Sunday, July 20, 2008

Where are the progressive taxes?

Taxes target not "income" - as they purport to - but economic activity. The government could not fund its $3 trillion budget even with a 100% tax on the top 10% of earners.

Instead, the bulk of economic activity occurs in small transactions in which taxes are built-in (sales tax, tarrifs, gas tax, etc.) To spread out its burden, government must draw the majority of its revenue from these small economic transactions.

The tax rules reflect this reality. IRS Pub. 525 defines income from babysitting as taxable income - when was the last time a rich person was making bank off of babysitting? Barter transactions are taxable - exchanging yard sale items with your neighbor is taxable. Of course, yard sale cash proceeds are taxable income - you know that's how Rockefeller got rich, right? He invested in the yard sale market and he soon became a global yard sale tycoon. Forgiven debt is taxable income - if I loan you $100, then forgive the repayment, you must pay taxes on that $100. Gifts, even small ones, are taxable.

Every time money changes hands, it is taxed - but not all money exchange is "income." Retailers escape this because they can pay taxes on what they say is the profit only. But if you are poor and open up a home bazaar, the government is going to treat all incoming cash as income unless you go get (pay for) a business license and file the appropriate tax forms (hire a tax consultant) and so on and so forth. Of course, no poor person can afford to do all that. How many poor people don't engage in trade that would help them improve themselves because of the onerous regulations and taxation?

Craigslist has enabled many poor people to circumvent this. I predict that you will soon hear calls for taxation and regulation of online transactions. The media has already begun demonizing Craigslist. We can't have poor people trying to better themselves, that would put the lie to the inherent superiority of the Ivy League class!

Of course, we realize that part of the reason our tax code is so complex is exactly to create special loopholes for those with enough money to lobby Congress on tax rules. If you earn $50 million a year, you can (profitably) employ tax lawyers, tax consultants and tax lobbyists to make sure you avoid taxes by whatever means possible.

Which leads to the problem of capital mobility. If you are wealthy, you can afford to maintain residence in one tax-advantageous country while operating businesses in other countries. You can afford to create off-shore corporations to shelter your wealth and move it from one place to another in anticipation of new changes in off-shore tax rules. The one-world government pscyhos see this as an argument for world government. I see it as an exposure of the lie that our system has ever been progressive. The rich write the rules, so you're never going to get rules written that tax the rich more than the poor.

Since taxation ultimately targets economic activity, it creates what economists call "deadweight loss." Basically, deadweight loss can be defined as "all the production and consumption that would have occurred at the higher price producers could have charged absent the tax and the lower price consumers could have paid absent the tax but didn't."

Let's say apples are selling at 69 cents per pound. Government decides we need a new Produce Safety Tax to ensure our apples are delivered safe and clean. The tax is 6 cents per pound. Afterwards, the price of apples goes up by 3 cents to 72 cents per pound. In this (idealized) scenario, the market splits the tax evenly between consumeres and producers. In any case, it's clear to see how the tax distorts the market. The effect of the tax is to reduce the price of apples by 3 cents for producers to 66 cents per pound and increase the price of apples for consumers by 3 cents to 72 cents per pound. The overall effect of the tax is to depress economic activity, since producers will only produce the amount of apples that they would have produced at 66 cents per pound (which is some amount less than they were producing at 69 cents per pound) and consumers will consume less apples at 72 cents per pound than they would have at 69 cents per pound. Deadweight loss is, of course, regressive - the decrease in economic activity affects the poor far more than it does the wealthy. A product tax is like a dual price control from hell that simultaneously holds down prices for producers (the opposite of what price ceilings are usually employed for) and increases prices for consumers (the opposite of what price floors are usually used for).

Tariffs are an obvious example of taxing the poor and giving to the rich. The argument put forward for tariffs is to protect local jobs but this is not the purpose at all. The purpose of tariffs is to protect local wealthy business owners who can't compete with overseas producers. As Steven Landsburg says it in a Fox news intereview (paraphrase), "the way to see that cheap overseas goods are good for us is to imagine they were sending us free stuff instead of cheap stuff. It's very hard to argue that that would be bad for us." If you introduce tariffs back into the picture, it becomes obvious what the government is really doing: a tariff on imports of free goods would serve the sole purpose of subsidizing the local business owners who produce the free good being shipped here.

Inflation is perhaps the most pervasive and insidious form of taxation of the poor. Inflation is a legalized counterfeiting operation which has the effect of draining wealth from everyone who is far removed from the source, the banking industry, and transferring it to those who are near the source - big industry, wealthy businessmen, and even ordinary homeowners.

Social Security is another obviously regressive tax. It is not even paid above a certain income ceiling. Since older people tend to be better off in their golden years than they were when they were young and since most payers of Social Security are younger than most collectors of Social Security, the entire system is really nothing more than a gigantic Ponzi scheme that transfers wealth from those who don't yet have it (the young) to those who do or, at least, ought to (the old). Medicare and Medicaid are the same thing.

So, while we're squabbling over which tax brackets have what percentage tax rates, the government is employing a full arsenal of regressive taxation instruments to transfer wealth from those who aren't part of the political hob-nobbing process (the poor) to those who are (the rich). We should be ashamed of ourselves. We engage in old-world aristocracy and then have the gall to call it "progressive" - it's not progressive, it's just doublespeak.

The war on personal freedom

The war on your liberty has been being waged in this country for decades. Starting at least as early as the cartelization of the banking industry under the "Federal" Reserve Act in 1913, industrial power players, entrenched political interests and government bureaucracies have been waging all out war on personal freedom.

I want to be clear that I am not engaging in some kind of paranoid exaggeration of the facts to rile you up. The facts are dramatic enough on their own, when you look at the right facts.

