make very simple assumptions that aren't realistic." And all the time they're not doing that, they're either being indoctrinated or reminded how smart they are.
I talked a little about this here, and relayed a story about someone in this forum who gave one of F.A. Hayek's works to an economics PhD graduate who ended up coming back and saying "I wish they had taught us some of this stuff." (Hayek was also a Nobel Laureate, by the way, and in his day was, along with John Maynard Keynes, one of the two most prominent economists in the world. So it's a little tough to say he's "too obscure.") But the fact is, they aren't taught anything about capital theory or a realistic time structure of interest rates. When your entire higher level education, (and after that, your entire career) is essentially nothing more than the mathematization of government regulation, it's quite easy to get so lost in the maze of trying to figure out exactly how much regulation should be in how many sectors, and how it should be implemented, and when, and where, and how each tweak affects what...that you never even think to consider whether there should be the regulation in the first place. Again, it's just a given. Not only that, but you've just spent 8 years of your life, and literally tens of thousands of dollars learning this crap...so it's a lot harder to consider the idea that it was all essentially for nothing. The system couldn't be that screwed up, could it?
And finally, there's also a small presence, (even if subconscious), of knowing where your paychecks come from. Not like the "remember who you're working for" kind of thing mentioned earlier, but more of a self-preservation instinct. Like the accountant who, on some level realizes that if the tax code gets any simpler, his skills are no longer necessary...so he argues against something like a flat tax or a Fair Tax. And it's not like he's even necessarily thinking about himself consciously...It's possible he completely believes the current system is better because it gives people like his clients (who are smart enough to hire him) the ability to avoid a lot of taxes that others have to pay. But of course in reality, in the grand scheme, the world is poorer in both situations...from the horrific policies that these economists advocate, and from the system of theft that makes "tax professionals" necessary.
In terms of Lehman not being bailed out - I wouldn't be surprised if that had something to do with Goldman's political influence.
Oh you don't even know the half of it.
-Joe-:But here you are referring to a scenario where we suddenly switched to a system of only sound money, right? Whereas if we repealed the legal tender laws and legalized competition, then the transition could take place more gradually and peacefully?
Yes.
Hmm meant to quote your sentence "I think the resistance to sound money concerns people wanting to have their cake and eat it too. In other words, sound money would reveal to them that things are actually scarcer in many ways than they want to believe." at the beginning of my last post, didn't work. How do you quote from someone's msg in your post, I can't figure it out. I hit reply on that person's post but that didnt work.
Again, New member? READ THIS!
John James:And again, it certainly doesn't help that every one around you, from teachers, to media personnel, to academics, to your all-knowing government are saying the same thing. Like this idiot who thinks that economic growth is determined and dependent upon the size of the money supply (i.e. if the money supply doesn't grow, economic advancement cannot occur. Seriously. Watch it. O'Reilly's even too ignorant to even begin to argue with him.)
At the risk of also sounding like an idiot... isn't it true that in terms of pure numbers (GDP), there actually would be less growth in a sound money system, because of the lack of easy credit. The problem is that people are conditioned to think of economic health only in terms of GDP. So as long as the numbers rise, they are satisfied.
One important thing to note about GDP is that it does not take into account broken windows.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
-Joe-:At the risk of also sounding like an idiot... isn't it true that in terms of pure numbers (GDP), there actually would be less growth in a sound money system, because of the lack of easy credit. The problem is that people are conditioned to think of economic health only in terms of GDP. So as long as the numbers rise, they are satisfied.
Bingo. See here and here.
The concern I have about the principles we've been discussing is that I don't think they would work well unless implemented in full. For example, the Austrian view seems to be that government regulation is bad, period. So what happens if Ron Paul gets elected, and due to an uncooperative Congress is unable to end the fed - but our Wall St.-funded Congress does agree that all regulations on Wall Street should be repealed. So then we'd still have the same easy-money madness we have now, except Wall St. would be even freer to exploit the casino economy. In my opinion that would be a whole lot worse than what we have now.
That's very perceptive. You're much quicker than most. Yes there is some danger in that, but it's not very probable. I actually think competing currencies would be legalized before all financial regulations would be repealed. The only way financial regs would disappear would be if the public made it politically profitable to remove them. And I think the only way that would happen is if they were getting in the way of enough people, and enough people were confident that other regulations (such as the regulation of the market itself) would be more effective and/or lead to better conditions.
Ultimately I think it will take the death of the dollar before you can even seriously talk about ending the Fed entirely, and even then it will be a tough going, because there will of course be plenty of push to maintain that kind of monopoly power, and there will be plenty of public outcry for our wise overlords to bring "stability, confidence, and strength" to the markets again. (As if.) And the powers that be will be waiting in the wings, more than happy to make that arrangement.
