The Possible Decrease of Poverty

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There are many solutions to a problem.  It just it seems to me that my idea seems sound, not just by me being biased that it is me, but I see the evidence of it around me where I live.  Poverty is a problem, and when people are faced with survival, they will break the law in order to get the things they need in order to survive.  This is not the case with all crime, but a large portion, it is the case.  I firmly believe that with the money that this country has, there should absolutely be no person living on the streets.  Not only should one consider the entire budget of The United States, but consider as well the printing power that this country has.  People don’t like the idea of paying for someone else to live; they would rather have their tax money go towards other things, especially considering how little reading people do on poverty.  People figure that you can just take things into your own hands, and just get out of poverty.  Since the majority of people in poverty stay in poverty, they are perceived to deserve to be there because they do not have the ability to get out.  The whole premise of our economy, our philosophy of it, is that people with more ability should be paid more.  So if people don’t have the ability to get out of poverty, then they should stay there.

But I just argue it is the decent thing to do, and we have the money to do it.  People don’t trust the government, as they should, but I think this would be a key point to use the power of the government.  Church’s do wonderful work, but they don’t have the capital to do what I am proposing needs to be done.  Private charities I just do not trust for the life of me.  The profit incentive is just too much with those organizations, and exploit their message to make more money for themselves at the expense of the people they were paid to help.  This is why I think the government is the only entity that can really pull this off on a national level.

I have found a basic relationship where I live.  There are extremes in income levels throughout the city and county.  What I have found, is that the neighborhoods seem to be in conditions accordance with different schools, and the better the schools create better neighborhoods.  It’s a symbiotic relationship.  Meaning, both entities influence one another in either a positive or negative way.  Considering that most schools, not all, are funded by property taxes, it makes sense that better schools create better neighborhoods and vise versa.  However, it is in my belief, that with this system comes a feedback loop in either the positive or negative way.

In regards to a positive feedback loop, good academic performance creates good test scores, good funding, and good advertisement for the school.  It puts the district or neighborhood in demand.  Raising prices, which increases funding for the school.  There is even a district where I live, that actually volunteered to raise prices for the school district.  The community recognizes the strength of education, and wants good education for their families.

On the negative side of things, poor test scores or academic performance, lowers the demand of the district in general.  This decreases the price of the real estate in the area.  With less money being funded to the schools, cuts have to be made, making learning conditions worse for the students, increasing the likelihood of poor test scores.  This makes property values go down, which further impacts the school.

There are other variables that impact property values.  The big one for me that comes to mind is crime.  The problem is crime would be alleviated if people were more educated, because they would decrease some if not most of poverty, by creating people that can land higher paying jobs, which again would decrease crime.  It’s all interconnected.

In short, by increasing the quality of education in all areas, people would be prepared to not only make better decisions, but to go to college, get a degree, and land a higher paying job.  This would create better communities to be apart of.

What is this idea?

It’s really basic.  I think what makes the most sense, if you the reader, were to read my posts on government debt, to print the money required to fund schools in need, and schools that are the center of poverty.  The funds would initially be used to modernize the facilities of the school.  Good electrical, plumping, good gyms, technological science labs, I mean the works.  There would also be money allocated, to hire better quality teachers.  Hopefully there would be enough funds available, to try and keep class size low.  With better facilities, and better teaching staff, it is up to the staff to provide favorable test scores.  I will note, that I think it would be better to teach multiple subjects, rather than just a test.  If you were to teach the kids well, the ACT or SAT would be just another test to study for.  To take the entire year to teach this test, you rob the student’s potential of learning important aspects of our world and society.

Tax payers are going to want the money to be paid back.  Essentially the school should be run like a business.  If a teacher is under performing, make warnings, but then don’t be afraid to fire.  All expenses, including the salaries of administration, should be termed “expenses.”  The profits are then sent back to the government to be paid back in full over time.  The incentive to pay back the government at a decent rate, is to have that money paid back into the school.  Once the government is paid back, (yes there will be instances where schools will fail and should be learned from) the government can take a database of statistics on the program, and ultimately can be used to learn how to attack the issue of poverty further.

It’s a really basic idea, founded upon a basic relationship I have found in my community.  At the very least, I would hope this idea could start a conversation on how to infuse government capital into education.  We spend trillions of dollars for wars, yet we refuse to educate our own people.  And honestly, I think that it is intentional.  As a Rockefellar was caught saying, “I want a nation of workers, not thinkers.”

The only thing we can really do, is express our voice to the people in power.  Honestly, I have lost hope there, but I am going to write to my representatives about this issue.  Ultimately I think what gets a voice in Washington is money, but at least I will have the ease of mind knowing I did what I could to bring an idea that I have to fruition for America.

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Government Debt –> What is it? How does it work?

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There is a common debate being displayed on the internet when discussing the national debt.  First, a person will chime in saying the debt is unsustainable when looking at the interest payments and the amount of taxes the government receives.  Then another person will chime in and say “the debt isn’t what you think it is.”  The first person just can’t fathom a debt that doesn’t matter as much as he or she perceived, and since they refuse to read up on the issue (it takes some time), while misunderstanding how the system works, he or she continues to disagree with what person B is saying.  Usually, people who view this “new” national debt are labeled as liberal, and the other party as conservative.

The best way to understand how the system works, is to view the economy as a flow of money.  The flow of money has three major segments.  Treasury to the Banks, the Banks to The Fed, and The Fed to the Treasury.  I would argue that this triangle is the core of our financial system, as the flow between these three bodies encapsulates the whole process of printing.  Let’s start with The Treasury.

The Treasury has two accounts.  Its “tax” account, and its “spending” account.  The Treasury has a target amount of money to work with each day.  Meaning, the goal is to reach that same amount day after day.  It isn’t precise.  The Treasury is able to print treasuries, or basically T bonds, or treasury bonds.  A bond is when a person gives a principle amount of money, and after the lifetime of the bond, the principle plus interest is paid back.  With a treasury, the bond is backed by the US government.  It is literally an asset that is safer than money itself.  If I am a billionaire and I have my assets as cash in banks, if an account is more than 250k it isn’t backed by the FDIC.  If the banks go under, then my cash goes with it.  But if I buy bonds that are backed by the US government, the US government will pay me back.  Therefore, this asset is in high demand, especially right now.  And treasuries, are the back bone of this entire system.

National Debt –>  Total outstanding treasuries.

Outstanding in this context, the financial context, means issued and sold.  So when the national debt clock increases over time, that means more and more treasuries have been bought.  Treasuries, like any other bond, has different lifetimes.  Month, three months, six months, year, ten years, even thirty years!  Over the course of the bond’s lifetime the interest on the bond is readjusted in accordance to the market’s conditions.  This is fundamentally important, because this means not all treasuries have to be repaid at once.  It is obvious, but becomes increasingly important as more is learned.

At the beginning of the day, The Treasury pays out what is due in expiring treasuries.  The remaining money that is in the “spending” account, is deficit spent.  Meaning, it is just spent in government programs.  (This is why fundamentally, regardless of ideology, the government is going to continue to grow in size.)  The Treasury then calculates what taxes they will receive from the bond holders later on in the year, and credits their spending account with tax money from their tax account.  Then, the remaining amount of money needed to put The Treasury’s spending account current, or in this case, the target amount of money that The Treasury works with each day – the required amount is printed in treasuries and they are ultimately sold.  This puts the spending account around the same amount of money it was at at the beginning of the day.  Currently, we are printing treasuries to pay for interest on treasuries.  Meaning the amount of money the Treasury prints is more than the amount of money The Treasury pays out.

When money is deficit spent, it is new money being deposited into the economy.  New money that gets spent on government programs, contracts, and employees.  They deposit money into their banks, and their banks get new deposits.  This increases the total liabilities that the banks have, which means their reserve accounts go up.  A bank, when it is issuing a loan, takes three main points into consideration.  What is the market for loans?  What is the customer’s credit?  What is the current reserve situation?  More reserves do not promote lending, however it allows for more lending.  That’s really important.

With more reserves being added to the system, eventually loans are made.  Loans are made through credit creation.  This basically means banks just fabricate the loan from nothing – they created credit out of thin air.  With all of these loans being made, and considering that loans are paid back over time, the net result is the expansion of the money supply.  This is crucial, because you need a growing money supply to meet the demand of money of the entire economy.  If there was a finite amount of money, the economy would screech to a halt because everyone would save their money because there would be no more to earn.  A growing money supply allows people to make more and more and more money.  Where this is relevant, is this allows people investing in treasuries, as well as new people to invest in treasuries, which allows treasuries to be bought consistently.