Let's look at some of the specific tyrannical powers the Founding Fathers worried about government having. They were concerned with government having the power to:

- Detain indefinitely without cause
- Arrest without cause
- Search without cause
- Suppress dissent and peaceful protest
- Torture or otherwise coerce confessions
- Alter private contracts, ex post facto

If you consider the history of US government growth during the 20th century, you see each and every one of these personal freedoms being eroded or abrogated completely by (just a select few milestone pieces of legislation):

Federal Reserve Act of 1913
Executive Order 6102 of 1933
Bank Secrecy Act of 1970
Money Laundering Control Act of 1986
PATRIOT Act of 2001
Sarbanes-Oxley of 2002
Real ID Act of 2005

Under the Federal Reserve Act, Congress created a private banking cartel with the power to regulate the banking industry. Banks must follow the rules handed down by the largest banks that make up the 12 regional Federal Reserve boards. The consequences of this cartelization to freedom are immense because freedom cannot be separated from money.

Under Executive Order 6102, FDR confiscated all non-jewelry, non-collectible gold in the United States and a subsequent act by Congress outlawed gold ownership completely. Gold ownership has only been legal since 1974 (1975, really).

Under the Bank Secrecy Act of 1970, any cash transaction exceeding $10,000 must be reported to the government.

Under the 1986 Money Laundering Control Act, transactions which are "structured" for the express purpose of avoiding the $10,000 reporting requirement are criminalize. To translate that into English, the act of making two $5,000 cash deposits to your bank in the same day will probably get you investigated, if not arrested, no matter your reasons.

Under the PATRIOT Act, this insanity is extended even further: any financial institution who even suspects structuring is required to file a Suspicious Activity Report. If the government decides after the fact that a financial institution should have filed an SAR but did not, the financial institution itself can be severely penalized.

What is this all about? Is it really about fighting crime or terrorism? It has nothing, absolutely nothing to do with fighting crime, except insomuch as prosecutors and police always want more arbitrary powers.

These laws are only about one thing: GOVERNMENT REVENUE. Let me break it down step-by-step:

1) The creation of the Federal Reserve system enabled government to circumvent the Constitutional prohibition (Article I, Section 10) on making anything other than gold or silver legal tender. Since the government is Constitutionally prohibited from doing this, the private banking industry offered to do it in exchange for cartelization in 1913.

The creation of paper legal tender is all-important since, without paper legal tender, government is powerless to inflate the currency. Without a legal tender law, private citizens can legally refuse payment of inflated paper currency in satisfaction of debts and contractual obligations.

2) The confiscation of gold in 1933 served two functions: It imposed a 69% one-time tax on anyone who happened to be holding gold and forced everyone thereafter to transact with Federal Reserve notes. The importance of holding Federal Reserve notes is that tax laws apply to the legal currency of the United States, which is the dollar. Converting people from the use of gold coins to paper dollars as a medium of exchange was requisite to ensure that all transactions could be taxed.

3) The next step is requiring all transactions not only to be performed with Federal Reserve Notes but to be written down. It is basically impossible to tax cash transactions that aren't written down somewhere. The Bank Secrecy Act of 1970 applied this arbitrary $10,000 ceiling (which gets lower every year as a consequence of inflation) to all cash transactions. The ostensible purpose is to "prevent money laundering" and so on, but the government doesn't care about money laundering because it wants to stop crime - it only cares about money laundering because criminal proceeds are untaxed transactions*.

4) The Money Laundering Control Act of 1986 - how appropriate it would have been had this law been passed in 1984 - criminalizes patterns of banks deposits. If you deposit your money at the bank in a certain way, that in itself is a criminal act. This has absolutely nothing to do with stopping crime and absolutely everything to do with making sure that all transactions are being taxed.

5) The PATRIOT Act then takes this to its ultimate, Orwellian end: Suspicious Activity Reports. You'd think they would have at least bothered to give it a sufficiently doublespeak name like, "Friendly Money Reminder" or something but apparently they figure they can get away with anything at this point. And they have good reason to be so smug, when you consider the last 95 years of financial fascism the government has been incrementally implementing.

If the bank even so much as suspsects that someone is engaging in structuring (avoiding the $10,000 reporting requirement), they must file an SAR on penalty of severe fines and even imprisonment. Over 1 million of these SARs were filed in 2006. To avoid the insane penalties, an entire industry of data-mining software has cropped up. This software searches through transaction records looking for any patterns which may look like structuring. For example, if you deposit $5,000 in branch A and the next day deposit another $5,000 in branch B of your bank, the data-mining software will detect that the sum of these two transactions is $10,000 or greater and - even though they occurred in different branches on different days - will automatically flag the transaction as an SAR candidate. In other words, the law requires your bank to spy on you in a manner reminiscent of the thoroughness for which the Gestapo was so proud.

Gotta keep track of every last penny so we can justify taxing it.

6) Sarbanes-Oxley - this monstrosity implements a board in Washington DC tasked with overseeing corporate accounting requirements throughout the entire United States. The costs of SOX-imposed regulations run well into the billions and for what? SOX was justified by the Enron scandal but was just one more Washington power grab. SOX amounts to a cartelization of the accounting industry. Of course, the link between accounting and taxation could not be more obvious.

7) Real ID Act. Now, in order to fly on an airplane - coming up in 2009 - you are going to be required to have what amounts to a Federal identification card. Of course, we've had Federal ID for some time now in the form of SSNs but their insecurity fortuitously prevented their overuse.

The link between taxes and identification should also be obvious.

Taxes are slavery, nothing more, nothing less. It is easy to see that this is the case because taxes are absurd. When I say "absurd," I do not mean some generic expression of disgust, I mean that they are actually irrational. Taxes actually don't make any sense at all. Let me illustrate:

A couple years ago, the IRS passed rules requiring barter transactions to be reported. Cash transactions - even at a yard sale - have always been required to be reported. The view of the IRS is that when I receive $5 in payment for some toys I sold at a yard sale, that $5 is income. As income, it is taxable. But our heroic, ever-vigilant taxmen realized that people could exchange a couple pairs of pants for some toys and this would be an untaxed transaction.

But the heroes that they are, they came up with a solution: You must report the fair market value of the item you received in exchange on your taxes. So, what is the fair market value? And what about the FMV of the thing you traded in exchange? If I trade a pair of pants for you box of toys, I may have barely preferred the toys to the pants, I did not profit by the full "fair-market value" of the pants.

