When
doing the research for the piece on Compound Interest, I came across
this article written by FSK and posted on his blog on Wednesday, May
21, 2008. FSK referred to himself as follows,
“I
want to do useful work and get paid, without having to report it for
taxation, confiscation, and regulation.”
This is a VERY widespread attitude, especially among the young. On
his newer website, REALFREEMARKET.ORG, FSK
further has this to say,
I blog Anonymously,
under the pseudonym “FSK”. I am very critical of financial
industry corruption. I also work writing financial software. I blog
Anonymously, because I don’t want potential employers refusing to
hire me based on my blog. I live in NYC. I am currently unemployed.
(They may have decided to do so anyway as they have ways of knowing things) This
article will appear in blue, my comments
in black, per usual.
The
Compound Interest Paradox - a Simpler Explanation
A
lot of people have asked for a short and simple explanation of the
Compound Interest Paradox. I'm planning an updated version my
Compound Interest Paradox post, scheduled to be posted in a few
weeks. (Now that Blogger offers "scheduled posting", I'm
queuing up posts ahead of time. I have 3 months' worth of nearly
finished drafts queued up, and I schedule posts a week in advance
now.)
I
didn't see this, so this article will be the basis for our
discussion.
There's
a fundamental structural flaw in debt-based money. Money is only
created when someone takes out a loan. However, only the
principal is created and not the interest payments. For example,
suppose a bank borrows $1B from the Federal Reserve at 5% interest
for 1 year, either directly at the Discount Rate or via the Federal
Reserve "monetizing the debt". In a year, the bank must
repay $1.05B. The $50M required interest was never created or put
into circulation. Therefore, there's a permanent money supply
shortfall. Everyone is enslaved under a crushing debt burden.
You
see, others are noticing the essential mathematical flaw underlying
usury and debt based currencies. [2/5/15:
Correction: After reviewing Arthur Kitson's work, beginning here we
are convinced that all money represents debt so the idea that
any money can be said to be free of debt is an illusion. The “gold
bugs” will immediate jump to the conclusion that their “money”
(gold or silver coins) is debt free, which is also an illusion,
since, unless one is of the opinion that gold is just wealth in terms
of mere “stuff”; commodities and not our stricter definition
which says that true wealth is only that capable of earning a living,
then one buys gold (or silver) with the intention of eventually
spending it as money for what one really wants or needs. If they are
gold or silver hoarders, then that's another trap. See what you have
in purchasing power after the “masters of the universe” in far
away cities reduce your hoards to next to nothing through
speculation, and we haven't even considered that fake commodity out
there, bitcoin. Basically, if it's money, it's purchasing power and
it's all debt, representing unsettled transactions for things that
can only settle transactions in terms of barter; real useful goods
and services. So money is not a matter of debt per se,
because all of it represents debt, but debt to whom.] Our solution of course is that
money can only be issued by the poor who have none and all others
must trade for it with whatever they have to offer. [2/5/15:
Correction: This too is modified by the insertion of Labour Contracts
into the proposal. Labour is a way of issuing money into the
system.] In a very short
time this would bring to an end all collectivist or state socialist
solutions to dealing with “the masses” and their poverty, which
of course the rich tend to blame on the poor, as if being poor was
their own fault. If you have some of their debt based money and wish
to get Value Units, you will have to trade that money for gold or
silver bullion first, since no Independent Exchange within the VEN
will want to hold either these currencies or anything valued in them.
[2/5/15: Correction: All IE's will take care of this for any who want to buy with currencies, but not through swipe cards which leave a trail which we cannot be part of.] Your exchange will be determined by how the brokers have manipulated
the prices of gold and silver and more importantly what the real bid
price for physical possession of gold or silver bullion would be
compared with these prices at the inception of the Value Unit on 2
November, 2011, an easy to remember date.
The
key step in the money creation process is when banks borrow from the
Federal Reserve to create new reserves. Only the Federal Reserve can
create new money, and all the money it creates has debt strings are
attached. For each $1 the Federal Reserve creates, the financial
industry can create $9 more via fractional reserve banking.