So a quick recap.  The Treasury pays out to bond holders that have expiring treasuries, and deficit spends.  This money ultimately increases bank reserves, which allows for more loans.  This expands the money supply, allows for more money to be invested into treasuries, who buys treasuries to put The Treasury’s account current.  Rinse and repeat.

As one could tell, it’s a feedback loop.  Deficit spending in essence takes the old bank loans and puts them back into the reserve system.  That’s important, because banks do not create reserves when they issue a loan.

There is one more step.  If one were to think about it, with the increasing amount of treasuries bought, the amount of treasuries to be paid out increases.  This decreases the amount that can be deficit spent.  Eventually the entire spending account will be used to pay out expiring treasuries.  Every year, The Fed transfers its “profits” to The Treasury, thus expanding the spending account.

How does The Fed make money?

The Fed makes money by providing services for banks, interest by providing loans to/for banks, and interest from the treasuries that it buys.  All of this interest is put in a server running a program that buys and sells currencies on the foreign exchange market.  The Fed then determines its expenses, and the remaining profit is then transferred to The Treasury.  This allows The Treasury to pay out existing debt, deficit spend, and sell debt at an expansionary rate.

There are some details that I left out, but I covered pretty much the entire printing process.  It’s really basic, it’s just people have to go out looking for it.  In my opinion, from the scholarly articles, journals, and books that I have read on this issue, our basic economic courses need an upgrade.  For example, my macroeconomics text book says banks create money from fractional reserve, where I read a study where economists were able to follow the books of a bank in Europe.  They created credit from nothing.

There are many implications and further understanding to take this.  But I want this post to be about how we print specifically.  Once that is understood, it can be seen that what we are doing is totally sustainable.  There are some people that think we can print as much as we want how fast as we want, and there will be no consequences.  I tend to think there are consequences on any action in this universe, so I do believe you can print too much.  But that is part of the reason of taxes.  It decreases the amount of you have to print to make The Treasury’s accounts current.  In essence, it slows the rate at which the national deficit increases.  If you have GDP increase as well, you can keep a certain target debt to GDP ratio.  Our is around 1, and Japan is over 2 and they are doing fine.  Yeah Japan has had some contractions/recessions/depressions however you want to define it.  But it is ignorant to think it is solely due to their debt levels, and not something else as complex as an economical system.

An indication on if you are printing too much is inflation.  However, it is usually the case with central banks, to keep inflation around 2 percent.  Not sure why.  If that starts to change significantly you can decrease demand by increasing taxes, or interest rates, or both.  If you would want to ease up on the taxes and interest rates, then it would be wise to deficit spend less.  Deficit ultimately helps put more money in the economy and thus increases demand.  If supply can’t keep up, prices increase.

I hope you all enjoyed this post!  Leave your comments/questions below.  Thanks!

What “National Debt” Really Means

Newman, Frank Neil. Freedom from National Debt. Minneapolis, MN: Two Harbors ; Distributed by Itasca, 2013. Print.

 

I have been busy to say the least, but as I have said in the past, I’ll never forget about this blog.  I have been studying and discussing as well as reading discussions on modern economics.  My goal is to write a formal essay with my overall understanding.  It is actually progressing rather nicely.  I have two more papers ready to be read, and I need to work hard to try and find a good source on The Fed.  I have to be careful, because there is a lot of speculation.  I will say, that my understanding of The Fed is not from good sources, and I know this because the information is not consistent.  Therefore, I will try to refrain from talking about The Fed.  Really, with the last two sources that I read, they both focused on The Treasury.  People that even worked The Treasury didn’t understand how The Fed has their money.  When The Treasury needed some money, it was provided in exchange for bonds by The Fed, and when those bonds expired, the account is credited closer to zero with the appropriate amount.  There is no transfer of money.  Again, this is based off of discussions rather than reliable texts.

So, what does national debt really mean?  The National Debt, that everyone is concerned about, is total outstanding treasury securities, that are held by either The Fed, private banks, or private investors.  Outstanding in this context means bonds that are issued and sold.  That means, the number you can keep track of by looking online, are the actual amount of bonds bought.  There maybe still some bonds on the market!  Treasury securities, or otherwise called Treasury Bonds, T Bonds, is a bond backed by the United States Government.  It is literally the safest USD asset on the market.  It is safer than money itself.  If someone is a billionaire, and they had cold hard cash, if banks were to go under, they may lose that money.  The Government has the resources of The Treasury and The Fed to provide a safety net for the Treasuries that are purchased.  Treasuries are safer than money.  Bonds in general have a lifetime associated with them.  So the text mentions one month, three month, one year, five years, to even thirty years.  In other words, if I buy a thirty year bond, I won’t be paid back with the interest until thirty years later.  By agreement, at certain time intervals, the interest on the bond changes in accordance to inflation and other factors.

That means, there are treasuries that have various lifetimes.  Which means, not all treasuries have to be repaid at once.  Only a fraction of the outstanding treasuries retire.  Once these treasuries retire, they are removed from the system.  However, treasuries are also printed.  What happens, as described by this text, is The Treasury will have a certain amount of money in their account at The Fed.  They use that money to pay off treasuries that are expiring, and then the rest is used for deficit spending.  That money, some economists theorize has a multiplier.  This means, that for every dollar that is deficit spent in the economy, since it passes through so many hands, it will wind up at around 2.5 dollars.  In any case, by the end of the day, the same amount of money that The Treasury spent on deficit spending and expiring treasuries, is put back into its account with the purchase of more bonds.  The Treasury receives money for the bonds that it issues.

At this point in the book, I was wondering about the interest.  It is common for investors once their treasuries expire, to take the interest and then reinvest the principle into treasuries again.  I started to think that the paid interest on bonds was expanding the money supply.  But there is something to take into consideration.  First, The Treasury can get bank money whenever they want by selling bonds to The Fed.  Second, The Treasury can control how many securities it is putting on the market.  Thirdly, by collaborating when The Fed they can manipulate interest rates on the bonds.  The Fed can declare what the overall interest rate is, affecting all interest rates in some what or another.  But that isn’t how The Fed manipulate bond interest.  The way that interest rates are determined on treasuries, is by an auctioning process.  The author did not go into great detail exactly how it works, because I suppose he didn’t want to overwhelm the reader, and it maybe extremely complicated just to determine interest rates.  I am inferring, that the overall supply of the bonds have an effect on the resulting interest rate.  Therefore, The Treasury while getting instant bank money from The Fed also manipulates the interest rates on the bonds by the remaining supply of treasuries available for investing.  Remember, the overall supply can be determined by The Treasury.  What this means, is that The Treasury can always be in a favorable position.  There is a specific example in the book, that directly addresses my issues with the bonds.  It has huge implications.  So I quote on page 49:

Interest payments do not affect the money supply.  Suppose The Treasury pays 100 dollars of interest from its Fed account (talking about interest on the treasuries).  That 100 dollars becomes cash flow to the holders of the treasuries.  If 20 dollars is paid back to the government as income taxes, investors will be left will 80 dollars increase in their bank accounts.  The Treasury then issues 80 dollars of new securities, with investors placing 80 dollars from their bank accounts to the treasuries, and The Treasury fully replenishes its account with The Fed from the 80 dollars from investors and 20 dollars from income taxes.

With people that don’t really follow the Modern Monetary Theory scene, this has huge implications.  It has been explained in the community, that it is required by law for The Treasury to be in the black, or negative.  Keep in mind it is technically true that The Treasury prints physical currency, but it does not create money electronically.  The Treasury can only print treasury bonds.  So, basically The Treasury exchanges money for bonds that it prints.  The government uses the money from The Fed to deficit spend.  Once the treasuries expire in The Fed account, money is credited, but obviously there is a perception that The Treasury prints faster than the treasuries retire.  This deficit spending, is one of the primary ways that the money supply expands, and since The Treasury is by law to be in the black, that debt is understood to never be repaid.  From what I gather in the community, the majority of the national debt is owned by The Fed.