The problem is that the government must view all transactions as a zero-sum game of exchange of objectively-valued objects in order to tax the transactions. In reality, transactions constitute a positive-sum game of exchange of subjectively-valued objects. The pants are worth more to me than the toys. The toys are worth more to you than the pants. How much more? That's a nonsense question once you admit that both parties are better off after the transaction. Each object would have to have two dollar valuations for the government to be able to tax both parties for the "income" they generated by the barter exchange.

Let us say a neighborhood of people are all in the 10% tax bracket. 10 people have yard sales in that neighborhood on the same day. Person 1 looks at the yard sale next door and sees something she wants, and pays Person 2 $5 for it. Person 2 looks at the next yard sale down the street, sees something she wants and hands the very same $5 to Person 3. And so on and so forth until Person 9 hands Person 10 the $5.

All the people in this neighborhood are also studiously law-abiding citizens. Since the IRS stipulates that even cash income from yard sales is taxable, each citizen includes that $5 in their year-end taxes. Ten people will pay 10% taxes on the same $5 as it traveled down the street that day. That adds up to a 100% taxation on that $5 between the 10 yard salers. And for what? For simply shifting one item one house over for each of the 10 households with yard sales that day.

So, taxes are absurd. They say they tax us on "income," but they're not really taxing income, they're taxing the positive rate of change of dollar holdings (they don't untax the negative rate of change, that is, they don't untax the money you spend). Of course, the larger the rate of change of dollar holdings, the more transactions are taking place in the market and the better off everyone is becoming. But government does this huge service to us by dampening that rate of change. Yeah!

If taxes are absurd, then collecting them is just slavery. Government dictates that it intends to take such and such money from such and such people according to such and such "rules." Taxes are the last vestige of slavery. Rather than constantly giving the government even more power to enslave us in the name of "stopping crime" or "fighting terror", we need to start moving towards a future of freedom from slavery.

The government keeps rooms full of secrets (it has to hide all the criminal things it does) but wants the power to track every detail of your waking life so they can tax every bit of it. I say, if their intent is just to enslave us, why not drop the pretenses and get on with it? Quit pretending to be enslaving us in the name of fighting crime. Quit pretending to be enslaving us in the name of fighting the "global war on Terror." Taxes are barbaric and immoral. It's long past time we stood up and said that enough is enough. We threw off racial slavery over 100 years ago, but we have yet to throw off slavery altogether.

Two last closing points:

- I'm not going off on taxes because I want more money... I make a plenty comfortable living after taxes and if I want more money I can always go out and make more. I am going off on taxes because of what I just said: they are an immoral and barbaric enslavement.

- Neither of the Presidential candidates is going to solve any of this - they will only extend it further. Do you think that Obama is going to work to scale back the PATRIOT Act or the Money Laundering Control Act or the Bank Secrecy Act or the Federal Reserve Act? No. Why would he reduce the revenues which empower his executive bureaucracies? Our enemy is, ultimately, not the elected officials. It is the long-term bureaucracies, the entrenched lobby interests and international power players.

These people just want power because they are criminal and power-seeking is a criminal mindset. Power is ultimately measured in the ability to destroy - you only have power over something to the extent you can destroy it. To demonstrate power over people, you must be able to destroy their wealth and their lives. Taxes are nothing more than the vicious, pointless destruction of wealth to demonstrate power. The government taxes us because it can. And the financial fascists who are obsessed with power will continue to work to enslave us.

Friday, July 18, 2008

The central problem with government

I am supposed to be using this blog to think through why I object to government and why I am an anarchist. I think that all the problems with government can be crystallized down to one, incompressible bit of error: government is an organization granted the power to make decisions and export the costs of those decisions onto others.

"Government is an organization"

People often ask questions like, "What is the will of society?" or make statements like, "This is what the people want." It is a fallacy, however, to speak of uncoordinated groups in terms of telic purpose. When a group of soldiers is routed and begin a panicked retreat, fleeing for their lives, is this a reflection that it was "the will of the soldiers" to retreat? To say it was "the will of the soldiers to retreat" would imply some kind of consensus, or organization, but in the case of a panicked retreat, this clearly cannot be the case.

Let's say 80% of Americans want to go to war with country X. If you ask 10 random Americans why they want to go to war with country X, you are liable to receive 10 different answers. Sure, they may all be motivated by a common national tragedy as in the case of 9-11, but their reasons for wanting to go to war will vary widely. How can 10 people spread over a country millions of square miles in size be said to have a common, telic purpose of any kind, even if they happen to agree by super-majority that the US government should take a certain action, like go to war with country X? To illustrate the absurdity, does the fact that David Cook won American Idol reflect that it was the will of Americans that he win? Such a statement is unintelligible and absurd.

So, what kinds of things can exhibit telic purpose? Well, certainly, individuals can exhibit purpose. You can make choices that reveal your preferences and express your will. Organizations can also exhibit telic purpose. Corporations exhibit the purpose to earn a profit and their actions, as a rule, consistently reveal this purpose. Societies, associations, bureaucracies, and assemblies can all exhibit purpose.

Cultures may exhibit patterns of behavior but I think it is not appropriate to describe these patterns of behavior as purposeful. I think the dividing line is in the nature of how cultures vs. organizations are structured. Organizations invariably exhibit top-down, hierarchical control. Their stated goals are rarely conflicting and they exhibit the ability to plan into the future. Cultures, on the other hand, usually do not have hierarchical control or even a single, charismatic leader. Cultures, as a rule, seem to be driven by population dynamics more than any kind of central planning or hierarchical control. Nations are an arbitrary political grouping of people that do not even coincide with cultural groups. To speak of a nation as having a will or purpose is a pernicious fallacy perpetrated daily by news media, academics and regular folks.

