How Fractional Reserve Lending Makes Money Disappear

Mr. Shostak described capital consumption in his excellent article. The mechanism he described here, counterfeiting, leads people away from producing real goods and into financial “services” (aka counterfeiting). I think everyone would agree that post World War II, this country was very productive and was producing a huge amount of real wealth. Over the years, we have lost productive industries and our “economy” has become financialized. Our big industries are known as FIRE or Finance, Insurance, and Real Estate. This is where counterfeiting leads – capital consumption. FIRES burn everything up and leave you with nothing. Here is Mr. Shostak:

The existence of the system of fractional reserve banking permits commercial banks to generate credit not backed by real savings, i.e., the generation of credit out of “thin air.”
For instance, let’s say that farmer Joe sells his saved kilogram of potatoes for ten dollars. He then deposits this money with the Bank A. The ten dollars are fully backed by the saved kilogram of potatoes.

Now let us say that Bank A “lends” $5 to Bob by taking $5 from Joe’s deposit. The money hasn’t really been lent, because Joe still uses his $10 as if it it hadn’t been lent out at all. This means that whenever he deems it necessary he is entitled to take the $10 out of deposit. No additional real savings have been accumulated to back the $5 loaned to Bob.

Once Bob, the borrower of the $5, uses the borrowed money, he has in fact engaged in an exchange of nothing for something, the reason being that the $5 are not backed by any real savings—it is empty money.

What we have here is $15 that are only backed by $10 proper. The $10 are fully backed by one kilogram of potatoes—real wealth that has been saved.

As you can see, printing money/credit is much easier than growing potatoes or another crop.

One of the posters made a very interesting point, assuming freedom to issue notes:

The point is that outside of knowing what a single bank has issued, there is no concern about some national aggregate of currencies. Without currency aggregates, inflation is also rendered meaningless. If prices in two currencies go up and in three they go down, what’s the inflation rate?

I think the post made an error in its use of the word “inflation” and I think the post meant this to mean a measure of the general rise in prices. That being said, the post imagined a nation with multiple currencies. Multiple currencies would render the government’s statistic collection irrelevant and it would no longer be able to set economic policy for the nation as a whole. A world/country with multiple currencies would have much MOAR liberty and the government would have much less control.

Come to think of it, it is a shame that we ever had a Bretton Woods agreement in the first place.

MOAR liberty!

Bernie Sanders is the beginning of an American Turn to the Left

There is an article in The Salon today regarding Bernie Sanders:

A new socialist movement is cohering in the US, thanks in large part to the popular class politics of Bernie Sanders. But as that movement grows and progresses, it is bound to run into dangerous obstacles and thorny contradictions. The new US socialist movement is without a single “line” or monolithic political position. That’s a strength of the movement, since none of us has all the answers. Still, many people in the movement, ourselves included, feel strongly about certain approaches to strategy. One approach we feel strongly about is what we call “the democratic road to socialism,” or the idea that we need to make good use of the democratic structures and processes available to us (and to improve and expand them) in order to advance our cause.

A country like the United States has both a well-developed capitalist state, beholden to the capitalist class and armed to the teeth, and mechanisms for democratic participation in that state that allow people to exercise some measure of control over their representatives. Even though their choices are limited, their representatives are bought off by the rich, and the capitalist class holds the entire system hostage with the threat of devastating economic retaliation if things don’t go their way, the system does have some basic democratic elements that its citizens largely affirm and occasionally participate in.

This is a tricky situation to navigate. If the democratic capitalist state were less developed, it might be possible to convince people to simply storm the gates, tear up the old rules, and start fresh in a socialist society. This is what socialists tried to do in Russia in 1917: the state was weak and after centuries of autocratic rule it didn’t have much legitimacy in the eyes of most Russians, so revolutionaries could get popular support for scrapping it and starting over.