I will get back to the thought I am about to say later, but that quote up above, shatters the perception in the MMT community.  The author, was the Associate as well as The Secretary of Treasury.  I think it is a very reliable source.  First, he has stated numerous times, that The Treasury would have positive accounts.  Second, he clearly says interest on bonds don’t expand the money supply.  The Treasury prints bonds to The Fed to pay interest, and in combination of taxes and issuance of new treasuries, the money is put back to the account with The Fed.  Thirdly, he uses taxes.  This is actually contested by a paper of economists that I have read.  They essentially say that in order for The Treasury to gain access to the money from printing securities, it has to send taxes to The Fed account.  With the perception that I had at the time, and the majority I would say of the MMT community, the taxes are essentially destroyed.  Simply because you are putting money into a deep black hole of negativity.

Well, it seems that The Treasury uses taxes.

Even though this particular source wasn’t 100 percent accurate, there was still some very valuable concepts discussed.  It goes to show the nature of learning economics.  There’s no pdf file that describes exactly how the economy works.  So when I navigate the information world on figuring out how the economy works, I try to find credible sources, and try to refrain from taking the word of other people.  I have already had instances where someone who seems to be more credible than me, is wrong in my eyes, simply from the readings that I have done.  A lot of people try to logically reason the process of the economy based upon assumptions that they know of the time.  What I have found out, is a lot of the time my assumptions are wrong.  The only way is credible sources.

I got distracted.

So another perception of the MMT world is that The Fed owns pretty much all or most of the national debt.  As of 2013, there was 11 trillion of national debt.  1.7 trillion was owned by The Fed, which means the rest, 9.3 trillion is owned by the private sector.  So that’s trumped.

So the begging question, what expands the money supply?

One thing that is not contested, and that is thoroughly understood, is that bank loans expand the money supply.  Banks create credit from nothing.  Issuance of loans turn the wheel of the economy, and expands the money supply, which allows an expansive amount of purchasing of national debt.  Finally, there is a huge black area of understanding that I have right now in the process of the economy.  What encompasses most of that blackness, is The Fed.  That’s my next project.  I want to find a good, credible book, on The Fed.  I have short papers to read as well, that have to do with overall economic policy, but I hope to one day solidify the process in my mind by reading a good book on The Fed and how it works.  As the author put it, if he ever wanted money The Fed had it and would give it to him.  How?  So I still have a ways to go, but I have learned a lot.

There is one more thing that I want to touch base on.  Foreign countries owning our debt (securities).  Our debt, is the safest USD asset, a treasury bond.  That bond, when it expires issues US currency.  US currency can only buy goods and services in the US.  If, these countries want to trade our currency for another, the person who bought all the US money, has the same problem.  Do I buy goods and services in the US?  Do I re-invest in the US?  Or do I trade currencies?  If he trades, then the person he traded with has the same problem.  Put simply, that money is going to be used to drive the US economy in one way or another.  It is good for us.  It isn’t true that China can demand on their debt and it will bring our entire economy to a halt.  The fact that China has trillions of dollars in US assets, means that’s trillions of dollars for us.

What is interesting is the author’s take on overall policy.  When the economy is slow and needs recovering, then it is good to print securities to pay for securities.  In fact, The Treasury has been printing securities to pay for securities since 1791!  It helps boost the economy.  When the economy is doing wonderful, he actually advocates for a more austerical philosophy.  You can think austerity as the traditional view of the economy, or another way to say it, a state’s budget.  A state can’t print their currency.  So a state, like Missouri which is where I live, can only spend money from state taxes that it collects.  Essentially that is what he was saying.  When the economy is hot, spend what you get in taxes.  When an economy is hot, The Treasury will manipulate securities to the point that more securities retire than printed, assuming The Government practices austerity, and that the economy is booming.  This results in a decrease of national debt.  Of course, there are other philosophies out there, but it is something to take note of and to think about.


For all who read this blog, I truly thank you.  I hope you learn something, and at the foremost, I hope it makes you think.  If you don’t agree, I just hope it made you think.  We all strive to be better and smarter people.  I hope you enjoyed your reading experience, and I hope you will continue to visit my blog.

The Theory that I Have Been Searching for is MMT

I have to apologize.  Some of the statements that I made in the previous post, on credit creation, were inaccurate.  I have found out there is no “multiplier effect” with credit creation.  Essentially there are multiple loans in the economy at one time, that are used in buying assets in many cases.  During that moment, the money supply has expanded.  However, when the loan is repaid, the principle amount of money has been destroyed.  The interest the bank keeps.  Only the central bank has the power to manipulate bank reserves, except for the added deposits from consumers.  Banks cannot manipulate their reserves – they are only traded and manipulated based on deposits, or transactions from the central bank.

With that out of the way.

I am going to rewind to the financial crisis of 2008.  I actually got really depressed, simply because I was so mad at the society around me.  My family is struggling financially, and institutions that are responsible for risking an entire systemic crisis, are bailed out and kept alive.  What about the American people?  Jobs were lost.  What was more displeasing was the fact that when someone was arrested for protesting, they got a felony.  There was more though.  The Fed bailed out institutions around the world for 17 trillion dollars.  There was the stimulus package.  Fox News replied by enacting fear, and started doing segments on the national debt.  Through the fear of it all, everything settled, and it occurred to me.  We didn’t collapse.  What about the federal debt?  Everything seems to be working fine with increasing government spending.  Could the government debt not matter?  How does The Fed have 17 trillion dollars?  What about spending that on the American people?

So I started to search for an explanation.  Along the way, I would piece together piece by piece what is really going on.  I would have an overall theory, and time and time again it was wrong.  But I pushed to learn more and more.  I first learned about fractional reserve banking, and contemplated an economy based upon that.  I mean, it has been the accepted theory of banking even in my macroeconomics class.  But recently, I have found out that the current theories on Quantitative Easing, which are based on fractional reserve banking, are flat out inaccurate.  My previous post, albeit with some miss information (my theorizing was inaccurate), empirically showed that banks create credit from nothing.

With more digging, it was like Neo searching for something called The Matrix.  I was searching for MMT, or Modern Monetary Theory.  The theory is complex, and will take some time to get a grasp on.  But once I have an idea on how commercial banks, central banks, and their respective governments interact with one another, I can say I have a general idea on how the economy works.  And that to me, would feel good.  To the reader, I hope you understand this is going to be a journey, and I am going to record it.  Along the way, I may say somethings that are inaccurate.  I will do my best to be as accurate as possible, but part of the process for me is to fill in the blanks so to speak, until I can verify if those blanks are accurate.  It’s part of the process.

And so, to the entree of the post.  I read a paper on the interaction of the banks among themselves, as well as on the influence of the central bank.  I learned what actual Quantitative Easing (QE) really is.


McLeay, Michael, Amar Radia, and Ryland Thomas. “Money Creation in the Modern Economy.” Quarterly Bulletin 2014.Q1 (2014): 1-12. Print.


A bank basically has assets and liabilities.  On the assets side, is paper currency and reserves – while on the liabilities side is deposits.  It makes sense.  The bank is responsible for everyone’s deposits, so therefore they are a liability.  Let’s take the first scenario, where a bank issues a loan to a consumer that banks with the same bank.  The newly credited loan, is considered an asset.  When the loan is issued to the consumer, there is a deposit matching the value of the loan.  Therefore, liabilities goes up.  And, the bank takes a percentage, the rumor on the internet is it is around 10 percent, of the loan amount to reserves.

In a more complex scenario, a loan is issued out to buy something, and then that money is deposited into another bank.  When this happens, the issued loan is still an asset to the original bank.  However the amount of the loan turns out to be deposits to the following bank.  Deposits, are a liability.  And, in order for the bank to cover this liability, about 10 percent of those deposits need to be placed in reserves.  The reserve amount is transferred from the original bank to the following bank.  Deposits are the main influence on bank reserves.  When a bank is short on reserves, or even in excess of reserves, banks can transfer reserves among themselves.  Reserves are in place by fiscal regulation, in order to satisfy consumer demand of their money.  However there is still great mystery for me the role reserves play in the whole process.

