The Burning Platform: Money, Politics, and Corruption

In a post titled The Last Link, ZMan writes at The Burning Platform about the difficulty of sustaining sound money among a corrupt political class.

Way back in the early days of the conservative movement, it was assumed that Federal spending was both unsustainable and damaging to the country. Cutting the size and scope of government was their thing. The tool they eventually settled on to reduce Federal spending was taxes. If they made high taxes so unpopular with the public, the Left could not keep raising taxes. If they could not raise taxes to cover their spending, they would eventually have to yield to the mathematics.

Obviously, that never happened. The big tax reforms of the 1980’s did simplify taxes and lower rates on rich people, but revenues remained stable. At the same time, spending kept growing. One of the unspoken truths of fiscal policy is the percent of GDP that is consumed by Federal taxes does not change much of time. The range is between 15% to 18%, depending on when tax policy was changed. This is the logic of the flat tax. One rate, no deductions and no more IRS.

Spending, of course, keeps going up, no matter who is in office. Despite their rhetoric, the Republicans are the big spenders. In the 1980’s they had to spend on the military to win the Cold War. In the Bush years it was the crusades against Islam. It is only when a Democrat is in the White House that the Republicans get tight-fisted, and even that is mostly ceremonial, as we have seen with the last Covid bill. It turns out that there is no relationship between taxes and spending.

Another shibboleth of conservatives is that eventually the bond markets will force a haircut on the government. The so-called bond vigilantes will drive up interest rates, which will make borrowing more expensive. The theory here is that there is a hard limit on debt. Once that limit is reached, spending must go down or taxes must go up in order to reconcile the books. Like the belief that taxes will curtail spending, faith in the mythological bond vigilantes has been misplaced.

Of course, you can go back further and find arguments from the hard money crowd about the limits of fiat currency. There was an argument in the old days that said fiat currency not only unleashes spending and inflation, but it eventually makes the money worthless, thus bankrupting the state. We have been off the gold standard for a very long time now and none of the predictions came true. The spending continues, the borrowing continues, and the money creation continues.

The gold bugs have now moved to crypto currency as the savior. Once everyone is using digital money that is outside the control of the state, then we end up with a de facto gold standard. That will force fiscal discipline on the state, which means radically reducing spending. The fact that this will never happen has so far not dimmed the enthusiasm, but like all of the other schemes to cut spending, this one will prove no match for the animal cunning of the ruling class.

There is another theory related to money. The monetarists have always argued that sound monetary policy would impose discipline on the state. Since central banks are independent of the state, they can maintain a stable money supply. While not the same as a gold standard, sound monetary policy has similar effects. That has turned out to be a myth as well. The Fed is now captive to the spending frenzy of Washington, finding new ways to underwrite trillions in new outlays.

Now, there are those who will keep lighting candles for their favorite theory. The gold bugs, for example, are sure hyperinflation is around the next corner. The bond vigilantes are similarly sure the next crisis will confirm their theory. The truth is though, none of these theories turned out to be true. The official debt is $28T, but that excludes things like Social Security. The real debt obligations of the Federal government are incalculable. No one knows and no one seems to care.

The lesson of the last half century is one the monetarists learned from the battles over the gold standard. If the ruler is so corrupt you need hard money to control him, your ruler is corrupt enough to find a way around the limits of hard money. It turns out our rulers are more than capable of conniving around every limit put before them. They have reached levels of corruption that were though impossible half a century ago. The display being put on now suggest they are just getting warmed up.

This rather shabby track record should raise a question. That is, is the field of economics just pseudoscientific nonsense? It has lots of complexity and lots of very clever solutions to the complex problems it unearths, but outside of the most basic of concepts like supply and demand, economics is not very useful. In all of the important things, it turns out to be wrong. Astrologers have a better record than economists, because they know they are grifters, not scientists.

Putting that aside, the lesson here is that contra the libertarians, economics is downstream from politics. No amount of fiddling with the tax code can fix the defects of the political class. Even further, the right people in a corrupt system cannot correct the defects of the corrupt system. This is why the people come and go in Washington, but the corruption rolls on unimpeded. In the great chain of causality, economics is the last link in that chain. It is the final effect of a chain of many causes.