They create far more than this so they don't even follow the norms of their own fraudulent business model.
This new
money is recycled. The interest payments on the extra $9 are recycled
as bank profits and expenses. Banks always are "loaned up"
to the full reserve ratio allowed by law. Surplus bank reserves are
loaned to other banks, or (rarely) back to the Federal Reserve via
reverse repurchase agreements. However, the interest payments on the
$1 created by the Federal Reserve are *PERMANENTLY* destroyed as the
loan is repaid. Total debt is always greater than total money.
I
hope you all got this. If not, take your time and read it over
again. There are some out there in thrall to the Austrians who still
believe, erroneously, that scarcity of money is a good thing in that
it counteracts the inflation caused by government spending.
Elsewhere we've shown this “school” of economics to be liars,
clever at it, but liars just the same. Please do not allow yourself
to be hooked on either horn of the bankster's dilemma. To them,
their dialectic consists of the either of Keynesian economics
and the or of Austrian economics. They do not want you to
think outside their box.
When
the Federal Reserve creates new money, the Compound Interest Paradox
operates with the full force of law. The general public does not have
the financial industry's money-printing power, and their access to
money is always limited by the Compound Interest Paradox. Banks don't
need to collude to cause economic booms and busts, because Fed Funds
Rate changes force them to collude. Before the Federal Reserve was
created, large banks colluded to create economic booms and busts. The
usual "Problem! Reaction! Solution!" scam led to the
creation of the Federal Reserve. It was State regulation of banking
in the first place that allowed large banks to collude to cause
economic cycles, which then allowed them to lobby for the creation of
the Federal Reserve.
State
regulation of ANYTHING is direct evidence of collusion and corruption
by special interests pleading with the government to protect their
monopolies and privileges against the onslaught of competition.
Those who foolishly assume that the government should or must
regulate business affairs, or anything else for that matter, are
either in sympathy with the fascist corporatist oligarchy (the
technical definition of the political order under which most of us
now live) or they are just plain stupid for trusting those who have
long proved they are unworthy of such trust.
Consider
a quantum mechanics analogy. In quantum mechanics, a proton and
anti-proton can be simultaneously created. They later collide and are
destroyed, for no net effect. Similarly, dollars and anti-dollars
(debt) are always created in matching pairs. However, the
anti-dollars multiply via interest, whereas the dollars do not.
Therefore, when the dollars and anti-dollars collide and cancel,
there always are surplus anti-dollars left over.
This
is a good analogy.
In
the USA, monopolies are openly discussed as immoral.
We're
supposed to laugh cynically, because this is plainly not how TPTB operate.
The Federal Reserve is the biggest monopoly of all. The Federal
Reserve's monetary monopoly is more valuable than the monopoly of the
State itself. By delegating its money-printing power to the Federal
Reserve, the State has delegated most of its power to the Federal
Reserve.
This
too is correct, but perhaps FSK has never heard that allowing ANY
government the right to issue money can never result in anything
good, because unlike the rest of us, the government has nothing to
offer anyone that anyone would willingly want to buy with which to
extinguish the money it issues. True, it has the power to tax, to
take by FORCE what it wants to preserve the illusion that a balance
between spending and taxation can eliminate inflation, but this is a
round about and expensive means to run either a government (that
should at least live within its own basic charter, in the case of the
US that means the original Constitution) or a diverse economy.
There
are a lot of consequences of the Compound Interest Paradox.
Boom/bust
cycles are not an economic law of nature. They are a consequence of
an unfair monetary system. The people who control large corporations
love this arrangement, because their smaller competitors are
bankrupted during the bust phase; large corporations can withstand
the cycle.
Correct.
The VEN will officially and forever forbid absentee ownership
(stocks) and limited liability, the chief features of corporate
capitalism as presently experienced. If a business can make it and
remain profitable it will without the government's help and if it
can't it will fold, without the government's interference because
somebody involved was “special,” etc.