For one, reserves don’t have to be cash.  As this paper in particular put it, some banks have Treasury Bonds in their reserves for the appropriate amount of cash.  I also read from a different source, that banks essentially have Mortgage-Backed Securities in their reserves.  (ring a bell?)  In other words, when money is put into the reserves, a “portfolio” is constructed, as I understand it.  It is true that the interest on loans is a way the bank makes money.  However, I’m starting to wonder if the banks uses its reserves as a means to accrue more wealth with financial instruments.  It is true, that the reserves cannot be created nor destroyed by the bank, however I am wondering if the principle amount of the reserves are used to accrue more wealth, and the only way the principle amount is adjusted, is when there are new deposits.  This, I am unsure of.  Also, something noted that the paper didn’t cover, is the reserves are a fraction of the deposits.  Where do the rest of the deposits go?  If they remained to satisfy money demand, would that not make them reserves as well?  But reserves are a fraction of total deposits.  Where does all the deposit money go?  It doesn’t go to loans, because loans are issued from fabricated credit.  Does it go to the bank to be used?  How do they use it?

As you can see, this paper does a great job showing the process of banking, but there is bad explanation in other areas.  There is knowledge that is assumed to be known, that I don’t know.  And as with anything when learning about MMT, once I learn more, I have more questions to be asked.  It is going to be a long process.  But it is a bear that I really want to tackle, and I’m going to record this growth over this blog.

With those questions aside, the paper makes a thorough case as to why banks have a limit to what they can loan out.  The limits are:

  1. Market forces constrain lending because individual banks have to be able to lend profitably in a competitive market.
  2. Lending is also constrained because banks have to take steps to mitigate the risks associated with issuing new loans.
  3. Regulatory policy acts as a constraint on banks’ activities in order to mitigate a build-up of risks that could pose a threat to the stability of the financial system.

-page 4.

This is important to understand.  Because if you think about it, if banks can issue loans with fabricated credit, why couldn’t they just lend out as much as possible, to get the most interest?

First banks not only get paid through interest on their assets (loans), but they also pay interest on their liabilities (savings accounts).  The whole idea is to receive more money from loans than they have to pay to their liabilities.  This interest rate, the rate on the loans and savings accounts, are determined by the central bank, which we will learn is the ultimate “constraint” to money creation.  Also one has to realize, it is very possible that loans created from a bank is deposits (liabilities) for the other.  In which case, reserves change accordingly.  I am going to assume for now the banks uses their money for themselves and invests with it, simply because why have fractional reserves?  If the bank can’t use the rest of the liabilities, why have reserves?  Reserves are rumored to be around 10 percent of deposits.  So why not just keep all of the bank’s liabilities as reserves?  The 10 percent rule I believe is in place to be able to provide money demands to the consumer base, while the rest the bank uses as means to accrue more wealth or pay for expenses.

Remember the interest rate on the loans vs. the savings accounts or deposits?  Well if for instance, a bank were to issue out loans at a lower value to compete, they may receive more assets (the loans) but deposits are sent to another bank, whereby the first bank lowers their bank reserves.  When looking at reserves, as well as the interest coming in and the interest paying out, they may have to start charging more interest on their loans, in order to make sure they can satisfy their consumer base.  If a bank were to continually loan under market value, eventually they would run out of reserves, and could not function as a bank.

Another variable on what determines when and how much a bank lends, is their cash flow.  Overtime, how much deposits does the bank receive?  Over time, what usually is the amount withdrawn?  If most of the bank’s deposits are withdrawn at one time, there is what is called “liquidity risk.”  Since banks loan out for months to even a year, they very well could not have the money to satisfy the demands for the deposits.

And this is what I don’t get.

What about the reserves?  If strictly speaking, reserves are a fraction of your deposits, once deposits are taken out of the bank, what happens to the reserves?  I’m thinking that reserves are taken from the deposits.  So if I deposit 100 dollars, 10 dollars are put in reserves.  If I withdraw all of my 100 dollars, 10 dollars are removed from the reserves to satisfy the withdraw.  So if many people are withdrawing most of their deposits at one time, most of the reserves are lowered.  This lowers the power of the banks to lend (assuming this is correct).  Because once a loan is issued, deposits are created somewhere else.  They would have to send reserves to the bank receiving deposits.  And if they are short on reserves, they are at risk to not being able to satisfy the demand on their liabilities.

Really this reserve system puts more risk on the bank, but I guess there is a chance that it makes more money, because they only have to have a fraction of reserves on hand.  But yes, I’m still confused.  It’s the learning process, right?

The obvious reason is next.  Credit risk.  If people have bad credit, a bank shouldn’t lend money out to them, because that would be too high a risk of the loan not being repaid.

There are two possible outcomes to money when it is issued out by banks.  First, a loan that is paid to someone else, could use that money to payback their loans.  This is called the “reflux theory”, because essentially money is being destroyed, and therefore having no effect on the economy.  On the other hand, the loans to pay for something, when that person or business receives that money, if they don’t have outstanding loans, the money is spent through the economy.  And, as it passes hands, it will continually be spent through the economy.  It is the view in this paper, that this is an inflationary process.  In other words, if bank loans aren’t destroying money, it is put out into the economy and expands the money supply, resulting in higher prices.

Onto the central bank.  As with England’s policy, as this paper was written in the context of the British economy (economies with central banks essentially work the same), the government wants inflation to be at around two percent.  So the central bank does practices to try and meet that two percent goal.

One interest rate that the central bank influences is the interest rates paid on the bank reserves that banks deposit into the central bank.  Therefore, the amount of money that they make from reserves deposited to the central bank influences their issuance of loans.  Also, the central bank is able to influence interest rates on loans that are sent through the money markets, which is basically banks and financial institutions.  These different interest rates have different “maturities” and are felt throughout the banking sector.  Ultimately, the interest rates put on reserves and the money markets have an impact on how much a bank is willing to lend.

Maturities – the state of being due.

The last section discussed in the paper, has to do with Quantitative Easing, or QE.  In England, the central bank went to the private sector, and bought assets from corporations.  It could of been an insurance policy, pensions, or what have you, and the central bank bought these assets with cash.  The central bank therefore has assets to accrue wealth, and in turn these corporations have this access cash that they do not particularly want.  Most will reinvest, while same may spend into the economy.  In both cases, this stimulates the economy.

In the states I have heard things are done differently with QE.  The Fed actually, by a mechanism that I can’t remember, increases the reserves of banks.  This is in hopes will create a incentive for banks to lend out more money, and therefore stimulate the economy.

Here are the main questions that I have after this reading:

  • With the reserves being a ratio to deposits, what is done with the rest of the deposits?
  • Do banks pay an interest to the central bank for depositing their reserves, or does the central bank pay an interest on the reserves deposited to it?  From the language of the paper, it is hard to discern either way.  I hope one day I will find out.
  • Why is spending money inflationary?  I got to get a pdf on variables that affect inflation.
  • How does The Fed increase bank reserves?
  • Are banks able to make their reserves a portfolio equal to the amount of reserves?  Whenever reserves have to be released, they can either sell to get cold cash, or just trade the asset, assuming this is what they do.  If they make a profit off of the assets, they can sell, but they cannot add to the principle of the reserves.
  • When banks send reserves to one another, is there interest associated with it?  Does the bank that transfers the reserves, do they get an interest payment or does the bank receiving the reserves?  I just don’t know from the paper that I read.

It seems as when there is anything you are trying to tackle intellectually, especially something as complicated as this, more questions are provided once you read the paper, and it seems more questions arise than questions that are answered.  I’m not done reading about banks.  I need a more thorough read on the practice of banks, but I think I’m going to dive deep into my next paper that is prepared, and it is over the central bank and the treasury.  I don’t know if it is written in the context of The United States, but it has been told to me from multiple people, that really any economy that uses a central bank does the same thing.  So I’m going to put this on hold, and learn how the central bank and treasury print money indefinitely.  A key component to the Modern Monetary Theory.

As you see, it is a process.  As I have stated earlier in this blog, I’m going to record the process of understanding this very complex theory.  Getting into it, is showing to be intimidating.  Every single time I read something I just have so much questions.  I just hope one day I can read something about MMT and say, “Interesting.  I get it.”  And leave it at that.  Only time will tell.

Thanks for reading!

 

 

The Credit Creation Theory of Banking is Empirically Verified

The Federal Reserve of the United States.

The Federal Reserve of the United States.

First, let me cite the article I am going to refer to:

Werner, Richard. “Can Banks Individually Create Money Out of Nothing? – The Theories and the Empirical Evidence.” International Review of Financial Analysis (2014). Print.