Mises Institute: Government’s Money Monopoly and the “Great Reset”

From the Mises Institute, Government’s Money Monopoly and the “Great Reset”

The unbacked paper money system is an economically and socially destructive system—with far-reaching and harmful economic and social consequences beyond what most people would imagine. Fiat money is inflationary; it benefits some at the expense of many others; it causes boom-and-bust cycles; it corrupts the morality of society; it will ultimately end in a major bust; and it leads to overindebtedness.

The Institute of International Finance (IIF) estimates that global debt climbed to $277 trillion by the end of 2020, amounting to a staggering 365 percent of world gross domestic product (GDP). As the graph below shows, global debt versus GDP has risen in recent years, suggesting that the increase in debt has outpaced the rise in GDP. This buildup of excessive debt, the path to overindebtedness, results from an unbacked paper money system.

In close cooperation with commercial banks, the central banks artificially lower the market interest rate through credit expansion, which increases the money supply. Consumption increases and savings decline, while capital expenditures go up. Taken together, this means that the economy is living beyond its means. While the injection of new credit and money at artificially low interest rates causes an initial surge in economic activity, this boom will and must be followed by bust.

Learning from the Austrian Business Cycle Theory

The Austrian business cycle theory (ABCT) points to this with rigorous logic. The reason is that once the injection of new credit and money has run its course—after wages are raised, cost of capital lowered, etc.—market interest rates return to their original levels, that is the levels which prevailed before the issuance of credit and money out of thin air. Once market interest rates start to rise, the boom slackens and collapses.

Higher market interest rates prompt people to reduce consumption and increase savings from current income. In addition, new investment projects that are considered profitable in times of artificially suppressed market interest rates turn out to be unprofitable. Firms start to rein in spending, cut jobs, liquidate assets. Painful as it is for most people, this is the process through which the economy cleanses itself of overconsumption and malinvestment caused by the boom.

As a rule of thumb, the higher the debt burden on an economy, the higher its debt in relation to income, the more problematic it is when a recession hits. Generally speaking, a decrease in output worsens borrowers’ ability to service their debt. However, once debt has reached relatively high levels, a recession can cause debtors to default on their payment obligations. In fact, it can cause the debt pyramid to collapse, sending the economy into depression.

Critics of the ABCT may argue that the unbacked paper money system, despite its sky-high debt, did not collapse in the 2008–09 crisis, nor did it collapse in the politically dictated lockdown crisis of 2020–21. Doesn’t that suggest the ABCT got it wrong? The answer is no; the important point here is that when applying the ABCT to past or current real events, it is important to take “special conditions” into account appropriately.

Once that is done, it becomes evident that central banks have taken control of market interest rates in recent years. Market interest rates are no longer “freely” determined in the market, but effectively dictated by monetary authorities. Indeed, central banks can—and do—prevent market interest rates from rising, which means that they are actually disrupting the corrective force that could turn the boom into bust, keeping the boom going for longer.

This policy has consequences that should also be taken into account. When central banks successfully intervene in the credit market and fend off the bust, the misallocation of scarce resources continues and gets even worse—adding to the scale and scope of the inevitable crisis in the future. What more, the monetary policy of preventing a bust by any means allows anticapitalist forces to destroy what little is left of the free market system. And that is exactly what is happening around the world.

An Uncomfortable Truth: The State Feeds on Crises

The politically dictated lockdown crisis has slowed down economic activity in many countries around the world and in extreme cases brought it to a standstill. Recession, business failures, and mass unemployment are the results. In the meantime, the governments—which have caused the disaster in the first place—have “come to the rescue”: they are letting their central banks put ever-greater amounts of money in the bank accounts of consumers and producers.

In relying on this money flow, a growing number of people and business models become dependent on government handouts. It does not take much to realize that this whole process is clearly playing into the hands of those political quarters that want to grow the state even bigger, push back the remaining capitalist elements in the economic system, and establish a collectivist-socialist regime—that it operates the switches to a truly “socialist transformation.”

When consumers and businesspeople receive generous financial support from the government, resistance against a policy that destroys many firms and jobs is greatly reduced—compared to a situation where those who suffer from such government policies receive no compensation. In other words, by running the electronic printing presses, state power is greatly increased at the expense of civil liberties and freedom.

History shows that emergencies and crises strengthen the power of the state; and also that it is very difficult to ever take power away from the state once it has seized it. And the more powerful the state becomes, the more it will be used by resourceful special interest groups—such as the military-industrial complex, Big Banking, Big Tech—as the economic theory of so-called rent seeking would explain to us.