Boom / bust
cycles encourage consolidation of industries. Large corporations
are the most common business, because they can most effectively
withstand boom/bust cycles and lobby the State for favours.
Keep
this point in mind because there is something else FSK mentions later
that is also part of the problem.
Real
interest rates must be negative, to ensure any money is in
circulation at all. Negative real interest rates provide a massive
subsidy to the financial industry and large corporations, paid by
everyone else as inflation. Banks and hedge funds can borrow the
cheapest, followed by large corporations. Individuals cannot borrow
on favourable terms, or cannot borrow at all.
This
is the other point; corporations who have members of the bank on
their boards of directors, etc. are favoured customers of these banks
because of their size, which means that the interest paid back to
banks on loans of tremendous amounts of money, sometimes over periods
as short as a day, are worth the bankers' time and expense. They do
not care at all about you. They want more control over you, like the
control they claim over their clients. They imagine they'll get it
through their control of governments as their perpetual debtors.
They do not need or want independent “black operators” out there
doing great things in their local communities or smaller countries.
A “black operator” in VEN parlance is a member that runs in the
black, free of debt, etc. [2/5/15: Correction: A "black operator" would be someone who accepted payment in Valuns and had no additional Valuns awaiting him from Credit Contracts within the VEN. People who sell items for money and expect a no return policy are "black operators" as operating in a "black" market where all sales are final.]
Without
a gold standard (sound money), individual savings are stolen by
inflation.
Ah,
I see FSK has been listening to the Austrians. Heads up FSK: gold
and silver prices are manipulated by brokers in far away cities who
are part of the bankers' dialectic. These people also control all
the mines. In the past they were manned by slaves acquired through
war. The argument that “sound money” is based on gold or silver
bullion is a flat out LIE! Our solution is much better in that it
relegates precious metals to function as a means of exchange between
our money and theirs. This does NOT mean that when you trade your
dollars for gold (or silver) and then trade your gold for Value
Units, that these new pieces of paper and coins (which we may
officially call weights instead) are receipts for precious metals
that are still your property that you may redeem for them at some
future point in time. NO, you would be buying a real international
standard for value measurement, which would stand alone as unaffected
by that which gave it original meaning; an ounce of gold at the chosen bid
price on 2 November, 2011. An individual's savings in Value Units
will be assured not to loose its ability to measure value because
their issuance will not be affected by government spending or the
Compound Interest Paradox. This is real “sound money.” [2/5/15: Correction: This was written a while ago and since then, we accept that laws regarding such things prohibit any coins and only those paper instances of money that bear more purchasing power than a dollar. Some individual states have laws prohibiting any other than the national currencies from being used. Also, all money represents unsettled transactions, so are instances of debt. That is not the issue, but rather it is to whom the debt is rendered. When Riegel and others regarded money as the means to split barter, they did not imply that barter itself was ever cancelled. Money is the go between, the substitute, but barter still rules all exchange transactions.]
Income
taxes and regulations prevent people from boycotting the Federal
Reserve and using sound money instead.
We
sincerely hope FSK gives our proposal a good look as it represents
the only solution to having sound money. The Austrians and “gold
bugs” are inherently misled or outright liars. Fiat currencies
always fail, and the present ones out there are no exception, because
they are all government issued, period! That they are issued by fiat has
nothing to do with it. It's a deliberate misrepresentation to get
you to keep to their dialectic.
If
you develop an on-the-books alternate monetary system based on real
money (gold or silver), the taxes and regulations make it
impractical. Whenever someone works, Federal Reserve Points must be
paid as taxes/tribute.
Well,
more people will try because trade is like life itself, it will find
a way.
Negative
real interest rates mean that the cheapest way to finance a business
is via the financial industry/State. With fair market-determined
rates, growing a business via reinvested earnings is
comparable/preferable to borrowing. This places individuals on an
equal footing with large corporations.
We
think he means that where interest rates are set by a central banking
authority rather than determined by free competition, they can be set
low enough to favour the biggest partners (owners) of the central
bank. But the issue is a little more complicated than that because
most banks will no longer lend to individuals wanting to start up or
even maintain their own businesses, because there is no money in it
for them; they'd rather deal with the corporations, where they have a
share in the oversight if not the management.