 

This 18 page article is extraordinary in the amount of research put into it, resulting in a very dense read filled with economical theory and schools of thought.  As with any good works, it unveils a layer of Truth.  Truth has not been obtained in economics, or pretty much anything for that matter, but it brings about a moment of clarity on not only how things work, but how things got to be the way they were.

The article first focuses on each hypothesis on banking theory, and goes into the historical shift among the economists with regards to this issue.  The author decided to let the former economists speak for themselves, and drenched the article with quotes from economists who lived in the late 18th century to modern times.  Then the author was able to do an experiment, and emperically verify one of the hypothesis.  But first, to the three hypothesis of how banks operate, in order from the oldest hypothesis that was favored to the most recent, before this paper was published.

During the firs two decades of the twentieth century, the credit creation theory was the favored theory among economists.  It basically says that when a bank issues out a loan, it fabricates that loan out of nothing.  Following the 1920’s and more up to the 1960’s, the favored hypothesis is that banks utilize fractional reserve banking (the method that I have been using in my own understanding of how the economy works.)  According to this paper, this method basically means the banks are a “financial intermediary,” using their just resources to issue out loans.  They create money out of nothing by what is termed “the multiplier effect.”  A bank can only issue a loan if it has received new reserves, which a fraction will be deposited to the central bank.  The bank only lends out the excess reserves.  Whereby another bank receives a deposit, puts a fraction in reserves, and issues the rest out as a loan.  What this does, is it takes the initial deposit and magnifies the available funds for loans based upon that initial deposit.  If Bank A gets a deposit of $100, the available deposits if put thru enough banks can exceed $9,000.  The banks themselves don’t create the money, however it is the issuance of loans that systemically create money by being deposited to bank after bank.  The most recent hypothesis that has been more or less favored by the majority of economists, is the financial intermediation theory.  First, let’s define intermediation:

Intermediation –>  Being, situated, or acting between two points, stages, things, or persons.

The bank is merely acting as a party to provide services for their customers.  As Keynes puts it:

A banker is in possession of resources which he can lend or invest equal to a large portion of the deposits standing to the credit of his depositors.  In so far as his deposits are Savings deposits, he is acting merely as an intermediary for the transfer of loan-capital.  In so far as they are Cash deposits, he is acting both as a provider of money for his depositors, and also as a provider of resources for his borrowing customers.  Thus the modern banker performs two distinct sets of services.  He supplies a substitute for State Money by acting as a clearing house and transferring current payments backwards and forwards between his different customers by means of book entries on the credit and debit sides.  But he is also acting as a middleman in respect of a particular type of lending, receiving deposits from the public which he employs in purchasing securities, or in making loans to industry and trade mainly to meet demands for working capital.  This duality of function is the clue to many difficulties in the modern Theory of Money and Credit and the source of some serious confusions of thought.

-Keynes [(1930, vol. 2, p. 213)] page 9

Keynes is an interesting figure.  He actually made statements backing all three hypothesis during his career.  Remember, the time frame outlined above talks about the prodominant view on banking theory.  There were probably some economists in the 1960’s thought that the credit creation theory was the most accurate view of how banks operate.  But it is clear, that over a period of time, economists regressed from the actual truth.  However I would argue that fractional reserve banking’s multiplier effect is still present even though credit is being created.

The authors of this study found a small cooperating bank in a small town in Germany.  The two directors of the bank agreed to allow them to monitor their transactions, and reserve amounts.  A small bank is actually a better choice than a big bank, simply because there is less transactions from the general public.  There is another reason why these researchers did not monitor a big bank – the big banks declined for various reasons, most notably the security of their data.  Nevertheless, it would of been a huge headache to pull off this research with thousands upon thousands transactions happening in a day.  So I personally think it worked for the best to do this procedure on a small bank.  And just because it is a small bank, doesn’t mean they don’t operate at the same standards and procedures of other banks.

The researcher took a loan out of 200,000 Euros with no interest, in agreement with the bank directors, and watched the process by which the money was credited to his account.  The process was video taped.  The researcher tested the account, and made small purchases that were a success.  The money indeed had been transferred, and there was no influence by any party, accept the gentlemen responsible for issuing to loan to the account.

The financial statements of the bank, when deducting all the deposits of other customers, revealed that the bank issued credit to the test account, without altering their own reserves, or obtaining money from external sources.  In essence, it is empirical evidence that the credit creation theory is actually a fact – money is created from nothing.

There is so much to talk about it is hard to start.  I guess I want to start by talking about the field of economics itself.  It’s ironic that the economist in the late 19th and early 20th centuries got it right.  Economists got further and further away from the truth, however when reading the various logic to defend each hypothesis, it is sound, assuming their axioms and assumptions are correct.  That is the core component to economic theory – assumptions.  When reading a theory, or a forecast on our economy going to fail, what are the assumptions?  Are those assumptions accurate?  Because if they aren’t, the logic maybe sound within those assumptions, but without those assumptions everything is moot.  Bernanke himself, the head of The Fed for the longest time, believed that banks were just intermediaries.  This paper reinforced for the the assertion that economics is merely educated guessing.  I follow a blog of an economist.  He basically states that macroeconomics is useless (which is taught everywhere), and discredits theory after theory on issues regarding the demand of money, labor, or trade just to name three.  However he never, I mean never, puts his two cents in.  It’s easy to discredit and criticize something for various reasons that can be seen, it takes guts and is plain harder to provide an alternative.  What economists need is data, and this is a good start.

Because now in the economical modeling, economists know how banks work.  That, obviously, is a central component to creating a more accurate model.  Economists know the interaction between The Fed and the government pretty well, they know how banks work now, the next step is trying to figure out the relationship between The Fed and The IMF, or the world bank.  Then the clearest picture of our economy would take fruit.

I read part of a book from an economist from MIT.  I didn’t finish it it was so bad.  His stance was that the capitalist markets behaved like that of an organism.  It is constantly evolving, so it can never be truly understood, and will always do what is necessary to ensure survival.  In essence, he has no idea.

The point of all of this is to take what economists say in the news with a grain of salt.  Their science is lacking serious data, and a lot of their assertions have core assumptions.  Those assumptions could down right be inaccurate, or there may not be right amount of assumptions.  This influences the train of logic, and can make something sound completely logical be completely false.

By knowing how banks operate, more appropriate fiscal policy can be put into place to prevent high systemic risk.  As stated in the study, current fiscal policy on banks assumes that the banks merely act as a intermediary.  This as we have learned, is inaccurate.

One thing I learned from this paper, is that banks deposit their reserves to The Fed.  Access reserves are either used to issue out loans or to invest.  If a bank can instantly issue out credit, this has no impact on their reserves initially.  However, when the issued loan is paid back with interest, they have essentially increased their reserves out of thin air.  Also, the bank can use old banking theory as well.  They can use a fraction of their deposits to issue loans or invest.  Regardless of how the loans are made, it is deposited in another bank, whereby a fraction is sent to The Fed, and that money can either be invested or loaned out.  What I am trying to say, is that I think the “multiplier effect” is still valid even though banks issue credit out of thing air.  Bank A issues a loan, and is deposited into Bank B.  Bank B takes a fraction of that, and puts it in the reserves with The Fed.  The next loan can be created through credit, however there is still excess reserves from the Bank A loan.  It all depends on the decisions of the bank.  The bank can take that money, or a fraction of it, and invest it.  Or it can us it to issue out more loans.  Whereby the amount goes to Bank C.

I don’t think it is as straight forward as economists put it on both sides of the credit creation and fractional reserve banking.  I think to some extent, both processes are used with current banking.  Regardless if this is true or not, and making an assumption that we know is true, which is that banks use credit creation, banks have a huge impact on the expansion of the money supply.  This is why our economy is so inflationary.  First there is deficit spending of the government (interaction between the government and The Fed), which we know by The Great Depression increases aggregate demand.  That is how America was able to get out of The Depression.  Increasing demand increases prices, and the reason why it increases aggregate demand is because there is more money to spend.  Eventually business owners will raise prices to increase profitability.  Banks, by creating credit out of nothing, increases the amount of money in the economy while keeping higher reserves.  This is accomplished in two parts.  First, if loans are created from thin air, the overall reserves from their customer base remains the same.  Second, once the issued credit and interest rate is paid off, this is a direct deposit to the bank’s reserves.  Higher reserves means more loans by a more traditional approach, or investing in financial instruments.  The creation of credit, in my opinion, contracts the money supply eventually by being repaid with interest.  However it is this multiplier effect between banks that really expands the money supply.  Therefore, it is with my understanding, that banks create money out of nothing, but expand the money supply using the multiplier effect, which was laid out in fractional reserve banking.