Why does this matter to the central problem of government? Well, the myth of democracy is that government is "of the people, by the people, for the people." This is a quaint bit of propaganda that implies a synonymy between the people and the government. But this cannot be the case because the government exhibits telic purpose whereas the people do not. That is, the government is distinctly organized with the three branches of government at the top (and the Executive, arguably, first among equals) and all the bureaucracies below. The Federal government even has a ranking system, the notorious G1, G2 and so on. The people do not have a will. Each individual has a will. Organizations exhibit purpose. But "society" or "the public" are just arbitrary groupings of largely unassociated individuals.

"... granted the power..."

The government has never had power that has not been granted to it by its host society. The government, by virtue of the fact that it is parasitic, is a minority. As a consequence, it is intrinsically less powerful than its host society - the weapons which make government seem more powerful are only effective so long as the majority of people obey the rules. Once mayhem breaks out, the weapons lose their effectiveness and the tiny minority who parasitically controls society becomes powerless. There are numerous examples of this throughout history, such as the French revolution.

Government only has power because it is granted power by society. This doesn't mean that governments can easily be changed or overthrown by their host populations but whenever it comes right down to widespread chaos and rioting, government loses because most of the weapons it uses to maintain its parasitic control over society rely on the majority of people remaining compliant. (Revolutions are still very rare because of the "Who's going to step up first?"-problem, but that's a different topic.)

"... to make decisions and export the costs of those decisions onto others."

This is the central problem with government.

Imagine a credit card such that when you spend money on the credit card, there are 1 million other people who are legally required to each pay 1 millionth of the balance you rack up. If you spent a million dollars, you would only be incurring a $1 burden on the folks required to pay your credit card balance. How much money would you spend? Well, you'd spend as much money as:

- Your conscience limited you to
- The people could pay
- You could tolerate the haranguing of the folks required to pay your balance

We see each of these throughout the history of human governance. In some very rare cases, rulers have exhibited self-restraint and have not spent as much of society's money as they might otherwise have spent. In other cases, we have seen government literally spend all the money in society. In most cases, however, government spending has been limited by the potential for political unrest. The government usually spends as much money as it feels will not trigger riots and social unrest, when fears of external threats are minimal*.

The powers of taxation, inflation and public debt are all forms of the public credit card above. The government may make whatever decisions suit its purposes and export the costs of those decisions onto the public. This is an ancient and barbarous practice that is nothing short of criminal.

So, if it is true that government only has the powers which society grants it, and government's powers to tax, inflate and incur public debt are harmful to society, then why does society grant government these powers? I think there are several reasons:

1) Most people do not understand the basic economic principle that there are no free lunches - everything has a cost. Without understanding this, it is not clear that every action the government takes imposes a cost on society.

2) Most people assume that an organization with the power to export the costs of its decisions is the only organization which can provide many services, especially military defense, security services, adjudication and conflict resolution. "Government isn't perfect, but it's a necessary evil."

3) Most people don't believe the government is just another organization. They assign all kinds of mystical and magical powers to the government but there is only one power the government has which no other organization has in its territory: the gun. The gun is both the excuse for and the means by which the government maintains its hold on the instruments of power: taxation, inflation and public debt.

4) Most people today do not understand that the market naturally imposes costs on socially undesirable behaviors (theft, fraud, etc.) by forcing individuals to bear the costs of their own decisions. When we empower government to export the costs of its decisions, we are actually removing the natural limitation of the market on undesirable behaviors. This is why governments have always been and still are the biggest traffickers in all forms of crime (I will spell this out in future posts on the consequences of the central problem with government.)

Because of this, people do not see the causal connection between the bad decision-making of government and the removal of costs on bad decisions by the public.

5) Psychological studies show that people prefer a small chance for a large prize to a better chance of a smaller prize, even when probability theory says the two are mathematically identical. Would you prefer a 1 in a million chance to win $1 million or a 1 in 100 chance to win $100? Mathematically, both choices have the same expected payout. Psychologically, people prefer the million dollar jackpot.

What does this have to do with government? Well, in the competitive free market, you can make a good living, but you will have to work hard. The market leaves very few leisurely, yet profitable, occupations since leisure is not an efficient use of time. The political economy, with the government's unlimited public checkbook, provides many opportunities for a leisurely, profitable occupation. By virtue of this fact, there are many people trying to claw their way to the top to reap the really big rewards, which reduces the odds of actually hitting the jackpot. But psychologically, it should not be surprising that people prefer a long shot at easy money (through the political economy) to the essentially sure thing (the market economy) which, even if it is more monetarily rewarding, entails significantly more effort.

6) Even many libertarians assume that defense must be provided by an organization with the power to export the costs of its decisions because even if a society tried to live freely without a publicly-funded government, its neighboring countries who still tolerate the existence of an organization with the power to export the costs of its decisions would be able to invade and militarily defeat the helpless free society.

It may or may not be true that neighboring countries would try to invade but there is no reason to believe that an organization without the efficiency constraints of bearing the costs of its own decisions can militarily defeat organizations with such constraints, especially in the age of technology. Scale doesn't decide wars, efficiency does.

I think the best way to understand this is relative to the history of how free countries have defended themselves against expansionist military socialist countries. Nazi Germany had inevitably to collapse because of its centrally controlled economy. Soviet Russia and Maoist China attempted to awe the West by dedicating an incredible proportion of their economy to production of military weapons. But the massive misallocation of resources only led to impoverishment and, in the case of Russia, total collapse.

Let us say that Region A secedes from all sovereign states and becomes an absolutely free territory. Country B - perhaps the country from which Region A seceded - attempts to invade Region A. While this invasion will impose costs on Region A, by virtue of the fact that people in Region A do not rely for their defense on organizations with the power to export the costs of their decisions, Region A - when considered in aggregate - suffers far less economic loss in defending itself than Country B must expend in its irrational aggression against Region A. In the long run, Country B will exhaust itself.