Individuals
cannot easily accumulate capital to form their own businesses. Their
savings are eroded by inflation. The stock market doesn't earn a
positive inflation-adjusted return. Politically connected insiders
can start businesses, because their connections allow them to get
funding from the financial industry. In a communist society like
the USA, connections are more important than talent.
We
are in agreement with this; communism and capitalism are both
creations of the same people to be used as a socio-economic
dialectic against everyone else. Free enterprise is NOT capitalism. I'll repeat: free
enterprise is NOT capitalism. Anyone not with the fascist
corporatist oligarchic programme (both capitalist and communist) are
JEERED off the stage. Here's a good place to reiterate something
about JEERING.
When
someone doesn't value you, they jeer you, jeer your ideas, jeer anything about
you, to destroy your public reputation, absolutely anything at all to
move the crowd of sheeple away from paying any attention to you.
Their first attempt might be a mildly condescending apology for you
not knowing what they presume to know, etc. Your first defence is to recognize
the jeer for what it is and identify it to those jeering you in plain and clear language. Do not try to reason with them or win them over. You're usually wasting your time. Try to remain cool and calm and do not
raise your voice. Since their next move, if you don't get the hint,
is violence, you prepare yourself for their next move. Eventually,
nature will take its course. We caution however against anyone
instigating violence against anyone. Let them make the first move.
Try and establish yourself somewhere else if you can get away from
their jeers. But power does not accommodate to any criticism, it is
by its very nature conceited. We are suggesting that the seeds of
their destruction are associated with their conceits. Walk away from
them if you can. If you can't then you may jolly well have to fight.
Always bear in mind though that they do not deserve your respect,
allegiance, support or business.
Individuals
cannot profitably loan each other money. If you loan money to your
friends at 6%, that isn't keeping up with inflation. If you make a
gold-denominated loan, that has an implied interest rate of 20%-30%;
it would be cheaper to borrow from a bank.
Well,
FSK is making some suppositions here because nobody really knows how
anything would work outside their
system. A free market rather than an artificially free one might see
interest rates soar, especially if we revert to a “gold standard.”
Think things are bad now? At the bottom of the Great Depression we
were on a gold standard and supposedly had "honest" money. As I said elsewhere, since gold and silver
are commodities, people tend to hold them when they think their
market value (purchasing power) is going up and they unload them if
they think their market value is on the way down, as many people seem
to think right now.
We
see it this way; buy gold and silver whenever you can and right now
is as good a time as any, because you will have to get off this
merry-go-round economy sooner or later, including dealing in any of
its public currencies, or you may be one of the unlucky ones who find
themselves without a chair in the musical chairs economy they have
been running for centuries. Yes, the music does occasionally stop
and they plan it that way. People tend to look backward in time and
nostalgically wish we could get back to what they believe to be a
better world. But those times had their own problems which led
inexorably to these times. Why don't we learn from our past rather
than stupidly repeating it? But without inflation, individual people
could lend to each other and the terms could be reasonable.
Individuals
don't have the magic money-printing power that banks have. This means
that they will always be slaves of the bankers.
That
is their intention.
The
financial industry has a unique perk. They get to print the money
that everyone else uses to trade. This guarantees that the financial
industry will *ALWAYS* be about 10% of the economy.
In
most developed countries their financial industry make up far
more of the business than would be normative since making money with money has nothing to do with productivity or adding anything of value to the marketplace of values. Much of it is in fact destructive of value or deliberately structured to steal value from others.
Large
banks become "too big to fail". If one is forced into
bankruptcy, then a bailout is *NECESSARY*, because otherwise the
financial system starts to unravel. In a free market, one business'
bankruptcy does not threaten the stability of its competitors, if
they are prudently managed. There is no need for financial industry
insiders to be concerned about negative consequences of bad
decisions; there will *ALWAYS* be a Federal Reserve bailout, either
directly as was the case with JP Morgan Chase and Bear Stearns, or
indirectly in the form of a Fed Funds Rate cut.