In any case, this was a very enlightening read.  Now entities that were a mystery to me aren’t anymore.  That is what I love about reading and learning.  Something just became clear, and it provides a sense of comfort, of knowing, the world around me.  I’m sorry I haven’t updated this blog in a while.  But life has its obstacles, as well as the fact that I have undertaken a pretty big project.  I will never forget this blog.  It may take some time for me to update it, but when I get my hands on that article, book, or study, you better believe I am going to share it to the world.

Thanks for reading.

Wouldn’t it be nice if the average American could create money out of nothing?

 

 

An Different Look into Scarcity

Mullainathan, Sendhil, and Eldar Shafir. Scarcity: why having too little means so much. New York, New York: Henry Holt and Company, LLC, 2013. Print.

 

Throughout the majority of my life, my family and I had to deal with very tight financial constraints.  I can’t count the amount of times I have feared that we wouldn’t be able to pay for food, and there have been a multitude of times when we have had to use a food pantry.  I wanted to know how this is possible.  Why are there people flying private jets while there are people unable to eat?  The resources are there!  So  I have tried to get a better understanding of how the economy works, and I have taken time to learn various philosophies when in regards to economic policy as well as general economies as a whole.  The book that I just read, adds a layer of complexity to the study of economies.  As it is stated in the book, various economists make the assumption that people will make the most rational decision.  Yet, as we all know, this is sometimes not the case.  The psychology of scarcity actually can explain this phenomenon.  What is interesting is there are other things that are scarce throughout life.  Time can be scarce at times, followed by calorie intake (diet), the book throws a curve ball and talks about “social scarcity” (loneliness), and quite frankly I think addiction can be applied to the sphere of scarcity as well.  There is probably more, but what this book shows is that what they are finding about scarcity can be applied generally to other cases, not just money.

The premise of their findings was generally stated in the introduction of the book.  Essentially scarcity first forces us to tunnel on the thing we are scarce over.  So if I don’t have a lot of time and I am working hard, I will focus on the most immediate or late deadlines.  This prioritization, or heightened focus on deadlines (tunneling), is a double edged sword.  The efficiency of the person under a strict deadline goes up substantially because he or she is focusing harder to get his or her work done.  However it is through this tunneling, that sometimes other factors that contribute to scarcity in the first place gets overlooked.  So in the time example, while working on a late deadline another deadline has to be completed late.  This is a feedback process, and eventually I would be placed in what is termed the “scarcity trap,” where I am constantly in the state of scarcity, fighting a forever uphill battle to actually complete everything on time.  There is more though.  The authors of this book used the word bandwidth to encapsulate the overall processing power of the brain.  It is found that scarcity actually taxes the bandwidth of the brain, more specifically fluid intelligence and impulse control.

Another example could be used with addiction, or chemical scarcity.  Once the addiction is established, there is a drive to put their drug of choice into their system.  When there are heavy cravings (scarcity) addicts will tunnel to focus on getting chemicals back into their system for their high.  Addicts get very creative when it comes to getting money for their addiction, and that typically means other financial to relationship obligations, fall through the tunnel.  Eventually the added on stress of not meeting those responsibilities is dealt with taking more drugs (not to mention their impulse control is down).  This again brings about another scarcity trap.  Usually addicts have to reach rock bottom in order for them to gain the motivation to stop.  In order to stop any scarcity trap, including that of addiction, impulse control is needed which is extremely difficult considering the bandwidth tax.

Here is a summary of the findings of this book with regards to financial scarcity:

Tying all this together, we see that scarcity traps emerge for several interconnected reasons, stretching back to the core scarcity mindset.  Tunneling leads us to borrow so that we are using the same physical resources less effectively, placing us one step behind.  Because we tunnel, we neglect, and then we find ourselves needing to juggle.  The scarcity trap becomes a complicated affair, a patchwork of delayed commitments and costly short-term solutions, that need to be constantly revisited and revised.  We do not have the bandwidth to plan a way out of this trap.  And when we make a plan, we lack the bandwidth needed to resist temptations and persist.  Moreover, the lack of slack means that we have no capacity to absorb shocks.  And all this is compounded by our failure to use the precious moments of abundance to create future buffers.

Shocks in this context has to do with the financial surprises that life brings us.  They use the term slack to talk about room in the overall budget.  Having slack is a very important component to keeping you out of, and get you out of, the scarcity trap.  Put simply, having a little extra money allows one to save money to keep him or her out of the trap.  When in the scarcity trap, slack allows for somebody to pay for late bills without the need of a loan.  When looking at the scarcity trap, saving is the most important thing one can do to keep yourself from that mindset.  It is extremely risky to spend all of your budget every paycheck if it is avoidable.  It takes just one major “shock” to put yourself into the scarcity trap and mindset.

This book was interesting, but I must say I did not like how they structured the book.  The majority of their theory was revealed in the introduction, which made the rest of the material more bland.  If they were to reveal the theory as they went, the material would have a more interesting factor to it.  I understand they have to be thorough when explaining the evidence for their theory, but in my opinion it was a little excessive.  They spelled it out like someone was a complete moron, being so thorough of their logic.  I suppose this is good, especially considering the kind of people they are selling their book to.  But I found it irritating.  I really think they could of taken 100 to 120 pages off of the book.  Their theory is condensed, not long, not hard to understand, and could be provided evidence through their studies.

This book makes me realize that all people will do things impulsively under scarcity.  So when someone does something irrationally, it has to do with their taxed bandwidth.  I hope that this knowledge can be used by economists to better understand how people behave in the economy.  Maybe it will allow economists to change their assumptions, which would provide a more accurate understanding.  But I hope in the end this will breed more empathy for the poor.  And I hope that one day we will all have the mindset to allow the necessities of life to be provided to everyone.

Hyperinflation Might Happen in the Near Future (Theory)

The Fed has been buying treasury bonds at an exceeding rate.  The national debt is a testimony to this.  I do not think the printing of money to pay off this debt contributes to inflation simply because the money is being sent to the banking sector.  However, when the financial crisis hit in 2008 the government had to infuse 780 billion dollars into the economy to keep the system from failing.  This increase in the money supply results in prices to increase because there is more available money to buy things.  The increase in prices slows the rate of expenditure for some people, because their income remains stagnate.  This decrease of currency velocity is inflationary in nature because in order for businesses to get the same amount of profit with less transactions, they must increase their prices.  In order to battle this inflation, The Fed has to increase interest rates.  Interest rates contract the money supply, because money is taken out from the public sector into the banking sector.  This does two things.  First, in theory, banks hope to obtain more money because people need loans to purchase certain things.  With this extra money, more money will eventually be sent to The Fed, whereby The Fed will be able to purchase treasury bonds at an inflationary rate (which is required in theory).  It also removes available income to the people who purchase those loans.  With less income, prices will rise because there will be less transactions.  Eventually however, in theory, businesses will be forced to lower prices to obtain more income.  Thus, the decrease of prices is due to higher interest rates.  This may or may not happen, but The Fed has to do this to try and contract the supply as much as they can, otherwise the shift of the extra money to the more “fortunate” from the increase in prices will alienate people who do not have the money to purchase goods or services.

The problem is a good percentage of people are not going to be able to purchase loans with an increase in interest rates as well as inflationary prices.  This means money will not be contracted from the overall money supply.  The added supply of money is inevitably going to initially shift money to businesses, while average workers won’t see their wages changed.  In order to keep the same or more profits, prices rise to combat slow transaction velocity.  Again, this shift of money requires a more percentage of people to not buy certain things, while more and more people can’t compete with the prices.  Eventually the value of money is going to be completely shifted to a select portion of the economy.  Less and less people are going to be able to deal with such high prices.  Eventually confidence in the currency is lost; the economy collapses.

This is the road that I think our future brings.  I think there are solutions to this problem:

  1. Enforce a regulation that transfers money from solvent companies to their employees.
  2. Reduce the cost of certain sectors of the economy that correlate to a large portion of average Americans’ debt (healthcare, education, etc.).
  3. Reform education.
  4. Tax the rich.