The United States is hardly an exemplary democracy, and socialists must push to further democratize elements of the state. But even if people are unhappy about much of our corrupt political system today, it does hold a strong degree of legitimacy in most citizens’ minds. Despite Republicans’ continued efforts to restrict the franchise, most people can vote, and they see the results of elections as basically lawful and valid. People often (rightfully) feel dejected and cynical about US electoral politics, but they don’t consider the system so illegitimate that they’re willing to risk their lives to destroy it anytime soon.”

This illustrates very well what Bastiat wrote about in the Law. This writer obviously sees a “capitalist class”, which has power over the “capitalist state”. What makes this author think doing the same thing with a different group of people, “a new socialist movement”, will be an improvement? The problem is those “elected” are above the law. This is what makes them dangerous and why elections in the U.S. are so hotly contested. Here is Bastiat:

I know what might be said in answer to this; what the objections might be. But this is not the place to exhaust a controversy of this nature. I wish merely to observe here that this controversy over universal suffrage (as well as most other political questions) which agitates, excites, and overthrows nations, would lose nearly all of its importance if the law had always been what it ought to be. In fact, if law were restricted to protecting all persons, all liberties, and all properties; if law were nothing more than the organized combination of the individual’s right to self defense; if law were the obstacle, the check, the punisher of all oppression and plunder — is it likely that we citizens would then argue much about the extent of the franchise?

Under these circumstances, is it likely that the extent of the right to vote would endanger that supreme good, the public peace? Is it likely that the excluded classes would refuse to peaceably await the coming of their right to vote? Is it likely that those who had the right to vote would jealously defend their privilege? If the law were confined to its proper functions, everyone’s interest in the law would be the same. Is it not clear that, under these circumstances, those who voted could not inconvenience those who did not vote?

This author said, “By engaging in mass democratic politics, and electing politicians faithful to our movement who can spearhead the fight for real reform (including democratizing the current state), we can tip the balance of power in favor of the working class.

How on earth does he propose to guarantee “electing politicians faithful to our movement”? If the outcome of the election were guaranteed, it would not be an election and it would not be democratic. I don’t think this author realizes that a truly free market (we do not have one now), would be the most democratic institution possible. Everyone would “vote” every time they made a purchase. I think what the author really wants is for the state to relinquish control over the issue of bank notes/credit. That would be the first step toward making the government beholden to law and that would wrest control of the “capitalist state” from the “capitalist class”, because the “capitalist class” would no longer be able to create money and debt out of thin air.

The authors also discussed using capital controls to keep money from leaving America. Once again, honest money would cure these ills. In addition, what did we witness in the Soviet Union between 1917 and 1991? Do we really want to repeat that?


Fredric Bastiat wrote in his essay, “The Law“:

What, then, is law? It is the collective organization of the individual right to lawful defense.

Each of us has a natural right — from God — to defend his person, his liberty, and his property. These are the three basic requirements of life, and the preservation of any one of them is completely dependent upon the preservation of the other two.

Today we read this in USA Today:

Frustrated by liberal policies, some Oregon residents are petitioning to leave the state –by moving the border with Idaho westward.

The movement has secured initial approval from two counties and aims to get enough signatures to put the proposal on local ballots in November, said the group Move Oregon’s Border for a Greater Idaho.

If the group succeeds, voters in southeast Oregon may see a question on whether their county should become part of Idaho by redrawing the border.

“Rural counties have become increasingly outraged by laws coming out of the Oregon Legislature that threaten our livelihoods, our industries, our wallet, our gun rights, and our values,” Mike McCarter, one of the chief petitioners, said in a press release. “We tried voting those legislators out but rural Oregon is outnumbered and our voices are now ignored. This is our last resort.”

Today state jurisdiction is largely superfluous, thanks to Federal supremacy, so no one should resist this desire to “secede”.

Mr. Bastiat wrote in his essay that if legislators were limited by law, people would have little interest in elections, because elections would no longer be a route to plunder fellow citizens and they would not be needed any longer for an attempt at blocking plunder. If this country really had “the rule of law”, as it pretends, there would be no excitement at election time and there would be no agitation to secede.

The Cantillon Effect or The Federal Reserve And Income Inequality

Have you ever heard of the Cantillon effect?