The Trouble with Oligarchic Democracy

This development is accelerated in democracies, because democracies develop into oligarchies, as the sociologist Robert Michels (1876–1936) argues. Why is that? In representative democracies, political parties are formed. These parties are organizations run by the most determined, power-hungry people. They become the “oligarchic party elite” and are in a position to set their own agendas, regardless of the will of the party base or party voters.

Various oligarchic party elite groups begin to work together, paving the way toward an “oligarchic democracy,” in which the powerful few rule over the many powerless. In other words: Michels argues that the idea of democracy is turned on its head. In fact, in an oligarchic democracy, it becomes possible for the political and corporate “elites” to effectively run the show, enforcing their favored political, economic, and social concept with joint forces.

Against this backdrop, the buzzwords “Great Transformation,” “Great Reset,” and “new world order” seem to be the brainchildren of today’s political and corporate elites, meant to replace what little is left of the free market system and install a so-called command economic system: While the institution of property is maintained in name, it is the central authority, the power elite, that determines what the owners of property may or may not do with their property.

In a command economic system, the oligarchic party elites would effectively dictate what is produced by whom, when, where, and at what cost, and who gets what and when from the production output; and it takes only a fairly small—and logically consistent—step to transform the command economic system into outright socialism—where the oligarchic party elites and their partners would effectively own the means of production. But socialism is a recipe for disaster.

We Must End the State’s Money Monopoly

The productivity of a command economy, let alone full-blown socialism, could not support, feed, clothe, and house a world population of currently around 7.8 billion people. In fact, a command economy or outright socialism would mean the death of millions, if not billions, of people. Ludwig von Mises (1881–1973) pointed this out as early as 1919: Socialism is impossible, it leads to chaos, impoverishment, and total loss of individual freedom.

And yet, collectivist-socialist ideologues and their supporters, politically weaponizing “climate change” and, most recently, the “coronavirus epidemic,” are pushing very hard to abolish the market system (or what little is left of it) altogether to impose a command economic system, or even a socialist regime, on mankind. Although they enjoy support by large numbers of people, that does not mean that socialism is inevitable, as Marxist-socialist thinkers wish to make their audience believe.

Mises understood that peaceful and productive cooperation among men at national and international levels requires private property and unimpeded division of labor, or what it boils down to: the free market system, or capitalism. He also pointed out that society lives and acts only in individuals, and that it is in the interest of every individual to stand up for the defense of the free market system. Mises noted in Socialism (1951):

society…was created by mankind. Whether society shall continue to evolve or whether it shall decay lies—in the sense in which causal determination of all events permits us to speak of freewill—in the hand of man. Whether Society is good or bad may be a matter of individual judgment; but whoever prefers life to death, happiness to suffering, well-being to misery, must accept society. And whoever desires that society should exist and develop must also accept, without limitation or reserve, private ownership in the means of production.

Against this backdrop, it should be clear that the unbacked paper money system is not only a cause of crises, it is also the central instrument for those political forces—namely the oligarchic party elites and their supporters—that want to overthrow the existing economic and social order and install a collectivist-socialist dictatorship. Because without the state being in a position to increase the money supply at will, people would sooner or later feel the true costs of the state’s machinations.

And once people understand the true costs of the politically orchestrated economic transformation to their own lives and the well-being of their families and communities, resistance would certainly ensue that has the potential to put an end to a political system that increasingly erodes individual freedoms and liberties. Ending the state money production monopoly and allowing a free market in money is perhaps the most effective line of defense against world tyranny.

FFF: Monetary Destruction in America

Jacob G Hornberger at the Future of Freedom Foundation has a well written article detailing Monetary Destruction in America. It’s a bit of a long read, but worth the Constitutional and monetary education.

The Constitution made it crystal clear what the official money of the United States was to be when it called the federal government into existence. That money was to be gold coins and silver coins, not paper money.

Article 1, Section 10, of the Constitution, which is a restriction on the power of the states, states, “No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts….”

What were “bills of credit”? That was the term used at that time for paper money. Through that provision in the Constitution, the Framers expressly prohibited the states from issuing paper money. It prohibited them from making anything but gold coins and silver coins legal tender or official money. It prohibited the states from issuing their own coins, leaving that power and responsibility to the federal government.

With respect to the federal government, Article 1, Section 8, states, “The Congress shall have Power …To coin Money, regulate the value thereof, and of foreign Coin…. To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.”