Forcing companies to invest back into their workforce will allow average workers to have more money to spend, which is a core problem to this debacle of money supply, interest rates, and transaction velocity.

The same concept applies to reducing debt.  This will create more money which will not only allow the purchase of loans with higher interest rates, but will speed the velocity of transactions which combats inflation.

If we can improve the quality and efficiency of education, more people will be able to work higher paying jobs, which thus allows for more loans to be purchased in combination with goods and services.

Putting ideology aside, taxing the rich is an effective way to shift the money supply back to the other classes, because the expenditure of more government aid gives people more money to purchase things, including loans.

 

I think a core problem with how Washington works is they are not transparent with not only the American people, but with the representatives themselves.  I think this mostly has to do with the idea that more knowledge is power.  If we put the situation on paper and out there, I think people would be willing to compromise with the other side in order to keep the system from collapsing.  Of course, if people knew the complete story there could be an uprising as I have stated before in previous posts.  Plus the schism of Congress is exactly what happens in The Age of Decadence; we are scheduled to collapse soon and the current state of the economy is evidence of this.  Honestly I am scared.  The uncertainty of what will happen is frightening.  However this is what I want.  This fear is what is required for drastic change for humanity.  In every case that I know in history, drastic change brings about fear in peoples’ lives.  I hope that one day humanity will learn the lessons of The Fate of Empires, and try to stop the cycle of empire death.  I hope humanity will progress to an economical system that removes money, the true reason for the decline of empires.

So now that I think about it, I am excited.  Who knows, maybe the people in power can figure things out to keep the boat from sinking.  But I am still hopeful.  I am hopeful that a new system will be put into place that is more humane and reduces the suffering of everyone.

 

 

Reflection on The Fate of Empires by Sir John Glubb

The Fate of Empires

This is one of those documents that once again motivates me to continue to learn.  The new set of eyes that learning creates brings a sense of peace about the world.  There is less uncertainty which means there is less fear.  Just as there was comfort in knowing that present time is just an instance in the endless cycle of empires, there was extreme anger about the institutions that we entrust to educate ourselves.  I know they are not perfect.  But forcing me to learn and memorize the names and views of senate electoral candidates of Virginia of 1865, does not compare to learning the life cycle of empires.  Honestly there is no contest as to what is more relevant to someone’s life.  This, and other works like Guns, Germs, and Steel, show the importance of knowing history, and also shows the failures of what is being taught.  There is a same phenomena with science classes.  They focus on the concepts and mathematics of it all, but do not discuss how the scientific method is presented in various experiments.  What was the intrinsic error of the experiment?  What questions are answered with this experiment, and what questions remain?  To me, it is more important to learn the why’s and how’s of history rather than the what’s.

The Fate of Empires is a brief essay laying out the life cycle of an empire.  An empire is defined as a super power of their time.  He brings examples ranging from Persia, Ancient China, to the Ottoman Empire.  In fact, all of his evidence is from eras other than our own era, which makes sense when writing something like this.  This read is a basic read, and should be taught to everyone.

The average lifespan of an empire is 250 years.  The life cycle of an empire is broken down into six ages.  They are:

  1. The Age of Pioneers
  2. The Age of Conquest
  3. The Age of Commerce
  4. The Age of Affluence
  5. The Age of Intellectualism
  6. The Age of Decadence

The age of pioneers are the initial surge for a certain country.  In most cases this is done through military means over a bigger civilization.  The main theory as to why this is, is the pioneers envy the life and riches of the great empire that they hope to overthrow.  They are tired of living their lives, which maybe in oppression by the empire.  So, they surge with courage and dedication to change their lives for the better.

Once a nation state is established, the age of conquest takes fruit.  The conquest is to expand their territory to obtain more resources and power.  Once an adequate amount of territories are under control, the age transitions to the age of commerce.  The main purpose of this era is to create more wealth.  The acquisition of wealth usually takes precedence over everything else.  This is the period of time when values start shifting from the self-sacrifice of the initial pioneers to self-interests.  The age of affluence is next.  The rich become more and more separated from the poor, as more wealth is flaunted for people to see.  People enjoy high standards of living, and more and more people are consuming things in excess rather than what they need.  The age of intellectualism is next.  With the necessities of life no worrisome to a good number of people, the next frontier man attempts to explore is that of mother nature.  Civilizations make advancements in science, philosophy, the arts, and literature just to name a few.  The production of universities and schools drastically increase, and the knowledge is more tailored towards specialized knowledge rather than a breadth of knowledge from various subjects.  Finally, where most of the essay is tailored towards, is the age of decadence.

The age of decadence is the decay of the empire.  It is characterized by defensive minded militaries, decaying morals, lost of religion, frivolous consumption of food, entertainment, sex, and the complete focus of individual interests.  When things tend to get rough, it would be thought that the people would work together to fix the problems, but instead there are schisms in the society that make the resolution of dire problems impossible.  With everyone thinking about themselves, they lack the self-sacrifice and courage needed to defend themselves from collapse internally or from the next age of pioneers.

It is pretty obvious that The United States, the world’s super power, is in the last and final stage, the age of decadence.  When just looking at our practices, it becomes clear that our morals have completely collapsed due to actions of various corporations for their increase in profits.  When debating politics, people constantly look at how their interests are affected rather than taking into account the needs of other people.  Sex is the main theme or method of selling products or services, and there are strip clubs and porn sites.  We consume frivolously on drugs, food (obesity), sex, and entertainment.  We worship celebrities rather than a God or religion.  This all points to a society that is on a verge of collapse.  The United States is scheduled to collapse at around 2030.  The 10 generation time scale is an average, so it is not exact.

So why is it, that this cycle exists?  Why is it the same cycle that occurs so frequently in history?  I honestly think it is the corruption and love of money that totally destroys the sustainability of a society.  The acquisition of wealth tailors people to get more, and to only think for themselves.  When individual interests are the priority, nothing gets resolved.  Governments become corrupt, so they accrue more wealth and power.  When the time comes of the new pioneers, they are unable to act.  I also think the self-interests that is created through money distances man from nature.  This separation from nature is literally a contamination that eats away at the required reasoning, morals, and feelings of complete sustainability.  People that are closer to nature are more prone to survival, and are closer to the habitat that we were evolved to be apart of.  Concepts and philosophies of self-sacrifice, and sustainability are needed to survive.  With survival, we are more prone to follow the path at finding who we are, the essence of man, compared to being isolated in cities gorging ourselves with food, drugs, sex, and entertainment.

The flow system of currency is just like any flow system, and a characteristic of a flow system is that it is hierarchical in nature.  That means, whenever there is currency, there are going to be segments that are wide and thick (lots of money), which in turn gets drained by smaller tributaries to facilitate more flow.  This is why there is always a class system with any society.  And that is always going to be there if currency is involved with any economy.  And considering that I think money is the key factor to this cycle of empire life, I think the removal of money should seriously be considered when constructing a new society.

And, as I have stated throughout this blog, I think a good concept that solves this problem is The Resource Based Economy.  Therefore, a Resource Based Economy would create a new cycle or progression of ages throughout its life cycle.

I really hope people start reading on their own, and educate themselves further than the bullshit schools of our day.  Our educational system is a failure.  I’ve read way more relevant and thought provoking works on my own than in any classroom.  I would skip history in high school to read Guns, Germs, and Steel, which should be a central work when evaluating the history of the Earth.  But in the end, I am at ease of all the failures of our society.  It was predetermined when we decided to use a currency with our economy.  And, as usual, a new set of pioneers will take hold and will most likely enact a currency to handle the scarcity of goods and services, which will make the cycle continue.

“The love of money is the root of all evil.” — The Bible

Space Based Solar Power is Entirely Feasible

I am going to quote a forum post on this topic.  It does a good job summarizing what I have found out and my thoughts on the issue.  In it I was wondering how the government program of the Space Based Solar Network could be transferred to the private sector.

 

I have been ranting about this engineering idea recently because frankly it is a great idea. During the 70’s I believe engineers first conceptualized the Space Based Solar Network. What is exciting is it is completely feasible, and I just recently read a business plan on a design for such a network. It laid out the finances quite nicely, and with a safety net of double the required budget, the entire project would cost around 200 billion dollars.