*This is the opposite conclusion you might expect - when external threats are very large, government must decrease spending to ensure sufficient internal productivity to be able to afford to protect itself. The "total war" of the 19th and 20th century simply illustrates that invasion of a nation is not necessarily a threat to the core organization of government which may relocate itself in exile with other allied nations. Governments which can relocate themselves out of harm's way are free to waste a nation's productive resources even in the face of imminent external attack.

What is inflation?

I put together this video to explain it. Enjoy.

Sunday, July 13, 2008

Hidden royalty?

I have to confess that I have one conspiracy theory of my own (see my last post on Conspiracy Theories). I think of it not so much a conspiracy theory as a hypothesis - but then, so do all conspiracy theorists.

My conspiracy theory is this: there is always a royalty. In the West, we believe royalty ended with monarchy. Of course, there are still the museum-pieces of the English and European royal families, but they have real power, so they say.

But let us suppose that all power derives, ultimately, from money. Since, in my view, no money but gold is a store of value, then it would follow that all power ultimately derives from gold. Gold is a physical measure of power.

Now, controlling the gold itself can be achieved by many means. If you are a bank, you might simply refuse to honor any future withdrawal requests and steal the depositors' gold that way. If you have control of a military, you might invade a neighboring region with a lot of gold. If you are the Nazi SS, you might steal the gold dental fillings and other gold of Holocaust victims. Beg, borrow or steal, to get power, you need to get gold.

Mao said, "Power comes out of the barrel of a gun," but without money to buy bullets and guns, there can be no power. So, armed force is just a means to power. To make that means effective requires money, gold.

The monarch is someone who has all the powers of modern government vested into a single individual. The monarch owns and, therefore, taxes all property. The monarch is the ultimate decision-maker, even in cases involving himself. The monarch has a monopoly on force and, usually, on the issuance of currency. And, frequently, the monarch has a monopoly on religious authority and may even command popularity.

With all these monopolies and other advantages, the king is king because no one can beat him, not just militarily. If being king were merely a question of military control, a chief general could easily topple the king at any time. While this has happened in the past, as a rule, most kings have not been overthrown by one of their chief generals.

Ultimately, it is the king's money which makes him more powerful than anyone else. Now, the king is rarely wealthy from his own endeavors. He is wealthy by virtue of his power to tax and inflate and generate public debt. These powers are his true secret. Because he can levy taxes, inflate the currency and incur public debt, the king can always generate unmatched wealth. This money can be used to defeat any challengers, whether political, religious or military or even rebellious. The king can use the public's money to put down the public's unrest, though this strategy has often failed.

So, if my conspiratorial reframing of power is correct, then the royalty are whoever today control - whether directly or indirectly - the powers of taxation, inflation and public debt. In the Middle East, this is still controlled by a literal monarchy in several nations. In the West, however, these powers are ultimately controlled by a largely anonymous elite. This makes their powers actually far greater than the powers wielded by kings in the past, which accounts for why taxation, inflation and public debt are at historical highs. Never have governments taxed their citizens so heavily, inflated the currency so rapidly or incurred such astronomical public debts as in modern times.

A burdensome king quickly became unpopular with his subjects if he imposed heavy taxation. The united kingdom of Israel divided under Rehoboam for this reason. Similarly, the American Revolution was ultimately motivated by insufferable taxes. But the object of hatred was well-known. In the modern system, it is difficult to know who exactly controls the taxation, inflation and public debt. While the wealthiest international bankers and industrialists are all involved one way or another, it is not always clear just who controls what. While elected officials must, obviously, sign off on the levels of taxation, inflation and public debt that come into existence, it is not clear who motivates the ever-increasing levels of these. It is the "movers and shakers" with an interest in seeing taxes raised (because they will be enriched), inflation increased and the public debt increased who will motivate changes in their levels. While government officials account for some of this, they do not and never have accounted for all of it, even in more nationalized systems like Europe.

The most powerful people can afford their own anonymity. Everyone knows who George W. Bush is, so his power is circumscribed by his own popularity. He is a fixed target. But I have no idea who all the nameless beneficiaries of increased government inflation are. These people are who I term the hidden royalty. They command the same powers as a king, that is, they have access to increase the levels of taxation, inflation and public debt when it will enrich them, but we have no idea what their names are.

Now, this doesn't mean that they operate conspiratorially. I'm sure that there are a sufficient number of conflicting interest to prevent the hidden royalty from acting with a univocal purpose. Think of classical European monarchs. They inter-married, visited one another and so on, but if it came right down to it, they'd just as soon slit each other's throats.

The most significant indication, to me, that there is a hidden royalty is the centralization of gold ownership. The vast majority of physical gold is controlled by a relatively small number of individuals. Both Europe and the United States engaged in unilateral gold confiscation - Europe in the run-up to WWI and the United States during the Great Depression. I believe that the massively skewed distribution of wealth is the exact consequence of this centralization of gold ownership. But, even more importantly, it is indicative that we live in a world that is much more similar to the Old World than we like to imagine. There are a relatively small number of rich, powerful elite that control most political power. And there's the rest of us trying to get by.

The solution, of course, is the eradication of the powers of taxation, inflation and public debt because it is these instruments which are the fountain of royal power. Without them, the royalty are naked, no different than anyone else. Without the power to openly (taxation) and surreptitiously (inflation) steal money from the public and enmire the public in debt, the royalty are just another Joe trying to make a buck. By eradicating these instruments of power, we would be forcing all men to play on a level playing field. The market is the great equalizer of men. No matter how many bazillions of dollars you have, if you cannot use them efficiently, they will soon be in the hands of those who can. By tolerating the existence of the instruments of power, we continue to subsidize this hidden royalty who, no different than the royalty of times past, are mostly fools and cowards (just read any quote from your average Rockefeller or Rothschild, these people are really, truly nincompoops.)

We don't need a revolution. We just need to stop tolerating the violation of private property rights by anyone, even the government. As a first step, we need to stop calling for the violation of property rights to fund our favorite programs. This is exactly what the Republican/Democrat system is all about: fighting to capture the flag for your team, so your team can decide how to spend the tax plunder for the next four years. We need to get back to a commitment to respecting property rights. Private property is the death sentence for the parasitic royal elite.