Both
astute and correct. This proves that insiders do control more and
more of everything.
With
the ability to (literally) print money, the financial industry can
lobby the State for perks.
After
the Supreme Court said corporations were people, they can buy
government perks.
They
can guarantee that reform will never occur. The insiders bought out
all the TV stations and newspapers, guaranteeing their abuses will
never be exposed. (The Internet is changing the equation somewhat. I
predict that the Internet will enable an agorist revolution.)
Agorism,
from agora,
FSK
had much to say about it here.
The
financial industry insiders bought control of schools and
universities, guaranteeing that only fake economics (Keynesian
economics) and fake politics ("Taxation is not theft.")
will be taught in schools. The financial industry insiders arranged
for everyone else to be educated / brainwashed as slaves ("good
citizens / consumers"). (Most politics courses don't even ask
the question "Are taxes different from stealing?" It's an
undiscussed axiom that taxes are morally acceptable.)
To
FSK and any others who are just trying to find their way out of the
matrix, ANY economics that allows fractional reserve banking, central
banking, and especially state issuance of money is fake economics.
The Keynesians and the Austrians are two sides of the same dialectic.
They do not want anyone to question their religion which they
pump up with all kinds of fraud concealing mathematics, snowing the
public with figures, believing rightly that most people are so
gullible that they believe numbers don't lie. A corollary is that if
someone answers a simple question with a roundabout confusing or
complicated answer, that they must really know something or are smart.
Alan Greenspan was particularly good at this.
With
negative real interest rates [FSK already explained how debt and issuance naturally create this, but add to that near zero official interest
rates and a decline in GDP making it worse], the incentive is
for banks and hedge funds to maximize their use of leverage, because
this maximizes their profits. Only politically connected insiders can
start a hedge fund. There is no true "free market" for
hedge fund managers; they are merely a group of people highly skilled
at lobbying the State for favours.
Uses
of financial leverage should make everyone nervous because whenever
they are used it implies someone is stealing from someone else.
There wont be any of this allowed in the VEN and anyone attempting it
will be tossed out for at least 5 years. I remind you all that this
is to be a private organization and it will set its own rules for
membership no matter what anyone else says, period!
When
inflation occurs, wealth is stolen from one group of people and
transferred to another group of people, the people who print the new
money and spend it first.
Well
of course if they don't actually print the money there are other
things they can concoct to steal real assets from people. Things
like mortgage backed securities and credit default swaps come
immediately to mind. The first thing they do is sell them as quickly
as they can because they know they will decrease in value soon enough
as the fraud they enclose is discovered. Over the past several years
they have even been discovered to have deliberately placed bets to
take advantage of the fall in value of these “creations” that
were sold to their customers. Talk about people who no longer
deserve any trust!
Most
new money is created by the financial industry, rather than by
Federal deficit spending.
Maybe.
But when an economy turns south, the government may spend money like
mad to keep it afloat just a while more. When all else fails, the bankers attempt to deflect public attention away from themselves by starting a war. Government spending as a
percentage of GDP goes up as an economy dies.
Therefore,
the primary beneficiary of money supply inflation is the financial
industry insiders and not the government.
It
may ultimately bring the government down entirely. Maybe this is
their intention.
If
this explanation is still too complicated, let me know. Once you
understand the Compound Interest Paradox, a lot of economic problems
are easier to understand. The Compound Interest Paradox is a key
concept, and I agree that it should be my #1 most popular post by a
wide margin.
I
try to answer any serious reader questions. Pro-State trolls get
annoying after awhile. Fortunately, most pro-State trolls get
disgusted and leave. I'm continuing my policy of pointing out and
ridiculing pro-State trolls.
A
jeering contest is NOT an advisable course of action. Were I ever to
run into a pro-State troll, I haven't yet except in reference to
other non-financial matters, my response is to clearly state my
objections and thereafter ignore them, turn your back on them, as it is
your right.
David
Burton
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