First let me say this could solve our energy problem completely. With the expansion of developing countries like India and China, the world is projected to consume about 50TW (terawatts) of power. A Space Based Solar Network (SBSN) could provide up to 155TW of power. It could satisfy an expansion of energy consumption three times over! Plus, it could provide power at half the cost of fossil fuels at about 1-2 cents/kWh. This really is a no brainer economically because we could easily provide power demand across the world at a fraction of the cost.

Now the project wouldn’t have to be paid for all at once. In a span of about 20 years, we would have to front 10 billion dollars. (Consider the current Depart of Defense budget is about 526 billion) If we wanted to put the SBSN in half the time we would have to double the money at 20 billion which is completely possible. Of course, the better option would be the private sector building this project. This is exponentially more difficult but it is still feasible in the future. The cost will continually decrease while economic growth (hopefully) would eventually make this project feasible. However, if the government were to get involved directly this project could be enacted now. What I think would be the best option would to have the government build the SBSN and then transfer the network to private companies. Notice companies, not company. This would promote competition which would in theory increase the efficiency of the network. What is beautiful about the NASA design is that it is completely compartmentalized. Meaning not only is it easy to repair and construct, but you can completely scale the project to add more power if necessary. I am trying to work out a procedure to hand over network to the private sector. This is where I am open to ideas.

My initial idea doesn’t cut the bill, but I haven’t come up with any other way. We could divide the network into X amount of shares. The cost of the shares equal a little more than the total cost of the entire network so the government gets a profit. Multiple organizations in theory would purchase shares. The percentages of the entire share pool will correlate ownership to the network. This is the initial ownership of the network to the private sector.

This is so feasible it isn’t even funny. Keep in mind that the way the money flow works, is as long as banks are issuing out loans The Fed can loan money to the government at an inflationary rate. This is why every single department has a growth of funds per year. There has to be, because the expenditure of money through government programs expands the overall money supply which is absolutely necessary for economic growth. I honestly don’t have the numbers in front of me, but this entire project could be paid for outright by government deficit spending. The overall government debt does not matter, because if there was no debt there would be no money in the economy. If the government were to pay back The Fed, they are essentially destroying that money because it is going back to the banking sector.

Honestly, this is amazing. I can’t believe it. I am ranting about this because I am too excited about the possibilities. Here is the business plan that I read:

Henson, Keith H. “Beamed Energy and the Economics of Space Based Solar Power.” n.pag. Academic OneFile. Database. 4 Sep 2013.

Not to mention this would probably create jobs.

Do you guys have any other ideas on the transition of the network from the government to the private sector? What do you guys think of this idea?

This to me is extremely exciting.  We could solve our energy issues!  But knowing our system the fossil fuel companies and their lobbying interests will halt this program from launching.  This is another prime example of the failure of our system.  But I have hope that if enough people learn of this they will enact change relatively soon.  The world energy problem solved would free humanity to pursue other projects that will increase our quality of life.  I really hope this goes through.  I am definitely writing to my representatives in congress.

Transitional Methodologies

I have been thinking about a basic framework on how to transition society to a new paradigm.  The first obvious method, would be to get the overall population backing a certain ideal, and then create a revolution, by overthrowing the people in power.  This is probably one of the most improbable possibilities, because people for the most part are not susceptible to new ideas that conflict with their values and identification.  This first evidence I see of this is just participating in political debate forums.  People blindly stick to their ideals, to the point that no matter how much evidence you throw their way, they refuse to acknowledge a conflicting idea.  When they are utterly defeated through debating, they will just devalue the evidence presented which is a central component to the conflicting stance.  Part of it has to do with dominance and competitiveness.  Individuals want to become superior than their counterparts to feel better about themselves.  But there is more to it.  All people identify with a group of people in their community.  There are people that tend to identify with the minority because they want to behave in an acceptable way.  A common explanation for this, is that people who were the first born in their family when they find acceptable characteristics of their parents, will try and establish a connection with those values.  They follow the rules and regulation of the parents, which makes them susceptible to identifying with the majority.  This means, that no matter what the evidence of certain ideas that conflict with their identification or values, these ideas will be rejected.  And, part of the component to this idea has to do with majority, therefore the majority of the populace would tend to not accept these new ideals.  Not to mention, the perceived fear of drastic change.  This, and other concepts of human psychology and sociology that I have not learned about, are the reason why I do not think the majority of the populace can be convinced of a new idea or ideal.  Therefore, another method should be implemented in transitioning society to a Resource Based Economy.

The transition must coincide with the values of the populace.  One common drive of the human race, is the drive to survive.  This is apparent in various works of art, where it is theorized that humanity would bond together to defeat the obstacle at hand.  And, in our current society, things are only changed when the lives of the majority are affected.  Therefore, I think the best method would be to implement this idea after the collapse of society’s systems.

The obvious target that comes to my mind, is the global economic system.  The distribution and consumption of resources is dependent upon a monetary system.  If this is removed, people would not know what to do with regards to the distribution of resources.  One idea that I will touch based on, is that the men in power now want to create a worldwide government once the economic system collapses (which maybe happening right now.  I will touch base on this in a second.)  But this would be a prime time to put into place The Resource Based Economy.

The easiest way to collapse the economic system is by ruining the banking sector:

  1. Everyone would request a complete withdrawal of their money.  Fractional reserve banking is dependent upon the assumption that not all of their reserves is required for withdrawals.  This is how they accrue their wealth.  Because of the reasons outlined above, this is near to impossible from happening.
  2. The confidence of Treasury Bonds are lost coupled with hyper-inflation.  This is the method that I think is being used today.  The increase of governmental deficit spending forces banks to increase interest rates to remove money from the overall money supply.  This is to increase the value of the dollar.  The deficit spending also essentially increases demand because there is more money available.  Therefore, prices go up while jobs are not created because for the most part, supply of goods and services are adequate as well as the advent of automation systems and outsourcing.  Wages also do not increase in concordance to inflation.  Combined with increased interest rates on loans, people cannot afford necessities.  They then turn to the government, which would be forced to increase deficit spending.  This induces a feedback process.  Additionally, the increase in interest rates decreases the rate at which loans are taken out.  This means there is less small businesses and the like being established.  Less jobs are being created.  Furthermore, with people losing money in addition to the value of the dollar being decreased, confidence of the currency dwindles.  Once the confidence of the established currency is lost, the economy collapses (because money’s value is fundamentally dependent upon the confidence in it.)  With no system present to distribute scarce resources, not only will there be upheaval and anger over lost wealth, everyone will be fearing for themselves and freedoms because those are the values of dominant economical cultures.  With no system to distribute scarce resources, another economy must be put into place.  The people in power now I believe want to implement a world-wide government, but this would be a prime time to implement and put into action The Resource Based Economy.
  3. By halting the cycle of money.  Money is borrowed from The Fed by the government, and then is spent on various governmental programs.  Money is then taken out of the system by banks by enforcing interest, whereby they use that money to create more money by contributing that money to financial instruments.  One way to halt the system, would be to break the physical process of The Fed issuing money to the government.  There could be multiple ways of doing this, by disrupting their electronic systems by cyber attacks or physical destruction etc., or by altering the ability of the government to be able to withdraw loans from The Fed.  This would be by eliminating the confidence in Treasury Bonds.  I need to research more on how this could be accomplished.

I must admit, I am for forcing this if need be.  I believe there are people that just do not grasp or educate themselves about the essence of the world around them.  Therefore, they do not adequately have the information to make an accurate decision.  Linked together with the reasons I put forth, the only way I see a new economy put into place is if the current one is of no use.  This would unite all of humanity because an economy is necessary for survival to distribute resources to all the people on the planet.  I would love it if we could transition from people just turning their minds towards a new idea, and have the new economy be put in place peacefully and without conflict, and with the approval with the vast majority of the people.  I think in the real world however, this is not possible.  Jaque Fresco is trying to show the world that his idea is practical and could work by physically building a small establishment with the various designs he has in place.  I think this is essentially going to add to the evidence that this idea could work, but I do not think it will convince the majority of the people.

I wish there was another way, but as of right now, I do not think there is.  Life tends to be harsh and not what you hoped for at times.

I hope I am wrong.  But I do believe that this system would bring a better satisfaction of life to everyone, while decreasing a substantial amount of suffering.

I am not going to hold it against you, the reader, if you disagree with what I have written.  But I hope you think it through.  I hope you keep reading.

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