Conspiracy theories

I watched a History Channel special on the JFK assassination some time ago. In it, the presenters go over the evidence for a conspiracy, particularly the large number of entry/exit wounds. Using 3-D, time-synchronized computer models built from the time sequences of the several cameras which were filming JFK from different angles, they were able to show that the shots that we know were fired by Lee Harvey Oswald can quite easily account for all the entry/exit wounds with no mumbo-jumbo or massaging of data.

While it is still possible that there were other shooters, Occam's razor would lead us to conclude that such explanations are superfluous and, therefore, improbable. Possible, but improbable.

Because of my interest in currency, the Federal Reserve and the modern monetary system, I have been watching quite a few YouTube videos propounding conspiracy theories all the way from the 9/11-Truthers to David Icke and his shape-shifting, Illuminati alien-lizards. One common thread I find in all these videos is that they say many true things that really are unpopular today - but they draw conclusions that are highly improbable, at best.

For example, the Zeitgeist movie argues that 9/11 is just one of a string of conspiratorial events which have been engineered as pretexts to launch wars. In WWI, the sinking of the Lusitania was engineered by the powerful elite who, knowing the ship would be sunk by the Germans, scheduled its voyage anyway. Once sunk, America had an excuse to enter the war. In WWII, Roosevelt had advance knowledge of the Pearl Harbor attacks both from Australian intelligence sources and from the codebreakers who had broken the Japanese Purple code. In Vietnam, the Gulf of Tonkin incident simply didn't happen at all. And, in 9/11, the government rigged military aircraft with UAV technology and crashed them into the WTC buildings as a pretext for demolishing the buildings with pre-planted demolition charges.

Not one of these conspiracy theories holds up under scrutiny. However, there is still a striking pattern that reflects something that is true: the American government consistently uses national tragedies as a pretext for entering war. Instead of conspiracy, I would describe this phenomenon as a confluence of interests. That is, when multiple parties all want the same thing, they will independently move towards that goal. Those who are looking for a conspiracy are likely to find one wherever there is a confluence of interests. Since conspiracies are improbable (they happen, but not often, and even more rarely do they succeed), we should ask whether there was a confluence of interests as a result of the national tragedies which are responsible for launching the major US military actions of the 20th century?

I think the answer is yes. The government profits from war by expansion of its powers, reduction of personal liberties, increased tax burden and increased territorial holdings (whether directly or indirectly administered). Private, political corporations profit by manufacturing weapons, sometimes used on both sides of a conflict. But the international banking industry benefits most of all by public debt. As both sides enter a conflict, they need to generate money to pay for all the weapons they intend to build to kill each other with. In order to buy these weapons, they can raise taxes. They can only raise taxes so far before the economy begins to collapse, so they begin selling war bonds which are promises of payment to the bond buyer from future taxes. But once they have raised taxes as high as they can be raised and have exhausted the war bond market, and still need more money, they must turn to private financing. The wealthy men of the world have enough money to give entire governments loans. When they loan their money to a government, the government's repayment plan is through future taxes. Essentially, the government is selling promises of future tax payments to international banks in exchange for cash now.

Now, every businessman is looking to do two things: maximize his profits while minimizing his risks. In fact, there is a name for the product of risk and profit, it is called Beta, the Greek letter 'B'. Beta is really what businesses are trying to maximize. Many people mistakenly believe that it's all about maximizing profits. This is not true. Highly profitable ventures that are even more highly risky may be a less attractive investment than less profitable ventures that are much safer. Loans to large, well-established and stable governments do not have the highest profit margins, but they are very safe. It is highly unlikely that the citizens of the United States are going to stop paying their taxes. So long as we will be paying our taxes, we will also be paying back the debt which the US government has racked up in our name. If you are an extremely wealthy international banker with zillions of dollars worth of capital you are trying to put to use, loaning money to governments looks very attractive.

But to generate sufficient demand for government loans, governments have to incur massive expenses. Wars and welfare entitlements are very expensive. Wars also happen to be very unpopular - except after a major national tragedy. So, there is a confluence of interests between national governments, international bankers (and other very large business interests) and the public after national tragedies. This is why the conspiracy theorists see a conspiracy. There is no over-arching conspiratorial direction of history. If you are a zillionaire international banker with excess cash needing to be invested, all you have to do is sit back and wait for the next national tragedy. When it happens, you work with politicians who are eager to increase their territorial power, tax revenues, etc. to sell a war. If you can fund both sides at once, that's even better because it allows you to hedge your risk... just give more loans to whichever side you believe will eventually win. There is no conspiracy required to make this happen because, after a national tragedy, the public really wants to go to war.

Now, war is only half or less of the overall expenditures of the US government. The bulk of US government spending goes to entitlement programs of one sort or another. These programs are also incredibly expensive. Unlike warfare, it is really difficult to whip up national fervor for welfare. The most successful expansion of the welfare state occurred under Hoover and Roosevelt during the Great Depression - the Depression was capitalized upon by politicians and wealthy interests in exactly the same manner as other national tragedies. Welfare, like warfare, is too expensive to be funded by present-day taxes. If taxes are raised too high, they public will object to further expansion of the welfare entitlements. So, politicians turn to the same means by which wars are funded: inflation and public debt.

The welfare state provides a similarly smooth, steady stream of low-risk profits to the banking system which operates the currency. By steadily inflating the currency, the nation's central bank silently spirits money from the hands of savers into its own hands. No conspiracy is required - there is a confluence of interests because wealthy bankers need a low-risk way to employ their capital while a nation's citizens want welfare entitlements. No one has to be brain-washed to want free stuff.

I think any sane person realizes that such behavior on the part of the public is ultimately self-destructive. We cannot continue destroying property in pointless wars and subsidizing laziness indefinitely. We cannot continue spending our children's and grand-children's money without repercussion. Eventually, something has to give. It is easy to want to blame others for the mess, and conspiracy theories provide a convenient means to do just this. "The reason we have so many pointless, destructive wars is there is a global conspiracy of Illuminati bankers who are pulling all the strings and brainwashing everyone." BS. We just don't want to face up to the truth that we the people share an interest in warfare and welfare with the government and wealthy bankers. It's morally convenient to blame an elite.