The key will be a large enough coalition that understands enough about the business cycle to be there with the real answers when that happens. And the more people who hear about it beforehand, the better...for even if they don't become one of the ones who understands it by the time it happens, they'll be that much more willing to listen to someone who told them it was coming when it actually does. And that someone could easily be you or me. "The public" may not "remember"...but "people" will. And that means your friends, your neighbors, and your co-workers. People you talk to every day. People you could easily plant seeds with. And that's why Ron Paul is so important. For one thing, the number of people he has already influenced to become educated is incalculable. He has already done more than any man in modern history to rally people to the cause of liberty and engage them to educate themselves...and he's done it all while being 1 of 535 representatives in Congress, officially representing a small coastal district in Texas...being mocked, laughed at, ignored, and attacked. Imagine what he could do as President.
That's the thing I think a lot of people don't realize (or don't want to admit). Even some liberty-minded individuals like to try to rain on Paul's parade and claim there's really nothing he could do as President, he'd still have a Congress to deal with, blah blah blah. Some I think it's because they truly don't get it, others I think because they have a need to be contrarian and rag on people, and still others because they're narcissistic pricks who don't know how to constructively deal with their jealousy. Not only do I not think these people have a full appreciation for the power of the Executive Branch (especially in the hands of someone who is a voluntarist), but I also don't believe they fully see the big picture. Most people still don't even know who Ron Paul is other than possibly "that kooky Republican guy who wants to end the wars". And that's only if they're lucky. The minute that guy wins even the R nomination...let alone the Presidency...the whole game changes. Everything he says automatically becomes infinitely more legitimate, and heard by 100 times more people. The impact someone like that could have, not only on policy in a bully-pulpit sort of way, but on public opinion in a leader/teacher sort of way, is unimaginable.
He talks about how he's not just trying to win an election, he's trying to change the course of history. I guarantee you, if that man becomes President, that's exactly what would happen. And not because of anything he'll do in government. He won't pass some law that will redefine the political system. He won't eliminate some department that history will call "the repeal that changed everything". He will affect change in the greatest, most important way possible...in the minds of people. Just imagine 4 whole years of that man talking...with the Presidential Seal hanging behind him. And as if that wasn't enough, times are going to get tougher...probably as tough as they've ever been, relatively. People will be ready, more than ever, to listen. You thought people were scared, hurting, ready for change, and looking for a leader with Obama...just wait.
If that wouldn't change history, nothing would.
John James:Not only do I not think these people have a full appreciation for the power of the Executive Branch (especially in the hands of someone who is a voluntarist), but I also don't believe they fully see the big picture.
That was interesting to see the Ron Paul video about voluntaryism. Having seen that, his positions make a lot more sense. I had always wondered, for example, about him invoking private property rights to deal with environmental problems - I had never heard anyone else deal with it in that way. I'm personally not anywhere near being a voluntaryist, but I don't see why we couldn't have some sort of opt-out system, where those who wish to live without taxation/government services are allowed to do so. I think we need to have a 100% transparent tax system where it is absolutely clear where every dollar goes, rather than just giving a lump sum and having government distribute it in secret. Then, those who wish to opt out of the tax system can do so, and they will not receive those associated services. If they wish to opt out of some services and not others, that would be fine as well. It would be a simple matter of accounting. The all-or-nothing idea is what strikes me as problematic. Certainly a majority could agree on that. If enough people learn about the problems of Fed, money printing, etc. I definitely think a majority would come to see that clearly as well. But I don't think we're anywhere near the total abolition of government, and personally I wouldn't want to live in a society like that. But I don't see why both sides can't get what they want without imposing on the other.
Then, those who wish to opt out of the tax system can do so, and they will not receive those associated services.
It also makes sense to remove the monopoly the government has on providing these services, right? Otherwise, what good is ability to opt out?
And when you agree to remove this monopoly - presto, there is NO government! It's just another service provider on the market!
a 100% transparent tax system
That'll never happen. The tax system must be opaque because its true purpose (to take as much as possible from as many as possible) must be concealed.
Shhhh, don't scare off the new guy.
Andris Birkmanis: Then, those who wish to opt out of the tax system can do so, and they will not receive those associated services. It also makes sense to remove the monopoly the government has on providing these services, right? Otherwise, what good is ability to opt out? And when you agree to remove this monopoly - presto, there is NO government! It's just another service provider on the market!
Clayton: a 100% transparent tax system That'll never happen. The tax system must be opaque because its true purpose (to take as much as possible from as many as possible) must be concealed. Clayton -
The books of a company are not 100% transparent either, but that doesnt mean they can't provide a valid service. All i mean is that when someone pays taxes, there would be a list of services that they are buying into, and those that they don't want or would rather get elsewhere they are free to do so.