The Cantillon Effect:

Richard Cantillon first suggested in 1755 that money is not as neutral as we think. He argued that money injection—what we could consider inflationary policies—may not change an economy’s output over the long-term. However, the process of readjustment affects different sectors of the economy differently. This analysis, known as the Cantillon Effect, serves as the foundation for the non-neutrality of money theories.

In recent history, the Fed injected enormous amounts of bank credit/money into the country’s banks. The banks were the first receivers of this new “money”. In a nutshell this means that some groups receive the new money first and they take some action with it, which changes prices in some market or markets, and as a result other economic participants change their behavior. Here is the importance of understanding this:

The next two chapters explore two of the more controversial topics, from the mainstream perspective. The first, chapter eight, analyzes the impact of new money on income and wealth. It is shown here that there are winners and losers from new money. For example, the Fed’s monetary expansions tend to help the wealthy, banks, big corporations, and the financial industry more generally. Subsequently, as prices rise, the Fed’s policy hurts retirees, those on fixed incomes, and wage earners who receive the new money last, if at all. This is one reason why the Fed and most mainstream macroeconomists vigorously deny the existence and importance of Cantillon effects and adopt the assumption of neutral money. Tragically, they often get away with this ruse because the theft cannot be directly seen, except in the final result.

In a nutshell, the Fed’s monopoly (granted by your wonderful Congress) on “money” creation allows one group of people to plunder another group of people. Without the physical force behind our “law”, this group would be powerless to do this, because people could switch out of Fed “money” much more easily (also known as a bank run). The law should be preventing this plunder. Unfortunately, it does the opposite. It facilitates it.

Unlicensed Contractors Arrested in Florida

“HILLSBOROUGH COUNTY, FL — Following the completion of a nine-month-long construction fraud sting, the Hillsborough County Sheriff’s Office has arrested 118 unlicensed contractors accused of performing more than $540,000 worth of work illegally.”

It is interesting that this story made no mention of any homeowners, who felt any of these individuals defrauded them. This is an example of thought policing. The state thinks it can prevent crime or poor workmanship using licensing. It is not true.

In a free market business could set up associations that build a reputation and then those that want the benefit of that reputation could become certified by those associations.

Here is a different take on this sting operation:

Occupational licensing, whether it’s of contractors or hair braiders, is often much more about protecting incumbent businesses and government licensing revenue than it is about safeguarding the welfare of consumers.

Operation House Hunters is a perfect illustration of this, with cops going to great lengths to manufacture licensing law violations that either wouldn’t have happened or wouldn’t have produced unsatisfied parties.

The more effort law enforcement spends entrapping handymen, the fewer personnel and resources they have to devote to deterring other, more serious crimes. “These sting operations rake in big money in fines and court costs,” Sammis says. “Catching real criminals actually committing a crime is much harder.”

Why Hate Fiat “Money”?

Some people ask why I am against fiat currency. My answer in the smallest nutshell possible is that it is theft.

Fiat currency divides the population into two classes. One class can create currency out of nothing and create “debt” and the other class must work to pay off that “debt”. The first class does not have to work – only create money. There is a Master/Slave relationship between the creators of “money” and the consumers of “money” or debtors.

I know that everyone is watching the stock “market” and thinking it is going up, so all is well. What is really happening is the purchasing power of USD (the garbage that you and I need to live) is going down. If its purchasing power goes low enough, all the USD you think you have stored up in the stock “market” won’t do much for you.

Mike Maloney explains this well in a video that you will find here. Fast forward to 11:05 and listen till 15:40. The part where he really lays into the Central Banks begins at 14:16.

Isn’t Secession the Civilized Way to Dissent?