The reason there is too much warfare and welfare is simple: we tolerate the existence of an organization with the power to make decisions and export the costs of its decisions onto others. No conspiracy is required for government to make irrational and destructive decisions because it does not bear the costs of its decisions. The President will not get in trouble no matter how much debt he saddles the public with. No member of Congress will ever be punished no matter how much of our children's and grand-children's money he votes to spend today on subsidizing laziness and government bureaucracy. The industry of financiers, industrialists and other private services which surrounds the fountain of government spending all has an interest in protecting and increasing the public debt, inflation and taxation. No conspiracy, just a confluence of interests.

Wednesday, July 2, 2008

What is money? Do you know?

What is money? You might say, "it's a medium of exchange" and it is that, but it's begging the question... what is a medium of exchange? So what is money? Is it power? Is it the root of all evil? Is it "legal tender for all debts public and private"? Is it gold? Is it a representation of land? Is it a representation of labor? What exactly is money?

Here is a great video which breaks down the origins and nature of money in a simple, entertaining way. I had not really grasped just how enmired in debt our monetary system is until I watched this video.

I will note a few mistakes I think the video makes. First, the author suggests that returning to gold as money cannot be the solution because the supply of gold is too fixed and it would leave only those currently holding gold (a tiny minority of the population) with any money. I think that gold has to be money because every other candidate (including the ones he mentions in the video, such as LETS) ultimately rests in the good will of the currency issuer and is, therefore, subject to counterfeit. It is impossible to really counterfeit gold (though it is always possible to swindle people), but it is always possible to counterfeit a fiat currency - by those issuing the currency expanding it. At most, the value of gold in a free market is subject to tiny fluctuations as a consequence of variations in mining prospects and the occasional surprise massive treasure find.

Second, his proposed solutions to the problems created by the Federal Reserve (fully nationalized banking systems) already exist in other nations and create exactly the same problem: inflationary money. The reason that the author is incorrect on both the first point (gold cannot be money) and the second point (nationalizing the banking system will solve the problem) is simple: any fiat monetary system, no matter how organized, ultimately rests in the goodwill of the fiat money issuer. Since people and organizations, on balance, act more in their own interest than in the interest of others, inflation (counterfeiting) is the inevitable result of any fiat money system.

Third, the author suggests that usury (interest) is the root problem, but this is also mistaken. You cannot have credit without interest and it is beyond coincidence that the explosion of industrialization in the 18th century occurred contemporaneously with the cultural normalization of interest at around the same time. If you have a boatload of (real) money not doing anything useful, and I have a great business idea or technological which I can't implement or develop because I don't have money, we can advantageously trade with one another. But, clearly, that will never happen if you have no prospects of earning some money on the risk you're taking by lending your money to me. This is the fatal flaw of Islamic banking (though they have some interesting ways of working around it...)

As for the arithmetical problem the author notes (I/(P+I) people must default on loans if there is a strictly conserved money supply where P is the principal and I is the interest on loans), it is not a problem. Storing value in money is just one of the many uses each individual in an economy can make of their wealth. The incentive to store value in money is dictated by the price of credit. That is, if banks are paying 1% on savings deposits but I can build widgets with my wealth and sell them for 10% profit, I will do the latter. If however, banks are paying 15% on savings deposits, I may consider depositing my wealth at the bank instead. The variability in the percentage rate banks are willing to pay depositors is directly proportional to the percentage rate creditors are willing to pay banks for loans, which in turn reflects the overall demand for capital. By allowing lenders to earn interest (and allowing bankers to earn interest by providing an economy of scale), capital itself can flow to its most valued uses, whether making widgets, building factories or hiding under mattresses.

Fourth, the author expresses concern that if usury is permitted, the lenders will end up owning everything. This is not a problem where all free people are permitted to hold wealth (gold, real money) in deposit at non-inflationary banks, since everyone benefits from the process of credit creation - borrowers and lenders (depositors). That is, an honest banking and credit system results in exactly what the author says, "... all the people have to share the interest." Depositors benefit from the bank's extension of bulk credit in proportion to the size of their deposit, just like a stock investor benefits from his stocks in proportion to the number of shares he holds. Bankers benefit from the profits they can earn by providing an economy of scale in lending (combining many small deposits to make large capital investments.) And creditors benefit by expanding their profit opportunities through financing new ideas.

The money never "runs out" and never ends up in the hands of one person as a consequence of interest for the same reason money doesn't "run out" or end up in the hands of one person as a consequence of businesses making profit between the price they paid for something and the price they sell something - the interest charged on loans by lenders is just competing with other alternative uses to which potential borrowers could put their money. Prices in terms of honest money should be continually falling* (effectively earning interest even on wealth stuffed under the mattress) as a consequence of economic progress. Overall, profits and the charging of interest (usury) result in a constant decrease in the demand for money (and/or an increase in the demand for goods and services, which is the same thing) because less money is required to purchase the same goods and services as prices fall as a consequence of economic progress.

In fact, we could say that the "L-curve" wealth distribution, where a tiny minority of individuals control the vast majority of the world's wealth, is exactly the symptom of cartelization, monopolization and nationalization of the banking industry. In an honest banking system, bankers have no special benefits except insomuch as they can attract depositors to increase the available pool of bulk credit which they may loan out (economy of scale) - which is exactly what bankers should get paid for. What our system effectively does is legalize counterfeiting by the government and banking industry (a point that the author of the video does not bring through clearly enough). It is counterfeiting, not usury, which is the culprit. Debt just happens to be the means by which governments and bankers today get away with legalized counterfeiting.