Why wasn’t there an express prohibition on the power of the federal government to emit “bills of credit” or paper money? The reason is that the Constitution established a government of limited, enumerated powers. The federal government’s powers were limited to those listed in the Constitution. If a power wasn’t enumerated, it couldn’t be exercised. Since there was no power to issue paper money given to the federal government, it couldn’t exercise such power.

It was different with the states. Under the Constitution, they were to have whatever powers they wished to exercise, unless there was an express restriction on a particular power within the Constitution. That was why the Framers deemed it necessary to restrict the powers of the states when it came to money: no printing of paper money, no coining of money, and no making anything but gold coins and silver coins official money.

The federal government, on the other hand, was given the power to coin money, not print money, and to regulate the value of such money. It was also given the power to punish people for counterfeiting “the Securities and current Coin of the United States.”

Article 1, Section 8 of the Constitution also gave Congress the power “To borrow Money on the credit of the United States.” That’s what counterfeiting “the Securities” of the Constitution was referring to — debt instruments of the United States, such as bills, notes, and bonds.

There is something important to realize about the federal government’s debt instruments: It was understood that they were not money or “legal tender” but rather promises to pay money — i.e., promises to pay gold coins and silver coins.

When we consider all of these constitutional provisions, it is easy to see that the Framers intended to establish a monetary system in which gold coins and silver coins were to be the official money of the United States. And, in fact, that is precisely what happened after the federal government was called into existence. The Coinage Act of 1792 established the first mint in Philadelphia for the purpose of issuing coins. The silver dollar was the first unit of money issued. That would be followed by the silver half-dollar, quarter-dollar, dime, and half-dime. Gold coins consisted of the $10 gold Eagle, $5 Half-Eagle, and $2.50 Quarter-Eagle.

That gold-coin, silver-coin system remained the monetary system of the United States for more than 125 years. It turned out to be the most stable monetary system in history, one that, along with no income taxation, no welfare state, no warfare state, no immigration controls, and very few economic regulations, played an important role in the tremendous rise in economic prosperity and rising standards of living in the United States throughout the 19th and early 20th centuries.

It is often said that America’s “gold standard” was a system in which paper money was “backed by gold.” Nothing could be further from the truth. There was no paper money. There were only debt instruments promising to pay gold and silver. The system was one in which gold coins and silver coins were the official money of the United States.

Paper money

Why did our American ancestors have such a deep antipathy toward paper money? They knew that throughout history public officials had plundered and looted people through the use of paper money. To finance their ever-burgeoning expenses, public officials, of course, would first resort to tax increases. At some point, however, taxes would get so high that people would begin to resist, cheat, or, in extreme cases, violently revolt. That’s when kings and other regimes would resort to the printing press to finance their expenditures. They would simply crank up their printing presses, print whatever amount of money they needed, and go spend it.

The result would be a devaluation of everyone’s else’s money…(continues)

Click here to read the entire article at the Future of Freedom Foundation.

Ben Yu: Cryptocurrency 101

Over at Medium.com, Ben Yu has written a cryptocurrency primer called Cryptocurrency 101. It is a long read, but it has much good history and other background information to enhance your understanding of the reason for and value of cryptocurrencies.

Bitcoin was designed, essentially, as a better ‘digital gold’. It incorporates all of the best elements of gold — its inherent scarcity and decentralized nature — and then solves all the shortcomings of gold, in allowing it to be globally transactable in precise denominations extremely quickly.

How does it do this? In short, by emulating gold’s production digitally. Gold is physically mined out of the ground. Bitcoin is also ‘mined’, but digitally. The production of bitcoin is controlled by code that dictates you must find a specific answer to a given problem in order to unlock new bitcoins.

In technical terms, bitcoin utilizes the same proof-of-work system that Hashcash devised in 1997. This system dictates that one must find an input that when hashed, creates an output with a specific number of preceding zeros, among a few other specific requirements.

This is where the ‘crypto’, incidentally, in cryptocurrency comes from. Cryptographic hash functions are fundamentally necessary for the functioning of bitcoin and other cryptocurrencies, as they are one-way functions. One-way functions work such that it is easy to calculate an output given an input, but near impossible to calculate the original input given the output. Hence, cryptographic one-way hash functions enable bitcoin’s proof of work system, as it ensures that it is nigh-impossible for someone to just see the output required to unlock new bitcoins, and calculate in reverse the input that created that output.

Read the entire article by clicking here