A struggle has been going on in Virginia. Ostensibly it is a struggle between gun control advocates and second Amendment advocates. It may really be a struggle between rural areas and urban areas. The rural areas do not want the second Amendment abridged. The urban areas argue for abridging it. It seems to me that the urban areas really want/need a Constitutional amendment. There is an easier and more peaceful way – Secession:

As Mises noted, to force members of conflicting groups to live side by side within a single jurisdiction is problematic to say the least. It only encourages each side to become ever more fanatical in its drive to gain control of the machinery of government so as to oppress the other side. This is why Mises presented his plan as a means of avoiding violence: increasingly intense competition over centralized institutions of political power tends to lead to violence in the long term. The answer lies in decentralization and secession. Conversely, the potential for violence is minimzed by minimizing the state’s power. In the presence of a mostly laissez-faire government, neither side has much reason to worry about who controls the state. But the stakes climb ever higher as the state gains more power over peoples’ lives.

But “minimizing state power” certainly isn’t what is going on in Virginia right now. If anything, the state is moving very much in the opposite direction. In a prudent and flexible political system, those parts of the state dominated by the now out-of-power groups would be permitted to join themselves to regimes more in line with their cultures and ideological views. But we do not live in a prudent and flexible political system. We live in a system where the dictates of “democracy” are such that whichever group finds itself in the minority must submit to the elected ruling regime. “Or else.” No other option is permitted. This is a road that often leads to violence, either by private parties, or by the regime against the people.

It is too bad that we don’t have MOAR freedom.

Your Money and Your Education

There is a sort of interesting case heading toward the Supreme Court,
which involves a dispute about how tax money (your money) should be
spent. Here is an articled from Time:

Kendra Espinoza of Kalispell, Montana, the lead plaintiff in the Supreme Court case, said the state court decision amounts to discrimination against her religious freedom. “They did away with the entire program so that no one could use this money to send their kids to a religious school,” said Espinoza, whose two daughters attend the Stillwater Christian School in Kalispell, near Glacier National Park.

She said she could not afford to keep her daughters enrolled without financial aid from the school, where tuition this year is $7,735 for elementary and middle school and $8,620 for high school. But Espinoza said she has never received money from the scholarship program and only began the application process late last year.

For Randi Weingarten, president of the American Federation of Teachers, the Montana program is part of a nationwide, conservative-backed campaign against public schools. “This is a ruse to siphon off money from public education,” Weingarten said. Teacher unions generally oppose school choice programs.

It looks like Mr. Weingarten is afraid of putting his educational
product into competition with another educational product and losing.

I know that Progressivism has taught everyone that publicly funded
education is somehow scientific and is therefore a better product, but is it really “scientific”? If the state funded product is really better, why are people forced to pay for it by the threat of “law” and why are they forced to send their children there by “law”? In my experience better products sell themselves.

The Trump Impeachment Charade is Not New

Politically motivated impeachments do not appear to be new. David Byrne said in “Once in a Lifetime”, “Same as it ever was”:

This is from Lew Rockwell’s site:

Andrew Johnson, a Tennessee Democrat, stood with the Republican Union of Abe Lincoln. Consequently, Lincoln chose Johnson as his Vice President in his 1864 reelection campaign. When Lincoln was assassinated, Johnson became president.

President Johnson took to heart Lincoln’s emphasis on restoring comity between North and South. Consequently, Johnson opposed the harsh, exploitative, and demeaning policies of the Republican Congress during Reconstruction. He didn’t see how the Union could be restored on the basis of dispossession of Southerners, rape of Southern women, and the infliction of general humiliation on a conquered people.

The fanatical Republican Congress, however, was set on punishment and humiliation of the South. By blocking some of the most extreme Reconstruction measures, Johnson aroused the same enmity against himself as the Republicans had toward the South.  A series of disputes between the President and the Republican Congress led to a resolution of impeachment drafted by the Congressional Joint Committee on Reconstruction.

The United States government routinely uses its money as an incentive for countries to behave a certain way. We know that Mr. Joe Biden threatened to withhold aid from the Ukraine, if they did not fire a prosecutor, who was investigating his son, and then he bragged that Ukraine fired him.

I think it is pretty clear the impeachment is just politics as it was when Mr. Johnson was impeached.

Who Controls All Our Money?

This video is good, but I question the accuracy of some of the quotes. The video is correct that “money” is “created” by commercial banks out of nothing, every time someone borrows “money” and if there was no debt, there would be no money. This tells us we will never be free of debt.