It should be obvious why an economy based on a currency controlled by a counterfeiting monopolist (the Federal Reserve or national central bank) results in an L-curve wealth distribution. As the counterfeiter runs the counterfeiting presses (or "creates money from debt" ala the video), he dilutes the value of all holders of his currency. This has the effect of surreptitiously "sucking" the money out of the hands of everyone and into the hands of the counterfeiter. Those individuals and businesses most closely associated with the counterfeiter then benefit from the fountain of stolen wealth which pours out from the counterfeiting operation. A national bank is no less susceptible to this problem than the private Federal Reserve. The problem with the Federal Reserve is not that it's "private" but that it's a fiat currency monopoly with the power to legally counterfeit.

I suspect that any economic system will result in the characteristic negative exponential curve that economists find in all developed countries. What legalizing a currency monopoly with the power to counterfeit does is to increase the sharpness of that curve.

Please watch the video (at least the first half, though the whole thing is pretty good). Here is a more scholarly, though less entertaining, presentation of some of the same concepts.

*This is probably offset by the increase in population, as when there are more people there is an increased demand for money even as economic progress results in decreased demand for money. Economist Steven Landsburg argues in his book, More Sex is Safer Sex, that population growth is the direct consequence of economic progress (and vice-versa) If that is true, then there may be a relationship between the decreased demand for money (economic progress) and the likelihood of childbirth (population growth). Overall, however, I think there still has to be a net drop in real prices if economic progress is more rapid than population growth (and, so far, it is) since for there to be more, wealthier people with a strictly conserved money supply implies that prices for goods and services must be lower.

Oil speculation is not the problem

Please watch the following videos, dramatic readings of an article by Alan Greenspan:

http://www.youtube.com/watch?v=ZoNW7u3TBi8
http://www.youtube.com/watch?v=-F2jDJS60YU&feature=related

The current rhetoric out of Washington - supported by a chorus of unwitting populists - is to "regulate" oil speculation. The express purpose of this regulation is to prohibit hedge funds from moving assets into oil. This is because oil behaves a lot like gold, at least in ways that are important for sheltering assets from government policy uncertainty and inflation of the money supply. If we substitute "oil speculation" for "gold standard" in the tail end of Greenspan's discussion, as read in the above videos, we have the following:

In the absence of [oil speculation] there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal as was done in the case of gold. If everyone decided, for example to convert all his bank deposits into silver or copper or [oil] and thereafter declined to accept checks as payment for goods, the bank deposits would lose their purchasing power and government created bank credit would be worthless as a claim on goods.

The financial policy of the welfare state requires that there be no way for owners of wealth to protect themselves. This is the shabby secret of the welfare statist's tirades against [oil speculation]. Deficit spending is simply a scheme for the hidden confiscation of wealth. [Oil speculation] stands in the way of this insidious process. it stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statist's antagonism towards [oil speculation].

Of course this isn't completely true, as rephrased, but you get the gist. Because of the numerous regulations on gold ownership, it is more complicated to purchase gold than oil futures. Oil speculation is serving as a shelter of wealth from political threats and inflation of the money supply.

You might ask, "So what? Why should I care about protecting the wealthy?" Oh, but it's not the wealthy who are trying to protect their wealth in oil futures - the very wealthiest of them all (central bankers, finance and industry magnates, etc.) are the ones with an interest in keeping regular Joes from protecting what little wealth they have managed to accrue in life from the ravages of central bank inflation because they profit from inflation.

What you have to keep in mind with counterfeiting (inflation, deficit spending/public debt), is that it's not just the counterfeiter who profits at the expense of all users of the currency. Those businesses at which the counterfeit monies are initially spent also profit significantly from the infusion of cash and the businesses at which they subsequently re-spend those counterfeit dollars also benefit, though a little less, and so on until the counterfeit money has diffused into the ordinary money supply and the rest of us are all left just slightly worse off. So, the central bankers and industry magnates have an alignment of interest with the government in inflating the money supply and running up public debt through deficit spending.

What the unwitting populists (e.g. Andyman) need to understand is that, for all their good intentions, they are supporting monetary policies that simply go to line the pockets of the wealthiest businessmen in the world: the central bankers and other industry magnates at the head of the counterfeiting fountain. Sure, it props up the welfare state, too, but only at the expense of infusing cash into the private industries owned by the wealthiest people in the world who keep the counterfeiting presses well-oiled.

The problem comes with our toleration of impunitive violations of private property rights. When you open the Pandora's Box of allowing a special class of people (government) to take property from some groups of society (e.g. "the rich") and give it to other groups of society (e.g. "the poor"), who do you think will benefit most? Neither the givers nor receivers ultimately benefit, only the special class with the power to redistribute. Those who control the class with the power to violate private property rights (government) have the potential to substantially enrich themselves. And in the struggle to control the government's redistributive powers, who do you think will most likely win? The poor? Or the wealthy? Do you think that because Warren Buffet or George Soros or Bill Gates have just one vote, they have no more say in how things are run than you do?

The power to own commodities, like oil and gold, is, as Greenspan notes, the cornerstone of economic freedom. The two go hand in hand. To acquiesce to fiat currency, legal tender, taxation, inflation, and public debt generated by deficit spending is nothing other than to acquiesce to slavery. The power to own wealth is freedom. The prohibition on wealth ownership is nothing other than slavery. And only gold, oil or physical commodities whose value cannot be counterfeited can reliably represent wealth. National currencies only represent wealth to the extent that the central banking systems act "as if" their currency is on the gold standard, that is, refrain from counterfeiting.

The welfare statist's* answer is often full nationalization of the central banking system, but this doesn't change a thing... the global bankers, industry magnates, etc. who drink at the head of the counterfeiting fountain benefit from the fully nationalized counterfeiting operations (e.g. Bank of England) as much as any. The only difference may be that the formalities are a little different. Either way, the power to redistribute wealth by any means is a "peaceful" or steady-state version of the power to kick someone's door down and expropriate their belongings at the end of a sword or gun. It's slavery.

*Please do not misunderstand this as a left-right issue - the military-welfare state is exactly the same deal with a different outlet to the counterfeiting fountain, the Pentagon. But the same jokers benefit either way.